During the nine-month period ended September 30, 2003, the Partnership generated $85.3 million in cash flow from operating activities. Other sources of cash flow for the nine-month period consisted of: (i) $20.0 million of proceeds from draws on the Credit Facility net of Credit Facility repayments, (ii) $47.0 million in net proceeds from share issuances, (iii) $6.8 million of proceeds from sales of properties, (iv) $3.0 million of escrowed cash, (v) $1.9 million from payments on employee loans and (vi) $1.3 million of cash distributions from Real Estate Ventures. During the nine-month period ended September 30, 2003, cash out-flows consisted of: (i) $80.2 million of mortgage note repayments, (ii) $64.5 million of distributions to common partnership unitholders, (iii) $33.5 million to fund development and capital expenditures, (iv) $5.9 million of leasing costs, (v) $0.5 million of additional investment in Real Estate Ventures and (vi) $0.1 million of debt financing costs.
During the nine-month period ended September 30, 2004, the Partnership replaced its existing credit facility with a $450 million unsecured Credit Facility that matures in May 2007, subject to a one-year extension option. The Partnership may elect to increase the Credit Facility to $600 million subject to the absence of any defaults and the Partnership’s ability to acquire additional commitments from its existing lenders or new lenders. The Credit Facility bears interest at LIBOR plus a spread over LIBOR ranging from 0.65% to 1.20% based on the Partnership’s unsecured senior debt rating. As of September 30, 2004, the Partnership’s interest rate was 2.74% (LIBOR rate of 1.84% plus a spread of 0.90%).
During the nine-month period ended September 30, 2004, the Partnership repaid all amounts due under its existing $100.0 million unsecured term loan and obtained two additional unsecured term loans in the principal amounts of $320.0 million (the 2007 Term Loan) and $113.0 million (the 2008 Term Loan). The 2007 Term Loan was scheduled to mature in September 2007 and the 2008 Term Loan matures in September 2008. As of September 30, 2004, the Partnership’s interest rate under the 2007 and 2008 Term Loans were 2.94% and 3.19% (LIBOR rate of 1.84% plus a spread of 1.10% and 1.35%).
On October 22, 2004, the Partnership issued $275.0 million of its 2009 4.5% unsecured notes (the “2009 Notes”) and $250.0 million of its 2014 5.4% unsecured notes (the “2014 Notes”). The Partnership received net proceeds after discounts and underwriting discounts of approximately $520.1 million. The Partnership and certain of the wholly-owned subsidiaries of the Partnership fully and unconditionally guaranteed the payment of principal of and interest on the Notes. In anticipation of the issuance of the Notes, the Partnership entered into treasury lock agreements with notional amounts totaling $194.8 million with an expiration of 5 years at an all-in rate of 4.7% and with notional amounts totaling $188.0 million with an expiration of 10 years at an all-in rate of 5.6%. Upon issuance of the Notes, the Partnership terminated the treasury lock agreements at a total cost of $3.2 million that will be amortized to interest expense over the life of the respective notes. The net proceeds of the Notes were used to repay the $320 million 2007 Term Loan, to settle the treasury lock agreements discussed above and to reduce borrowings outstanding under the Partnership’s revolving credit facility.
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As of September 30, 2004, the Partnership had approximately $1,277.7 million of debt outstanding, consisting of $322.0 million of borrowings under the Credit Facility, $433.0 million under two unsecured term loans and $522.7 million of mortgage notes payable. The mortgage loans mature between January 2006 and July 2027. As of September 30, 2004, the Partnership also had $10.7 million of letters of credit outstanding under the Credit Facility and $117.3 million of unused availability under the Credit Facility.
Previously, the Partnership had entered into interest rate swap agreements to fix the LIBOR component of the Partnership’s interest rate on $175 million of the Credit Facility at approximately 4.2%. These interest rate swaps expired on June 29, 2004.
The Partnership intends to refinance its mortgage notes payable as they become due primarily through the use of unsecured debt or equity. The Partnership expects to renegotiate its Credit Facility prior to maturity or extend its term.
On January 12, 2004, the Company issued 2,645,000 Common Shares for net proceeds of approximately $69.3 million, in an underwritten public offering, and contributed those proceeds to the Partnership in exchange for 2,645,000 GP Units. The Partnership used the proceeds to reduce the outstanding balance under our revolving credit facility.
In February 2004, the Partnership redeemed all of its outstanding Series B Preferred Units for an aggregate price of $93.0 million, together with accrued but unpaid distributions from January 1, 2004. The Series B Preferred Units had an aggregate stated value of $97.5 million and accrued distributions at 7.25% per annum. The Partnership recorded a gain of $4.5 million related to the redemption.
On February 27, 2004, the Company issued 2,300,000 Series D Preferred Shares for net proceeds of approximately $55.5 million, in an underwritten public offering, and contributed those proceeds to the Partnership in exchange for 2,300,000 Series E Preferred Mirror Units. The Partnership used the proceeds to reduce the outstanding balance under our revolving credit facility.
