Our principal source of cash flows is from the operation of our Properties. Our decreased cash flow from operating activities is primarily attributable to the timing of real estate tax payments and deposits on future property acquisitions.
Increased investing activity was comprised of our acquisition of properties/developable land parcels ($11.6 million), construction costs related to our Cira Centre development project and various other capital and tenant improvement projects (totaling $33.2 million in 2005).
Increased financing activity was comprised of additional borrowings on our Credit Facility in 2005 ($48 million). These proceeds were used to fund the investment activity discussed above.
As of March 31 2005, we had approximately $1.3 billion of outstanding indebtedness. The table below summarizes our mortgage notes payable, our unsecured notes and our revolving credit facility at March 31, 2005 and December 31, 2004:
The variable rate debt shown above generally bears interest based on various spreads over LIBOR (the term of which is selected by the Company).
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 Company maintains a $450 million unsecured credit facility (the “Credit Facility”) that matures in May 2007, subject to a one year extension option upon payment of a fee and absence any defaults at the time of the extension. Borrowings under the new Credit Facility generally bear interest at LIBOR plus a spread over LIBOR ranging from 0.65% to 1.20% based on the Company’s unsecured senior debt rating. The Company has an option to increase its maximum borrowings under the Credit Facility to $600 million subject to the absence of any defaults and our ability to acquire additional commitments from our existing lenders or new lenders. The Credit Facility contains various financial and non-financial covenants. As of March 31, 2005, the Company was in compliance with all such covenants.
The Company expects to renegotiate its Credit Facility prior to maturity or extend its term.
The Company utilizes unsecured notes as a long-term financing alternative. The indentures and note purchase agreements contain various financial restrictions and requirements, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 40%, (3) an debt service coverage ratio of greater than 1.5 to 1.0, and (4) an unencumbered asset value of not less than 150% of unsecured debt. In addition, the note purchase agreement relating to the 2008 Notes contains covenants that are similar to the above covenants. At March 31, 2005, the Company was in compliance with each of these financial restrictions and requirements.
The Company has mortgages, loans payable and other obligations which consist of various loans collateralized by certain of the Company’s Properties. Payments on mortgages, loans payable and other obligations are generally due in monthly installments of principal and interest, or interest only.
The Company intends to refinance its mortgage indebtedness as they become due primarily through the use of unsecured debt or equity.
As of March 31, 2005, the Company’s debt plus preferred shares-to-market capitalization ratio was 46.6%. As a general policy, the Company intends, but is not obligated, to adhere to a policy of maintaining a debt plus preferred shares-to-market capitalization ratio of no more than 50%.
Equity
On March 16, 2005, the Company declared a distribution of $0.44 per Common Share, totaling $24.6 million, which was paid on April 15, 2005 to shareholders of record as of April 6, 2005. The Operating Partnership simultaneously declared a $0.44 per unit cash distribution to holders of Class A Units totaling $0.9 million.
On March 16, 2005, the Company declared distributions on its Series C Preferred Shares and Series D Preferred Shares to holders of record on March 30, 2005. These shares are currently entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on April 15, 2005 to holders of Series C Preferred Shares and Series D Preferred Shares totaled $0.9 million and $1.1 million, respectively.
The Company’s Board of Trustees approved a share repurchase program authorizing the Company to repurchase up to 4,000,000 of its outstanding Common Shares. Through March 31, 2005, the Company had repurchased 3.2 million of its Common Shares at an average price of $17.75 per share. Under the share repurchase program, the Company has the authority to repurchase an additional 762,000 shares. No Common Shares were repurchased during the three-month period ended March 31, 2005 under the share repurchase program. No time limit has been placed on the duration of the share repurchase program.
Shelf Registration Statement
The Company and the Operating Partnership also have an effective shelf registration statement on Form S-3 filed with the Securities and Exchange Commission that registered $750.0 million in common shares, preferred shares, depositary shares and warrants and $750.0 million in debt securities. As of March 31, 2005, the registration statement had $533 million of capacity for future issuances of common shares, preferred shares, depositary shares and warrants and had $225 million of capacity for future issuances of debt securities.
Short- and Long-Term Liquidity
The Company 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 Company 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.
The Company 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
27
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 Company’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 Company believes that inflationary increases in expenses will be significantly offset by expense reimbursement and contractual rent increases.
