UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
_X_ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001
or
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ___________
Commission file number 1-9106
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Brandywine Realty Trust
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(Exact name of registrant as specified in its charter)
Maryland 23-2413352
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
14 Campus Boulevard, Newtown Square, Pennsylvania 19073
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(Address of principal executive offices) (Zip Code)
(610) 325-5600
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Registrant's telephone number
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
A total of 36,041,057 Common Shares of Beneficial Interest were
outstanding as of May 15, 2001.
BRANDYWINE REALTY TRUST
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001 and December
31, 2000
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2001 and March 31, 2000
Condensed Consolidated Statements of Beneficiaries' Equity for the
three months ended March 31, 2001 and the year ended December 31, 2000
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and March 31, 2000
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
BRANDYWINE REALTY TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands, except number of shares and per share amounts)
March 31, December 31,
2001 2000
----------- ------------
(restated)
ASSETS
Real estate investments:
Operating properties $ 1,776,188 $ 1,754,895
Accumulated depreciation (195,827) (179,558)
----------- -----------
1,580,361 1,575,337
Construction-in-progress 58,444 54,311
Land held for development 51,166 44,693
----------- -----------
1,689,971 1,674,341
Cash and cash equivalents 5,451 16,060
Escrowed cash 16,334 14,788
Accounts receivable, net 9,067 8,065
Accrued rent receivable, net 22,624 21,221
Due from affiliates 4,846 4,591
Investment in real estate ventures, at equity 32,656 33,566
Deferred costs, net 20,278 19,828
Other assets 26,848 34,897
----------- -----------
Total assets $ 1,828,075 $ 1,827,357
=========== ===========
LIABILITIES AND BENEFICIARIES' EQUITY
Mortgage notes payable $ 526,149 $ 527,877
Borrowings under Credit Facility 353,325 338,325
Accounts payable and accrued expenses 21,290 22,094
Distributions payable 20,479 20,428
Tenant security deposits and deferred rents 18,321 17,232
----------- -----------
Total liabilities 939,564 925,956
Minority interest 144,438 144,896
Commitments and contingencies
Beneficiaries' equity:
Preferred Shares (shares authorized-10,000,000):
7.25% Series A Preferred Shares, $0.01 par value;
issued and outstanding-750,000
in 2001 and 2000 8 8
8.75% Series B Preferred Shares, $0.01 par value;
issued and outstanding-4,375,000
in 2001 and 2000 44 44
Common Shares of beneficial interest, $0.01 par value;
shares authorized-100,000,000; issued and outstanding-
35,746,660 in 2001 and 35,681,314 in 2000 357 357
Additional paid-in capital 852,673 851,875
Share warrants 908 908
Cumulative earnings 140,027 131,256
Accumulated other comprehensive loss (5,831) (1,731)
Cumulative distributions (244,113) (226,212)
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Total beneficiaries' equity 744,073 756,505
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Total liabilities and beneficiaries' equity $ 1,828,075 $ 1,827,357
=========== ===========
The accompanying condensed notes are integral part of these
consolidated financial statements.
3
BRANDYWINE REALTY TRUST
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
Three Months Ended
March 31,
-------------------------
2001 2000
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(restated)
Revenue:
Rents $ 63,184 $ 60,531
Tenant reimbursements 9,528 8,956
Other 2,301 2,678
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Total revenue 75,013 72,165
Operating Expenses:
Property operating expenses 20,101 18,102
Real estate taxes 6,731 6,284
Interest 15,998 15,963
Depreciation and amortization 18,498 16,761
Administrative expenses 4,000 2,927
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Total operating expenses 65,328 60,037
Income before equity in income of real estate ventures, net gain
on sales and minority interest 9,685 12,128
Equity in income of real estate ventures 1,466 643
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Income before net gain on sales and minority interest 11,151 12,771
Net gain on sales of interest in real estate 182 -
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Income before minority interest 11,333 12,771
Minority interest (2,193) (2,181)
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Net income 9,140 10,590
Income allocated to Preferred Shares (2,977) (2,977)
-------- --------
Income allocated to Common Shares $ 6,163 $ 7,613
======== ========
Earnings per Common Share:
Basic $ 0.16 $ 0.21
======== ========
Diluted $ 0.16 $ 0.21
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
BRANDYWINE REALTY TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Three Months Ended
March 31,
-----------------------
2001 2000
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(restated)
Cash flows from operating activities:
Net income $ 9,140 $ 10,590
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation 17,452 16,078
Amortization:
Deferred financing costs 841 815
Deferred leasing costs 1,046 683
Notes payable discount 21 21
Deferred compensation costs 841 497
Straight-line rent (1,494) (1,872)
Provision for doubtful accounts 150 -
Equity in income of real estate ventures (1,466) (643)
Net gain on sale of interests in real estate (182) -
Minority interest 2,193 2,181
Distributions paid to minority partners (2,651) (2,630)
Changes in assets and liabilities:
Accounts receivable (1,061) 265
Due from affiliates (255) 107
Other assets 6,409 (1,242)
Accounts payable and accrued expenses (5,172) (3,416)
Tenant security deposits and deferred rents 1,089 (1,626)
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Net cash from operating activites 26,901 19,808
Cash flows from investing activities:
Acquisitions of properties (21,389) (5,250)
Sales of properties 3,499 -
Capital expenditures (14,779) (17,917)
Investment in real estate ventures (601) (1,841)
Increase in escrowed cash (1,546) (2,340)
Cash distributions from real estate ventures 2,977 -
Leasing costs (986) (1,672)
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Net cash from investing activities (32,825) (29,020)
Cash flows from financing activites:
Proceeds from notes payable, Credit Facility 15,000 39,999
Repayments of notes payable, Credit Facility - -
Proceeds from mortgage notes payable 219 8,235
Repayments of mortgage notes payable (1,968) (6,067)
Debt financing costs (86) (161)
Repurchases of Common Shares - (14,632)
Distributions paid to shareholders (17,850) (16,352)
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Net cash from financing activities (4,685) 11,022
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(Decrease) increase in cash and cash equivalents (10,609) 1,810
Cash and cash equivalents at beginning of period 16,060 6,316
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Cash and cash equivalents at end of period $ 5,451 $ 8,126
======= ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
BRANDYWINE REALTY TRUST
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
1. THE COMPANY
Brandywine Realty Trust (collectively with its subsidiaries, the "Company") is a
self-administered and self-managed real estate investment trust (a "REIT")
active in acquiring, developing, redeveloping, leasing and managing office and
industrial properties. As of March 31, 2001, the Company's portfolio included
197 office properties, 51 industrial facilities, one mixed-use property and one
property under redevelopment (collectively, the "Properties") that contained an
aggregate of 16.6 million net rentable square feet. The Properties are located
in the office and industrial markets surrounding Philadelphia, Pennsylvania, New
Jersey and Long Island, New York and Richmond, Virginia. As of March 31, 2001,
the Company also held economic interests in 14 office real estate ventures (the
"Real Estate Ventures").
The Company's interest in its assets is held through Brandywine Operating
Partnership, L.P. (the "Operating Partnership"). The Company is the sole general
partner of the Operating Partnership and, as of March 31, 2001, was entitled to
approximately 94.3% of the Operating Partnership's income after distributions to
holders of Series B Preferred Units (defined below). The Operating Partnership
owns a 95% interest in Brandywine Realty Services Corporation (BRSCO), a taxable
REIT subsidiary that performs management and leasing services for properties
owned by third-parties that contain approximately 4.0 million net rentable
square feet as of March 31, 2001.
Minority interest relates to interests in the Operating Partnership that are not
owned by the Company. Income allocated to the minority interest is based on the
percentage ownership of the Operating Partnership held by third parties
throughout the year. Minority Interest is comprised of Class A Units of limited
partnership interest ("Class A Units") and Series B Preferred Units of limited
partnership interest ("Series B Preferred Units"). The Operating Partnership
issued these interests to persons that contributed assets to the Operating
Partnership. The Operating Partnership is obligated to redeem, at the request of
a holder, each Class A Unit for cash or one Common Share, at the option of the
Company. Each Series B Preferred Unit has a stated value of $50.00 and is
convertible, at the option of the holder, into Class A Units at a conversion
price of $28.00. The conversion price declines to $26.50, if the average trading
price of the Common Shares during the 60-day period ending December 31, 2003 is
$23.00 or less. The Series B Preferred Units bear a preferred distribution of
7.25% per annum, subject to an increase in the event quarterly distributions
paid to holders of Common Shares exceed $0.51 per share. As of March 31, 2001,
there were 2,154,905 Class A Units and 1,950,000 Series B Preferred Units
outstanding held by third party investors. Minority interest also relates to
interests in BRSCO that are not owned by the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements have been prepared by the
Company without audit except as to the balance sheet as of December 31, 2000,
which has been prepared from audited data, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with accepted accounting principles generally accepted in the United States have
been condensed or omitted pursuant to such rules and regulations, although the
Company believes that the included disclosures are adequate to make the
information presented not misleading. In the opinion of the Company, all
adjustments (consisting solely of normal recurring matters) necessary to fairly
present the financial position of the Company as of March 31, 2001, the results
of its operations for the three months ended March 31, 2001 and 2000, and its
cash flows for the three months ended March 31, 2001 and 2000 have been
included. The results of operations for such interim periods are not necessarily
indicative of the results for a full year. For further information, refer to the
Company's consolidated financial statements and footnotes included in the Annual
Report on Form 10-K for the year ended December 31, 2000. Certain prior year
amounts have been reclassified to conform with the current year presentation.