On March 3, 2004, the Company issued 1,840,000 Common Shares for net proceeds of approximately $50.7 million, in an underwritten public offering, and contributed those proceeds to the Partnership in exchange for 1,840,000 GP Units. The Partnership used the proceeds to reduce the outstanding balance under our revolving credit facility.
On September 17, 2004, the Company issued 7,750,000 Common Shares for net proceeds of approximately $217.1 million, in an underwritten public offering, and contributed those proceeds to the Partnership in exchange for 7,750,000 general partnership units.
As of September 30, 2004, the Partnership’s debt-to-market capitalization ratio was 44.1%. As a general policy, the Partnership intends, but is not obligated, to adhere to a policy of maintaining a debt-to-market capitalization ratio of no more than 50%.
The Board of Trustees of Brandywine Realty Trust approved a share repurchase program authorizing it to repurchase up to 4,000,000 of its outstanding Common Shares. Through September 30, 2004, Brandywine Realty Trust had repurchased 3.2 million of its Common Shares at an average price of $17.75 per share. Concurrent with share repurchases by Brandywine Realty Trust, we have repurchased 3.2 million of its GP Units from Brandywine Realty Trust at an average price of $17.75 per GP Unit. Under the share repurchase program, Brandywine Realty Trust has the authority to repurchase an additional 762,000 shares. No time limit has been placed on the duration of the share repurchase program.
Short- and Long-Term Liquidity
The Partnership believes that its cash flow from operations is adequate to fund its short-term liquidity requirements. 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 Partnership intends to use these funds to meet short-term liquidity needs, which are to fund operating expenses, debt service requirements, recurring capital expenditures, tenant allowances, leasing commissions and the minimum distributions required to maintain the Company’s REIT qualification under the Internal Revenue Code.
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On September 20, 2004, the Partnership declared a distribution of $0.44 per Common Partnership Unit, totaling $24.6 million, which was paid on October 15, 2004 to unit holders of record as of October 5, 2004.
On September 20, 2004, the Partnership declared distributions to holders of its Series A Preferred Units, Series D Preferred Units and Series E Preferred Units to holders of record on September 30, 2004. These units are currently entitled to a cumulative preferential return of 7.25%, 7.50% and 7.375%, respectively. Distributions paid on October 15, 2004 to holders of Series A Preferred Units, Series D Preferred Units and Series E Preferred Units totaled $.7 million, $.9 million and $1.1 million, respectively.
The 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 its Credit Facility, other long-term secured and unsecured indebtedness, the issuance of equity securities and the proceeds from the disposition of selected assets.
Inflation
A majority of the Partnership’s leases provide for separate escalations of real estate taxes and operating expenses either on a triple net basis or over a base amount. In addition, many of the office leases provide for fixed base rent increases. The Partnership believes that inflationary increases in expenses will be significantly offset by expense reimbursement and contractual rent increases.
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 its business plan, the primary market risk to which the Partnership 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 Partnership’s yield on invested assets and cost of funds and, in turn, the Partnership’s ability to make distributions or payments to its shareholders. While the Partnership 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 Partnership which adversely affect its operating results and liquidity.
The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market rates. The range of changes chosen reflects our 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 prevailing market conditions at September 30, 2004.
Our financial instruments consist of both fixed and variable rate debt. As of September 30, 2004, our consolidated debt consisted of $499.5 million in fixed rate mortgages and $23.2 million in variable rate mortgage notes, $322.0 million borrowings under our credit facility and $433.0 million under our term loans. 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 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 position.
As of September 30, 2004, the carrying value of our fixed rate debt was $499.5 million and had a fair value of $553.7 million. Changes in market interest rates on our fixed-rate debt impacts the fair value of the debt, but it has no impact on interest incurred or cash flow. The sensitivity analysis related to our fixed debt assumes an immediate 100 basis point move in interest rates from their actual September 30, 2004 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair market value of our fixed-rate debt by $32.3million at September 30, 2004. A 100 basis point decrease in market interest rates would result in an increase in the fair market value of our fixed-rate debt by $35.6 million at September 30, 2004.
Based on our variable rate debt as of September 30, 2004, a 1% increase in interest rates would result in an additional $7.8 million in interest expense per year and a 1% decrease would reduce interest expense by $7.8 million per year.
