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, 2011
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)
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23-2413352 |
DELAWARE (Brandywine Operating Partnership L.P.)
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23-2862640 |
(State or other jurisdiction of
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(I.R.S. Employer |
Incorporation or organization)
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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.
Brandywine Realty Trust:
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
Brandywine Operating Partnership, L.P.:
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
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Brandywine Realty Trust
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Yes o No þ |
Brandywine Operating Partnership, L.P.
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Yes o No þ |
A total of 135,579,643 Common Shares of Beneficial Interest, par value $0.01 per share, were
outstanding as of October 26, 2011.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2011 of
Brandywine Realty Trust (the Parent Company) and
Brandywine Operating Partnership L.P. (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. In addition, terms such as we, us, or our used in this report may refer to the
Company, the Parent Company, or the Operating Partnership.
The Parent Company is the sole general partner of the Operating Partnership and, as of September
30, 2011, owned a 93.2% interest in the Operating Partnership. The remaining 6.8% interest
consists of common units of limited partnership interest issued by the Operating Partnership to
third parties in exchange for contributions of properties to the Operating Partnership. As the
sole general partner of the Operating Partnership, the Parent Company has full and complete
authority over 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 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 real estate 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 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 equity interests in subsidiaries of the
Operating Partnership.
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 the Operating Partnership. The common units of limited partnership interest in the
Operating Partnership are accounted for as partners equity in the Operating Partnerships
financial statements while the common units of 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.
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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Parent Companys and Operating Partnerships Equity; and |
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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 real estate 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 Companys operations on a consolidated basis and how management operates the Company.
2
TABLE OF CONTENTS
Filing Format
This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine
Operating Partnership, L.P.
3
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
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September 30, |
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December 31, |
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2011 |
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2010 |
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(unaudited) |
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ASSETS |
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Real estate investments: |
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Rental properties |
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$ |
4,920,728 |
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$ |
4,834,111 |
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Accumulated depreciation |
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(860,584 |
) |
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(776,078 |
) |
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Operating real estate investments, net |
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4,060,144 |
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4,058,033 |
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Construction-in-progress |
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36,246 |
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33,322 |
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Land inventory |
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120,470 |
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110,055 |
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Total real estate investments, net |
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4,216,860 |
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4,201,410 |
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Cash and cash equivalents |
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5,706 |
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16,565 |
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Accounts receivable, net |
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15,048 |
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16,009 |
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Accrued rent receivable, net |
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107,756 |
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95,541 |
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Investment in real estate ventures, at equity |
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84,219 |
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84,372 |
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Deferred costs, net |
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113,656 |
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106,117 |
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Intangible assets, net |
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81,562 |
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97,462 |
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Notes receivable |
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19,436 |
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18,205 |
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Other assets |
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59,511 |
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54,697 |
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Total assets |
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$ |
4,703,754 |
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$ |
4,690,378 |
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LIABILITIES AND BENEFICIARIES EQUITY |
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Mortgage notes payable |
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$ |
491,867 |
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$ |
711,789 |
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Unsecured credit facility |
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166,000 |
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183,000 |
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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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1,651,360 |
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1,352,657 |
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Accounts payable and accrued expenses |
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85,942 |
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72,235 |
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Distributions payable |
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23,505 |
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22,623 |
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Deferred income, gains and rent |
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100,419 |
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121,552 |
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Acquired below market leases, net |
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37,940 |
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29,233 |
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Other liabilities |
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42,827 |
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36,515 |
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Total liabilities |
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2,782,860 |
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2,712,604 |
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Commitments and contingencies (Note 17) |
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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 2011 and 2010, 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 2011 and 2010, 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; 135,579,643 and 134,601,796 issued in 2011 and 2010, respectively
and 135,579,643 and 134,485,117 outstanding in 2011 and 2010, respectively |
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1,353 |
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1,343 |
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Additional paid-in capital |
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2,686,800 |
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2,671,217 |
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Deferred compensation payable in common stock |
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5,631 |
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5,774 |
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Common shares in treasury, at cost, 116,679 in 2010 |
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(3,074 |
) |
Common shares in grantor trust, 292,646 in 2011 and 291,281 in 2010 |
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(5,631 |
) |
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(5,774 |
) |
Cumulative earnings |
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481,577 |
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483,439 |
|
Accumulated other comprehensive loss |
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(2,424 |
) |
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(1,945 |
) |
Cumulative distributions |
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(1,368,809 |
) |
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(1,301,521 |
) |
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Total Brandywine Realty Trusts equity |
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1,798,540 |
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1,849,502 |
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Non-controlling interests |
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122,354 |
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128,272 |
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Total equity |
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1,920,894 |
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1,977,774 |
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Total liabilities and equity |
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$ |
4,703,754 |
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$ |
4,690,378 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share information)
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For the three-month periods ended |
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For the nine-month periods ended |
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September 30, |
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September 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenue: |
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Rents |
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$ |
121,701 |
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$ |
116,520 |
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$ |
362,846 |
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$ |
343,568 |
|
Tenant reimbursements |
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19,806 |
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19,784 |
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|
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61,831 |
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57,834 |
|
Termination fees |
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|
190 |
|
|
|
1,039 |
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2,706 |
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4,124 |
|
Third party management fees, labor reimbursement and leasing |
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3,028 |
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|
2,922 |
|
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8,514 |
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9,293 |
|
Other |
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|
939 |
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1,227 |
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3,378 |
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3,170 |
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Total revenue |
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145,664 |
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|
141,492 |
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439,275 |
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417,989 |
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Operating Expenses: |
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Property operating expenses |
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42,363 |
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41,851 |
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|
128,977 |
|
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|
124,187 |
|
Real estate taxes |
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13,863 |
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|
14,096 |
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|
42,734 |
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|
40,217 |
|
Third party management expenses |
|
|
1,379 |
|
|
|
1,528 |
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|
|
4,395 |
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|
4,433 |
|
Depreciation and amortization |
|
|
54,252 |
|
|
|
51,644 |
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|
163,940 |
|
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|
154,962 |
|
General and administrative expenses |
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6,177 |
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|
5,753 |
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|
18,311 |
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18,498 |
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Total operating expenses |
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118,034 |
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|
114,872 |
|
|
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358,357 |
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342,297 |
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Operating income |
|
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27,630 |
|
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|
26,620 |
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|
80,918 |
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|
75,692 |
|
Other Income (Expense): |
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Interest income |
|
|
523 |
|
|
|
726 |
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|
1,385 |
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|
2,554 |
|
Historic tax credit transaction income |
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|
12,026 |
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|
|
|
|
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|
12,026 |
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|
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Interest expense |
|
|
(32,346 |
) |
|
|
(34,488 |
) |
|
|
(99,477 |
) |
|
|
(97,222 |
) |
Interest expense amortization of deferred financing costs |
|
|
(1,846 |
) |
|
|
(827 |
) |
|
|
(3,844 |
) |
|
|
(2,700 |
) |
Equity in income of real estate ventures |
|
|
418 |
|
|
|
1,035 |
|
|
|
2,739 |
|
|
|
3,356 |
|
Net gain on sale of interests in real estate |
|
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|
|
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|
2,791 |
|
|
|
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Gain (loss) on early extinguishment of debt |
|
|
176 |
|
|
|
(64 |
) |
|
|
(580 |
) |
|
|
(1,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) from continuing operations |
|
|
6,581 |
|
|
|
(6,998 |
) |
|
|
(4,042 |
) |
|
|
(20,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
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Discontinued operations: |
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|
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|
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Income from discontinued operations |
|
|
30 |
|
|
|
385 |
|
|
|
93 |
|
|
|
1,060 |
|
Net gain (loss) on disposition of discontinued operations |
|
|
|
|
|
|
(3 |
) |
|
|
3,836 |
|
|
|
6,346 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total discontinued operations |
|
|
30 |
|
|
|
382 |
|
|
|
3,929 |
|
|
|
7,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
6,611 |
|
|
|
(6,616 |
) |
|
|
(113 |
) |
|
|
(12,615 |
) |
Net income from discontinued operations attributable to non-
controlling interests LP units |
|
|
(2 |
) |
|
|
(8 |
) |
|
|
(80 |
) |
|
|
(159 |
) |
Net (income) loss attributable to non-controlling interests LP units |
|
|
(360 |
) |
|
|
187 |
|
|
|
(66 |
) |
|
|
548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to non-controlling interests |
|
|
(362 |
) |
|
|
179 |
|
|
|
(146 |
) |
|
|
389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Brandywine Realty Trust |
|
|
6,249 |
|
|
|
(6,437 |
) |
|
|
(259 |
) |
|
|
(12,226 |
) |
Distribution to Preferred Shares |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
Amount allocated to unvested restricted shareholders |
|
|
(121 |
) |
|
|
(128 |
) |
|
|
(384 |
) |
|
|
(384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Common Shareholders of Brandywine Realty Trust |
|
$ |
4,130 |
|
|
$ |
(8,563 |
) |
|
$ |
(6,637 |
) |
|
$ |
(18,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
Basic income (loss) per Common Share: |
|
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|
|
|
|
|
|
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|
|
|
|
|
Continuing operations |
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.20 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.03 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.20 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.03 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
135,562,487 |
|
|
|
132,208,245 |
|
|
|
135,164,424 |
|
|
|
130,841,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
136,841,451 |
|
|
|
132,208,245 |
|
|
|
135,164,424 |
|
|
|
130,841,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Brandywine Realty Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
6,221 |
|
|
$ |
(6,811 |
) |
|
$ |
(4,108 |
) |
|
$ |
(19,473 |
) |
Income from discontinued operations |
|
|
28 |
|
|
|
374 |
|
|
|
3,849 |
|
|
|
7,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6,249 |
|
|
$ |
(6,437 |
) |
|
$ |
(259 |
) |
|
$ |
(12,226 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
For the nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Net income (loss) |
|
$ |
6,611 |
|
|
$ |
(6,616 |
) |
|
$ |
(113 |
) |
|
$ |
(12,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
|
|
|
|
2,274 |
|
|
|
(613 |
) |
|
|
6,445 |
|
Reclassification of realized (gains)/losses on derivative financial
instruments to operations, net |
|
|
53 |
|
|
|
13 |
|
|
|
126 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
53 |
|
|
|
2,287 |
|
|
|
(487 |
) |
|
|
6,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
6,664 |
|
|
|
(4,329 |
) |
|
|
(600 |
) |
|
|
(6,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (income) loss attributable to non-controlling interest |
|
|
(365 |
) |
|
|
131 |
|
|
|
(139 |
) |
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Brandywine Realty Trust |
|
$ |
6,299 |
|
|
$ |
(4,198 |
) |
|
$ |
(739 |
) |
|
$ |
(5,905 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES EQUITY
For the Nine-Month Periods Ended September 30, 2011 and 2010
(unaudited, in thousands, except number of shares)
September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Rabbi |
|
|
Common Shares of |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value of |
|
|
|
|
|
|
Number of |
|
|
Trust/Deferred |
|
|
Brandywine Realty |
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Preferred |
|
|
Number of Common |
|
|
Treasury |
|
|
Compensation |
|
|
Trusts beneficial |
|
|
Additional Paid-in |
|
|
Common Shares |
|
|
Payable in |
|
|
Common Shares in |
|
|
Cumulative |
|
|
Comprehensive |
|
|
Cumulative |
|
|
Non-Controlling |
|
|
|
|
|
|
Preferred Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
interest |
|
|
Capital |
|
|
in Treasury |
|
|
Common Stock |
|
|
Grantor Trust |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Distributions |
|
|
Interests |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2010 |
|
|
4,300,000 |
|
|
$ |
43 |
|
|
|
134,601,796 |
|
|
|
116,679 |
|
|
|
291,281 |
|
|
$ |
1,343 |
|
|
$ |
2,671,217 |
|
|
$ |
(3,074 |
) |
|
$ |
5,774 |
|
|
$ |
(5,774 |
) |
|
$ |
483,439 |
|
|
$ |
(1,945 |
) |
|
$ |
(1,301,521 |
) |
|
$ |
128,272 |
|
|
$ |
1,977,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(259 |
) |
|
|
|
|
|
|
|
|
|
|
146 |
|
|
|
(113 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(479 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
(487 |
) |
Issuance of Common Shares of Beneficial Interest |
|
|
|
|
|
|
|
|
|
|
679,285 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
8,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,272 |
|
Equity issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
(338 |
) |
Conversion of LP Units to Common Shares |
|
|
|
|
|
|
|
|
|
|
92,992 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,099 |
) |
|
|
|
|
Bonus Share Issuance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(463 |
) |
|
|
463 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
6 |
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Vesting of Restricted Stock |
|
|
|
|
|
|
|
|
|
|
85,248 |
|
|
|
(116,216 |
) |
|
|
9,043 |
|
|
|
1 |
|
|
|
(1,818 |
) |
|
|
3,062 |
|
|
|
|
|
|
|
|
|
|
|
(1,597 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(352 |
) |
Restricted Stock Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,228 |
|
Restricted Performance Units Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,229 |
|
Exercise of Stock Options |
|
|
|
|
|
|
|
|
|
|
120,179 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
659 |
|
Stock Option Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,105 |
|
Outperformance Plan Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128 |
|
Share Issuance from/to Deferred Compensation Plan |
|
|
|
|
|
|
|
|
|
|
(845 |
) |
|
|
|
|
|
|
(8,141 |
) |
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
(149 |
) |
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
Share Choice Plan Issuance |
|
|
|
|
|
|
|
|
|
|
(1,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55 |
) |
Trustee Fees Paid in Shares |
|
|
|
|
|
|
|
|
|
|
2,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
Adjustment to Non-controlling Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,037 |
) |
|
|
|
|
Preferred Share distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,994 |
) |
|
|
|
|
|
|
(5,994 |
) |
Distributions declared ($0.45 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,294 |
) |
|
|
(1,890 |
) |
|
|
(63,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2011 |
|
|
4,300,000 |
|
|
$ |
43 |
|
|
|
135,579,643 |
|
|
|
|
|
|
|
292,646 |
|
|
$ |
1,353 |
|
|
$ |
2,686,800 |
|
|
$ |
|
|
|
$ |
5,631 |
|
|
$ |
(5,631 |
) |
|
$ |
481,577 |
|
|
$ |
(2,424 |
) |
|
$ |
(1,368,809 |
) |
|
$ |
122,354 |
|
|
$ |
1,920,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Rabbi |
|
|
Common Shares of |
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value of |
|
|
|
|
|
|
Number of |
|
|
Trust/Deferred |
|
|
Brandywine Realty |
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Preferred |
|
|
Number of Common |
|
|
Treasury |
|
|
Compensation |
|
|
Trusts beneficial |
|
|
Additional Paid-in |
|
|
Common Shares |
|
|
Payable in |
|
|
Common Shares in |
|
|
Cumulative |
|
|
Comprehensive |
|
|
Cumulative |
|
|
Non-Controlling |
|
|
|
|
|
|
Preferred Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
interest |
|
|
Capital |
|
|
in Treasury |
|
|
Common Stock |
|
|
Grantor Trust |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Distributions |
|
|
Interests |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2009 |
|
|
4,300,000 |
|
|
$ |
43 |
|
|
|
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 |
|
Stock Option Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
804 |
|
Outperformance Plan Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339 |
|
Share Issuance from/to Deferred Compensation Plan |
|
|
|
|
|
|
|
|
|
|
(314 |
) |
|
|
|
|
|
|
(3,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110 |
) |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trustee Fees Paid in Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,412 |
) |
|
|
3,020 |
|
|
|
|
|
|
|
|
|
|
|
224 |
|
|
|
35 |
|
|
|
(35 |
) |
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,994 |
) |
|
|
|
|
|
|
(5,994 |
) |
Distributions declared ($0.45 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,878 |
) |
|
|
(1,265 |
) |
|
|
(61,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, September 30, 2010 |
|
|
4,300,000 |
|
|
$ |
43 |
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an intergral part of these consolidated financial statements.