The Company's Annual Report on Form 10-K for the year ended December 31, 2000
disclosed the Company's purchase of the 5% minority ownership interest in BRSCO
not historically owned by the Company. The Company, upon further consideration,
determined not to purchase the minority interest, but instead, converted the
Company's non-voting equity interest in BRSCO to a voting interest. Accordingly,
the Company owns 95% of the equity of BRSCO and has voting control over BRSCO.
Therefore, the 2001 financial results of BRSCO have been consolidated and the
2000 financial statements restated to reflect this presentation.
6
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Real Estate Investments
Real estate investments include capitalized direct internal development costs
totaling $654,000 in the quarter ended March 31, 2001 and $415,000 in quarter
ended March 31, 2000. Interest totaling $1.4 million was capitalized related to
the development of certain Properties and land holdings in the quarter ended
March 31, 2001 and in the quarter ended March 31, 2000.
Deferred Costs
Deferred costs include internal direct leasing costs totaling $739,000 in the
quarter ended March 31, 2001 and $696,000 in the quarter ended March 31, 2000.
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and its corresponding amendments
under SFAS No. 138. SFAS 133 requires the Company to measure every derivative
instrument (including certain derivative instruments embedded in other
contracts) at fair value and record them in the balance sheet as either an asset
or liability. 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. Changes in fair value of derivative instruments and
ineffective portions of hedges are recognized in earnings in the current period.
Upon adoption of this new standard as of January 1, 2001, the Company recorded a
charge of $1.3 million to comprehensive income for the cumulative effect of an
accounting change to recognize at fair value all derivatives that are designed
as cash flow hedging instruments. The Company recorded an additional charge of
$2.6 million in other comprehensive income to recognize the change in value
during the three month period ended March 31, 2001.
The Company formally assesses, both at inception of the hedge and on an on-going
basis, whether each derivative is highly effective in offsetting changes in fair
values of cash flows of the hedged item. If it is determined 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 Company manages its ratio of fixed to floating rate debt with the objective
of achieving a mix that management believes is appropriate. To manage this mix
in a cost-effective manner, the Company, from time to time, enters its interest
rate swap agreements, in which it agrees to exchange various combinations of
fixed and/or variable interest rates based on agreed upon notional amounts.
3. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS
First Quarter 2001
During the first quarter of 2001, the Company sold one office property
containing 30,000 net rentable square feet, one industrial property containing
16,000 net rentable square feet and one parcel of land containing 2.1 acres for
an aggregate of $3.5 million, realizing a net gain of $182,000. In addition, the
Company purchased two office properties containing 146,000 net rentable square
feet for $18.0 million and one parcel of land containing 20 acres for $7.6
million.
7
First Quarter 2000
In January 2000, the Company purchased a 21 acre parcel of land for $5.3
million.
The results of operations, on a pro forma basis, for the above acquisitions and
dispositions, individually and collectively, are not significant.
4. INDEBTEDNESS
The Company utilizes credit facility borrowings for general business purposes,
including the acquisition of properties and the repayment of debt. At March 31,
2001, the Company had a $450.0 million unsecured credit facility (the "Credit
Facility") that matures in September 2001, which can be extended through
September 2002 upon payment of a fee. This debt will either be refinanced or
extended. The Credit Facility bears interest at LIBOR (LIBOR was 5.05% at March
31, 2001) plus 1.5%, with the spread over LIBOR subject to reductions from .125%
to .35% based on the Company's leverage. As of March 31, 2001, the Company had
$353.3 million of borrowings, $15.1 million of letters of credit outstanding and
$81.6 million of unused availability under the Credit Facility. The
weighted-average interest rate on the Company's Credit Facility was 7.52% for
the quarter ended March 31, 2001.
As of March 31, 2001, the Company had $526.1 million of mortgage notes payable
secured by 104 of the Properties and certain land holdings. Fixed rate
mortgages, totaling $399.9 million, require payments of principal and/or
interest (or imputed interest) at rates ranging from 7.18% to 9.88% and mature
at various dates from April 2001 through July 2027. Variable rate mortgages,
totaling $126.2 million, require payments of principal and/or interest at rates
ranging from LIBOR plus .76% to 2.25% or 75% of prime (the prime rate was 6.80%
at March 31, 2001) and mature at various dates through July 2027. The
weighted-average interest rate on the Company's mortgages was 7.69% for the
quarter ended March 31, 2001.