Commitments and Contingencies
The following table outlines the timing of payment requirements related to the Company’s contractual commitments as of March 31, 2005:
| | | Payments by Period (in thousands) | |
| | |
| |
| | | Total | | Less than
1 Year | | 1-3 Years | | 3-5 Years | | More than
5 Years | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| Mortgage notes payable (a) | | $ | 506,066 | | $ | 6,482 | | $ | 62,665 | | $ | 133,906 | | $ | 303,013 | |
| Revolving credit facility | | | 200,000 | | | — | | | 200,000 | | | — | | | — | |
| Unsecured debt (a) | | | 638,000 | | | — | | | 113,000 | | | 275,000 | | | 250,000 | |
| Purchase commitments | | | 11,000 | | | 11,000 | | | — | | | — | | | — | |
| Ground leases | | | 107,146 | | | 1,435 | | | 2,870 | | | 2,870 | | | 99,971 | |
| Other liabilities | | | 1,525 | | | 837 | | | — | | | — | | | 688 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | $ | 1,463,737 | | $ | 19,754 | | $ | 378,535 | | $ | 411,776 | | $ | 653,672 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| (a) | Amounts do not include unamortized discounts and/or premiums. |
The Company intends to refinance its mortgage notes payable as they become due or repay those that are secured by properties being sold. The Company expects to renegotiate its Credit Facility prior to maturity or extend its term.
In 1998, we acquired a portfolio of properties from Donald E. Axinn and affiliates. Upon completion of our acquisition, Mr. Axinn joined our Board. The 1998 agreement provides for our acquisition in September 2005 of an approximately 141,724 square foot office building located at 101 Paragon Drive, Montvale, New Jersey for $11.0 million from an entity primarily owned and controlled by Mr. Axinn. The Company and Mr. Axinn are currently negotiating a modification of the 1998 agreement that would provide for the following: (i) Mr. Axinn would pay us $500,000; (ii) our obligation to fund $11.0 million to acquire 101 Paragon would be deferred for approximately five years and the amount of our obligation would be reduced to $5.5 million, with Mr. Axinn assuming responsibility to fund the remaining $5.5 million; and (iii) we and Mr. Axinn would share equally in any net cash flow and in any proceeds of a sale of 101 Paragon, and we would each be required to fund any operating expenses associated with ownership of 101 Paragon. Consummation of the modification is subject to several conditions, including preparation of customary documentation.
As part of our purchase of the TRC Properties in September 2004, the Operating Partnership agreed to issue to the sellers up to a maximum of $9.7 million of Class A Units of the Operating Partnership if certain of the acquired properties achieve at least 95% occupancy prior to September 21, 2007. At March 31, 2005, the maximum amount payable under this arrangement was $8.4 million.
As part of the TRC Properties, we acquired our interest in Two Logan Square, a 696,477 square foot office building in Philadelphia, primarily through a second and third mortgage secured by this property. We currently do not expect to take title to Two Logan Square until, at the earliest, September 2019. In the event that we take title to Two Logan Square upon a foreclosure of our mortgage, we have agreed to make a payment to an unaffiliated third party with a residual interest in the fee owner of this property. The amount of the payment would be $0.6 million if we must pay a state and local transfer upon taking title, and $2.9 million if no transfer tax is payable upon the transfer.
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As part of the TRC Properties and several of our other acquisitions, we agreed not to sell the acquired properties. In the case of the TRC Properties, we agreed not to sell the acquired properties for periods ranging from three to 15 years from the acquisition date as follows: 201 Radnor Financial Center, 555 Radnor Financial Center and 300 Delaware Avenue (three years); One Rodney Square and 130/150/170 Radnor Financial Center (10 years); and One Logan Square, Two Logan Square and Radnor Corporate Center (15 years). We also own 14 properties that aggregate 1.0 million square feet and have agreed not to sell these properties for periods that expire through 2008. These 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 Code or in other tax deferred transactions. In the event that we sell any of the properties within the applicable restricted period in non-exempt transactions, we have agreed to pay significant tax liabilities that would be incurred by the parties who sold us the applicable property.
We invest in our Properties and regularly incur capital expenditures in the ordinary course to maintain the Properties. We believe that such expenditures enhance the competitiveness of the Properties. We also enter into construction, utility and service contracts in the ordinary course of business which may extend beyond one year. These contracts include terms that provide for cancellation with insignificant or no cancellation penalties.
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 Company 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 Company’s yield on invested assets and cost of funds and, in turn, the Company’s 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 adversely affect its operating results and liquidity.