7
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(113 |
) |
|
$ |
(12,615 |
) |
Adjustments to reconcile net loss to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
164,014 |
|
|
|
156,953 |
|
Amortization of deferred financing costs |
|
|
3,844 |
|
|
|
2,700 |
|
Amortization of debt discount/(premium), net |
|
|
1,028 |
|
|
|
590 |
|
Straight-line rent income |
|
|
(14,925 |
) |
|
|
(9,179 |
) |
Amortization of acquired above (below) market leases to rental revenue, net |
|
|
(4,011 |
) |
|
|
(4,535 |
) |
Straight-line ground rent expense |
|
|
1,450 |
|
|
|
1,172 |
|
Provision for doubtful accounts |
|
|
1,190 |
|
|
|
2,276 |
|
Non-cash compensation expense |
|
|
3,189 |
|
|
|
3,744 |
|
Real estate venture income in excess of distributions |
|
|
(1,020 |
) |
|
|
(2,779 |
) |
Net gain on sale of interests in real estate |
|
|
(6,627 |
) |
|
|
(6,346 |
) |
Loss on early extinguishment of debt |
|
|
580 |
|
|
|
1,701 |
|
Historic tax credit transaction income |
|
|
(12,026 |
) |
|
|
|
|
Cumulative interest accretion of repayments of unsecured notes |
|
|
|
|
|
|
(2,716 |
) |
Contributions from historic tax credit transaction, net of deferred costs |
|
|
|
|
|
|
27,396 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,130 |
|
|
|
(1,540 |
) |
Other assets |
|
|
(5,000 |
) |
|
|
(16,051 |
) |
Accounts payable and accrued expenses |
|
|
21,382 |
|
|
|
11,238 |
|
Deferred income, gains and rent |
|
|
(4,376 |
) |
|
|
(7,368 |
) |
Other liabilities |
|
|
5,284 |
|
|
|
4,981 |
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
155,993 |
|
|
|
149,622 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of properties |
|
|
(40,674 |
) |
|
|
(50,342 |
) |
Sales of properties, net |
|
|
5,639 |
|
|
|
17,352 |
|
Proceeds from repayment of mortgage notes receivable |
|
|
|
|
|
|
40,000 |
|
Capital expenditures |
|
|
(97,557 |
) |
|
|
(144,884 |
) |
Advances for purchase of tenant assets, net of repayments |
|
|
(1,552 |
) |
|
|
(4,514 |
) |
Loan provided to an unconsolidated Real Estate Venture partner |
|
|
(1,045 |
) |
|
|
|
|
Investment in unconsolidated Real Estate Ventures |
|
|
(2,259 |
) |
|
|
|
|
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income |
|
|
3,432 |
|
|
|
1,453 |
|
Decrease in cash due to the deconsolidation of variable interest entities |
|
|
|
|
|
|
(1,382 |
) |
Leasing costs |
|
|
(28,460 |
) |
|
|
(16,720 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(162,476 |
) |
|
|
(159,037 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
407,502 |
|
|
|
344,000 |
|
Repayments of Credit Facility borrowings |
|
|
(424,502 |
) |
|
|
(414,000 |
) |
Proceeds from mortgage notes payable |
|
|
|
|
|
|
253,981 |
|
Repayments of mortgage notes payable |
|
|
(218,959 |
) |
|
|
(6,533 |
) |
Proceeds from unsecured notes |
|
|
321,498 |
|
|
|
|
|
Repayments of unsecured notes |
|
|
(25,366 |
) |
|
|
(66,408 |
) |
Net settlement of hedge transactions |
|
|
(613 |
) |
|
|
|
|
Debt financing costs |
|
|
(4,199 |
) |
|
|
(492 |
) |
Refund of deferred financing costs related to forward commitment |
|
|
|
|
|
|
1,659 |
|
Net proceeds from issuance of shares |
|
|
7,966 |
|
|
|
65,990 |
|
Exercise of stock options |
|
|
659 |
|
|
|
|
|
Distributions paid to shareholders |
|
|
(67,119 |
) |
|
|
(65,045 |
) |
Distributions to noncontrolling interest |
|
|
(1,243 |
) |
|
|
(1,263 |
) |
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
(4,376 |
) |
|
|
111,889 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(10,859 |
) |
|
|
102,474 |
|
Cash and cash equivalents at beginning of period |
|
|
16,565 |
|
|
|
1,567 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
5,706 |
|
|
$ |
104,041 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest during the nine months ended September 30, 2011
and 2010 of $1,450 and $9,468, respectively |
|
$ |
78,091 |
|
|
$ |
85,824 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Proceeds from mortgage notes payable retained by lender and included in other assets |
|
|
|
|
|
|
2,519 |
|
Change in capital expenditures financed through accounts payable at period end |
|
|
(2,114 |
) |
|
|
(7,805 |
) |
Change in capital expenditures financed through retention payable at period end |
|
|
(5,863 |
) |
|
|
1,362 |
|
Change in unfunded tenant allowance |
|
|
(442 |
) |
|
|
(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 |
|
|
|
|
|
|
77,733 |
|
Distributions payable |
|
|
23,505 |
|
|
|
22,624 |
|
The accompanying notes are an integral part of these consolidated financial statements
8
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Real estate investments: |
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
4,920,728 |
|
|
$ |
4,834,111 |
|
Accumulated depreciation |
|
|
(860,584 |
) |
|
|
(776,078 |
) |
|
|
|
|
|
|
|
Operating real estate investments, net |
|
|
4,060,144 |
|
|
|
4,058,033 |
|
Construction-in-progress |
|
|
36,246 |
|
|
|
33,322 |
|
Land inventory |
|
|
120,470 |
|
|
|
110,055 |
|
|
|
|
|
|
|
|
Total real estate investments, net |
|
|
4,216,860 |
|
|
|
4,201,410 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
5,706 |
|
|
|
16,565 |
|
Accounts receivable, net |
|
|
15,048 |
|
|
|
16,009 |
|
Accrued rent receivable, net |
|
|
107,756 |
|
|
|
95,541 |
|
Investment in real estate ventures, at equity |
|
|
84,219 |
|
|
|
84,372 |
|
Deferred costs, net |
|
|
113,656 |
|
|
|
106,117 |
|
Intangible assets, net |
|
|
81,562 |
|
|
|
97,462 |
|
Notes receivable |
|
|
19,436 |
|
|
|
18,205 |
|
Other assets |
|
|
59,511 |
|
|
|
54,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,703,754 |
|
|
$ |
4,690,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
491,867 |
|
|
$ |
711,789 |
|
Unsecured credit facility |
|
|
166,000 |
|
|
|
183,000 |
|
Unsecured term loan |
|
|
183,000 |
|
|
|
183,000 |
|
Unsecured senior notes, net of discounts |
|
|
1,651,360 |
|
|
|
1,352,657 |
|
Accounts payable and accrued expenses |
|
|
85,942 |
|
|
|
72,235 |
|
Distributions payable |
|
|
23,505 |
|
|
|
22,623 |
|
Deferred income, gains and rent |
|
|
100,419 |
|
|
|
121,552 |
|
Acquired below market leases, net |
|
|
37,940 |
|
|
|
29,233 |
|
Other liabilities |
|
|
42,827 |
|
|
|
36,515 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,782,860 |
|
|
|
2,712,604 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
|
|
Redeemable limited partnership units at redemption value;
9,809,759 and 9,902,752 issued and outstanding in 2011 and 2010, respectively |
|
|
124,487 |
|
|
|
132,855 |
|
|
|
|
|
|
|
|
|
|
Brandywine Operating Partnerships equity: |
|
|
|
|
|
|
|
|
7.50% Series D Preferred Mirror Units; issued and outstanding-
2,000,000 in 2011 and 2010, respectively |
|
|
47,912 |
|
|
|
47,912 |
|
7.375% Series E Preferred Mirror Units; issued and outstanding-
2,300,000 in 2011 and 2010, respectively |
|
|
55,538 |
|
|
|
55,538 |
|
General Partnership Capital, 135,579,643 and 134,601,796 units issued in 2011
and 2010, respectively and 135,579,643 and 134,485,117 units outstanding
in 2011 and 2010, respectively |
|
|
1,695,526 |
|
|
|
1,743,549 |
|
Accumulated other comprehensive loss |
|
|
(2,569 |
) |
|
|
(2,080 |
) |
|
|
|
|
|
|
|
Total Brandywine Operating Partnerships equity |
|
|
1,796,407 |
|
|
|
1,844,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners equity |
|
$ |
4,703,754 |
|
|
$ |
4,690,378 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
9
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods ended |
|
|
For the nine-month periods ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rents |
|
$ |
121,701 |
|
|
$ |
116,520 |
|
|
$ |
362,846 |
|
|
$ |
343,568 |
|
Tenant reimbursements |
|
|
19,806 |
|
|
|
19,784 |
|
|
|
61,831 |
|
|
|
57,834 |
|
Termination fees |
|
|
190 |
|
|
|
1,039 |
|
|
|
2,706 |
|
|
|
4,124 |
|
Third party management fees, labor reimbursement and leasing |
|
|
3,028 |
|
|
|
2,922 |
|
|
|
8,514 |
|
|
|
9,293 |
|
Other |
|
|
939 |
|
|
|
1,227 |
|
|
|
3,378 |
|
|
|
3,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
145,664 |
|
|
|
141,492 |
|
|
|
439,275 |
|
|
|
417,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
42,363 |
|
|
|
41,851 |
|
|
|
128,977 |
|
|
|
124,187 |
|
Real estate taxes |
|
|
13,863 |
|
|
|
14,096 |
|
|
|
42,734 |
|
|
|
40,217 |
|
Third party management expenses |
|
|
1,379 |
|
|
|
1,528 |
|
|
|
4,395 |
|
|
|
4,433 |
|
Depreciation and amortization |
|
|
54,252 |
|
|
|
51,644 |
|
|
|
163,940 |
|
|
|
154,962 |
|
General & administrative expenses |
|
|
6,177 |
|
|
|
5,753 |
|
|
|
18,311 |
|
|
|
18,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
118,034 |
|
|
|
114,872 |
|
|
|
358,357 |
|
|
|
342,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
27,630 |
|
|
|
26,620 |
|
|
|
80,918 |
|
|
|
75,692 |
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
523 |
|
|
|
726 |
|
|
|
1,385 |
|
|
|
2,554 |
|
Historic tax credit transaction income |
|
|
12,026 |
|
|
|
|
|
|
|
12,026 |
|
|
|
|
|
Interest expense |
|
|
(32,346 |
) |
|
|
(34,488 |
) |
|
|
(99,477 |
) |
|
|
(97,222 |
) |
Interest expense amortization of deferred financing costs |
|
|
(1,846 |
) |
|
|
(827 |
) |
|
|
(3,844 |
) |
|
|
(2,700 |
) |
Equity in income of real estate ventures |
|
|
418 |
|
|
|
1,035 |
|
|
|
2,739 |
|
|
|
3,356 |
|
Net gain on sale of interests in real estate |
|
|
|
|
|
|
|
|
|
|
2,791 |
|
|
|
|
|
Gain (loss) on early extinguishment of debt |
|
|
176 |
|
|
|
(64 |
) |
|
|
(580 |
) |
|
|
(1,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
6,581 |
|
|
|
(6,998 |
) |
|
|
(4,042 |
) |
|
|
(20,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
30 |
|
|
|
385 |
|
|
|
93 |
|
|
|
1,060 |
|
Net gain (loss) on disposition of discontinued operations |
|
|
|
|
|
|
(3 |
) |
|
|
3,836 |
|
|
|
6,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
30 |
|
|
|
382 |
|
|
|
3,929 |
|
|
|
7,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
6,611 |
|
|
|
(6,616 |
) |
|
|
(113 |
) |
|
|
(12,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to Preferred Shares |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
Amount allocated to unvested restricted shareholders |
|
|
(121 |
) |
|
|
(128 |
) |
|
|
(384 |
) |
|
|
(384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Common Partnership Unitholders of
Brandywine Operating Partnership |
|
$ |
4,492 |
|
|
$ |
(8,742 |
) |
|
$ |
(6,491 |
) |
|
$ |
(18,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.19 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.03 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.19 |
) |
Discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.03 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common partnership units outstanding |
|
|
145,372,247 |
|
|
|
139,423,151 |
|
|
|
145,027,662 |
|
|
|
135,135,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common partnership units outstanding |
|
|
146,651,211 |
|
|
|
139,423,151 |
|
|
|
145,027,662 |
|
|
|
135,135,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Brandywine Operating Partnership, L.P. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
6,581 |
|
|
$ |
(6,998 |
) |
|
$ |
(4,042 |
) |
|
$ |
(20,021 |
) |
Loss from discontinued operations |
|
|
30 |
|
|
|
382 |
|
|
|
3,929 |
|
|
|
7,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6,611 |
|
|
$ |
(6,616 |
) |
|
$ |
(113 |
) |
|
$ |
(12,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
10
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods |
|
|
For the nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
Net income (loss) |
|
$ |
6,611 |
|
|
$ |
(6,616 |
) |
|
$ |
(113 |
) |
|
$ |
(12,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative financial instruments |
|
|
|
|
|
|
2,274 |
|
|
|
(613 |
) |
|
|
6,445 |
|
Reclassification of realized (gains)/losses on derivative financial
instruments to operations, net |
|
|
53 |
|
|
|
13 |
|
|
|
126 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
53 |
|
|
|
2,287 |
|
|
|
(487 |
) |
|
|
6,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Brandywine Operating Partnership, L.P. |
|
$ |
6,664 |
|
|
$ |
(4,329 |
) |
|
$ |
(600 |
) |
|
$ |
(6,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
11
BRANDYWINE OPERATING PARTNERSHIP L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(113 |
) |
|
$ |
(12,615 |
) |
Adjustments to reconcile net loss to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
164,014 |
|
|
|
156,953 |
|
Amortization of deferred financing costs |
|
|
3,844 |
|
|
|
2,700 |
|
Amortization of debt discount/(premium), net |
|
|
1,028 |
|
|
|
590 |
|
Straight-line rent income |
|
|
(14,925 |
) |
|
|
(9,179 |
) |
Amortization of acquired above (below) market leases, net |
|
|
(4,011 |
) |
|
|
(4,535 |
) |
Straight-line ground rent expense |
|
|
1,450 |
|
|
|
1,172 |
|
Provision for doubtful accounts |
|
|
1,190 |
|
|
|
2,276 |
|
Non-cash compensation expense |
|
|
3,189 |
|
|
|
3,744 |
|
Real estate venture income in excess of distributions |
|
|
(1,020 |
) |
|
|
(2,779 |
) |
Net gain on sale of interests in real estate |
|
|
(6,627 |
) |
|
|
(6,346 |
) |
Loss on early extinguishment of debt |
|
|
580 |
|
|
|
1,701 |
|
Historic tax credit transaction income |
|
|
(12,026 |
) |
|
|
|
|
Cumulative interest accretion of repayments of unsecured notes |
|
|
|
|
|
|
(2,716 |
) |
Contributions from historic tax credit transaction, net of deferred costs |
|
|
|
|
|
|
27,396 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,130 |
|
|
|
(1,540 |
) |
Other assets |
|
|
(5,000 |
) |
|
|
(16,051 |
) |
Accounts payable and accrued expenses |
|
|
21,382 |
|
|
|
11,238 |
|
Deferred income, gains and rent |
|
|
(4,376 |
) |
|
|
(7,368 |
) |
Other liabilities |
|
|
5,284 |
|
|
|
4,981 |
|
|
|
|
|
|
|
|
Net cash from operating activities |
|
|
155,993 |
|
|
|
149,622 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of properties |
|
|
(40,674 |
) |
|
|
(50,342 |
) |
Sales of properties, net |
|
|
5,639 |
|
|
|
17,352 |
|
Proceeds from repayment of mortgage notes receivable |
|
|
|
|
|
|
40,000 |
|
Capital expenditures |
|
|
(97,557 |
) |
|
|
(144,884 |
) |
Advances for purchase of tenant assets, net of repayments |
|
|
(1,552 |
) |
|
|
(4,514 |
) |
Loan provided to unconsolidated real estate venture partner |
|
|
(1,045 |
) |
|
|
|
|
Investment in unconsolidated Real Estate Ventures |
|
|
(2,259 |
) |
|
|
|
|
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income |
|
|
3,432 |
|
|
|
1,453 |
|
Decrease in cash due to the deconsolidation of variable interest entities |
|
|
|
|
|
|
(1,382 |
) |
Leasing costs |
|
|
(28,460 |
) |
|
|
(16,720 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(162,476 |
) |
|
|
(159,037 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from Credit Facility borrowings |
|
|
407,502 |
|
|
|
344,000 |
|
Repayments of Credit Facility borrowings |
|
|
(424,502 |
) |
|
|
(414,000 |
) |
Proceeds from mortgage notes payable |
|
|
|
|
|
|
253,981 |
|
Repayments of mortgage notes payable |
|
|
(218,959 |
) |
|
|
(6,533 |
) |
Proceeds from unsecured notes |
|
|
321,498 |
|
|
|
|
|
Repayments of unsecured notes |
|
|
(25,366 |
) |
|
|
(66,408 |
) |
Net settlement of hedge transactions |
|
|
(613 |
) |
|
|
|
|
Debt financing costs |
|
|
(4,199 |
) |
|
|
(492 |
) |
Refund of deferred financing costs related to forward commitment |
|
|
|
|
|
|
1,659 |
|
Net proceeds from issuance of partnership units |
|
|
7,966 |
|
|
|
65,990 |
|
Exercise of stock options |
|
|
659 |
|
|
|
|
|
Distributions paid to preferred and common partnership unitholders |
|
|
(68,362 |
) |
|
|
(66,308 |
) |
|
|
|
|
|
|
|
Net cash from (used in) financing activities |
|
|
(4,376 |
) |
|
|
111,889 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(10,859 |
) |
|
|
102,474 |
|
Cash and cash equivalents at beginning of period |
|
|
16,565 |
|
|
|
1,567 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
5,706 |
|
|
$ |
104,041 |
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest during the nine months ended September 30, 2011
and 2010 of $1,450 and $9,468, respectively |
|
$ |
78,091 |
|
|
$ |
85,824 |
|
Supplemental disclosure of non-cash activity: |
|
|
|
|
|
|
|
|
Proceeds from mortgage notes payable retained by lender and included in other assets |
|
|
|
|
|
|
2,519 |
|
Change in capital expenditures financed through accounts payable at period end |
|
|
(2,114 |
) |
|
|
(7,805 |
) |
Change in capital expenditures financed through retention payable at period end |
|
|
(5,863 |
) |
|
|
1,362 |
|
Change in unfunded tenant allowance |
|
|
(442 |
) |
|
|
(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 |
|
|
|
|
|
|
77,733 |
|
Distributions payable |
|
|
23,505 |
|
|
|
22,624 |
|
The accompanying notes are an integral part of these consolidated financial statements.
12
BRANDYWINE REALTY TRUST AND BRANDYWINE OPERATING PARTNERSHIP, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011
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, 2011, owned a 93.2% 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, 2011, the Company owned 211 office properties, 20 industrial facilities and
five mixed-use properties (collectively, the Properties) containing an aggregate of approximately
25.9 million net rentable square feet. In addition, as of September 30, 2011, the Company owned
economic interests in 16 unconsolidated real estate ventures that contain approximately 6.1 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, 2011, 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. 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 (U.S. GAAP) 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, 2011,
the results of its operations for the three- and nine-month periods ended September 30, 2011 and
2010 and its cash flows for the nine-month periods ended September 30, 2011 and 2010 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 2010 Annual Reports on Form 10-K filed with the SEC on
February 25, 2011.
Reclassifications and Out of Period Adjustment
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 properties as discontinued
operations on the statement of operations for all periods presented.
During the first quarter of 2011, the Company recorded additional income of $0.5 million related to
electricity charges in prior years that were under-billed to a certain tenant. This resulted in the
overstatement of total revenue by $0.5 million during the first quarter of 2011 and in the
understatement of total revenue by $0.3 million and $0.2 million for the years ended December 31,
2009, and 2008, respectively. As management believes that this error was not material to prior
years consolidated financial statements and that the impact of recording the error in the current
period is not material to the Companys consolidated financial statements, the Company recorded the
related adjustment in the first quarter of the current year.
The consolidated statement of operations for the second quarter of 2011 also contained an out of
period depreciation and amortization expense adjustment of $4.7 million relating to intangible
assets representing tenant relationships and in-place leases that should have been written off in
prior periods. This resulted in the overstatement of depreciation and amortization expense by $4.7
million in the current year. During the year ended December 31, 2010, depreciation and amortization
expense was overstated by $1.7 million and was understated by $1.4 million, $1.8 million, $1.7
million and $1.5 million during the years ended December 31, 2009, 2008, 2007, and 2006,
respectively. As management believes that this error was not material to prior years consolidated
financial statements and that the impact of recording the error in the current period is not
material to the Companys consolidated financial statements, the Company recorded the related
adjustment in the second quarter of the current year.
13
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. The accounting standard for the consolidation of VIEs requires the
Company 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. 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, 2011
(see Note 4). 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. 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 and controlled by the Company and in
which 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 Companys assessment includes a review of applicable documents such as, but not
limited, to applicable partnership agreements, real estate venture agreements, LLC agreements,
management and leasing agreements to determine whether the Company has control to direct the
business activities of the entities. 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 (including 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.
14
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
generally 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 generally
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.
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 generally 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 generally 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 classified as held-for-sale; defines the scope of businesses to be disposed of
that qualify for reporting as discontinued operations; and affects 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 periods ended September 30, 2011 and
2010, the Company determined that no impairment charges were necessary.
The Company 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, 2011.
Investments in Unconsolidated Real Estate Ventures
The Company accounts for its investments in unconsolidated Real Estate Ventures under the equity
method of accounting as it is not the primary beneficiary (for VIEs) and the Company exercises
significant influence, but does not control these entities under the provisions of the entities
governing agreements pursuant to the accounting standard for the consolidation of VIEs.
15
Under the equity method, investments in unconsolidated joint ventures are recorded initially at
cost, as Investments in Real Estate Ventures, and subsequently adjusted for equity in earnings,
cash contributions, less distributions and impairments. On a periodic basis, management also
assesses whether there are any indicators that the value of the Companys investments in
unconsolidated Real Estate Ventures may be other than temporarily impaired. An investment is
impaired only if the value of the investment, as estimated by management, is less than the carrying
value of the investment and the decline is other than temporary. To the extent impairment has
occurred, the loss shall be measured as the excess of the carrying amount of the investment over
the value of the investment, as estimated by management. The determination as to whether an
impairment exists requires significant management judgment about the fair value of its ownership
interest. Fair value is determined through various valuation techniques, including but not limited
to, discounted cash flow models, quoted market values and third party appraisals.
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 $4.9 million and $13.2 million for the three and nine-month
periods ended September 30, 2011 and approximately $3.1 million and $7.0 million for the three and
nine-month periods ended September 30, 2010, 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 $1.7 million for
the three and nine-month periods ended September 30, 2011 and by $0.6 million and $2.2 million for
the three and nine-month periods ended September 30, 2010, 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 $0.4 million and $1.0 million for the three and nine-month periods ended
September 30, 2011 and by $0.2 million and $1.2 million for the three and nine-month periods ended
September 30, 2010, respectively.
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, 2011, 5,788,395 common shares remained available for future awards
under the 1997 Plan (including 4,578,737 shares available solely for options and share appreciation
rights). Through September 30, 2011, all options awarded under the 1997 Plan had a one to ten-year
term.
The Company incurred stock-based compensation expense of $1.6 million and $4.9 million during the
three and nine-month periods ended September 30, 2011, of which $0.4 million and $1.1 million,
respectively, were capitalized as part of the Companys review of employee salaries eligible for
capitalization. The Company recognized stock-based compensation expense of $1.7 million and $4.8
million during the three and nine-month periods ended September 30, 2010, of which $0.4 million and
$1.0 million, respectively, were also 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 accounting standard for
fair value measurements and disclosures.
16
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.
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; |
|
|
|
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 |
|
|
|
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.
There were no items that were accounted for at fair value on a recurring basis as of September 30,
2011.
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting |
|
|
|
Date Using: |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
December 31, |
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
Description |
|
2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Recurring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Securities |
|
$ |
248 |
|
|
$ |
248 |
|
|
$ |
|
|
|
$ |
|
|
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:
|
|
|
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, |
|
|
|
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, |
|
|
|
|
Equity and cost method investments measured at fair value due to an impairment in
accordance with the accounting standard for investments, |
|
|
|
Notes receivable adjusted for any impairment in its value in accordance with the
accounting standard for loan receivables, and |
|
|
|
Asset retirement obligations initially measured at fair value under the accounting
standard for asset retirement obligations. |
17
There were no items that were accounted for at fair value on a non-recurring basis as of September
30, 2011.