The Company has entered into interest rate swap and rate cap agreements designed
to reduce the impact of interest rate changes on its variable rate debt. At
March 31, 2001, the Company had three interest rate swap agreements for notional
principal amounts aggregating $175 million. The swap agreements effectively fix
the interest rate on $100 million of Credit Facility borrowings at 6.383%, $50
million at 6.080% and $25 million at 5.215% until September 2002. The interest
rate cap agreements effectively fix the interest rate on two variable rate
mortgages. One rate cap fixes the interest rate on a mortgage with a notional
value of $75 million at 6.25% until April 2001 and then at 7% until maturity in
April 2002. The second interest rate cap fixes the interest rate on a mortgage
with a notional value of $28 million at 8.7% until July 2004. The impact of the
cap agreements is recorded as a component of interest expense.
The Company paid interest totaling $17.0 million in 2001 and $16.7 million in
2000.
5. BENEFICIARIES' EQUITY
In 1998, the Company issued $37.5 million of convertible preferred securities
with a 7.25% coupon rate (the Series A Preferred Shares). The Series A Preferred
Shares, with a stated value of $50.00, are convertible into Common Shares, at
the option of the holder, at a conversion price of $28.00. The conversion price
declines to $26.50, if the trading price of the Common Shares during the 60-day
period ending December 31, 2003 is $23.00 or less. The Series A Preferred Shares
distribution is subject to an increase, if quarterly distributions paid to
Common Share holders exceeds $0.51 per share. The Series A Preferred Shares are
perpetual and may be redeemed, at the Company's option, at par beginning in
January 2004 or earlier, if the market price of the Common Shares exceeds
specified levels.
In 1999, the Company issued $105.0 million of convertible preferred securities
(the Series B Preferred Shares) with an 8.75% coupon rate for net proceeds of
$94.8 million. The Company is accreting the discount as a charge to cumulative
earnings through the redemption date in 2007. The Series B Preferred Shares,
convertible into Common Shares at a conversion price of $24.00 per share, are
entitled to quarterly dividends equal to the greater of $0.525 per share or the
quarterly dividend on the number of Common Shares into which a Series B
Preferred Share is convertible. The Series B Preferred Shares are perpetual and
may be redeemed, at the Company's option, at par, beginning in April 2007. In
addition, the Company may require the conversion of the Series B Preferred
Shares into Common Shares starting in April 2004, if certain conditions are met,
8
including that the Common Shares are then trading in excess of 130% of the
conversion price. Upon certain changes in control of the Company, the holder may
require the Company to redeem its Series B Preferred Shares. However, the
Company has the ability and intent to cause the Series B Preferred Shares to be
converted into Common Shares rather than redeemed in such circumstances. In
addition, as part of the transaction, the Company issued the holder seven-year
warrants exercisable for 500,000 Common Shares at an exercise price of $24.00
per share.
On March 21, 2001, the Company declared a distribution of $0.41 per Common
Share, totaling $14.9 million, which was paid on April 16, 2001 to shareholders
of record as of April 5, 2001. The Operating Partnership simultaneously declared
a $0.41 per unit cash distribution to holders of Class A Units totaling
$900,000.
On March 21, 2001, the Company and the Operating Partnership, respectively, also
declared distributions to holders of Series A Preferred Shares, Series B
Preferred Shares and Series B Preferred Units, which are each currently entitled
to a preferential return of 7.25%, 8.75% and 7.25%, respectively. Distributions
paid on April 16, 2001 to holders of Series A Preferred Shares, Series B
Preferred Shares and Series B Preferred Units totaled $700,000, $2.3 million and
$1.7 million, respectively.
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss), plus the results of
certain non-shareholders' equity changes not reflected in the Consolidated
Statements of Operations. The components of comprehensive income (loss) are as
follows:
Three Months Ended March 31,
----------------------------
2001 2000
----------- ------------
Net income $ 9,140 $ 10,590
Other comprehensive income (loss):
Cumulative effect of change in accounting
principle (SFAS #133) on other comprehensive income (1,300) -
Unrealized derivative losses on cash flow hedges (2,656) -
Unrealized loss on available-for-sale securities (144) -
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Comprehensive income $ 5,040 $ 10,590
======= ========
7. SEGMENT INFORMATION
The Company currently manages its portfolio within three segments: (1)
Pennsylvania, (2) New Jersey/New York, and (3) Virginia. Corporate is
responsible for cash and investment management and certain other general support
functions.