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On October 22, 2004, the Partnership issued $275.0 million of its 2009 4.5% unsecured notes (the “2009 Notes”) and $250.0 million of its 2014 5.4% unsecured notes (the “2014 Notes”). In anticipation of the issuance of the Notes, the Partnership entered into treasury lock agreements with notional amounts totaling $194.8 million with an expiration of 5 years at an all-in rate of 4.7% and with notional amounts totaling $188.0 million with an expiration of 10 years at an all-in rate of 5.6%. Upon issuance of the Notes, the Partnership terminated the treasury lock agreements at a total cost of $3.2 million that will be amortized to interest expense over the life of the respective notes. On a pro forma basis after these financing transactions, the Partnership’s variable rate debt has decreased by $525.0 million to $253.2 million. Based on the pro forma variable rate debt, a 1% increase would result in an additional $2.5 million of interest expense per year and a 1% decrease would reduce interest expense by $2.5 million per year.
Item 4. Controls and Procedures
| (a) | Evaluation of disclosure controls and procedures. The Chief Executive Officer and its Chief Financial Officer of the Company, after evaluating the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report, have concluded that the Partnership’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Partnership in the reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. |
| | |
| (b) | Changes in internal controls over financial reporting. There was no change in the Partnership’s 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 Partnership’s internal control over financial reporting. |
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the unit repurchases during the three-month periods ended September 30, 2004:
| | Total
Number of
Unit
Purchased | | | Average
Price Paid
Per Unit | | Total Number of Unit Purchased as Part of Publicly Announced Plans or
Programs (1) | | Maximum
Number of Units that May Yet Be Purchased Under the Plans or Programs (1) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| 2004: |
| |
|
| |
| |
| |
| April | — | | $ | — | | — | | 762,000 | |
| May | — | | $ | — | | — | | 762,000 | |
| June | — | | $ | — | | — | | 762,000 | |
| |
| |
|
| |
| �� |
| |
| Total | — | | $ | — | | — | | 762,000 | |
| |
| |
|
| |
| |
| |
(1) In 1998, the Company's Board of Trustees approved an open market share repurchase program and in 2001 authorized an increase in the total number of Common Shares that may be repurchased under the program to 4,000,000 Common Shares. The share repurchase program does not have an expiration date.
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| Item 3. Defaults Upon Senior Securities |
| | |
| Not applicable. |
| | |
| Item 4. Submission of Matters to a Vote of Security Holders |
| |
| Not applicable. |
| | |
| Item 5. Other Information |
| | |
| Not applicable. |
| | |
| Item 6. Exhibits and Reports on Form 8-K |
| | |
| (a) Exhibits |
| 10.1 | Contribution Agreement (Incorporated by reference to Exhibit 10.1 to Brandywine’s Current Report on Form 8-K filed August 19, 2004) |
| 10.2 | Amendment No. 1 to Credit Agreement (Incorporated by reference to Exhibit 10.1 to Brandywine’s Current Report on Form 8-K filed September 13, 2004) |
| 10.3 | Term Loan Credit Agreement (2007) (Incorporated by reference to Exhibit 10.1 to Brandywine’s Current Report on Form 8-K filed September 21, 2004) |
| 10.4 | Term Loan Credit Agreement (2008) (Incorporated by reference to Exhibit 10.2 to Brandywine’s Current Report on Form 8-K filed September 21, 2004) |
| 10.5 | Registration Rights Agreement (Incorporated by reference to Exhibit 10.3 to Brandywine’s Current Report on Form 8-K filed September 21, 2004) |
| 10.6 | Tax Protection Agreement (Incorporated by reference to Exhibit 10.4 to Brandywine’s Current Report on Form 8-K filed September 21, 2004) |
| 10.7 | Indenture (Incorporated by reference to Exhibit 4.1 to Brandywine’s Current Report on Form 8-K filed October 22, 2004) |
| 10.8 | Form of $275,000,000 4.50% Guaranteed Note due 2009 (Incorporated by reference to Exhibit 4.2 to Brandywine’s Current Report on Form 8-K filed October 22, 2004) |
| 10.9 | Form of $250,000,000 5.40% Guaranteed Note due 2014 (Incorporated by reference to Exhibit 4.3 to Brandywine’s Current Report on Form 8-K filed October 22, 2004) |
| 31.1 | Certification Pursuant to 13a-14 of the Securities Exchange Act of 1934 |
| 31.2 | Certification Pursuant to 13a-14 of the Securities Exchange Act of 1934 |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES OF REGISTRANT
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | BRANDYWINE OPERATING PARTNERSHIP, L.P. |
| | (Registrant) | |
| | | |
| | By: | Brandywine Realty Trust, its General Partner |
| | | |
| | | |
| | | |
| Date: November 9, 2004 | By: | /s/ Gerard H. Sweeney |
| | |
|
| | | Gerard H. Sweeney, President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| | | |
| Date: November 9, 2004 | By: | /s/ Christopher P. Marr |
| | |
|
| | | Christopher P. Marr, Senior Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
| | | |
| Date: November 9, 2004 | By: | /s/ Timothy M. Martin |
| | |
|
| | | Timothy M. Martin, Vice President-Finance and Chief Accounting Officer |
| | | (Principal Accounting Officer) |
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