As of September 30, 2011, the Company has an outstanding purchase money mortgage note with a
principal balance of $7.2 million that it extended to a buyer (the
Borrower) of its parcel of
land in Newtown, Pennsylvania in December 2006. During 2011, the Borrower, who is developing a
residential community, defaulted on the note and as a result, a forbearance agreement was entered
into between the Company and the Borrower. The Borrower also entered into another forbearance
agreement with a third party senior creditor bank related to its own loan. The forbearance
agreement between the Company and the Borrower outlined the repayment terms of the outstanding
debt and the payment of accrued interest by the Borrower and included, among other things, the
metrics for selling and settling on home sales over an agreed period of time. With the inherent
credit risk in collecting interest from the note, as provided in the forbearance agreement, the
Company will provide a full allowance for any accrued interest receivable. Construction has
already recommenced while loan repayments are scheduled to start in 2012. The Company believes
that based on terms of the forbearance agreement, the total note will be fully paid by 2014. Given
the current circumstances, the Company performed an impairment assessment of its note through a
valuation analysis of the land and other Borrower assets that are encumbered by the note and
determined that, as of September 30, 2011, the fair value of the land and other Borrowers
assets, net of carrying costs and estimated costs to sell exceeded the outstanding balance
of the note and therefore the note is recoverable based on the estimated fair values of the
aforementioned assets as of September 30, 2011. However, it is possible that the terms of the
forbearance agreement may not be met due to non-performance by the Borrower of the conditions
set forth in the said agreement or due to further deterioration in the housing market and could
cause an impairment of the Companys note receivable which could be material to its consolidated
results of operations.
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 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.
Recent Accounting Pronouncement
In June 2011, the Financial Accounting Standards Board (FASB) issued an amendment to the accounting
standard for the presentation of comprehensive income. The amendment requires entities to present
the total of comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. In addition, the amendment requires entities to present on the
face of the financial statements reclassification adjustments for items that are reclassified from
other comprehensive income to net income in the statement(s) where the components of net income and
the components of other comprehensive income are presented. This amendment is effective for fiscal
years and interim periods beginning after December 15, 2011. The Companys adoption of the new
standard will not have a material impact on its consolidated financial position or results of
operations as the amendment relates only to changes in financial statement presentation.
18
In May 2011, the FASB issued amendments to the accounting standard for fair value measurements and
disclosures. The amendments change the wording used to describe many of the requirements in U.S.
GAAP for measuring fair value and for disclosing information about fair value measurements. The
amendments are intended to create comparability of fair value measurements presented and disclosed
in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting
Standards. These amendments are effective for fiscal years and interim periods beginning after
December 15, 2011. The Companys adoption of the new standard will not have a material impact on
its consolidated financial position or results of operations.
In December 2010, the FASB issued a new accounting standard for the disclosure of supplementary
pro-forma information for business combinations. This guidance clarifies that the disclosure of
supplementary pro-forma information for business combinations should be presented such that
revenues and earnings of the combined entity are calculated as though the relevant business
combinations that occurred during the current reporting period had occurred as of the beginning of
the comparable prior annual reporting period. The guidance also seeks to improve the usefulness of
the supplementary pro-forma information by requiring a description of the nature and amount of
material, non-recurring pro-forma adjustments that are directly attributable to the business
combinations. This new standard is effective for business combinations with an acquisition date on
or after the beginning of the first annual reporting period beginning on or after December 15,
2010. The Companys adoption of this new standard did not have a material impact on its
consolidated financial position or results of operations.
3. REAL ESTATE INVESTMENTS
As of September 30, 2011 and December 31, 2010 the gross carrying value of the Companys rental
properties was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
698,985 |
|
|
$ |
697,724 |
|
Building and improvements |
|
|
3,748,256 |
|
|
|
3,693,579 |
|
Tenant improvements |
|
|
473,487 |
|
|
|
442,808 |
|
|
|
|
|
|
|
|
|
|
$ |
4,920,728 |
|
|
$ |
4,834,111 |
|
|
|
|
|
|
|
|
Acquisitions
On August 12, 2011, the Company acquired an office property located in Philadelphia, Pennsylvania,
together with related ground tenancy rights under a long-term ground lease, through the foreclosure
of a note receivable amounting to $18.8 million under which the said property was encumbered. The
Company obtained the note receivable from a third party on August 2, 2011 and was funded through an
advance under its $600.0 million Credit Facility (the Credit Facility) and with available
corporate funds. The office property contains 192,707 of net rentable square feet and is
57.2% leased as of September 30, 2011. The Company recognized $0.3 million of transaction costs to acquire the office
property and is included as part of general and administrative expenses in the Companys
consolidated statements of operations. On the acquisition date of the office property, the total
purchase price was allocated as follows: $21.4 million to building, $12.0 million to intangible
assets and $14.4 million to below market lease liabilities assumed. The Company also acquired
other assets of $0.2 million and assumed certain liabilities of $0.4 million.
On March 28, 2011, the Company acquired two office properties totaling 126,496 of net rentable
square feet in Glen Allen, Virginia known as Overlook I and II for $12.6 million. The acquired
properties are 100% leased as of September 30, 2011. The Company funded the acquisition price through an advance
under its Credit Facility and with available corporate funds. The Company recognized a nominal
amount of acquisition related costs, which are included as part of general and administrative
expenses in the Companys consolidated statements of operations.
19
On January 20, 2011, the Company acquired a one acre parcel of land in Philadelphia, Pennsylvania
for $9.3 million. The Company funded the cost of this acquisition with available corporate funds
and a draw on its Credit Facility. The Company capitalized $0.5 million of acquisition related
costs as part of land inventory on its consolidated balance sheet. The Company expects to
contribute the acquired property into a real estate venture in return for a 50% limited interest in
the partnership. The real estate venture is expected to be formed to construct a mixed-use
development property in the city of Philadelphia. The Company received $4.9 million from the
prospective partner in anticipation of the real estate venture formation. The amount received is
included as part of other liabilities in the Companys consolidated balance sheet as of September
30, 2011.
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 67.2% leased as of September 30, 2011. The Company
acquired Three Logan Square for approximately $129.0 million funded through a combination of $51.2
million in cash and the issuance of 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 did not accrue any dividends and were not entitled to income or loss allocations
prior to August 5, 2011, 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 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 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 was allocated as follows (in thousands):
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
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 were included as part of the accounts
receivable and the other asset sections, respectively, of the Companys consolidated balance sheets
on the date of acquisition.
The Company recognized $0.4 million of acquisition related costs which are included as part of
general and administrative expenses of the Companys prior year consolidated statements of
operations.
The unaudited pro forma information below summarizes the Companys combined results of operations
for the three and nine-months ended September 30, 2010 as though the acquisition of Three Logan
Square was completed on January 1, 2010. 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).
20
|
|
|
|
|
|
|
|
|
|
|
Three-months |
|
|
Nine-months |
|
|
|
ended September 30, 2010 |
|
|
ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
Pro forma revenues |
|
$ |
142,920 |
|
|
$ |
433,734 |
|
Pro forma loss from continuing operations |
|
|
(7,408 |
) |
|
|
(19,279 |
) |
Pro forma net loss attributable to common shareholders |
|
|
(8,973 |
) |
|
|
(17,862 |
) |
|
|
|
|
|
|
|
|
|
Loss per common share from continuing operations: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.06 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
Basic as pro forma |
|
$ |
(0.06 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diulted as reported |
|
$ |
(0.06 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
Diulted as pro forma |
|
$ |
(0.06 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.06 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
Basic as pro forma |
|
$ |
(0.06 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diulted as reported |
|
$ |
(0.06 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
Diulted as pro forma |
|
$ |
(0.06 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
Dispositions
On June 27, 2011, the Company sold Three Greentree Center, a 69,300 net rentable square feet office
property located in Marlton, New Jersey, for a sales price of $5.9 million. The property was 13.9%
occupied as of the date of sale. This sale is included in discontinued operations (see Note 10).
During the first quarter of the current year, the Company recognized a $2.8 million net gain upon
the sale of its remaining 11% ownership interest in three properties which it partially sold to one
of its unconsolidated Real Estate Ventures in December 2007. The Company had retained an 11% equity
interest in these properties subject to a put/call at fixed prices for a period of three years from
the time of the sale. In January 2011, the Company exercised the put/call and transferred full
ownership in the three properties to the Real Estate Venture. Accordingly, the Companys direct
continuing involvement through its 11% interest in the properties ceased as a result of the
transfer of the ownership interest. The Company has also presented the gain as part of its
continuing operations in its consolidated statements of operations because of its prior significant
continuing involvement with the properties through its interest in the unconsolidated Real Estate
Venture and its management and leasing activities at the properties.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of September 30, 2011, the Company had an aggregate investment of approximately $84.2 million in
16 unconsolidated Real Estate Ventures. The Company formed these ventures with unaffiliated third
parties, or acquired interests in them, to develop or
manage office properties or to acquire land in anticipation of possible development of office
properties. As of September 30, 2011, 14 of the Real Estate Ventures owned 49 office buildings that
contain an aggregate of approximately 6.1 million net rentable square feet; one Real Estate Venture
owned 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 20% 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
distributions of excess financing proceeds. The Company reflected its acquisition of this Real
Estate Venture interest at its relative fair value as of the date of the merger. 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.
21
The following is a summary of the financial position of the Real Estate Ventures as of September
30, 2011 and December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Net property |
|
$ |
723,108 |
|
|
$ |
804,705 |
|
Other assets |
|
|
127,863 |
|
|
|
105,576 |
|
Other liabilities |
|
|
48,320 |
|
|
|
44,509 |
|
Debt |
|
|
680,505 |
|
|
|
748,387 |
|
Equity |
|
|
122,146 |
|
|
|
117,385 |
|
Companys share of equity (Companys basis) |
|
|
84,219 |
|
|
|
84,372 |
|
The following is a summary of results of operations of the Real Estate Ventures for the three and
nine-month periods ended September 30, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
36,345 |
|
|
$ |
27,713 |
|
|
$ |
108,743 |
|
|
$ |
82,310 |
|
Operating expenses |
|
|
15,863 |
|
|
|
9,766 |
|
|
|
46,407 |
|
|
|
28,767 |
|
Interest expense, net |
|
|
10,326 |
|
|
|
8,928 |
|
|
|
31,999 |
|
|
|
25,936 |
|
Depreciation and amortization |
|
|
9,869 |
|
|
|
8,336 |
|
|
|
28,836 |
|
|
|
22,860 |
|
Net income |
|
|
287 |
|
|
|
683 |
|
|
|
1,501 |
|
|
|
4,747 |
|
Companys share of income (Companys basis) |
|
|
418 |
|
|
|
1,035 |
|
|
|
2,739 |
|
|
|
3,356 |
|
As of September 30, 2011, the Company had guaranteed repayment of approximately $0.7 million of
loans on behalf of a 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.
On June 29, 2011, one of the unconsolidated Real Estate Ventures sold its only office building, a
347,620 net rentable square feet office property located in
Conshohocken, Pennsylvania, through an assignment of all of the
partnerships interests for a sales
price of $86.7 million. The property was 87.0% occupied as of the date of sale. The Company had a
three percent ownership percentage in the Real Estate Venture and recognized $0.6 million of income
from the sale as part of its equity in income from the Real Estate Venture.
In November 2010, the Company acquired a 25% interest in two partnerships which own two office
buildings in Philadelphia, Pennsylvania. The other partner holds the remaining 75% interest in each
of the two partnerships. In connection with the closing, the Company contributed an initial $5.0
million, out of a total of $25.0 million of committed preferred equity. The Company expects to
contribute the remaining $20.0 million by December 2012. Failure to fund the remaining commitment
will result in an adjustment to the Companys 25% limited partnership ownership percentage.
22
5. DEFERRED COSTS
As of September 30, 2011 and December 31, 2010, the Companys deferred costs were comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing Costs |
|
$ |
137,299 |
|
|
$ |
(50,321 |
) |
|
$ |
86,978 |
|
Financing Costs |
|
|
39,057 |
|
|
|
(12,379 |
) |
|
|
26,678 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
176,356 |
|
|
$ |
(62,700 |
) |
|
$ |
113,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Deferred Costs, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing Costs |
|
$ |
123,724 |
|
|
$ |
(43,930 |
) |
|
$ |
79,794 |
|
Financing Costs |
|
|
37,257 |
|
|
|
(10,934 |
) |
|
|
26,323 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
160,981 |
|
|
$ |
(54,864 |
) |
|
$ |
106,117 |
|
|
|
|
|
|
|
|
|
|
|
During the three and nine-month periods ended September 30, 2011, the Company capitalized
internal direct leasing costs of $1.7 million and
$5.4 million, and $1.4 million and $4.7 million
during the three and nine-months ended September 30, 2010, respectively, in accordance with the
accounting standard for the capitalization of leasing costs.
6. INTANGIBLE ASSETS
As of September 30, 2011 and December 31, 2010, the Companys intangible assets were comprised of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011 |
|
|
|
|
|
|
|
Accumulated |
|
|
Intangible Assets, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
104,581 |
|
|
$ |
(62,542 |
) |
|
$ |
42,039 |
|
Tenant relationship value |
|
|
79,110 |
|
|
|
(47,036 |
) |
|
|
32,074 |
|
Above market leases acquired |
|
|
16,037 |
|
|
|
(8,588 |
) |
|
|
7,449 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
199,728 |
|
|
$ |
(118,166 |
) |
|
$ |
81,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
79,966 |
|
|
$ |
(42,026 |
) |
|
$ |
37,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
Intangible Assets, |
|
|
|
Total Cost |
|
|
Amortization |
|
|
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease value |
|
$ |
108,456 |
|
|
$ |
(63,010 |
) |
|
$ |
45,446 |
|
Tenant relationship value |
|
|
95,385 |
|
|
|
(52,113 |
) |
|
|
43,272 |
|
Above market leases acquired |
|
|
18,319 |
|
|
|
(9,575 |
) |
|
|
8,744 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
222,160 |
|
|
$ |
(124,698 |
) |
|
$ |
97,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases acquired |
|
$ |
67,198 |
|
|
$ |
(37,965 |
) |
|
$ |
29,233 |
|
|
|
|
|
|
|
|
|
|
|
23
As of September 30, 2011, the Companys annual amortization for its intangible
assets/liabilities were as follows (in thousands, and assuming no early lease terminations):
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
2011 (three months remaining) |
|
$ |
7,282 |
|
|
$ |
1,964 |
|
2012 |
|
|
21,458 |
|
|
|
7,009 |
|
2013 |
|
|
13,303 |
|
|
|
6,493 |
|
2014 |
|
|
10,250 |
|
|
|
4,926 |
|
2015 |
|
|
7,699 |
|
|
|
2,751 |
|
Thereafter |
|
|
21,570 |
|
|
|
14,797 |
|
|
|
|
|
|
|
|
Total |
|
$ |
81,562 |
|
|
$ |
37,940 |
|
|
|
|
|
|
|
|
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Companys consolidated debt obligations
outstanding at September 30, 2011 and December 31, 2010 (in thousands):
MORTGAGE DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
September 30, |
|
|
December 31, |
|
|
Interest |
|
Maturity |
Property / Location |
|
2011 |
|
|
2010 |
|
|
Rate |
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
Arboretum I, II, III & V |
|
$ |
|
|
|
$ |
20,386 |
|
|
7.59 |
% (a) |
Jul-11 |
Midlantic Drive/Lenox Drive/DCC I |
|
|
|
|
|
|
56,514 |
|
|
8.05 |
% (b) |
Oct-11 |
Research Office Center |
|
|
|
|
|
|
39,145 |
|
|
5.30 |
% (c), (d) |
Oct-11 |
Concord Airport Plaza |
|
|
|
|
|
|
34,494 |
|
|
5.55 |
% (d), (e) |
Jan-12 |
Newtown Square/Berwyn Park/Libertyview |
|
|
56,940 |
|
|
|
58,102 |
|
|
7.25 |
% |
May-13 |
Southpoint III |
|
|
2,070 |
|
|
|
2,597 |
|
|
7.75 |
% |
Apr-14 |
Tysons Corner |
|
|
95,299 |
|
|
|
96,507 |
|
|
5.36 |
% (d) |
Aug-15 |
Two Logan Square |
|
|
89,800 |
|
|
|
89,800 |
|
|
7.57 |
% |
Apr-16 |
One Logan Square |
|
|
|
|
|
|
60,000 |
|
|
4.50 |
% (f) |
Jul-16 |
IRS Philadelphia Campus |
|
|
204,301 |
|
|
|
208,366 |
|
|
7.00 |
% |
Sep-30 |
Cira South Garage |
|
|
44,879 |
|
|
|
46,335 |
|
|
7.12 |
% |
Sep-30 |
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
493,288 |
|
|
|
712,246 |
|
|
|
|
|
Plus: unamortized fixed-rate debt premiums (discounts), net |
|
|
(1,421 |
) |
|
|
(457 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage indebtedness |
|
$ |
491,867 |
|
|
$ |
711,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNSECURED DEBT: |
|
|
|
|
|
|
|
|
|
|
|
|
$345.0M 3.875% Guaranteed Exchangeable Notes due 2026 |
|
|
59,835 |
|
|
|
59,835 |
|
|
5.50 |
% (g) |
Oct-11 |
Bank Term Loan |
|
|
183,000 |
|
|
|
183,000 |
|
|
LIBOR + 0.800 |
% (h) |
Jun-12 |
Credit Facility |
|
|
166,000 |
|
|
|
183,000 |
|
|
LIBOR + 0.725 |
% (h) |
Jun-12 |
$300.0M 5.750% Guaranteed Notes due 2012 |
|
|
152,296 |
|
|
|
175,200 |
|
|
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 |
|
|
248,585 |
|
|
|
250,000 |
|
|
7.77 |
% |
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 |
$325.0M 4.950% Guaranteed Notes due 2018 |
|
|
325,000 |
|
|
|
|
|
|
5.14 |
% |
Apr-18 |
Indenture IA (Preferred Trust I) |
|
|
27,062 |
|
|
|
27,062 |
|
|
LIBOR + 1.25 |
% |
Mar-35 |
Indenture IB (Preferred Trust I) |
|
|
25,774 |
|
|
|
25,774 |
|
|
LIBOR + 1.25 |
% |
Apr-35 |
Indenture II (Preferred Trust II) |
|
|
25,774 |
|
|
|
25,774 |
|
|
LIBOR + 1.25 |
% |
Jul-35 |
|
|
|
|
|
|
|
|
|
Principal balance outstanding |
|
|
2,006,007 |
|
|
|
1,722,326 |
|
|
|
|
|
Less: unamortized exchangeable debt discount |
|
|
(91 |
) |
|
|
(906 |
) |
|
|
|
|
unamortized fixed-rate debt discounts, net |
|
|
(5,556 |
) |
|
|
(2,763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured indebtedness |
|
$ |
2,000,360 |
|
|
$ |
1,718,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Obligations |
|
$ |
2,492,227 |
|
|
$ |
2,430,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
On April 1, 2011, the Company prepaid the remaining balance of the loan without penalty. |
|
(b) |
|
On June 3, 2011, the Company prepaid the remaining balance of the loan without penalty. |
|
(c) |
|
On June 30, 2011, the Company prepaid the remaining balance of the loan without penalty. The
unamortized fixed-rate debt premium of $0.3 million related to this loan was included as part
of the gain (loss) on early extinguishment of debt in the Companys consolidated statement of
operations during the current year. |
|
(d) |
|
These loans were assumed upon acquisition of the related properties. The interest rates
reflect the market rate at the time of acquisition. |
24
|
|
|
(e) |
|
On September 1, 2011, the Company prepaid the remaining balance of the loan without penalty.
The unamortized fixed-rate debt premium of $0.2 million related to this loan was included as
part of the gain (loss) on early extinguishment of debt in the Companys consolidated statement of
operations during the quarter. |
|
(f) |
|
This mortgage was subject to an interest rate floor of 4.50% on a monthly basis. On July 11,
2011, the Company prepaid the balance of the loan without penalty. |
|
(g) |
|
On October 20, 2011, holders representing $59.5 million of the outstanding Exchangeable Notes
as of September 30, 2011, exercised their right to cause the Company to redeem their notes at
par plus accrued and unpaid interest leaving an outstanding balance of $0.4 million. On
October 15, 2016, the remaining holders have the right to request, with proper notice, the
redemption of all or a portion of their Exchangeable Notes at a price equal to 100% of the
principal amount of the Exchangeable Notes plus accrued and unpaid interest. Accordingly, the
remaining balance of the Exchangeable Notes after October 20, 2011 will reflect a maturity
date of October 15, 2016, notwithstanding their final maturity date of October 15, 2026. |
|
(h) |
|
On March 31, 2011, the maturity dates of the Bank Term Loan and the Credit Facility were
extended to June 29, 2012 from June 29, 2011. On June 29, 2011, the Company paid a total
extension fee amounting to $1.2 million which is equal to 15 basis points of the outstanding
principal balance of the Bank Term Loan and of the committed amount under the Credit Facility.