Segment information for the three month periods ended March 31, 2001 and March
31, 2000 is as follows (in thousands):
9
New Jersey/
Pennsylvania New York Virginia Corporate Total
------------ ----------- --------- --------- -----------
2001:
Real estate investments, at cost $ 972,769 $ 604,104 $ 308,001 $ 924 $ 1,885,798
Investments in real estate ventures,
at equity - - - 32,656 32,656
Total revenue 39,045 25,549 9,763 656 75,013
Property operating expenses 10,180 6,569 2,978 374 20,101
Real estate taxes 3,044 2,933 754 - 6,731
Interest - - - 15,998 15,998
Depreciation & amortization 9,108 6,487 2,718 185 18,498
2000:
Real estate investments, at cost $ 912,897 $ 632,701 $ 305,658 $ 2,643 $ 1,853,899
Investments in real estate ventures,
at equity - - - 33,566 33,566
Total revenue 35,442 26,041 9,828 854 72,165
Property operating expenses 8,891 5,842 2,677 692 18,102
Real estate taxes 2,760 2,800 724 - 6,284
Interest - - - 15,963 15,963
Depreciation & amortization 8,124 6,005 2,501 131 16,761
8. EARNINGS PER COMMON SHARE
The following table details the number of shares and net income used to
calculate basic and diluted earnings per share (in thousands, except number of
shares and per share amounts).
Three Months Ended March 31,
----------------------------------------------------------------
2001 2000
------------------------------ ------------------------------
Basic Diluted Basic Diluted
------------- ------------- ------------- -------------
Net income $ 9,140 $ 9,140 $ 10,590 $ 10,590
Preferred Share discount amortization (369) (369) - -
Income allocated to Preferred Shares (2,977) (2,977) (2,977) (2,977)
------------ ------------ ------------ ------------
Net income available to common shareholders $ 5,794 $ 5,794 $ 7,613 $ 7,613
============ ============ ============ ============
Weighted-average shares outstanding 35,745,208 35,745,208 36,144,013 36,144,013
Options and warrants - 25,568 - 12,072
------------ ------------ ------------ ------------
Total weighted-average shares outstanding 35,745,208 35,770,776 36,144,013 36,156,085
============ ============ ============ ============
Earnings per share $ 0.16 $ 0.16 $ 0.21 $ 0.21
============ ============ ============ ============
9. SUBSEQUENT EVENT
In April 2001, the Company consumated an exchange of properties with Prentiss
Properties Acquisition Partners, L.P. ("Prentiss"). The Company acquired from
Prentiss 30 properties (29 office and 1 industrial) containing approximately 1.6
million net rentable square feet and approximately 6.9 acres of developable land
for total consideration of approximately $215.2 million. The Company conveyed to
Prentiss four office properties located in Northern Virginia that contain an
aggregate of approximately 657,000 net rentable square feet, assumed
approximately $79.7 million of mortgage debt secured by certain of the Prentiss
properties, issued approximately a $7.8 million promissory note, paid
approximately $15.9 million at closing and agreed to make additional payments
totaling approximately $7.0 million (including $5.4 million of payments
discounted at 7.5%) over a three year period subsequent to closing. The Company
also contributed to Prentiss its interest in a real estate venture that owns two
additional office properties that contain an aggregate of approximately 452,000
net rentable square feet and received a combination of preferred and common
units of limited partnership interest in Prentiss having an approximate value of
$10.7 million, as of the closing.
10
The Company also agreed to purchase a 103,000 square foot building under
construction and approximately six acres of related developable land for
approximately $5.7 million, plus additional costs related to development.
Although the Company expects to acquire this building and land, the acquisition
is subject to resolution of a third party's purchase right claim.
In April 2001, the Company closed a $66 million loan, secured by nine
properties, that has a 12 year term and bears interest at a fixed annual rate of
7.25%. The loan requires monthly payments of principal and interest amortized
over a 25 year period after a three year period of interest only.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements appearing elsewhere herein. This Form 10-Q contains forward-looking
statements for purposes of the Securities Act of 1933 and the Securities
Exchange Act of 1934 and as such may involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, there can
be no assurance that these expectations will be realized. The Company assumes no
obligation to update or supplement forward-looking statements that become untrue
because of subsequent events. Factors that could cause actual results to differ
materially from current expectations include, but are not limited to, changes in
general economic conditions, changes in local real estate conditions (including
rental rates and competing properties), changes in industries in which the
Company's principal tenants compete, the failure to timely lease unoccupied
space, the failure to timely re-lease occupied space upon expiration of leases,
the inability to generate sufficient revenue to meet debt service payments and
operating expenses, the unavailability of equity and debt financing,
unanticipated costs associated with the acquisition and integration of the
Company's acquisitions, potential liability under environmental or other laws
and regulations, the failure of the Company to manage its growth effectively and
the other risks identified in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
OVERVIEW
The Company currently manages its portfolio within three segments: (1)
Pennsylvania, (2) New Jersey/New York, and (3) Virginia. The Company believes it
has established an effective platform in these office and industrial markets
that provides a foundation for achieving its goals of maximizing market
penetration and operating economies of scale. As of March 31, 2001, the
Company's portfolio consisted of 197 office properties, 51 industrial
facilities, one mixed-use property and one property under redevelopment that
contain an aggregate of 16.6 million net rentable square feet.