There have been no material changes in Quantitative and Qualitative disclosures in 2004 from the disclosures included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Reference is made to Item 7 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and the caption “Liquidity and Capital Resources” under Item 2 of this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures
| | (a) | Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’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 Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company 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 Company’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 Company’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 share repurchases during the three-month period ended March 31, 2005:
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| | | Total
Number of
Shares
Purchased (A) | | Average
Price Paid Per
Share | | Total
Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs | | Maximum
Number of
Shares that May
Yet Be Purchased
Under the Plans
or Programs | |
| | |
|
| |
|
| |
|
| |
|
| |
2005: | | | | | | | | | | | | | |
| January | | | 20,137 | | $ | 29.39 | | | — | | | 762,000 | |
| February | | | — | | $ | — | | | — | | | 762,000 | |
| March | | | — | | $ | — | | | — | | | 762,000 | |
| | |
|
| |
|
| |
|
| |
|
| |
| Total | | | 20,137 | | $ | 29.39 | | | — | | | 762,000 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| (A) Represent Common Shares cancelled by the Company upon vesting of restricted Common Shares previously awarded to Company employees, in satisfaction of tax withholding obligations. |
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
| | • | The Company held its annual meeting of shareholders on May 2, 2005. At the meeting, each of the eight individuals nominated for election to the Company’s Board of Trustees was elected to the Board. These individuals will serve on the Board until the next annual meeting of shareholders and until their successors are elected and qualified or until their earlier resignation. The number of shares cast for or withheld for each nominee is set forth below: |
Trustee | | | For | | | Withheld | |
| |
|
| |
|
| |
| Walter D’Alessio | | | 51,167,302 | | | 1,800,620 | |
| D. Pike Aloian | | | 51,289,117 | | | 1,678,805 | |
| Donald E. Axinn | | | 50,104,539 | | | 2,863,383 | |
| Wyche Fowler | | | 52,182,925 | | | 784,997 | |
| Michael J. Joyce | | | 50,898,665 | | | 2,069,257 | |
| Anthony A. Nichols Sr. | | | 51,301,759 | | | 1,666,163 | |
| Charles P. Pizzi | | | 51,189,843 | | | 1,778,079 | |
| Gerard H. Sweeney | | | 51,181,922 | | | 1,786,000 | |
| | • | At its annual meeting of shareholders, the shareholders voted as follows to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the calendar year 2005 as follows: |
| – Votes For | | | 52,925,451 | |
| – Votes Against | | | 25,105 | |
| – Abstentions | | | 17,366 | |
| – Broker Non-Votes | | | zero | |
| | • | At its annual meeting of shareholders, the shareholders voted as follows to amend and restate the Company’s 1997 Long-Term Incentive Plan as follows: |
| – Votes For | | | 44,461,578 | |
| – Votes Against | | | 2,446,871 | |
| – Abstentions | | | 63,209 | |
| – Broker Non-Votes | | | 5,996,264 | |
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Item 6. Exhibits
(a) Exhibits
| 10.1 | 2005 Restricted Share Award to Gerard H. Sweeney (previously filed as Exhibit 10.1 to the Company’s Form 8-K dated February 11, 2005 and incorporated herein by reference)* |
| 10.2 | Form of 2005 Restricted Share Award to executive officers (other than the President and Chief Executive Officer) (previously filed as Exhibit 10.2 to the Company’s Form 8-K dated February 11, 2005 and incorporated herein by reference)* |
| 10.3 | Amended and Restated Employment Agreement of President and Chief Executive Officer (previously filed as Exhibit 10.3 to the Company’s Form 8-K dated February 11, 2005 and incorporated herein by reference)* |
| 10.4 | Form of Severance Agreement for executive officers (previously filed as Exhibit 10.4 to the Company’s Form 8-K dated February 11, 2005 and incorporated herein by reference)* |
| 10.5 | Amended and Restated 1997 Long-term Incentive Plan* |
| 12.1 | Statement re Computation of Ratios |
| 31.1 | Certification Pursuant to 13a-14 under the Securities Exchange Act of 1934 |
| 31.2 | Certification Pursuant to 13a-14 under 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 |
|
| | * Management contract or compensatory plan or arrangement. |
31
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 REALTY TRUST |
| | (Registrant) |
| | | |
| Date: May 6, 2005 | By: | /s/ GERARD H. SWEENEY |
| | |
|
| | | Gerard H. Sweeney, President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| Date: May 6, 2005 | By: | /s/ CHRISTOPHER P. MARR |
| | |
|
| | | Christopher P. Marr, Senior Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | |
| Date: May 6, 2005 | By: | /s/ TIMOTHY M. MARTIN |
| | |
|
| | | Timothy M. Martin, Vice President-Finance and Chief Accounting Officer |
| | | (Principal Accounting Officer) |
32