The extension of the maturity dates was at the Companys option under the Bank Term Loan and
the Credit Facility agreements. There were no changes in the terms and conditions of the loan
agreements as a result of the maturity date extensions. |
During the nine-month periods ended September 30, 2011 and 2010, the Companys
weighted-average effective interest rate on its mortgage notes payable was 6.83% and 6.62%,
respectively.
During the nine-months ended September 30, 2011, the Company repurchased $24.3 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 |
|
2012 5.750% Notes |
|
$ |
23,765 |
|
|
$ |
22,904 |
|
|
$ |
(857 |
) |
|
$ |
32 |
|
2015 7.500% Notes |
|
|
1,600 |
|
|
|
1,415 |
|
|
|
(212 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,365 |
|
|
$ |
24,319 |
|
|
$ |
(1,069 |
) |
|
$ |
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Parent Company unconditionally guarantees the unsecured debt obligations of the Operating
Partnership (or is a co-borrower with the Operating Partnership) but does not, by itself incur
indebtedness.
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 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, 2011, the Company had
$166.0 million of borrowings and $10.6 million in letters of credit outstanding, leaving $423.4
million of unused availability under the Credit Facility. During the nine-month periods ended
September 30, 2011 and 2010, the weighted-average interest rate on Credit Facility borrowings was
0.98% and 1.14%, respectively. As of September 30, 2011 and 2010, the weighted average interest
rate on the Credit Facility was 0.95% and 0.98%, respectively.
The Credit Facility requires the maintenance of ratios related to minimum net worth, debt-to-total
capitalization and fixed charge coverage and includes non-financial covenants. The Company was in
compliance with all financial covenants as of September 30, 2011.
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 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).
25
The principal amount outstanding of the 3.875% Guaranteed Exchangeable Notes was $59.8 million,
both at September 30, 2011 and December 31, 2010, 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
or a combination of both at the Companys option. 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 $0.1 million at September 30, 2011 and $0.9 million at December 31, 2010, respectively,
and will be amortized through October 15, 2011. The effective interest rate at September 30, 2011
and December 31, 2010 was 5.5%. The Company recognized contractual coupon interest of $0.6 million
and $1.7 million for the three and nine-month periods ended September 30, 2011 and $0.7 million and
$2.6 million for the three and nine-month periods ended September 30, 2010, respectively. In
addition, the Company recognized interest expense on amortization of debt discount of $0.3 million
and $0.8 million during the three and nine-month periods ended September 30, 2011 and $0.3 million
and $1.3 million during the three and nine-month periods ended September 30, 2010, respectively.
Debt discount write-offs resulting from debt repurchases amounted to $1.6 million for the
nine-month period ended September 30, 2010. There were no repurchases of the notes during the three
and nine-month periods ended September 30, 2011. See note (g) to the above table for activity
subsequent to September 30, 2011.
As of September 30, 2011, the Companys aggregate scheduled principal payments of debt obligations,
excluding amortization of discounts and premiums, were as follows (in thousands):
|
|
|
|
|
2011 |
|
$ |
62,732 |
|
2012 |
|
|
513,694 |
|
2013 |
|
|
66,467 |
|
2014 |
|
|
254,401 |
|
2015 |
|
|
348,079 |
|
Thereafter |
|
|
1,253,922 |
|
|
|
|
|
Total principal payments |
|
|
2,499,295 |
|
Net unamortized premiums/(discounts) |
|
|
(7,068 |
) |
|
|
|
|
Outstanding indebtedness |
|
$ |
2,492,227 |
|
|
|
|
|
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, 2011 and December 31, 2010,
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, 2011 and December 31, 2010
approximate the fair values for cash and cash equivalents, accounts receivable, other assets,
accounts payable and accrued expenses.
The following are financial instruments for which the Companys estimates of fair value differ from
the carrying amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Mortgage payable, net of discounts |
|
$ |
491,867 |
|
|
$ |
506,042 |
|
|
$ |
711,789 |
|
|
$ |
726,348 |
|
Unsecured notes payable, net of discounts |
|
$ |
1,572,750 |
|
|
$ |
1,610,233 |
|
|
$ |
1,274,047 |
|
|
$ |
1,338,743 |
|
Variable rate debt instruments |
|
$ |
427,610 |
|
|
$ |
416,089 |
|
|
$ |
444,610 |
|
|
$ |
432,556 |
|
Notes receivable |
|
$ |
32,407 |
(a) |
|
$ |
32,309 |
|
|
$ |
31,216 |
(a) |
|
$ |
28,921 |
|
|
|
|
(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 2009 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
and counterparties on derivatives not fulfilling their obligations. 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.
26
Risks and Uncertainties
Significantly challenging and sluggish economic conditions have reduced the volume of real estate
transactions and created credit stresses on many businesses. Vacancy rates may increase through
2012 and possibly beyond as the current economic climate negatively impacts tenants. 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 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, 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 affect 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 event
could arise which would limit the Companys borrowings under the Credit Facility. If an event
occurs which is considered to have a material adverse effect, the lenders could consider the
Company in default under the terms of the Credit Facility and the borrowings under the Credit
Facility would become due and payable. If the Company is unable to obtain a waiver, this would have
a material adverse effect on the Companys financial position and results of operations.
The Company was in compliance with all financial covenants as of September 30, 2011. Management
continuously monitors the Companys compliance with and anticipated compliance with the covenants.
Certain of the covenants restrict managements ability to obtain alternative sources of capital.
While the Company currently believes it will remain in compliance with its covenants, in the event
of a continued slow-down and continued crisis in the credit markets, the Company may not be able to
remain in compliance with such covenants and if the lender would not provide a waiver, it could
result in an event of default.
Use of Derivative Financial Instruments
The Companys use of derivative instruments is limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposures and not for speculative
purposes. The principal objective of such arrangements is to minimize the risks and/or costs
associated with the Companys operating and financial structure, as well as to hedge specific
transactions. The counterparties to these arrangements are major financial institutions with which
the Company and its affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of non-performance by these counterparties.
However, because of the high credit ratings of the counterparties, the Company does not anticipate
that any of the counterparties will fail to meet these obligations as they come due. The Company
does not hedge credit or property value market risks through derivative financial instruments.
The Company formally assesses, both at inception of a 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 consolidated 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.
27
To comply with the provisions of the 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.
On March 31, 2011, in anticipation of the offering of $325.0 million of 4.95% unsecured guaranteed
notes due April 15, 2018, the Company entered into seven intra-day treasury lock agreements. The
treasury lock agreements were designated as cash flow hedges on interest rate risk and qualified
for hedge accounting. The total notional amount of the treasury lock agreements was $230.0 million
with an expiration of 7 years at treasury rates of 2.891%, 2.873%, and 2.858% and a fair value of
$0.6 million at March 31, 2011. The agreements were settled on the day we completed the debt
offering at a total expense of $0.6 million. This expense was recorded as a component of
accumulated other comprehensive income in the accompanying consolidated balance sheet and will be
amortized over the term of the note.
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, in connection with the intra-day
treasury lock agreement that the Company entered into and the remaining interest swaps which
matured on October 18, 2010, 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 changes in fair values of the hedges during the three and nine months
ended September 30, 2010 were included in other liabilities and accumulated other comprehensive
income in the accompanying balance sheet.
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 10% or more of the Companys rents
during the three and nine-month periods ended September 30, 2011 and 2010. Conditions 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, 2011, income from discontinued operations
relates to one property that the Company sold during 2011. 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, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, 2011 |
|
|
ended September 30, 2011 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
|
|
|
$ |
475 |
|
Tenant reimbursements |
|
|
1 |
|
|
|
84 |
|
Other |
|
|
14 |
|
|
|
(64 |
) |
|
|
|
|
|
|
|
Total revenue |
|
|
15 |
|
|
|
495 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
(2 |
) |
|
|
258 |
|
Real estate taxes |
|
|
|
|
|
|
70 |
|
Depreciation and amortization |
|
|
(13 |
) |
|
|
74 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(15 |
) |
|
|
402 |
|
Income from discontinued operations before gain on
sale of interests in real estate |
|
|
30 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
Net gain on disposition of discontinued operations |
|
|
|
|
|
|
3,836 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
30 |
|
|
$ |
3,929 |
|
|
|
|
|
|
|
|
28
For the three and nine-month periods ended September 30, 2010, income from discontinued
operations relates to nine properties that the Company sold since January 1, 2010 through September
30, 2011. 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, 2010
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, 2010 |
|
|
ended September 30, 2010 |
|
Revenue: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
1,423 |
|
|
$ |
4,416 |
|
Tenant reimbursements |
|
|
518 |
|
|
|
1,875 |
|
Other |
|
|
37 |
|
|
|
39 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
1,978 |
|
|
|
6,330 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
751 |
|
|
|
2,357 |
|
Real estate taxes |
|
|
293 |
|
|
|
924 |
|
Depreciation and amortization |
|
|
549 |
|
|
|
1,989 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,593 |
|
|
|
5,270 |
|
Income from discontinued operations before gain on
sale of interests in real estate |
|
|
385 |
|
|
|
1,060 |
|
|
|
|
|
|
|
|
|
|
Net gain on disposition of discontinued operations |
|
|
(3 |
) |
|
|
6,346 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
382 |
|
|
$ |
7,406 |
|
|
|
|
|
|
|
|
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.
As of September 30, 2011 and December 31, 2010, the aggregate book value of the non-controlling
interests associated with the redeemable common limited partnership interests in the accompanying
consolidated balance sheet of the Parent Company was $122.4 million and $128.3 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 $78.6 million and $115.4 million, respectively.
29
12. 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, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
6,581 |
|
|
$ |
6,581 |
|
|
$ |
(6,998 |
) |
|
$ |
(6,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to non-controlling interests |
|
|
(360 |
) |
|
|
(360 |
) |
|
|
187 |
|
|
|
187 |
|
Amount allocable to unvested restricted shareholders |
|
|
(121 |
) |
|
|
(121 |
) |
|
|
(128 |
) |
|
|
(128 |
) |
Preferred share dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common shareholders |
|
|
4,102 |
|
|
|
4,102 |
|
|
|
(8,937 |
) |
|
|
(8,937 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
30 |
|
|
|
30 |
|
|
|
382 |
|
|
|
382 |
|
Discontinued operations attributable to non-controlling interests |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(8 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common shareholders |
|
|
28 |
|
|
|
28 |
|
|
|
374 |
|
|
|
374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
$ |
4,130 |
|
|
$ |
4,130 |
|
|
$ |
(8,563 |
) |
|
$ |
(8,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
135,562,487 |
|
|
|
135,562,487 |
|
|
|
132,208,245 |
|
|
|
132,208,245 |
|
Contingent securities/Share based compensation |
|
|
|
|
|
|
1,278,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average shares outstanding |
|
|
135,562,487 |
|
|
|
136,841,451 |
|
|
|
132,208,245 |
|
|
|
132,208,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common shareholders |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
Discontinued operations attributable to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(4,042 |
) |
|
$ |
(4,042 |
) |
|
$ |
(20,021 |
) |
|
$ |
(20,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to non-controlling interests |
|
|
(66 |
) |
|
|
(66 |
) |
|
|
548 |
|
|
|
548 |
|
Amount allocable to unvested restricted shareholders |
|
|
(384 |
) |
|
|
(384 |
) |
|
|
(384 |
) |
|
|
(384 |
) |
Preferred share dividends |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common shareholders |
|
|
(10,486 |
) |
|
|
(10,486 |
) |
|
|
(25,851 |
) |
|
|
(25,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
3,929 |
|
|
|
3,929 |
|
|
|
7,406 |
|
|
|
7,406 |
|
Discontinued operations attributable to non-controlling interests |
|
|
(80 |
) |
|
|
(80 |
) |
|
|
(159 |
) |
|
|
(159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common shareholders |
|
|
3,849 |
|
|
|
3,849 |
|
|
|
7,247 |
|
|
|
7,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common shareholders |
|
$ |
(6,637 |
) |
|
$ |
(6,637 |
) |
|
$ |
(18,604 |
) |
|
$ |
(18,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
135,164,424 |
|
|
|
135,164,424 |
|
|
|
130,841,534 |
|
|
|
130,841,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to common shareholders |
|
$ |
(0.08 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.20 |
) |
Discontinued operations attributable to common shareholders |
|
|
0.03 |
|
|
|
0.03 |
|
|
|
0.06 |
|
|
|
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable limited partnership units totaling 9,809,759 and 9,920,220 as of September 30, 2011
and 2010, respectively, were excluded from the diluted earnings per share computations because
their effect would have been anti-dilutive.
30
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, 2011 and 2010, earnings representing nonforfeitable dividends as noted in the
table above were allocated to the unvested restricted shares issued to the Companys executives and
other employees under the 1997 Plan.
Common and Preferred Shares
On September 13, 2011, the Parent Company declared a distribution of $0.15 per common share,
totaling $20.5 million, which was paid on October 19, 2011 to shareholders of record as of October
5, 2011. On September 13, 2011, the Parent Company declared distributions on its Series C Preferred
Shares and Series D Preferred Shares to holders of record as of September 30, 2011. These shares
are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on
October 17, 2011 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 engages sales agents who receive compensation, in
aggregate, of up to 2% of the gross sales price per share sold. During the nine months ended
September 30, 2011, the Parent Company sold 679,285 shares under this program at an average sales
price of $12.18 per share resulting in net proceeds of $8.0 million. The Parent Company
contributed the net proceeds from the sale of its shares to the Operating Partnership in exchange
for the issuance of 679,285 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. From the inception of the
Offering Program in March 2010 through September 30, 2011, the Parent Company had sold 6,421,553
shares under this program resulting in 8,578,447 remaining shares available for sale. There was no
sale activity under the Offering Program during the three months ended September 30, 2011.
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,
2011. As of September 30, 2011, 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.
31
13. 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, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
6,581 |
|
|
$ |
6,581 |
|
|
$ |
(6,998 |
) |
|
$ |
(6,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocable to unvested restricted unitholders |
|
|
(121 |
) |
|
|
(121 |
) |
|
|
(128 |
) |
|
|
(128 |
) |
Preferred unit dividends |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
(1,998 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to common unitholders |
|
|
4,462 |
|
|
|
4,462 |
|
|
|
(9,124 |
) |
|
|
(9,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common unitholders |
|
|
30 |
|
|
|
30 |
|
|
|
382 |
|
|
|
382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common unitholders |
|
$ |
4,492 |
|
|
$ |
4,492 |
|
|
$ |
(8,742 |
) |
|
$ |
(8,742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding |
|
|
145,372,247 |
|
|
|
145,372,247 |
|
|
|
139,423,151 |
|
|
|
139,423,151 |
|
Contingent securities/Share based compensation |
|
|
|
|
|
|
1,278,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average units outstanding |
|
|
145,372,247 |
|
|
|
146,651,211 |
|
|
|
139,423,151 |
|
|
|
139,423,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common unitholders |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
Discontinued operations attributable to common unitholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common unitholders |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-month periods ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
Basic |
|
|
Diluted |
|
|
Basic |
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(4,042 |
) |
|
$ |
(4,042 |
) |
|
$ |
(20,021 |
) |
|
$ |
(20,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocable to unvested restricted unitholders |
|
|
(384 |
) |
|
|
(384 |
) |
|
|
(384 |
) |
|
|
(384 |
) |
Preferred unit dividends |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
(5,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common unitholders |
|
|
(10,420 |
) |
|
|
(10,420 |
) |
|
|
(26,399 |
) |
|
|
(26,399 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations attributable to common unitholders |
|
|
3,929 |
|
|
|
3,929 |
|
|
|
7,406 |
|
|
|
7,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common unitholders |
|
$ |
(6,491 |
) |
|
$ |
(6,491 |
) |
|
$ |
(18,993 |
) |
|
$ |
(18,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average units outstanding |
|
|
145,027,662 |
|
|
|
145,027,662 |
|
|
|
135,135,380 |
|
|
|
135,135,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Partnership Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common unitholders |
|
$ |
(0.07 |
) |
|
$ |
(0.07 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.19 |
) |
Discontinued operations attributable to common unitholders |
|
|
0.03 |
|
|
|
0.03 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common unitholders |
|
$ |
(0.04 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted units 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, 2011 and 2010, earnings representing nonforfeitable dividends as noted in the
table above were allocated to the unvested restricted units.
Common Partnership Unit and Preferred Mirror Units
On September 13, 2011, the Operating Partnership declared a distribution of $0.15 per common
partnership unit, totaling $20.5 million, which was paid on October 19, 2011 to unitholders of
record as of October 5, 2011.
32
On September 13, 2011, 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, 2011.
These units are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions
paid on October 17, 2011 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 nine-month period ended September 30, 2011, the Parent Company contributed net proceeds
amounting to $8.0 million from the sale of 679,285 common shares under its Offering Program to the
Operating Partnership in exchange for the issuance of 679,285 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.
The Operating Partnership issued 7,111,112 Class F (2010) Units on August 5, 2010 in connection
with its acquisition of 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 ($11.54) less
$0.60 to reflect that these units do not begin to accrue a dividend prior to the first anniversary
of their issuance. The Class F (2010) Units are 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 shares. 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
Parent Company common shares.
Common Unit Repurchases
The Parent Company did not purchase any shares during the nine months ended September 30, 2011 and
accordingly, during the nine months ended September 30, 2011, the Operating Partnership did not
repurchase any units in connection with the Parent Companys share repurchase program.
14. SHARE BASED AND DEFERRED COMPENSATION
Stock Options
At September 30, 2011, the Parent Company had 3,599,673 options outstanding under its shareholder
approved equity incentive plan. There were 1,311,943 options unvested as of September 30, 2011 and
$2.7 million of unrecognized compensation expense associated with these options to be recognized
over a weighted average of 1.7 years. During the three and nine-months ended September 30, 2011,
the Company recognized compensation expense related to unvested options of $0.4 million and $1.1
million, of which $0.1 million and $0.3 million, respectively, were capitalized as part of the
Companys review of employee salaries eligible for capitalization. During the three and
nine-months ended September 30, 2010, the Company recognized $0.3 million and $0.7 million of
compensation expense, respectively, of which nominal amounts of compensation expense were
capitalized. The recognized compensation expenses are included as part of general and
administrative expense in the Companys consolidated statements of operations.
Option activity as of September 30, 2011 and changes during the nine months ended September 30,
2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining Contractual |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
Value |
|
Outstanding at January 1, 2011 |
|
|
3,116,611 |
|
|
$ |
14.56 |
|
|
|
7.81 |
|
|
$ |
(9,080,625 |
) |
Granted |
|
|
603,241 |
|
|
|
11.89 |
|
|
|
9.43 |
|
|
|
(2,338,765 |
) |
Exercised |
|
|
(120,179 |
) |
|
|
2.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2011 |
|
|
3,599,673 |
|
|
$ |
14.50 |
|
|
|
7.46 |
|
|
$ |
(23,367,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/Exercisable at September 30, 2011 |
|
|
2,287,729 |
|
|
$ |
17.01 |
|
|
|
6.85 |
|
|
$ |
(20,370,992 |
) |
On March 2, 2011, the Compensation Committee of the Companys Board of Trustees awarded
603,241 options to the Companys executives. The options vest ratably over three years and have a
ten year term. The vesting of the options is also subject to acceleration upon a change in control
or if the recipient of the award were to die, become disabled, be terminated without cause or
retire in a qualifying retirement prior to the vesting date. Qualifying retirement for options
granted on March 2, 2011 as provided under the 1997 Plan means the recipients voluntary
termination of employment after reaching age 57 and accumulating at least 15 years of service with
the Company. On May 24, 2011, the Compensation Committee modified these options in respect of
101,437 shares awarded to one of the Companys executives. The modification, with the said
executives approval, provided additional vesting conditions linked to the Companys total
shareholder return which the Company will determine every year during the vesting period. The
implementation of these market conditions did not materially impact total compensation expense
expected to be recognized. The modified portion of the options will vest in whole or in part only
if the Companys total shareholder return achieves specified targets, subject to vesting upon
death, disability, qualifying retirement or a change of control. As of September 30, 2011, none of
the Companys executives had met conditions to elect a qualifying retirement.