The Company receives income primarily from rental revenue (including tenant
reimbursements) from the Properties and, to a lesser extent, from the management
of certain properties owned by third parties. The Company expects that revenue
growth in the next two years will result primarily from property acquisitions,
rent increases in its current portfolio and the development or redevelopment of
office properties. As of March 31, 2001, the Company had seven properties in
development or redevelopment aggregating 598,000 square feet.
RESULTS OF OPERATIONS
The results of operations for the three months ended March 31, 2001 and 2000
include the respective operations of the Properties. For comparative purposes,
the Company had a total of 238 of the Properties ("Same Store Properties") for
the entire three month periods ended March 31, 2001 and 2000 as compared to 250
properties as of March 31, 2001.
Comparison of the Three Months Ended March 31, 2001 and March 31, 2000
Revenue (which includes rental income, recoveries from tenants and other income)
increased to $75.0 million for the three months ended March 31, 2001 from $72.2
million for the comparable period in 2000. The straight-line rent adjustment
increased revenues by $1.5 million for the three months ended March 31, 2001 and
$1.9 million for the three ended March 31, 2000. Rental income for the Same
Store Properties increased to $60.0 million for the three months ended March 31,
2001 from $57.4 million for the comparable period in 2000. This increase was the
result of increased rental rates and occupancy in 2001 as compared to 2000.
Average occupancy for the Same Store Properties for the three months ended March
31, 2001 increased to 95.7% from 94.5% for the comparable period in 2000.
Property operating expenses increased to $20.1 million for the three months
ended March 31, 2001 from $18.1 million for the comparable period in 2000 as a
result of higher utility costs and increased snow removal expense.
Real estate taxes increased to $6.7 million in 2001 from $6.3 million in 2000,
primarily due to increased real estate tax assessments in 2001.
12
Interest expense was $16.0 million for the three months ended March 31, 2001 and
2000. Average outstanding debt balances for the three months ended March 31,
2001 were $872.8 million as compared to $861.0 million for the comparable period
in 2000. The Company's weighted-average interest rate on the unsecured
Credit Facility was 7.52% for the three months ended March 31, 2001 and 7.56%
for the comparable period in 2000. The weighted-average interest rate on
mortgage notes payable was 7.69% for the three months ended March 31, 2001 and
6.86% for the comparable period in 2000. For the three months ended March 31,
2001 and 2000, the Company paid interest totaling $17.0 million and $16.7
million, including capitalized interest of $1.4 million in 2001 and 2000.
Depreciation increased to $17.5 million for the three months ended March 31,
2001 from $16.1 million for the comparable period of 2000, primarily due to
write-offs of capital and tenant improvements. Amortization, related to deferred
leasing costs, increased to $1.0 million for the three months ended March 31,
2001 from $.6 million for the comparable period of 2000, primarily due to
increased leasing activity.
Administrative expenses increased to $4.0 million for the three months ended
March 31, 2001 from $2.9 million for the comparable period in 2000 primarily due
to amortization of deferred compensation costs related to additional restricted
Common Shares awarded in late 2000, a compensation accrual for loans made to
executives to purchase Common Shares which is subject to forgiveness over a
three year period, and increased compensation and benefit costs.
During the three months ended March 31, 2001, the Company sold one office
property containing 30,000 net rentable square feet, one industrial property
containing 16,000 net rentable square feet and one parcel of land containing 2.1
acres for an aggregate of $3.5 million, realizing a net gain of $182,000.
Equity in income in Real Estate Ventures increased to $1.5 million for the three
months ended March 31, 2001 from $0.6 million for the comparable period of 2000.
The increase is primarily attributable to the gain of $785,000 realized on the
sale of one real estate venture.
Minority interest represents equity in income attributable to the portion of the
Operating Partnership and BRSCO not owned by the Company. Minority interest
increased slightly for the three months ended March 31, 2001 from the comparable
period in 2000 primarily due to the net gain from the sales of property in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the three months ended March 31, 2001, the Company generated $26.9
million in cash flow from operating activities. Other sources of cash flow
consisted of: (i) $15.0 million of proceeds from draws on the Credit Facility,
(ii) $3.5 million of proceeds from sales of properties, (iii) $3.0 million of
cash distributions from Real Estate Ventures and (iv) $219,000 of additional
mortgage notes payable. During the three months ended March 31, 2001, cash
out-flows consisted of: (i) $21.4 million of property acquisitions, (ii) $17.9
million of distributions to shareholders, (iii) $14.8 to fund development and
capital expenditures, (iv) $2.0 million of mortgage note repayments, (v) $1.5
million of escrowed cash, (vi) $1.1 million in deferred leasing and financing
costs and (vii) $601,000 of investment in unconsolidated Real Estate Ventures.