33
Restricted Share Awards
As of September 30, 2011, 808,098 restricted shares were outstanding under the 1997 Plan and vest
over three to seven years from the initial grant date. The remaining compensation expense to be
recognized at September 30, 2011 was approximately $4.4 million. That expense is expected to be
recognized over a weighted average remaining vesting period of 1.4 years. The Company recognized
compensation expense related to outstanding restricted shares of $0.8 million and $2.4 million
during the three and nine-months ended September 30, 2011, of which $0.2 million and $0.5 million,
respectively, were capitalized as part of the Companys review of employee salaries eligible for
capitalization. The Company recognized 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. 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, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Grant |
|
|
|
Shares |
|
|
Date Fair value |
|
Non-vested at January 1, 2011 |
|
|
851,278 |
|
|
$ |
10.75 |
|
Granted |
|
|
197,035 |
|
|
|
11.92 |
|
Vested |
|
|
(237,541 |
) |
|
|
19.76 |
|
Forfeited |
|
|
(2,674 |
) |
|
|
11.30 |
|
|
|
|
|
|
|
|
Non-vested at September 30, 2011 |
|
|
808,098 |
|
|
$ |
9.47 |
|
|
|
|
|
|
|
|
On March 2, 2011, the Compensation Committee of the Companys Board of Trustees awarded
174,012 restricted shares to the Companys executives. The restricted shares will cliff vest after
three years from the grant date. The vesting of the restricted shares is also subject to
acceleration upon a change in control or if the recipient of the award were to die, become
disabled, be terminated without cause or retire in a qualifying retirement prior to the vesting
date. Qualifying retirement for restricted shares granted on March 2, 2011 as provided in the award
agreements Plan means the recipients voluntary termination of employment after reaching age 57 and
accumulating at least 15 years of service with the Company. As of September 30, 2011, none of the
Companys executives had met conditions to elect a qualifying retirement.
Restricted Performance Share Units Plan
On March 2, 2011, March 4, 2010 and April 1, 2009, the Compensation Committee of the Parent
Companys Board of Trustees awarded an aggregate of 124,293, 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,
2011 (in the case of the March 2, 2011 awards), 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, 2013, 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.
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.
34
On the date of each grant, the awards were valued using a Monte Carlo simulation. The fair values
of the 2011 and 2010 awards on the grant dates were $2.0 million, respectively, while the 2009
award was $1.1 million. The fair values of each award are being amortized over the three year cliff
vesting period. In the case of the 2011 awards, the vesting of the RPSUs is also subject to
acceleration upon a change in control or if the recipient of the award were to die, become
disabled, terminated without cause or retire in a qualifying retirement prior to the vesting date.
Qualifying retirement for restricted shares granted on March 2, 2011 as provided under the 1997
Plan means the recipients voluntary termination of employment after reaching age 57 and
accumulating at least 15 years of service with the Company. As of September 30, 2011, none of the
Companys executives has met conditions to elect a qualifying retirement.
For the three and nine-month periods ended September 30, 2011, the Company recognized total
compensation expense for the 2011, 2010 and 2009 awards of $0.5 million and $1.2 million, of which
$0.1 million and $0.3 million were capitalized as part of the Companys review of employee salaries
eligible for capitalization. For the three and nine months ended September 30, 2010, the Company
recognized total compensation expense for 2010 and 2009 awards of $0.3 million and $0.7 million,
respectively, related to this plan of which nominal amounts were 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, 2011, the Company
recognized a nominal amount and $0.1 million of compensation expenses related to the outperformance
program. 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.
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 2011 plan year is limited to
the lesser of 20% of compensation or $50,000. The number of shares initially reserved for issuance
under the ESPP is 1.25 million. During the three and nine-month periods ended September 30, 2011,
employees made purchases under the ESPP of $0.1 million and $0.3 million, respectively. The Company
recognized a nominal amount and $0.1 million of compensation expense related to the ESPP during the
three and nine-month periods ended September 30, 2011, respectively. 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 a nominal
amount and $0.1 million of compensation expense related to the ESPP during the three and nine-month
periods ended September 30, 2010, respectively. 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 participant-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, 2011 and 2010, the Company
recorded a net decrease in compensation costs of $0.8 million and a net increase in compensation
costs of $0.4 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, 2011 and 2010, the Company recorded a net increase in compensation costs of $0.8
million and a net decrease in compensation costs of $0.4 million, respectively, in connection with
the investments in the company-owned policies and mutual funds.
35
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 permit diversification of a participants deferral allocated to the Company
common share and deferrals allocated to Company common shares 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 shares 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, 2011 and 2010, 0.3 million of such shares, respectively, 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.
15. 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 $64.1
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. On October 19, 2011, the Company received the
remaining $2.7 million of the total contributions upon its completion of certain items and
compliance with the federal rehabilitation regulations.
In exchange for its contributions into the development of the 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 presented within deferred income in the Companys balance sheet
amounted to $48.9 million and $61.4 million as of September 30, 2011 and December 31, 2010,
respectively. The contributions were recorded net of the amount allocated to non-controlling
interest as described above of $2.2 million and $2.1 million at September 30, 2011 and December 31,
2010, respectively. Beginning in September 2011 through September 2015, the Company recognized and
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 within other income (expense) in its consolidated statements
of operations. During the three months ended September 30, 2011, the Company recognized $12.0
million of the cash received as revenue net of $0.5 million of allocated expenses within other
income (expense) in its consolidated statements of operations.
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, 2011 and December 31, 2010 is $2.1
million and $4.3 million, respectively, and is included in other assets in 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 $1.0 million for the three- and nine-months
ended September 30, 2011, respectively, and $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.
36
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 sheets at September 30, 2011 and
December 31, 2010. 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, 2011 and December 31, 2010 is $5.3
million and is included in other assets in the Companys consolidated balance sheet.
16. SEGMENT INFORMATION
As of September 30, 2011, the Company was managing 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 in New Jersey 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.
37
Segment information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
|
Philadelphia |
|
|
|
|
|
|
New Jersey |
|
|
Richmond, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suburbs |
|
|
CBD |
|
|
Metropolitan, D.C. |
|
|
/Delaware |
|
|
Virginia |
|
|
Austin, Texas |
|
|
California |
|
|
Corporate |
|
|
Total |
|
As of September 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,214,060 |
|
|
$ |
951,790 |
|
|
$ |
1,369,899 |
|
|
$ |
570,804 |
|
|
$ |
306,039 |
|
|
$ |
257,208 |
|
|
$ |
250,928 |
|
|
$ |
|
|
|
$ |
4,920,728 |
|
Construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,246 |
|
|
|
36,246 |
|
Land inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,470 |
|
|
|
120,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments, at cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
1,199,957 |
|
|
$ |
911,354 |
|
|
$ |
1,359,776 |
|
|
$ |
568,413 |
|
|
$ |
294,406 |
|
|
$ |
254,019 |
|
|
$ |
246,186 |
|
|
$ |
|
|
|
$ |
4,834,111 |
|
Construction-in-progress |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,322 |
|
|
|
33,322 |
|
Land inventory |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,055 |
|
|
|
110,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended September 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
38,864 |
|
|
$ |
31,098 |
|
|
$ |
31,554 |
|
|
$ |
22,096 |
|
|
$ |
9,334 |
|
|
$ |
7,453 |
|
|
$ |
5,567 |
|
|
$ |
(302 |
) |
|
$ |
145,664 |
|
Property operating expenses, real estate taxes and third party management expenses |
|
|
14,224 |
|
|
|
11,541 |
|
|
|
11,526 |
|
|
|
10,576 |
|
|
|
3,664 |
|
|
|
3,233 |
|
|
|
3,262 |
|
|
|
(421 |
) |
|
|
57,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
24,640 |
|
|
$ |
19,557 |
|
|
$ |
20,028 |
|
|
$ |
11,520 |
|
|
$ |
5,670 |
|
|
$ |
4,220 |
|
|
$ |
2,305 |
|
|
$ |
119 |
|
|
$ |
88,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-months ended September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
36,809 |
|
|
$ |
24,617 |
|
|
$ |
33,881 |
|
|
$ |
23,944 |
|
|
$ |
8,919 |
|
|
$ |
8,014 |
|
|
$ |
5,503 |
|
|
$ |
(195 |
) |
|
$ |
141,492 |
|
Property operating expenses, real estate taxes and third party management expenses |
|
|
14,591 |
|
|
|
9,859 |
|
|
|
11,665 |
|
|
|
11,930 |
|
|
|
3,287 |
|
|
|
3,204 |
|
|
|
3,171 |
|
|
|
(232 |
) |
|
|
57,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
22,218 |
|
|
$ |
14,758 |
|
|
$ |
22,216 |
|
|
$ |
12,014 |
|
|
$ |
5,632 |
|
|
$ |
4,810 |
|
|
$ |
2,332 |
|
|
$ |
37 |
|
|
$ |
84,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-months ended September 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
118,295 |
|
|
$ |
93,520 |
|
|
$ |
96,813 |
|
|
$ |
64,526 |
|
|
$ |
27,409 |
|
|
$ |
23,202 |
|
|
$ |
16,359 |
|
|
$ |
(849 |
) |
|
$ |
439,275 |
|
Property operating expenses, real estate taxes and third party management expenses |
|
|
44,554 |
|
|
|
34,954 |
|
|
|
36,012 |
|
|
|
32,302 |
|
|
|
10,667 |
|
|
|
9,740 |
|
|
|
8,772 |
|
|
|
(895 |
) |
|
|
176,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
73,741 |
|
|
$ |
58,566 |
|
|
$ |
60,801 |
|
|
$ |
32,224 |
|
|
$ |
16,742 |
|
|
$ |
13,462 |
|
|
$ |
7,587 |
|
|
$ |
46 |
|
|
$ |
263,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-months ended September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
113,622 |
|
|
$ |
61,579 |
|
|
$ |
103,285 |
|
|
$ |
71,884 |
|
|
$ |
27,087 |
|
|
$ |
23,979 |
|
|
$ |
17,374 |
|
|
$ |
(821 |
) |
|
$ |
417,989 |
|
Property operating expenses, real estate taxes and third party management expenses |
|
|
44,218 |
|
|
|
25,643 |
|
|
|
36,041 |
|
|
|
34,716 |
|
|
|
10,111 |
|
|
|
9,968 |
|
|
|
8,853 |
|
|
|
(713 |
) |
|
|
168,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
69,404 |
|
|
$ |
35,936 |
|
|
$ |
67,244 |
|
|
$ |
37,168 |
|
|
$ |
16,976 |
|
|
$ |
14,011 |
|
|
$ |
8,521 |
|
|
$ |
(108 |
) |
|
$ |
249,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Net operating income (NOI) is defined as total revenue less property operating expenses,
real estate taxes and third party management expenses. Segment NOI 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 NOI 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. NOI is the measure that is used by the Company to
evaluate the operating performance of its real estate assets by segment. The Company also believes
that NOI provides useful information to investors regarding its financial condition and results of
operations because it reflects only those income and expenses recorded at the property level. NOI
does not also reflect general and administrative expenses, interest expenses, real estate
impairment losses, depreciation and amortization costs, capital expenditures and leasing costs, or
trends in development and construction activities that could materially impact the Companys
results from operations. All companies may not also calculate NOI in the same manner. The Company
believes that net income, as defined by GAAP, is the most appropriate earnings measure. 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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(amounts in thousands) |
|
|
(amounts in thousands) |
|
Consolidated net operating income |
|
$ |
88,059 |
|
|
$ |
84,017 |
|
|
$ |
263,169 |
|
|
$ |
249,152 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(32,346 |
) |
|
|
(34,488 |
) |
|
|
(99,477 |
) |
|
|
(97,222 |
) |
Deferred financing costs |
|
|
(1,846 |
) |
|
|
(827 |
) |
|
|
(3,844 |
) |
|
|
(2,700 |
) |
Depreciation and amortization |
|
|
(54,252 |
) |
|
|
(51,644 |
) |
|
|
(163,940 |
) |
|
|
(154,962 |
) |
Administrative expenses |
|
|
(6,177 |
) |
|
|
(5,753 |
) |
|
|
(18,311 |
) |
|
|
(18,498 |
) |
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
523 |
|
|
|
726 |
|
|
|
1,385 |
|
|
|
2,554 |
|
Historic tax credit transaction income |
|
|
12,026 |
|
|
|
|
|
|
|
12,026 |
|
|
|
|
|
Equity in income of real estate ventures |
|
|
418 |
|
|
|
1,035 |
|
|
|
2,739 |
|
|
|
3,356 |
|
Net gain on sales of interests in real estate |
|
|
|
|
|
|
|
|
|
|
2,791 |
|
|
|
|
|
Gain (loss) on early extinguishment of debt |
|
|
176 |
|
|
|
(64 |
) |
|
|
(580 |
) |
|
|
(1,701 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
6,581 |
|
|
|
(6,998 |
) |
|
|
(4,042 |
) |
|
|
(20,021 |
) |
Income from discontinued operations |
|
|
30 |
|
|
|
382 |
|
|
|
3,929 |
|
|
|
7,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6,611 |
|
|
$ |
(6,616 |
) |
|
$ |
(113 |
) |
|
$ |
(12,615 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
17. 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.
39
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.
The Companys ground leases have remaining lease terms ranging from 18 to 92 years. Minimum future
rental payments on non-cancelable leases at September 30, 2011 are as follows (in thousands):
|
|
|
|
|
|
|
2011 (three months remaining) |
|
|
|
$ |
455 |
|
2012 |
|
|
|
|
1,818 |
|
2013 |
|
|
|
|
1,818 |
|
2014 |
|
|
|
|
1,909 |
|
2015 |
|
|
|
|
1,909 |
|
Thereafter |
|
|
|
|
289,668 |
|
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.
The Company acquired ground tenancy rights under a long term ground lease agreement related to its
acquisition of an office building in Philadelphia, Pennsylvania on August 12, 2011. The annual
rental payments under this ground lease is equal to a percentage of the NOI generated by the
property. The Company has not included the amounts in the table above since such amounts are not
fixed or determinable.
The Company also acquired ground tenancy rights under a long term ground lease agreement through
its acquisition of 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
is scheduled to 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 Company acquired its rights under the lease (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 to $27.4 million. The Company has not included the
amounts in the table above since such amounts are not fixed or 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 708,856 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 $2.9 million. On the TRC acquisition date, the Company recorded a liability of
$0.7 million and this amount will accrete up to $2.9 million through September 2019. As of
September 30, 2011, the Company had a balance of $1.3 million for this liability in its
consolidated balance sheet.
The Company is currently being audited by the Internal Revenue Service (the IRS) 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. On
December 17, 2010, the Company received notice that the IRS proposed an adjustment to the
allocation of recourse liabilities allocated to the contributor of the properties. The Company has
appealed the proposed adjustment. The proposed adjustment, if upheld, would not 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.
40
As part of the Companys 2006 merger with Prentiss Properties Trust, the 2004 TRC acquisition 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, 2011: 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.
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.
18. SUBSEQUENT EVENTS
On October 28, 2011, the Company sold two office properties (Five Greentree Centre and Lake Center II), containing a total of 206,243 net rentable square feet in Marlton, New Jersey for an aggregate sales price of $22.8 million. Five Greentree Centre and Lake Center II were 96.1% and 47.8% occupied, respectively, at the date of sale.
The Company has evaluated subsequent events through the date the financial statements were issued.
41
|
|
|
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 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,
demand for office space 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; |
|
|
|
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; |
|
|
|
increases in interest rates; |
|
|
|
failure of interest rate hedging contracts to perform as expected 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; |
|
|
|
unanticipated 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; |
|
|
|
actual or threatened terrorist attacks; |
|
|
|
demand for tenant services beyond those traditionally provided by landlords; |
|
|
|
liability under environmental or other laws; |
|
|
|
failure or bankruptcy of real estate venture partners; |
|
|
|
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; |
|
|
|
unforeseen impact of climate change and compliance costs relating to laws and
regulations governing climate change; |
42
|
|
|
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
2010 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, 2011 and December 31, 2010 and for the three and nine-months ended September 30, 2011
and 2010 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, 2011, our portfolio consisted of 211 office properties, 20 industrial
facilities and five mixed-use properties that contain an aggregate of approximately 25.9 million
net rentable square feet. These 236 properties make up our core portfolio. As of September 30,
2011, we also held economic interests in 16 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 6.1 million net rentable
square feet.
As of September 30, 2011, 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 in New Jersey 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 could result in a reduction of the availability of financing and
potentially in higher borrowing costs. These factors, coupled with a sluggish economic recovery,
have reduced the volume of real estate transactions and created credit stresses on most businesses.
Vacancy rates may increase through 2012 and possibly beyond as the current economic climate
negatively impacts tenants.
43
We expect that the impact of the current state of the economy, including high unemployment and the
unprecedented volatility 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, in various forms and from different sources, including
traditional term or secured loans from banks, pension funds and life insurance companies. However,
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 throughout our portfolio by increasing occupancy and rental rates. Occupancy
at our wholly owned properties at September 30, 2011 was 85.6%.
The table below summarizes the key operating and leasing statistics of our wholly owned operating
properties for the three and nine-months ended September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
Three-month period |
|
|
Nine-month period |
|
|
|
ended September 30, 2011 |
|
|
ended September 30, 2011 |
|
Leasing Activity: |
|
|
|
|
|
|
|
|
Total net rentable square feet owned (1) |
|
|
25,884,113 |
|
|
|
25,884,113 |
|
Occupancy percentage (end of period) |
|
|
85.6 |
% |
|
|
85.6 |
% |
Average occupancy percentage |
|
|
85.7 |
% |
|
|
85.2 |
% |
New leases and expansions commenced (square feet) |
|
|
359,242 |
|
|
|
1,415,882 |
|
Leases renewed (square feet) |
|
|
590,052 |
|
|
|
1,746,894 |
|
Net absorption (square feet) (2) |
|
|
(14,529 |
) |
|
|
22,607 |
|
Percentage change in rental rates per square feet (3): |
|
|
|
|
|
|
|
|
New and expansion rental rates |
|
|
-0.5 |
% |
|
|
-0.3 |
% |
Renewal rental rates |
|
|
-0.8 |
% |
|
|
-2.2 |
% |
|
|
|
|
|
|
|
|
|
Capital Costs Committed (4): |
|
|
|
|
|
|
|
|
Leasing commissions (per square feet) |
|
$ |
4.37 |
|
|
$ |
4.63 |
|
Tenant Improvements (per square feet) |
|
$ |
12.85 |
|
|
$ |
14.68 |
|
|
|
|
(1) |
|
For each period, includes all properties in the core portfolio (i.e. not under development
or redevelopment), including properties that were sold during
these periods. |
|
(2) |
|
Includes leasing related to current developments and redevelopments, held for sale and sold
properties. |
|
(3) |
|
Rental rates include base rent plus reimbursement for operating expenses and real estate taxes. |
|
(4) |
|
Calculated on a weighted average basis. |
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 3.3% of our
aggregate final annualized base rents as of September 30, 2011 (representing approximately 1.5% of
the net rentable square feet of the Properties) expire without penalty in 2011. We maintain an
active dialogue with our tenants in an effort to maximize lease renewals. During the nine months
ended September 30, 2011, we achieved a 67.0% 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 $15.5 million or 11.2% of total receivables
(including accrued rent receivables) as of September 30, 2011 compared to $15.2 million or 12.0% of
total receivables (including accrued rent receivables) as of December 31, 2010.
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.
44
Development Risk:
At September 30, 2011, we are completing the lease-up of four recently completed developments,
aggregating 0.7 million square feet, for which we expect to spend an additional $8.4 million for
tenant improvements and other leasing costs in 2011. 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, 2011, we owned approximately 503 acres of undeveloped land. As market
conditions warrant, we will seek to opportunistically dispose of those parcels that we do not
anticipate developing. For parcels of land that we ultimately 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 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, 2011.
RECENT PROPERTY TRANSACTIONS
On August 12, 2011, we acquired an office property located in Philadelphia, Pennsylvania, together
with related ground tenancy rights under a long-term ground lease, through the foreclosure of a
note receivable amounting to $18.8 million under which the said property was encumbered. We
obtained the notes receivable from a third party on August 2, 2011 and was funded through an
advance under our Credit Facility and with available corporate funds. The office property contains
192,707 of net rentable square feet and is 57.2% leased as of September 30, 2011.