Development
The Company is in the process of developing six sites and redeveloping one
property aggregating 598,000 square feet. These projects are in various stages
of development and there can be no assurance that any of these projects will be
completed or opened on schedule. The total costs of these projects is estimated
to be $105 million.
Capitalization
At March 31, 2001, the Company maintained a $450.0 million Credit Facility.
13
As of March 31, 2001, the Company had approximately $879.4 million of debt
outstanding, consisting of $353.3 million of borrowings under the Credit
Facility and $526.1 million of mortgage notes payable. The mortgage notes
payable consists of $399.9 million of fixed rate loans and $126.2 million of
variable rate loans. The Company has entered into interest rate swap and cap
agreements that effectively fix the interest rate on $278 million of its
variable rate debt. The mortgage loans mature between April 2001 and July 2027.
As of March 31, 2001, the Company had $15.1 million of letters-of-credit
outstanding and $81.6 million of unused availability under the Credit Facility.
For the three months ended March 31, 2001, the weighted-average interest rate
under the Credit Facility was 7.52%, and the weighted-average interest rate for
borrowings under mortgage notes payable was 7.69%.
In April 2001, the Company refinanced $81.4 million of mortgage notes payable
(including the notes due in April 2001) with a $66 million secured loan that has
a 12 year term and bears interest at a fixed annual rate of 7.25% and additional
borrowings on the line-of-credit.
As of March 31, 2001, the Company's debt-to-market capitalization ratio was
48.3%. As a general policy, the Company intends to maintain a long-term average
debt-to-market capitalization ratio of no more than 50%.
The Company's Board of Trustees previously approved a program authorizing the
Company to repurchase up to 3,000,000 of its outstanding Common Shares. The
Board imposed no time limit on the share repurchase program. Through March 31,
2001, the Company has repurchased 2,373,000 shares of its Common Stock at an
average price of $16.48 per share. Under the share repurchase program, the
Company has authority to repurchase an additional 627,000 shares.
Short- and Long-Term Liquidity
The Company believes that cash flow from operations is adequate to fund
short-term liquidity requirements for the foreseeable future. Cash flow from
operations is generated primarily from rental revenues and operating expense
reimbursements from tenants and management services income from the provision of
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.
On March 21, 2001, the Company declared a distribution of $0.41 per Common
Share, totaling $14.9 million, which was paid on April 16, 2001 to shareholders
of record as of April 5, 2001. The Operating Partnership simultaneously declared
a $0.41 per unit cash distribution to holders of Class A Units totaling
$900,000.
On March 21, 2001, the Company and the Operating Partnership, respectively, also
declared distributions to holders of Series A Preferred Shares, Series B
Preferred Shares and Series B Preferred Units, which are each currently entitled
to a preferential return of 7.25%, 8.75% and 7.25%, respectively. Distributions
paid on April 16, 2001 to holders of Series A Preferred Shares, Series B
Preferred Shares and Series B Preferred Units totaled $700,000, $2.3 million and
$1.7 million, respectively.
The Company expects to meet long-term liquidity requirements, such as for
property acquisitions, development, investments in unconsolidated real estate
ventures, scheduled debt maturities, renovations, expansions and other
non-recurring capital improvements, through asset dispositions, long-term
secured and unsecured indebtedness and the issuance of equity securities.
Funds from Operations
Management considers Funds from Operations ("FFO") as one measure of REIT
performance. FFO is calculated as net income (loss) adjusted for depreciation
expense attributable to real property, amortization expense attributable to
capitalized leasing costs, net gain (loss) on sales of real estate investments
and extraordinary items and comparable adjustments for real estate ventures
accounted for using the equity method. Management believes that FFO is a useful
disclosure in the real estate industry; however, the Company's disclosure may
not be comparable to other REITs. FFO should not be considered an alternative to
net income as an indication of the Company's performance or to cash flows as a
measure of liquidity.
14
FFO for the three month period ended March 31, 2001 and 2000 is summarized in
the following table (in thousands, except share data):
Three Months Ended March 31,
-----------------------------
2001 2000
------------ ------------
Income before net gain on sales and minority interest $ 11,151 $ 12,771
Add:
Depreciation:
Real property 17,452 15,947
Real estate ventures 1,053 537
Amortization of leasing costs 1,046 616
Gain on sale of land interests 41 -
Less:
Gain included in equity in income of real estate ventures (785) -
------------ ------------
Funds from operations before minority interest $ 29,958 $ 29,871
============ ============
Weighted-average Common Shares (including Common
Share equivalents) and Operating Partnership units 47,396,137 47,781,584
============ ============
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 or indexed escalations (based on the CPI or other measure). The
Company 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
There have been no material changes in Quantitative and Qualitative disclosures
in 2000. Reference is made to Items 7 and 7A included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved from time to time in litigation on various matters,
which include disputes with tenants and disputes arising out of agreements to
purchase or sell properties. Given the nature of the Company's 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.