On June 27, 2011, we sold Three Greentree Center, a 69,300 net rentable square feet office property
located in Marlton, New Jersey, for a sales price of $5.9 million.
On March 28, 2011, we acquired two office properties totaling 126,496 of net rentable square feet
in Glen Allen, Virginia known as Overlook I and II for $12.6 million. These office properties are
100% leased as of September 30, 2011. We funded the acquisition price through an advance under our Credit
Facility and with available corporate funds.
On January 20, 2011, we acquired a one acre parcel of land in Philadelphia, Pennsylvania for $9.3
million. We funded the cost of this acquisition with available corporate funds and a draw on our
Credit Facility. We are planning to contribute the acquired property into a real estate venture in
return for a 50% limited interest in the partnership. The real estate venture will be formed to
construct a mixed-use development property in the city of Philadelphia. We received $4.9 million
from the prospective partner in anticipation of the real estate venture formation.
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 our 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, 2010 contains a discussion of our
critical accounting policies. There have been no significant changes in our critical accounting
policies since December 31, 2010. See also Note 2 in our unaudited
consolidated financial statements for the three and nine-months ended September 30, 2011 set forth
herein. Management discusses our critical accounting policies and managements judgments and
estimates with our Audit Committee.
45
RESULTS OF OPERATIONS
The following discussion is based on our Consolidated Financial Statements for the three and
nine-months ended September 30, 2011 and 2010. We believe that presentation of our consolidated
financial information, without a breakdown by segment, will effectively present important
information useful to our investors.
Net operating income (NOI) as presented in the comparative analysis below is defined as total
revenue less operating expenses, real estate taxes and third party management expenses. NOI is a
non-GAAP financial measure that we use internally to evaluate the operating performance of our real
estate assets by segment, as presented in Note 16 to the consolidated financial statements, and of
our business as a whole. We believe NOI provides useful information to investors regarding our
financial condition and results of operations because it reflects only those income and expense
items that are incurred at the property level. While NOI is a relevant and widely used measure of
operating performance of real estate investment trusts, it does not represent cash flow from
operations or net income as defined by GAAP and should not be considered as an alternative to those
measures in evaluating our liquidity or operating performance. NOI does not also reflect general
and administrative expenses, interest expenses, real estate impairment losses, depreciation and
amortization costs, capital expenditures and leasing costs, or trends in development and
construction activities that could materially impact our results from operations. We believe that
net income, as defined by GAAP, is the most appropriate earnings measure. See Note 16 to the
Consolidated Financial Statements for a reconciliation of NOI to our consolidated net loss.
Comparison of the Three-Month Periods Ended September 30, 2011 and 2010
The table below shows selected operating information for the Same Store Property Portfolio and
the Total Portfolio. The Same Store Property Portfolio consists of 229 properties containing an
aggregate of approximately 23.1 million net rentable square feet, and represents properties that we
owned for the entire three-month periods ended September 30, 2011 and 2010. The Same Store
Property Portfolio includes properties acquired or placed in service on or prior to July 1, 2010
and owned through September 30, 2011. The Total Portfolio includes the effects of other properties
that were either placed into service, acquired or redeveloped after July 1, 2010 or disposed prior
to September 30, 2011. 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, 2011 and 2010) 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, 2011 and
2010 (in thousands).
The Total Portfolio net income (loss) presented in the table is equal to the net income (loss) of
the Parent Company and the Operating Partnership.
46
Comparison of three-months ended September 30, 2011 to the three-months ended September 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently Completed |
|
|
Other |
|
|
|
|
|
|
Same Store Property Portfolio |
|
|
Properties |
|
|
(Eliminations) (a) |
|
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
(dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
(Decrease) |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash rents |
|
$ |
104,807 |
|
|
$ |
107,752 |
|
|
$ |
(2,945 |
) |
|
$ |
10,690 |
|
|
$ |
4,288 |
|
|
$ |
(672 |
) |
|
$ |
(657 |
) |
|
$ |
114,825 |
|
|
$ |
111,383 |
|
|
$ |
3,442 |
|
Straight-line rents |
|
|
4,990 |
|
|
|
3,368 |
|
|
|
1,622 |
|
|
|
489 |
|
|
|
415 |
|
|
|
(1 |
) |
|
|
|
|
|
|
5,478 |
|
|
|
3,783 |
|
|
|
1,695 |
|
Above/below market rent amortization |
|
|
1,397 |
|
|
|
1,427 |
|
|
|
(30 |
) |
|
|
1 |
|
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
|
1,398 |
|
|
|
1,354 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
111,194 |
|
|
|
112,547 |
|
|
|
(1,353 |
) |
|
|
11,180 |
|
|
|
4,630 |
|
|
|
(673 |
) |
|
|
(657 |
) |
|
|
121,701 |
|
|
|
116,520 |
|
|
|
5,181 |
|
Tenant reimbursements |
|
|
17,474 |
|
|
|
18,484 |
|
|
|
(1,010 |
) |
|
|
2,228 |
|
|
|
1,206 |
|
|
|
104 |
|
|
|
94 |
|
|
|
19,806 |
|
|
|
19,784 |
|
|
|
22 |
|
Termination fees |
|
|
190 |
|
|
|
1,039 |
|
|
|
(849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190 |
|
|
|
1,039 |
|
|
|
(849 |
) |
Third party management fees, labor reimbursement and leasing |
|
|
|
|
|
|
(3 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
3,028 |
|
|
|
2,925 |
|
|
|
3,028 |
|
|
|
2,922 |
|
|
|
106 |
|
Other |
|
|
545 |
|
|
|
724 |
|
|
|
(179 |
) |
|
|
231 |
|
|
|
208 |
|
|
|
163 |
|
|
|
295 |
|
|
|
939 |
|
|
|
1,227 |
|
|
|
(288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
129,403 |
|
|
|
132,791 |
|
|
|
(3,388 |
) |
|
|
13,639 |
|
|
|
6,044 |
|
|
|
2,622 |
|
|
|
2,657 |
|
|
|
145,664 |
|
|
|
141,492 |
|
|
|
4,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
40,572 |
|
|
|
42,555 |
|
|
|
1,983 |
|
|
|
4,290 |
|
|
|
1,586 |
|
|
|
(2,499 |
) |
|
|
(2,290 |
) |
|
|
42,363 |
|
|
|
41,851 |
|
|
|
(512 |
) |
Real estate taxes |
|
|
12,577 |
|
|
|
13,190 |
|
|
|
613 |
|
|
|
1,064 |
|
|
|
613 |
|
|
|
222 |
|
|
|
293 |
|
|
|
13,863 |
|
|
|
14,096 |
|
|
|
233 |
|
Third party management expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,379 |
|
|
|
1,528 |
|
|
|
1,379 |
|
|
|
1,528 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income |
|
|
76,254 |
|
|
|
77,046 |
|
|
|
(792 |
) |
|
|
8,285 |
|
|
|
3,845 |
|
|
|
3,520 |
|
|
|
3,126 |
|
|
|
88,059 |
|
|
|
84,017 |
|
|
|
4,042 |
|
General & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390 |
|
|
|
269 |
|
|
|
5,787 |
|
|
|
5,484 |
|
|
|
6,177 |
|
|
|
5,753 |
|
|
|
(424 |
) |
Depreciation and amortization |
|
|
47,707 |
|
|
|
47,254 |
|
|
|
(453 |
) |
|
|
6,215 |
|
|
|
2,849 |
|
|
|
330 |
|
|
|
1,541 |
|
|
|
54,252 |
|
|
|
51,644 |
|
|
|
(2,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
28,547 |
|
|
$ |
29,792 |
|
|
$ |
(1,245 |
) |
|
$ |
1,680 |
|
|
$ |
727 |
|
|
$ |
(2,597 |
) |
|
$ |
(3,899 |
) |
|
$ |
27,630 |
|
|
$ |
26,620 |
|
|
$ |
1,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of properties |
|
|
229 |
|
|
|
229 |
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
236 |
|
|
|
236 |
|
|
|
|
|
Square feet |
|
|
23,119 |
|
|
|
23,119 |
|
|
|
|
|
|
|
2,765 |
|
|
|
2,765 |
|
|
|
|
|
|
|
|
|
|
|
25,884 |
|
|
|
25,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523 |
|
|
|
726 |
|
|
|
(203 |
) |
Historic tax credit interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,026 |
|
|
|
|
|
|
|
12,026 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,346 |
) |
|
|
(34,488 |
) |
|
|
2,142 |
|
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,846 |
) |
|
|
(827 |
) |
|
|
(1,019 |
) |
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418 |
|
|
|
1,035 |
|
|
|
(617 |
) |
Gain (loss) on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176 |
|
|
|
(64 |
) |
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,581 |
|
|
|
(6,998 |
) |
|
|
13,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
382 |
|
|
|
(352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,611 |
|
|
$ |
(6,616 |
) |
|
$ |
13,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.03 |
|
|
$ |
(0.06 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPLANATORY NOTES
(a) Represents certain revenues and expenses at the corporate level as well as various
intercompany costs that are eliminated in consolidation and third-party management fees.
47
Total Revenue
Cash rents from the Total Portfolio increased by $3.4 million from the third quarter of 2010 to the
third quarter of 2011 primarily reflecting:
|
|
|
increase of $6.4 million in rental income due to our acquisition of Three Logan
Square, the completion and placement in service of the IRS Philadelphia Campus and
Cira South Garage during the third quarter of 2010, the acquisition of Overlook I
and II during the first quarter of 2011, the placement in service of the Juniper
Street Parking Garage during the second quarter of 2011, and the acquisition of 3020
Market Street during this quarter; and |
|
|
|
|
offsetting decrease of $3.0 million of rental income at the same store portfolio
as a result of declining renewal rates and the commencement of leases with free rent
periods during the third quarter of 2011 compared to the third quarter of 2010. |
Straight-line rents increased by $1.7 million due to the aforementioned properties that were
acquired and placed in service subsequent to the third quarter of 2010 and also due to leases that
commenced during the third quarter of 2011 with free rent periods at our same store properties.
Termination fees at the Total Portfolio decreased by $0.9 million due to timing and volume of
tenant move-outs during the third quarter of 2010 when compared to the third quarter of 2011.
Property Operating Expenses
Property operating expenses increased by $0.5 million mainly due to $2.7 million of additional
expenses from the aforementioned properties that we acquired and placed in service subsequent to
the third quarter of 2010. This increase was offset by decreases in repairs and maintenance costs
of $1.4 million and utilities costs of $0.8 million during the third quarter of 2011 compared to
the third quarter of 2010.
Depreciation expense and amortization
Depreciation expense and amortization increased by $2.6 million mainly due to the aforementioned
properties that were acquired and placed in service during and subsequent to the third quarter of
2010.
Historic tax credit transaction income
During the third quarter of 2011, we recognized $12.0 million of income related to our historic tax
credit financing. We will recognize the same amount of income each year over the five year tax
credit recapture period as defined in the Internal Revenue Code. See Note 15 to the consolidated
financial statements for additional details of our historic tax credit transaction.
Interest Expense
The decrease in interest expense of $2.1 million is primarily due to the following:
|
|
|
decrease of $2.8 million related to the pay-off of our 5.625% Guaranteed Notes in
the fourth quarter of 2010; |
|
|
|
|
decrease of $2.3 million in mortgage interest expense due to the prepayment of
five mortgage loans during 2011; |
|
|
|
|
decrease of $0.6 million resulting from our buybacks of unsecured notes
subsequent to September 30, 2010; decrease of $2.3 million due to lower weighted
average interest rates on our $183.0 million Bank Term Loan and on one of our
Preferred Trust borrowings. These borrowings have variable interest rates and a
portion of such borrowings was swapped to fixed rates through our hedging program.
The variable interest rates on these borrowings are lower than the swapped fixed
rate on the hedges assigned to them. All of our hedges matured during the fourth
quarter of 2010, resulting in said decreases; and |
|
|
|
|
decrease of $0.3 million resulting from a lower weighted average interest rate on
our Credit Facility borrowings during the third quarter of 2011 compared to the
third quarter of 2010. |
The decrease of $8.3 million in interest expense described above was offset by an increase in
interest expense of $4.2 million related to the closing of our $325.0 million 4.950% Guaranteed
Notes due 2018 in April 2011, and an increase of $2.1 million in interest expense due to a
decreased amount of capitalized interest as a result of lower development activity during the three
months ended September 30, 2011 as compared to the three months ended September 30, 2010.
48
Deferred Financing Costs
The increase in deferred financing costs of $1.0 million is mainly attributable to the acceleration
of $0.8 million of deferred financing costs in connection with the mortgage debt prepayments made
during 2011. The remainder of the increase is due to the closing of the forward financing on the
IRS Philadelphia Campus and Cira South Garage during the third quarter of 2010.
Equity in income of real estate ventures
The decrease in equity in income of real estate ventures of $0.6 million is primarily due to lower
net income at the real estate venture properties during the third quarter of 2011 compared to the
third quarter of 2010.
Discontinued Operations
We have no property dispositions during the three months ended September 30, 2011. The nominal
amount of income from discontinued operations pertains to certain sale-related expense adjustments
subsequent to the sale of certain properties through June 30, 2011.
The September 30, 2010 amounts are reclassified to include the operations of the properties sold
through the second quarter of 2011, as well as all properties that were sold through the year ended
December 31, 2010. Therefore, the discontinued operations amount for the third quarter of 2010
includes total revenue of $2.0 million, operating expenses of $1.1 million and depreciation and
amortization expense of $0.5 million.
Net income (loss)
Net income (loss) increased by $13.2 million during the three months ended September 30, 2011
compared to the three months ended September 30, 2010 as a result of the factors described above.
Net income (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.
Income (loss) per Common Share
Income per share was $0.03 during the three months ended September 30, 2011 as compared to loss per
share of $0.06 during the three months ended September 30, 2010 as a result of the factors
described above, offset by the increase in the average number of common shares outstanding. The
increase in the average number of common shares outstanding is primarily due to issuances pursuant
to the Offering Program in 2010.
49
Comparison of the Nine-Month Periods Ended September 30, 2011 and 2010
The table below shows selected operating information for the Same Store Property Portfolio and
the Total Portfolio. The Same Store Property Portfolio consists of 228 properties containing an
aggregate of approximately 22.9 million net rentable square feet, and represents properties that we
owned for the entire nine-month periods ended September 30, 2011 and 2010. The Same Store Property
Portfolio includes properties acquired or placed in service on or prior to January 1, 2010 and
owned through September 30, 2011. The Total Portfolio includes the effects of other properties that
were either placed into service, acquired or redeveloped after January 1, 2010 or disposed of prior
to September 30, 2011. 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, 2011 and 2010) 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, 2011 and 2010 (in thousands).
The Total Portfolio net loss presented in the table is equal to the net loss of the Parent Company
and the Operating Partnership.
50
Comparison of nine-months ended September 30, 2011 to the nine-months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently Completed |
|
|
Other |
|
|
|
|
|
|
Same Store Property Portfolio |
|
|
Properties |
|
|
(Eliminations) (a) |
|
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
(dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
(Decrease) |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash rents |
|
$ |
312,759 |
|
|
$ |
326,587 |
|
|
$ |
(13,828 |
) |
|
$ |
33,042 |
|
|
$ |
5,216 |
|
|
$ |
(1,960 |
) |
|
$ |
(1,972 |
) |
|
$ |
343,841 |
|
|
$ |
329,831 |
|
|
$ |
14,010 |
|
Straight-line rents |
|
|
11,975 |
|
|
|
8,804 |
|
|
|
3,171 |
|
|
|
2,949 |
|
|
|
397 |
|
|
|
|
|
|
|
|
|
|
|
14,924 |
|
|
|
9,201 |
|
|
|
5,723 |
|
Above/below market rent amortization |
|
|
4,198 |
|
|
|
4,608 |
|
|
|
(410 |
) |
|
|
(117 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
4,081 |
|
|
|
4,536 |
|
|
|
(455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rents |
|
|
328,932 |
|
|
|
339,999 |
|
|
|
(11,067 |
) |
|
|
35,874 |
|
|
|
5,541 |
|
|
|
(1,960 |
) |
|
|
(1,972 |
) |
|
|
362,846 |
|
|
|
343,568 |
|
|
|
19,278 |
|
Tenant reimbursements |
|
|
54,262 |
|
|
|
56,297 |
|
|
|
(2,035 |
) |
|
|
7,267 |
|
|
|
1,241 |
|
|
|
302 |
|
|
|
296 |
|
|
|
61,831 |
|
|
|
57,834 |
|
|
|
3,997 |
|
Termination fees |
|
|
2,706 |
|
|
|
4,000 |
|
|
|
(1,294 |
) |
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
2,706 |
|
|
|
4,124 |
|
|
|
(1,418 |
) |
Third party management fees, labor reimbursement and leasing |
|
|
|
|
|
|
(3 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
8,514 |
|
|
|
9,296 |
|
|
|
8,514 |
|
|
|
9,293 |
|
|
|
(779 |
) |
Other |
|
|
2,537 |
|
|
|
1,977 |
|
|
|
560 |
|
|
|
343 |
|
|
|
209 |
|
|
|
498 |
|
|
|
984 |
|
|
|
3,378 |
|
|
|
3,170 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
388,437 |
|
|
|
402,270 |
|
|
|
(13,833 |
) |
|
|
43,484 |
|
|
|
7,115 |
|
|
|
7,354 |
|
|
|
8,604 |
|
|
|
439,275 |
|
|
|
417,989 |
|
|
|
21,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
123,800 |
|
|
|
127,569 |
|
|
|
3,769 |
|
|
|
13,296 |
|
|
|
2,597 |
|
|
|
(8,119 |
) |
|
|
(5,979 |
) |
|
|
128,977 |
|
|
|
124,187 |
|
|
|
(4,790 |
) |
Real estate taxes |
|
|
38,600 |
|
|
|
38,533 |
|
|
|
(67 |
) |
|
|
3,547 |
|
|
|
1,012 |
|
|
|
587 |
|
|
|
672 |
|
|
|
42,734 |
|
|
|
40,217 |
|
|
|
(2,517 |
) |
Third party management expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,395 |
|
|
|
4,433 |
|
|
|
4,395 |
|
|
|
4,433 |
|
|
|
38 |
|
Net Operating Income |
|
|
226,037 |
|
|
|
236,168 |
|
|
|
(10,131 |
) |
|
|
26,641 |
|
|
|
3,506 |
|
|
|
10,491 |
|
|
|
9,478 |
|
|
|
263,169 |
|
|
|
249,152 |
|
|
|
14,017 |
|
General & administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429 |
|
|
|
269 |
|
|
|
17,882 |
|
|
|
18,229 |
|
|
|
18,311 |
|
|
|
18,498 |
|
|
|
187 |
|
Depreciation and amortization |
|
|
143,217 |
|
|
|
144,659 |
|
|
|
1,442 |
|
|
|
19,374 |
|
|
|
4,707 |
|
|
|
1,349 |
|
|
|
5,596 |
|
|
|
163,940 |
|
|
|
154,962 |
|
|
|
(8,978 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (loss) |
|
$ |
82,820 |
|
|
$ |
91,509 |
|
|
$ |
(8,689 |
) |
|
$ |
6,838 |
|
|
$ |
(1,470 |
) |
|
$ |
(8,740 |
) |
|
$ |
(14,347 |
) |
|
$ |
80,918 |
|
|
$ |
75,692 |
|
|
$ |
5,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
properties |
|
|
228 |
|
|
|
228 |
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
236 |
|
|
|
236 |
|
|
|
|
|
Square feet |
|
|
22,921 |
|
|
|
22,921 |
|
|
|
|
|
|
|
2,963 |
|
|
|
2,963 |
|
|
|
|
|
|
|
|
|
|
|
25,884 |
|
|
|
25,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,385 |
|
|
|
2,554 |
|
|
|
(1,169 |
) |
Historic tax credit transaction income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,026 |
|
|
|
|
|
|
|
12,026 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99,477 |
) |
|
|
(97,222 |
) |
|
|
(2,255 |
) |
Interest expense Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,844 |
) |
|
|
(2,700 |
) |
|
|
(1,144 |
) |
Equity in income of real estate ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,739 |
|
|
|
3,356 |
|
|
|
(617 |
) |
Net gain on sale of interests in real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,791 |
|
|
|
|
|
|
|
2,791 |
|
Loss on early extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(580 |
) |
|
|
(1,701 |
) |
|
|
1,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,042 |
) |
|
|
(20,021 |
) |
|
|
15,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,929 |
|
|
|
7,406 |
|
|
|
(3,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(113 |
) |
|
$ |
(12,615 |
) |
|
$ |
12,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.05 |
) |
|
$ |
(0.14 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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EXPLANATORY NOTES
|
|
|
(a) |
|
Represents certain revenues and expenses at the corporate level as well as various
intercompany costs that are eliminated in consolidation and third-party management fees. |
51
Total Revenue
Cash rents from the Total Portfolio increased by $14.0 million from the nine-month period ended
September 30, 2010 to the nine-month period ended September 30, 2011 primarily reflecting:
|
|
|
increase of $27.8 million in rental income due to our acquisition of Three Logan
Square, the completion and placement in service of the IRS Philadelphia Campus and
Cira South Garage during the third quarter of 2010, the acquisition of Overlook I
and II during the first quarter of 2011 the placement in service of the Juniper
Street Parking Garage during the second quarter of 2011, and the acquisition of 3020
Market Street during this quarter; and |
|
|
|
|
offsetting decrease of $13.8 million of rental income at the same store portfolio
as a result of declining renewal rates and the commencement of leases with free rent
periods during 2011 compared 2010. |
Straight-line rents increased by $5.7 million, partially due to $2.6 million of straight-line rents
from the aforementioned properties that were acquired and placed in service during and subsequent
to the third quarter of 2010. The remainder of the increase is due to leases that commenced
subsequent to the third quarter of 2010 with free rent periods at our same store properties.