Reference is made to the litigation disclosed in Part II, Item 1 of the
Company's Form 10-Q for the quarter ended September 30, 2000. On July 9, 1999,
the Superior Court of New Jersey, Camden County, dismissed the complaint against
the Company with prejudice. The plaintiffs subsequently filed a motion for
reconsideration, which motion the Superior Court denied. Plaintiffs then
appealed to the Appellate Division, which is the intermediate appellate level
court in New Jersey. In December 2000, the Appellate Division affirmed in part
and reversed in part the Chancery Division's earlier dismissal of the entire
action. The Appellate Division affirmed the dismissal of the fraud and other
non-contractual counts in the Complaint, but reversed the contract and
reformation counts and remanded these to the lower court for further
proceedings. The Company sought review of this decision by the Supreme Court of
New Jersey, but in March 2001, that Court declined to consider the appeal. The
case therefore returned to the Chancery Division. On April 6, 2001, the Company
filed an Answer to the Complaint denying all liability, and also filed a
counterclaim against Whitesell, seeking damages for breach of contract and
unjust enrichment.
15
In November 1999, a third-party complaint was filed in the Superior Court of New
Jersey, Burlington County, by BRI OP Limited Partnership ("BRI OP") against the
Company and several other persons and entities, including several former
affiliates of the Company, relative to Greentree Shopping Center located in
Marlton, New Jersey ("Subject Property"). The Subject Property was owned and
managed by a subsidiary of the Company between 1986 and 1988. BRI OP, also a
former owner of the Subject Property, has been sued by the present owner and
manager of the Subject Property, seeking indemnification and contribution for
costs related to the remediation of environmental contamination allegedly caused
by a dry cleaning business, which was a tenant of the Subject Property. The
present owner also seeks economic damages separate and apart from the
remediation costs. BRI OP, in turn, brought a third-party action against the
Company and others seeking indemnification for environmental remediation and
clean up costs for which it may be held liable. This legal proceeding remains in
the early stages of discovery, as the plaintiff has yet to complete testing that
would document its alleged damages. Plaintiff has, however, sought a Directive
from the New Jersey Department of Environmental Protection that would treat the
Company as a responsible party for site assessment and remediation going
forward. However, the Company believes, based on its assessment of the potential
cost of any required remediation and defenses that may be available to the
Company, that this proceeding will not have a material adverse effect on the
Company's financial position or results of operations.
The Company is involved from time to time in litigation on various matters,
which include disputes with tenants and disputes arising out of agreements to
purchase or sell properties. Given the nature of the Company's 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.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on May 7, 2001. At the meeting, each of the
seven individuals nominated for election to the Company's Board of Trustees were
elected to the Board. These individuals will serve on the Board, together with
an eighth Trustee (D. Pike Aloian), separately elected by the holder of a class
of the Company's preferred securities. The number of shares cast for, against or
withheld for each nominee is set forth below:
For Against Withheld
---------- ------- ----------
Anthony A. Nichols, Sr. 35,555,856 0 292,272
Gerard H. Sweeney 35,555,956 0 292,172
Donald E. Axinn 35,573,553 0 274,575
Walter D'Alessio 35,574,631 0 273,497
Robert Larson 35,5495,81 0 298,547
Warren V. Musser 23,424,260 0 12,423,868
Charles P. Pizzi 35,575,271 0 272,857
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
16
(b) Reports on Form 8-K:
During the three months ended March 31, 2001, and through May 15, 2001, the
Company filed the following:
(i) Current Report on Form 8-K filed March 23, 2001 (reporting under Item 5).
This Current Report disclosed the then pending acquisition with Prentiss
Properties Acquisition Partners, L.P.
(ii) Current Report on Form 8-K filed April 23, 2001 (reporting under Item 2
and Item 7). This Current Report disclosed the acquisition and
disposition of properties with Prentiss Properties Acquisition Partners,
L.P.
(iii) Current Report on Form 8-K/A filed May 15, 2001 (reporting under Item 7)
amended the Current Report on Form 8-K filed April 23, 2001. This Current
Report included the combined statement of revenue and certain expenses
related to the acquired properties and the required pro forma financial
information.
17
BRANDYWINE REALTY TRUST
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 15, 2001 By: /s/ Gerard H. Sweeney
----------------------------------------
Gerard H. Sweeney, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2001 By: /s/ Jeffrey F. Rogatz
----------------------------------------
Jeffrey F. Rogatz, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 2001 By: /s/ Bradley W. Harris
----------------------------------------
Bradley W. Harris, Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
18