Tenant reimbursements increased by $4.0 million, mainly due to $6.0 million of additional
reimbursements from the aforementioned properties that were acquired and placed in service during
and subsequent to the third quarter of 2010. These increases were offset by a $2.0 million
decrease in tenant reimbursements in our same store portfolio resulting from decreases in property
operating expenses at our same store portfolio. These changes in tenant reimbursements are
consistent with the changes in property operating expenses and real estate taxes.
Termination fees at the Total Portfolio decreased by $1.4 million due to timing and volume of
tenant move-outs during the nine months ended September 30, 2011 when compared to the nine months
ended September 30, 2010.
Property Operating Expenses
Property operating expenses increased by $4.8 million, mainly due to $10.7 million of additional
expenses from the aforementioned properties that we acquired and placed in service during and
subsequent to the third quarter of 2010. This increase was offset by the decreases in repairs and
maintenance costs of $3.4 million, utilities costs of $0.3 million, and bad debt expense of $1.9
million during the nine months ended September 30, 2011 compared to the nine months ended September
30, 2010 within our same store portfolio. In addition, during the first quarter of 2011, we
received a refund from the State of Texas amounting to $0.3 million for overpayment of gross
receipt taxes in prior years.
Real Estate Taxes
Real estate taxes increased by $2.5 million, mainly due to additional real estate taxes from the
aforementioned properties that we acquired and placed into service during and subsequent to the
third quarter of 2010.
Depreciation expense and amortization
Depreciation expense and amortization increased by $9.0 million, mainly due to the additional
depreciation and amortization expense from the aforementioned properties that we acquired and
placed into service during and subsequent to the third quarter of 2010. We also recorded $4.7
million of out of period depreciation and amortization expense adjustment during the second quarter
of 2011 relating to intangible assets representing tenant relationships and in-place leases that
should have been written off in prior years. (See Note 2 to the consolidated financial statements).
Interest Income
Interest income decreased by $1.2 million, primarily due to the receipt during the third quarter of
2010 of the $40.0 million purchase money mortgage note that we extended to the buyer of our
properties in Oakland, California in October 2008.
Historic tax credit transaction income
During the third quarter of 2011, we recognized $12.0 million of income related to our historic tax
credit financing. We will recognize the same amount of income each year over the five year tax
credit recapture period as defined in the Internal Revenue Code. See Note 15 to the consolidated
financial statements for additional details of our historic tax credit transaction.
52
Interest Expense
The increase in interest expense of $2.3 million is primarily due to the following:
|
|
|
increase of $8.1 million related to the closing in April 2011 of our $325.0
million 4.950% Guaranteed Notes due 2018; |
|
|
|
increase of $3.0 million due to the closing of the mortgages on the IRS
Philadelphia Campus and Cira South Garage during the third quarter of 2010; and |
|
|
|
decrease of $8.0 million of capitalized interest expense as a result of lower
development activity during the nine months ended September 30, 2011 compared to the
nine months ended September 30, 2010. |
The increase of $19.1 million in interest expense described above was offset by the following
decreases in interest expense during the nine months ended September 30, 2011 compared to the nine
months ended September 30, 2010:
|
|
|
decrease of $8.3 million related to the pay-off of our 5.625% Guaranteed Notes in
the fourth quarter of 2010; |
|
|
|
decrease of $6.7 million due to lower weighted average interest rates on our
$183.0 million Bank Term Loan and on one of our Preferred Trust borrowings. These
borrowings have variable interest rates and a portion of such borrowings was swapped
to fixed rates through our hedging program. The variable interest rates on these
borrowings are lower than the swapped fixed rate on the hedges assigned to them. All
of our hedges matured during the fourth quarter of 2010 resulting in said decreases;
and |
|
|
|
decrease $1.8 million resulting from our buybacks of unsecured notes subsequent
to September 30, 2010. The details of the various repurchases made during 2011 are
noted in the Gain (loss) on early extinguishment of debt section below. |
Deferred Financing Costs
The increase in deferred financing costs of $1.1 million is mainly attributable to the acceleration
of $1.0 million of deferred financing costs in connection with the mortgage debt prepayments made
during 2011. The remainder of the increase is due to the closing of the forward financing on the
IRS Philadelphia Campus and CIRA South Garage during the third quarter of 2010.
Equity in income of real estate ventures
The decrease in equity in income of real estate ventures of $0.6 million is primarily due to lower
net income at the real estate venture properties during 2011 compared to 2010, offset by the $0.6
million of income from the sale of a building of one of the unconsolidated real estate ventures and
by the $0.3 million of preferred returns from the two unconsolidated real estate ventures in which
we acquired 25% interest during the third quarter of 2010 (see Note 4 of the notes to the
consolidated financial statements for details of these two transactions).
Net gain on sale of interests in real estate
During the three months ended March 31, 2011, we recognized a $2.8 million net gain upon the sale
of our 11% remaining ownership interest in three properties that we partially sold to one of our
unconsolidated Real Estate Ventures in December 2007. We had retained an 11% equity interest in
these properties subject to a put/call at fixed prices for a period of three years from the time of
the sale. In January 2011, we exercised the put/call which then transferred full ownership in the
three properties to the Real Estate Venture. Accordingly, our direct continuing involvement
through our 11% interest in the properties ceased as a result of the transfer of the ownership
interest.
Loss on early extinguishment of debt
During the nine months ended September 30, 2011, we repurchased (i) $22.9 million of our 5.750%
Guaranteed Notes due 2012, and (ii) $1.4 million of our 7.500% Guaranteed Notes due 2015, which
resulted in a net loss on early extinguishment of debt of $1.1 million. The loss was offset by the
write-off of the unamortized fixed-rate debt premium of $0.5 million related to the prepayment of
two of our mortgage loans during the nine months ended September 30, 2011.
During the nine-month period ended September 30, 2010, we repurchased (i) $54.4 million of our
3.875% 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.
53
Discontinued Operations
During the nine month period ended September 30, 2011, we sold one property in Marlton, New Jersey.
This property had total revenues of $0.5 million, operating expense of $0.3 million and $0.1
million of depreciation and amortization expense. We recognized a gain on sale of this property of
$3.8 million.
The nine month period ended September 30, 2010 amounts are reclassified to include the operations
of the properties sold through the third quarter of 2011, as well as all properties that were sold
through the year ended December 31, 2010. Therefore, the discontinued operations amount for the
nine months ended September 30, 2010 includes total revenue of $6.3 million, operating expenses of
$3.3 million and depreciation and amortization expense of $2.0 million. We recognized a gain on
sale of these properties of $6.4 million.
Net loss
Net loss decreased by $12.5 million during the nine months ended September 30, 2011 compared to the
nine months ended September 30, 2010 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 per Common Share
Loss per share was $0.05 during the nine months ended September 30, 2011 and $0.14 during the nine
months ended September 30, 2010, respectively as a result of the factors described above, offset by
the increase in the average number of common shares outstanding. The increase in the average
number of common shares outstanding is primarily due to issuances pursuant to the Offering Program
in 2010.
54
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 shares and
preferred shares. The Parent Companys principal source of funding for its dividend payments and
other obligations is the distributions it receives from the Operating Partnership.
As of September 30, 2011, the Parent Company owned a 93.2% interest in the Operating Partnership.
The remaining interest of approximately 6.8% pertains to common limited partnership interests owned
by non-affiliated investors who contributed property to the Operating Partnership in exchange for
the interests. 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.
As noted above, the Parent Companys only source of capital (other than proceeds of equity
issuances which the Parent Company contributes to the Operating Partnership) is 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 enables the Parent Company to make dividend payments
to its shareholders.
The Parent Company receives proceeds from equity issuances from time to time contributes 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 engages sales agents who receive
compensation, in aggregate, of up to 2% of the gross sales price per share. During the nine months
ended September 30, 2011, the Parent Company sold 679,285 shares under this program at an average
sales price of $12.18 per share resulting in net proceeds of $8.0 million. The Parent Company
contributed the net proceeds from the sales to the Operating Partnership, which the Operating
Partnership in turn used to reduce borrowings under the Credit Facility and for general corporate
purposes. From its inception through September 30, 2011, the Parent Company has sold 6,421,553
shares under this program, resulting in 8,578,447 remaining shares available for sale. There was no
sale activity during the third quarter of 2011.
On September 13, 2011, the Parent Company declared a distribution of $0.15 per common share,
totaling $20.5 million, which it paid on October 19, 2011 to its shareholders of record as of
October 5, 2011. 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, 2011. These shares
are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on
October 17, 2011 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, 2011, there were approximately 0.5 million shares remaining to be repurchased under this
program. The Parent Company did not repurchase any shares during the nine-month period ended
September 30, 2011. 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 unconditionally guarantees the Operating Partnerships secured and unsecured
obligations, which, as of September 30, 2011, amounted to $493.3 million and $2,006.0 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, 2011, 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 shareholders 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.
55
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 uncertain economic conditions, 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 2011 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 its 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
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
regularly pursues 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 or property acquisition funding needs. The Operating
Partnership believes that its current balance sheet is in an adequate position at the date of this
filing, despite the volatility in the credit and financial markets. On April 5, 2011, the Operating
Partnership closed a registered offering of $325.0 million in aggregate principal amount of its
4.95% senior unsecured notes due 2018. The notes were priced at 98.907% of their face amount with
an effective interest rate of 5.137%. The net proceeds which amounted to $318.9 million after
deducting underwriting discounts and offering expenses were used to repay indebtedness under the
Credit Facility and for general corporate purposes. During the nine months ended September 30,
2011, the Parent Company had contributed $8.0 million in net proceeds from the sale of 679,285 of
its common shares under the Offering Program to the Operating Partnership in exchange for the
issuance of 679,285 common partnership units to the Parent Company. The Operating Partnership used
the net proceeds contributed by the Parent Company to reduce borrowings under the Credit Facility
and for general corporate purposes.
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.
56
The ability of the Parent Company and the Operating Partnership to sell their equity securities 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 as consideration for property acquisitions and developments.
The Operating Partnership will also consider sales of selected Properties as another vehicle for
managing its liquidity. Asset sales have been a source of cash for the Operating Partnership. 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, 2011 and December 31, 2010, the Operating Partnership maintained cash and
cash equivalents of $5.7 million and $16.6 million, respectively. The following are the changes in
cash flow from its activities for the nine-month periods ended September 30 (in thousands):
|
|
|
|
|
|
|
|
|
Activity |
|
2011 |
|
|
2010 |
|
Operating |
|
$ |
155,993 |
|
|
$ |
149,622 |
|
Investing |
|
|
(162,476 |
) |
|
|
(159,037 |
) |
Financing |
|
|
(4,376 |
) |
|
|
111,889 |
|
|
|
|
|
|
|
|
Net cash flows |
|
$ |
(10,859 |
) |
|
$ |
102,474 |
|
|
|
|
|
|
|
|
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 increase of $6.4 million in cash flows from operating activities of the Operating
Partnership during the nine months ended September 30, 2011 compared to the nine months ended
September 30, 2010 is primarily attributable to the following:
|
|
|
acquisition of Three Logan Square and the completion and placement in service of the IRS
Philadelphia Campus and Cira South Garage during the third quarter of 2010, acquisition of
Overlook I and II during the first quarter of 2011, the placement in service of the Juniper
Street Parking Garage during the second quarter of 2011, and the acquisition of 3020 Market
Street during the current quarter; |
|
|
|
increase in occupancy from 84.9% during the nine months ended September 30, 2010 to
85.6% during the nine months ended September 30, 2011; and |
|
|
|
timing of cash receipts and cash expenditures in the normal course of operations. |
The increase in cash from operating activities was partially offset by the decrease in the number
of operating properties due to dispositions. The Operating Partnership sold a total of eight
properties subsequent to September 30, 2010. The Operating Partnership also received contribution
of $27.4 million from the historic tax credit transaction in June 2010 and recognized $12.0 million
of the total contributions received as income during the current quarter.
The net increase of $3.4 million in cash flows used in investing activities of the Operating
Partnership during the nine months ended September 30, 2011 compared to the nine months ended
September 30, 2010 is primarily attributable to the following:
|
|
|
receipt of $40.0 million of proceeds from the repayment of a note receivable during the
nine months ended September 30, 2010; |
57
|
|
|
decrease in net proceeds from sales of properties of $11.7 million during the nine months
ended September 30, 2011 when compared to the nine months ended September 30, 2010 (see Note
3 to the consolidated financial statements); |
|
|
|
|
$1.0 million loan provided to an unconsolidated Real Estate Venture partner during the
nine months ended September 30, 2011; and |
|
|
|
$2.3 million of investments in unconsolidated Real Estate Ventures during the third
quarter of 2011. |
The increase in cash used in investing activities was partially offset by the following
transactions:
|
|
|
decrease of $9.7 million of net cash paid related to the acquisitions in 2011 and 2010
(see Note 3 to the consolidated financial statements for details); |
|
|
|
decreased capital expenditures for tenant and building improvements and leasing
commissions by $35.5 million during the nine months ended September 30, 2011 compared to the
nine months ended September 30, 2010. The decrease in capital expenditures mainly related to
the completion of and placement in service of the IRS Philadelphia Campus and Cira South
Garage during the third quarter of 2010 and of the Juniper Street Parking Garage during the
second quarter of the current year; |
|
|
|
increase in cash distributions from unconsolidated Real Estate Ventures of $2.0 million
during the nine months ended September 30, 2011 compared to the nine months ended September
30, 2010. $0.6 million of the increase pertains to a portion of the proceeds from the sale
of a building of one of the unconsolidated Real Estate Ventures (see Footnote 4 of the notes
to the consolidated financial statements); |
|
|
|
decrease in cash of $1.4 million during the nine months ended September 30, 2010 due to
the deconsolidation of variable interest entities last year; and |
|
|
|
decrease in advances made for purchase of tenant assets, net of repayments of $3.0
million during the nine months ended September 30, 2011 when compared to the nine months
ended September 30, 2010. |
The net decrease of $116.3 million in cash from financing activities of the Operating Partnership
during the nine months ended September 30, 2011 compared to the nine months ended September 30,
2010 is mainly due to the following:
|
|
|
decrease in proceeds from Credit Facility and mortgage notes payable of $190.5 million
during the nine months ended September 30, 2011 compared to the nine months ended September
30, 2010; |
|
|
|
increase in repayments of the Credit Facility and mortgage notes payable of $222.9
million during the nine months ended September 30, 2011 compared to the nine months ended
September 30, 2010; |
|
|
|
net settlement of hedge transactions amounting to $0.6 million during the nine months
ended September 30, 2011; |
|
|
|
increase in debt financing costs of $3.7 million during the nine months ended September
30, 2011 compared to the nine months ended September 30, 2010; |
|
|
|
decrease in net proceeds received from the issuance of common shares of the Parent
Company and exercise of stock options amounting to $57.4 million during the nine months
ended September 30, 2011, compared to the issuances made during the nine months ended
September 30, 2010; |
|
|
|
increase in distributions paid by the Parent Company to its shareholders and on
non-controlling interests from $66.3 million during the nine months ended September 30, 2010
to $68.4 million during the nine months ended September 30, 2011; and |
|
|
|
receipt of refund of deferred financing costs related to forward commitment amounting to
$1.6 million during the third quarter of 2010. |
The net decrease in cash from financing activities described above was offset by the following:
|
|
|
proceeds from the issuance of our 4.950% Notes due 2018 during the second quarter of
2011 amounting to $321.5 million; and |
|
|
|
decrease in repayments of unsecured notes of $41.0 million during the nine months ended
September 30, 2011 when compared to the nine months ended September 30, 2010. |
58
Capitalization
Indebtedness
During the nine-months ended September 30, 2011, we repurchased $24.3 million of our 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 |
|
2012 5.750% Notes |
|
$ |
23,765 |
|
|
$ |
22,904 |
|
|
$ |
(857 |
) |
|
$ |
32 |
|
2015 7.500% Notes |
|
|
1,600 |
|
|
|
1,415 |
|
|
|
(212 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,365 |
|
|
$ |
24,319 |
|
|
$ |
(1,069 |
) |
|
$ |
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the Operating Partnerships mortgage notes payable, its unsecured notes
and its Credit Facility at September 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(dollars in thousands) |
|
Balance: |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
2,071,685 |
|
|
$ |
1,929,962 |
|
Variable rate unhedged |
|
|
427,610 |
|
|
|
504,610 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,499,295 |
|
|
$ |
2,434,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Debt: |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
82.9 |
% |
|
|
79.3 |
% |
Variable rate unhedged |
|
|
17.1 |
% |
|
|
20.7 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average interest rate at period end: |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
6.1 |
% |
|
|
6.4 |
% |
Variable rate unhedged |
|
|
1.1 |
% |
|
|
1.6 |
% |
Total |
|
|
5.3 |
% |
|
|
5.4 |
% |
The variable rate debt shown above generally bear interest based on various spreads over a LIBOR
term selected by the Operating Partnership.
The Operating Partnership uses Credit Facility borrowings for general business purposes, including
the acquisition, development and redevelopment of properties and the repayment of other debt. It
has the option to increase the maximum borrowings under its Credit Facility to $800.0 million
subject to the absence of any defaults and its ability to obtain additional commitments from its
existing or new lenders. The Credit Facility requires the maintenance of financial covenants,
including ratios related to minimum net worth, debt to total capitalization and fixed charge
coverage and customary non-financial covenants. The Operating Partnership is in compliance with all
covenants as of September 30, 2011.
The indenture under which the Operating Partnership issued its unsecured notes contains financial
covenants, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not
to exceed 40%, (3) a debt service coverage ratio of greater than 1.5 to 1.0 and (4) an unencumbered
asset value of not less than 150% of unsecured debt. The Operating Partnership is in compliance
with all covenants as of September 30, 2011.
The Operating Partnership has mortgage loans that are collateralized by certain of its Properties.
Payments on mortgage loans are generally due in monthly installments of principal and interest, or
interest only. The Operating Partnership intends to refinance or repay its mortgage loans as they
mature through the use of proceeds from selective Property sales and secured or unsecured
borrowings. However, in the current and expected future economic environment one or more of these
sources may not be available on attractive terms or at all.
The Parent Companys charter documents do not limit the amount or form of indebtedness that the
Operating Partnership may incur, and its policies on debt incurrence are solely within the
discretion of the Parent Companys Board of Trustees, subject to financial covenants in the Credit
Facility, indenture and other credit agreements.
59
As of September 30, 2011, the Operating Partnership had guaranteed repayment of approximately $0.7
million of loans on behalf of one Real Estate Venture. The Operating Partnership also provides
customary environmental indemnities and completion guarantees in connection with construction and
permanent financing both for its own account and on behalf of certain of the Real Estate Ventures.
Equity
On September 13, 2011, the Operating Partnership declared a distribution of $0.15 per common
partnership unit, totaling $20.5 million, which was paid on October 19, 2011 to unitholders of
record as of October 5, 2011.
On September 13, 2011, 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, 2011.
These units are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions
paid on October 17, 2011 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 nine-months ended September 30, 2011, the Parent Company contributed net proceeds
amounting to $8.0 million from the sale of 679,285 shares under its Offering Program to the
Operating Partnership in exchange for the issuance of 679,285 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. From the inception
of the Offering Program through September 30, 2011, the Operating Partnership has issued an
aggregate of 8,578,447 common partnership units to the Parent Company.
The Parent Company did not purchase any shares during the nine months ended September 30, 2011 and,
accordingly, during the nine months ended September 30, 2011, the Operating Partnership did not
repurchase any units in connection with the Parent Companys share repurchase program.
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, if
warranted by market conditions, the Company may offer and sell equity and debt securities from time
to time under the shelf registration statement.
Short- and Long-Term Liquidity
The Operating Partnership believes that its cash flow from operations is adequate to fund its
short-term liquidity requirements, excluding principal payments under its debt obligations. Cash
flow from operations is generated primarily from rental revenues and operating expense
reimbursements from tenants and management services income from providing services to third
parties. The Operating Partnership intends to use these funds to meet short-term liquidity needs,
which are to fund operating expenses, recurring capital expenditures, tenant allowances, leasing
commissions, interest expense and the minimum distributions required to maintain the Parent
Companys REIT qualification under the Internal Revenue Code. The Operating Partnership expects to
meet short-term scheduled debt maturities through borrowings under the Credit Facility and proceeds
from potential asset dispositions. As of September 30, 2011, the Operating Partnership had $561.1
million of unsecured debt scheduled to mature and $15.3 million of mortgage principal payments
through December 2012. On April 5, 2011, the Operating Partnership closed a registered underwritten
offering of $325.0 million in aggregate principal amount of its 4.95% senior unsecured notes due
2018. The net proceeds which amounted to $318.9 million after deducting underwriting discounts and
offering expenses were used to repay indebtedness under the Credit Facility and for general
corporate purposes. The Operating Partnership extended its Credit Facility and the Bank Term Loan
from June 29, 2011 to June 29, 2012 and is currently exploring refinancing options such as bank
financing or unsecured note issuances to address the upcoming maturities. For the remaining debt
maturities the Operating Partnership expects to have sufficient capacity under the Credit Facility
but it will also continue to evaluate the other listed sources to fund these maturities.
The Operating Partnership expects to meet its long-term liquidity requirements, such as for
property acquisitions, development, investments in real estate ventures, scheduled debt maturities,
major renovations, expansions and other significant capital improvements, through cash from
operations, borrowings under the Credit Facility, additional secured and unsecured indebtedness,
the issuance of equity securities, contributions from joint venture investors and proceeds from
asset dispositions.
Many commercial real estate lenders have stricter underwriting standards or have withdrawn from the
lending marketplace. Current global economic sluggishness has impacted liquidity in the debt
markets, making financing terms less attractive, and in certain cases have resulted in the
unavailability of certain types of debt financing. As a result, the Operating Partnership expects
debt financings may be more difficult to obtain and that borrowing costs on new and refinanced debt
may be more expensive. Moreover, the volatility in the financial markets, in general, could make it
more difficult or costly for the Parent Company to raise capital through the issuance of common
stock, preferred stock or other equity instruments or through public issuances of debt securities
from its shelf registration
statement as it has been able to do in the past. Such conditions could also limit the Operating
Partnerships ability to raise capital through asset dispositions at attractive prices or at all.
60
Inflation
A majority of the Operating Partnerships leases provide for tenant reimbursement of real estate
taxes and operating expenses either on a triple net basis or over a base amount. In addition, many
of its office leases provide for fixed base rent increases. The Operating Partnership believes that
inflationary increases in expenses will be partially offset by expense reimbursement and
contractual rent increases.
Commitments and Contingencies
The following table outlines the timing of payment requirements related to the Operating
Partnerships contractual commitments as of September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by Period (in thousands) |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable (a) |
|
$ |
493,288 |
|
|
$ |
12,061 |
|
|
$ |
78,494 |
|
|
$ |
196,689 |
|
|
$ |
206,044 |
|
Revolving credit facility |
|
|
166,000 |
|
|
|
|
|
|
|
166,000 |
|
|
|
|
|
|
|
|
|
Unsecured term loan |
|
|
183,000 |
|
|
|
|
|
|
|
183,000 |
|
|
|
|
|
|
|
|
|
Unsecured debt (a) |
|
|
1,657,007 |
|
|
|
212,131 |
|
|
|
|
|
|
|
1,041,266 |
|
|
|
403,610 |
|
Ground leases (b) |
|
|
297,577 |
|
|
|
455 |
|
|
|
5,545 |
|
|
|
5,727 |
|
|
|
285,850 |
|
Development contracts (c) |
|
|
177 |
|
|
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (d) |
|
|
686,956 |
|
|
|
123,364 |
|
|
|
228,934 |
|
|
|
185,735 |
|
|
|
148,923 |
|
Other liabilities |
|
|
9,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,493,520 |
|
|
$ |
348,188 |
|
|
$ |
661,973 |
|
|
$ |
1,429,417 |
|
|
$ |
1,053,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Amounts do not include unamortized discounts and/or premiums. |
|
(b) |
|
Future minimum rental payments under the terms of all non-cancelable ground leases under
which we are the lessee
are expensed on a straight-line basis regardless of when payments are due. The table above
does not include the
future minimum annual rental payments related to the ground lease that we assumed in
connection with our acquisition of
Three Logan Square as the amounts cannot be determined at this time. The table also don
include the future minimum
rental payments related to the ground lease in connection with our acquisition of an office
building in Philadelphia,
Pennsylvania during the current quarter. Both of these ground leases are discussed below. |
|
(c) |
|
Represents contractual obligations for development projects and does not contemplate all
costs expected to be incurred
for such developments. |
|
(d) |
|
Variable rate debt future interest expense commitments are calculated using
September 30, 2011 interest rates. |
The Operating Partnership obtained 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 Operating Partnership has various options to renew the
lease until 2091. The Operating Partnership also obtained 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 that time until 2042 and at fair market value until 2091. The
Operating Partnership 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
Operating Partnership has not included the amounts in the table above since such amounts are not
fixed and determinable. The Operating Partnership also acquired ground tenancy rights under a long
term ground lease agreement
related to its acquisition of an office building in Philadelphia, Pennsylvania on August 12, 2011.
The annual rental payments under this ground lease are equal to a percentage of the NOI generated
by the property. The Company has not included the amounts in the table above since such amounts are
not fixed or determinable.
As part of the Operating Partnerships September 2004 acquisition of a portfolio of properties from
the Rubenstein Company (which the Operating Partnership refers to as the TRC acquisition), the
Operating Partnership acquired its interest in Two Logan Square, a 708,856 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
Operating Partnership, through its ownership of the second and third mortgages, is the primary
beneficiary. It currently does not expect to take title to Two Logan Square until, at the earliest,
September 2019. If the Operating Partnership takes fee title to Two Logan Square upon a foreclosure
of its mortgage, the Operating Partnership has agreed to pay an unaffiliated third party that holds
a residual interest in the fee owner of this property an amount equal to $2.9 million. On the TRC
acquisition date, the Operating Partnership recorded a liability of $0.7 million and this amount
will accrete up to $2.9 million through September 2019. As of September 30, 2011, the Operating
Partnership has a balance of $1.3 million for this liability on its consolidated balance sheet.
61
The Operating Partnership is currently being audited by the Internal Revenue Service (the IRS)
for its 2004 tax year. The audit concerns the tax treatment of the TRC acquisition in September
2004 in which the Operating Partnership acquired a portfolio of properties through the acquisition
of a limited partnership. On December 17, 2010, the Operating Partnership received notice that the
IRS proposed an adjustment to the allocation of recourse liabilities allocated to the contributor
of the properties. The Operating Partnership has appealed the proposed adjustment. The proposed
adjustment, if upheld, would not result in a material tax liability for the Operating Partnership.
However, an adjustment could raise a question as to whether a contributor of partnership interests
in the 2004 transaction could assert a claim against the Operating Partnership under the tax
protection agreement entered into as part of the transaction.
As part of the Operating Partnerships 2006 Prentiss merger, the 2004 TRC acquisition and several
of its other transactions, it 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 Operating Partnership agreed not to sell acquired properties for periods up to 15
years from the date of the TRC acquisition as follows at
September 30, 2011: 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 Operating Partnership
assumed the obligation of Prentiss not to sell Concord Airport Plaza before March, 2018. The
Operating Partnerships agreements generally provide that we 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 Operating Partnership was to sell a restricted
property before expiration of the restricted period in a non-exempt transaction, it would be
required to make significant payments to the parties who sold the applicable property to the
Operating Partnership for tax liabilities triggered to them.
As part of the Operating Partnerships acquisition of properties from time to time in tax-deferred
transactions, it has agreed to provide certain of the prior owners of the acquired properties with
the right to guarantee its indebtedness. If the Operating Partnership was to seek to repay the
indebtedness guaranteed by the prior owner before the expiration of the applicable agreement, it
will be required to provide the prior owner an opportunity to guarantee a qualifying replacement
debt. These debt maintenance agreements may limit its ability to refinance indebtedness on terms
that will be favorable to the Operating Partnership.
In connection with the development of the IRS Philadelphia Campus and the Cira South Garage,
during 2008, the Operating Partnership entered into a historic tax credit and new markets tax
credit arrangement, respectively. The Operating Partnership 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 therefore, require a refund to USB or a reduction of investor
capital contributions, which are reported as deferred income in the Operating Partnerships
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 Operating
Partnership does not anticipate that any material refunds or reductions of investor capital
contributions will be required in connection with these arrangements.
The Operating Partnership invests in properties and regularly incurs capital expenditures in the
ordinary course of its business to maintain the properties. The Operating Partnership believes that
such expenditures enhance its competitiveness. The Operating Partnership also enters into
construction, utility and service contracts in the ordinary course of its business which may extend
beyond one year. These contracts typically provide for cancellation with insignificant or no
cancellation penalties.
Interest Rate Risk and Sensitivity Analysis
The analysis below presents the sensitivity of the market value of the Operating Partnerships
financial instruments to selected changes in market rates. The range of changes chosen reflects its
view of changes which are reasonably possible over a one-year period. Market values are the present
value of projected future cash flows based on the market rates chosen.
The Operating Partnerships financial instruments consist of both fixed and variable rate debt. As
of September 30, 2011, its consolidated debt consisted of $493.3 million in fixed rate mortgages,
$183.0 million in an unsecured term loan, $166.0 million of borrowings under the Credit Facility,
and $1,657.0 million in unsecured notes, of which $1,578.4 million are fixed rate borrowings and
$78.6 million are variable rate borrowings. All financial instruments were entered into for other
than trading purposes and the net market value of these financial instruments is referred to as the
net financial position. Changes in interest rates have different impacts on the fixed and variable
rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt
portfolio impacts the net financial instrument position, but has no impact on interest incurred or
cash flows. A change in interest rates on the
variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not
impact the net financial instrument position.
62
As of September 30, 2011, based on prevailing interest rates and credit spreads, the fair value of
the Operating Partnerships unsecured notes was $1.6 billion. For sensitivity purposes, a 100 basis
point change in the discount rate equates to a change in the total fair value of the Operating
Partnerships debt, including the Notes, of approximately $15.7 million at September 30, 2011.
From time to time or as the need arises, the Operating Partnership uses derivative instruments to
manage interest rate risk exposures and not for speculative purposes. The total carrying value of
the Operating Partnerships variable rate debt was approximately $427.6 million and $444.6 million
at September 30, 2011 and December 31, 2010, respectively. The total fair value of the Operating
Partnerships debt, excluding the Notes, was approximately $416.1 million and $432.6 million at
September 30, 2011 and December 31, 2010, respectively. For sensitivity purposes, a 100 basis point
change in the discount rate equates to a change in the total fair value of its debt, excluding the
Notes, of approximately $4.3 million at September 30, 2011, and a 100 basis point change in the
discount rate equates to a change in the total fair value of its debt of approximately $4.4 million
at December 31, 2010.
If market rates of interest increase by 1%, the fair value of the Operating Partnerships
outstanding fixed-rate mortgage debt would decrease by approximately $28.6 million. If market rates
of interest decrease by 1%, the fair value of its outstanding fixed-rate mortgage debt would
increase by approximately $29.2 million.
At September 30, 2011, the Operating Partnerships outstanding variable rate debt based on LIBOR
totaled approximately $427.6 million. At September 30, 2011, the interest rate on its variable rate
debt was approximately 1.1%. If market interest rates on its variable rate debt were to change by
100 basis points, total interest expense would have changed by approximately $1.1 million for the
quarter ended September 30, 2011.
These amounts were determined solely by considering the impact of hypothetical interest rates on
the Operating Partnerships financial instruments. Due to the uncertainty of specific actions it
may undertake to minimize possible effects of market interest rate increases, this analysis assumes
no changes in its financial structure.
Funds from Operations (FFO)
Pursuant to the definition of FFO adopted by the Board of Governors of the National
Association of Real Estate Investment Trusts (NAREIT), we calculate FFO by adjusting net
income/(loss) attributable to common unit holders (computed in accordance with GAAP) for gains (or
losses) from sales of properties, real estate related depreciation and amortization, and after
similar adjustments for unconsolidated real estate ventures. FFO is a non-GAAP financial measure.
The Operating Partnership believes that the use of FFO combined with the required U.S. GAAP
presentations, has been beneficial in improving the understanding of operating results of REITs
among the investing public and making comparisons of REITs operating results more meaningful. The
Operating Partnership considers FFO to be a useful measure for reviewing comparative operating and
financial performance because, by excluding gains or losses related to sales of previously
depreciated operating real estate assets and real estate depreciation and amortization, FFO can
help the investing public compare the operating performance of a companys real estate between
periods or as compared to other companies. The Operating Partnerships computation of FFO may not
be comparable to FFO reported by other REITs or real estate companies that do not define the term
in accordance with the current NAREIT definition or that interpret the current NAREIT definition
differently.
The Operating Partnership considers net income, as defined by U.S. GAAP, to be the most comparable
earnings measure to FFO. While FFO and FFO per unit are relevant and widely used measures of
operating performance of REITs, FFO does not represent cash flow from operations or net income as
defined by U.S. GAAP and should not be considered as alternatives to those measures in evaluating
the companys liquidity or operating performance. The Operating Partnership believes that to
further understand our performance, FFO should be compared with its reported net income/(loss)
attributable to common unit holders and considered in addition to cash flows in accordance with
GAAP, as presented in our Consolidated Financial Statements.
63
The following table presents a reconciliation of net income attributable to common unit holders to
FFO for the three and nine months ended September 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month periods |
|
|
Nine-month periods |
|
|
|
ended September 30, |
|
|
ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(amounts in thousands) |
|
|
(amounts in thousands) |
|
Net income (loss) attributable to common unitholders |
|
$ |
4,492 |
|
|
$ |
(8,742 |
) |
|
$ |
(6,491 |
) |
|
$ |
(18,993 |
) |
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocated to unvested restricted unitholders |
|
|
121 |
|
|
|
128 |
|
|
|
384 |
|
|
|
384 |
|
Net gain on sale of interests in real estate |
|
|
|
|
|
|
|
|
|
|
(2,791 |
) |
|
|
|
|
Net (gain) loss on disposition of discontinued operations |
|
|
|
|
|
|
3 |
|
|
|
(3,836 |
) |
|
|
(6,346 |
) |
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property continuing operations |
|
|
41,518 |
|
|
|
38,557 |
|
|
|
126,213 |
|
|
|
117,159 |
|
Leasing costs including acquired intangibles continuing operations |
|
|
12,444 |
|
|
|
12,802 |
|
|
|
36,887 |
|
|
|
36,838 |
|
Real property discontinued operations |
|
|
(13 |
) |
|
|
439 |
|
|
|
70 |
|
|
|
1,604 |
|
Leasing costs including acquired intangibles discontinued operations |
|
|
|
|
|
|
110 |
|
|
|
4 |
|
|
|
385 |
|
Companys share of unconsolidated real estate ventures |
|
|
2,128 |
|
|
|
2,610 |
|
|
|
6,553 |
|
|
|
7,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations |
|
$ |
60,690 |
|
|
$ |
45,907 |
|
|
$ |
156,993 |
|
|
$ |
138,764 |
|
Funds from operations allocable to unvested restricted shareholders |
|
|
(359 |
) |
|
|
(294 |
) |
|
|
(983 |
) |
|
|
(897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations available to common share and unit holders (FFO) |
|
$ |
60,331 |
|
|
$ |
45,613 |
|
|
$ |
156,010 |
|
|
$ |
137,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares/units outstanding fully diluted |
|
|
146,651,211 |
|
|
|
141,236,259 |
|
|
|
146,341,612 |
|
|
|
136,909,622 |
|
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
Market risk is the exposure to loss resulting from changes in interest rates, commodity prices and
equity prices. In pursuing the Companys business plan, the primary market risk to which it is
exposed is interest rate risk. Changes in the general level of interest rates prevailing in the
financial markets may affect the spread between the Companys yield on invested assets and cost of
funds and, in turn, the Companys ability to make distributions or payments to its shareholders.
While the Company has not experienced any significant credit losses, in the event of a significant
rising interest rate environment and/or economic downturn, defaults could increase and result in
losses to the Company which would adversely affect its operating results and liquidity.
See Interest Rate Risk and Sensitivity Analysis in Item 2 above.
Item 4.
Controls and Procedures (Parent Company)
|
(a) |
|
Evaluation of disclosure controls and procedures. Under the supervision and with the
participation of its management, including its principal executive officer and principal
financial officer, the Parent Company conducted an evaluation of its disclosure controls
and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period
covered by this quarterly report. Based on this evaluation, the Parent Companys
principal executive officer and principal financial officer have concluded that the Parent
Companys disclosure controls and procedures are effective as of the end of the period
covered by this quarterly report. |
|
(b) |
|
Changes in internal controls over financial reporting. There was no change in the
Parent Companys internal control over financial reporting that occurred during the period
covered by this quarterly report that has materially affected, or is reasonably likely to
materially affect, the Parent Companys internal control over financial reporting. |
Controls and Procedures (Operating Partnership)
|
(a) |
|
Evaluation of disclosure controls and procedures. Under the supervision and with the
participation of its management, including its principal executive officer and principal
financial officer, the Operating Partnership conducted an evaluation of its disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under
the Exchange Act as of the end of the period covered by this quarterly report. Based on
this evaluation, the Operating Partnerships principal executive officer and principal
financial officer have concluded that the Operating Partnerships disclosure controls and
procedures are effective as of the end of the period covered by this quarterly report. |
|
(b) |
|
Changes in internal controls over financial reporting. There was no change in the
Operating Partnerships internal control over financial reporting that occurred during the
period covered by this quarterly report that has materially affected, or is reasonably
likely to materially affect, the Operating Partnerships internal control over financial
reporting. |
64
Part II. OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
None.
There has been no material change to the risk factors previously disclosed by us in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2010.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
The following table summarizes the share repurchases during the nine-month period ended September
30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Purchased as |
|
|
Shares that May |
|
|
|
Number of |
|
|
Average |
|
|
Part of Publicly |
|
|
Yet Be Purchased |
|
|
|
Shares |
|
|
Price Paid Per |
|
|
Announced Plans |
|
|
Under the Plans |
|
|
|
Purchased |
|
|
Share |
|
|
or Programs |
|
|
or Programs (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
539,200 |
|
August |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
539,200 |
|
September |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
539,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Relates to the remaining share repurchase availability under the Parent Companys
share repurchase program. There is no expiration date on the share repurchase program.
The Parent Companys Board of Trustees initially authorized this program in 1998 and has
periodically replenished capacity under the program. |
|
|
|
Item 3. |
|
Defaults Upon Senior Securities |
None.
|
|
|
Item 4. |
|
Removed and Reserved |
|
|
|
Item 5. |
|
Other Information |
None.
65
(a) Exhibits
|
|
|
|
|
|
31.1 |
|
|
Certification of the Chief Executive Officer of Brandywine Realty
Trust pursuant to 13a-14 under the Securities Exchange Act of 1934 |
|
|
|
|
|
|
31.2 |
|
|
Certification of the Chief Financial Officer of Brandywine Realty
Trust pursuant to 13a-14 under the Securities Exchange Act of 1934 |
|
|
|
|
|
|
31.3 |
|
|
Certification of the Chief Executive Officer of Brandywine Realty
Trust, in its capacity as the general partner of Brandywine
Operating Partnership, L.P., pursuant to 13a-14 under the Securities
Exchange Act of 1934 |
|
|
|
|
|
|
31.4 |
|
|
|