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 June 30, 2003
or
____ 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 1-9106
------
Brandywine Realty Trust
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 23-2413352
------------------------------- -----------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
401 Plymouth Road, Plymouth Meeting, Pennsylvania 19462
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 325-5600
-----------------------------
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 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. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
A total of 37,359,460 Common Shares of Beneficial Interest, par value $.01 per
share, were outstanding as of August 13, 2003.
BRANDYWINE REALTY TRUST
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002................ 3
Condensed Consolidated Statements of Operations for the three- and six-month periods
ended June 30, 2003 and June 30, 2002.......................................................... 4
Condensed Consolidated Statements of Cash Flows for the six-month periods ended June
30, 2003 and June 30, 2002..................................................................... 5
Notes to Condensed Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................................... 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 27
Item 4. Controls and Procedures........................................................................ 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 28
Item 4. Submission of Matters to a Vote of Security Holders........................................... 28
Item 6. Exhibits and Reports on Form 8-K............................................................... 28
Signatures..................................................................................... 30
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
BRANDYWINE REALTY TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
June 30, December 31,
2003 2002
---------- ----------
(unaudited)
ASSETS
Real estate investments:
Operating properties $1,896,697 $1,890,009
Accumulated depreciation (263,327) (245,230)
---------- ----------
1,633,370 1,644,779
Construction-in-progress 43,624 58,127
Land held for development 43,637 43,075
---------- ----------
1,720,631 1,745,981
Cash and cash equivalents 7,520 26,801
Escrowed cash 17,605 16,318
Accounts receivable, net 3,729 3,657
Accrued rent receivable, net 30,959 28,333
Marketable securities 11,918 11,872
Assets held for sale 23,262 7,666
Investment in real estate ventures, at equity 14,646 14,842
Deferred costs, net 28,279 29,271
Other assets 28,246 34,547
---------- ----------
Total assets $1,886,795 $1,919,288
========== ==========
LIABILITIES AND BENEFICIARIES' EQUITY
Mortgage notes payable $ 575,839 $ 597,729
Borrowings under Credit Facility 264,000 307,000
Unsecured term loan 100,000 100,000
Accounts payable and accrued expenses 21,786 27,576
Distributions payable 22,106 21,186
Tenant security deposits and deferred rents 21,685 22,276
Other liabilities 18,869 22,006
Liabilities related to assets held for sale 254 20
---------- ----------
Total liabilities 1,024,539 1,097,793
Minority interest 133,468 135,052
Commitments and contingencies
Beneficiaries' equity:
Preferred Shares (shares authorized-10,000,000):
7.25% Series A Cumulative Convertible Preferred
Shares, $.01 par value; issued and outstanding-
750,000 in 2003 and 2002 8 8
8.75% Series B Cumulative Convertible Preferred
Shares, $.01 par value; issued and outstanding-
4,375,000 in 2003 and 2002 44 44
Common Shares of Beneficial Interest, $0.01 par value;
shares authorized-100,000,000; issued and outstanding-
37,359,131 in 2003 and 35,226,315 in 2002 373 352
Additional paid-in capital 894,051 841,659
Share warrants 401 401
Cumulative earnings 251,713 225,010
Accumulated other comprehensive loss (4,923) (6,402)
Cumulative distributions (412,879) (374,629)
---------- ----------
Total beneficiaries' equity 728,788 686,443
---------- ----------
Total liabilities and beneficiaries' equity $1,886,795 $1,919,288
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
BRANDYWINE REALTY TRUST
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share information)
Three-Month Periods Six-Month Periods
Ended June 30, Ended June 30,
-------------------- --------------------
2003 2002 2003 2002
------- ------- -------- --------
Revenue:
Rents $64,961 $62,095 $129,281 $121,301
Tenant reimbursements 8,559 8,102 17,164 15,472
Other 1,356 2,717 4,083 5,586
------- ------- -------- --------
Total revenue 74,876 72,914 150,528 142,359
Expenses:
Property operating expenses 19,281 18,232 40,799 36,453
Real estate taxes 6,819 6,118 13,423 11,854
Interest 15,241 16,105 30,547 31,835
Depreciation and amortization 15,062 15,268 29,856 27,542
Administrative expenses 3,809 3,805 7,323 7,841
------- ------- -------- --------
Total operating expenses 60,212 59,528 121,948 115,525
Income from continuing operations before equity in income of real estate
ventures, net gain on sales of interests in real estate and minority interest 14,664 13,386 28,580 26,834
Equity in income of real estate ventures 411 229 569 693
------- ------- -------- --------
Income from continuing operations before gain on sale of interests
in real estate and minority interest 15,075 13,615 29,149 27,527
Gain on sale of interests in real estate - - 1,152 -
Minority interest attributable to continuing operations (2,299) (2,270) (4,618) (4,612)
------- ------- -------- --------
Income from continuing operations 12,776 11,345 25,683 22,915
Discontinued operations:
Income from discontinued operations 395 1,416 895 5,581
Gains on disposition of discontinued operations 390 116 951 8,562
Minority interest (37) (77) (88) (789)
------- ------- -------- --------
Income from discontinued operations 748 1,455 1,758 13,354
------- ------- -------- --------
Net income 13,524 12,800 27,441 36,269
Income allocated to Preferred Shares (2,976) (2,977) (5,952) (5,954)
------- ------- -------- --------
Income allocated to Common Shares $10,548 $ 9,823 $ 21,489 $ 30,315
======= ======= ======== ========
Basic earnings per Common Share:
Continuing operations $ 0.27 $ 0.22 $ 0.54 $ 0.46
Discontinued operations 0.02 0.04 0.05 0.37
------- ------- -------- --------
$ 0.29 $ 0.26 $ 0.59 $ 0.83
======= ======= ======== ========
Diluted earnings per Common Share:
Continuing operations $ 0.27 $ 0.22 $ 0.53 $ 0.45
Discontinued operations 0.02 0.04 0.05 0.37
------- ------- -------- --------
$ 0.29 $ 0.26 $ 0.58 $ 0.82
======= ======= ======== ========
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)
Six-Month Periods Ended
June 30,
------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 27,441 $ 36,269
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation 26,899 26,875
Amortization:
Deferred financing costs 1,004 1,007
Deferred leasing costs 3,404 2,706
Deferred compensation costs 1,500 1,599
Straight-line rent (2,913) (2,937)
Provision for doubtful accounts 300 1,122
Net gain on sale of interests in real estate (2,103) (8,562)
Minority interest 4,706 5,401
Changes in assets and liabilities:
Accounts receivable (243) 2,498
Other assets 6,008 4,696
Accounts payable and accrued expenses (5,476) (10,103)
Tenant security deposits and deferred rents (328) (6,580)
Other liabilities (988) (913)
-------- --------
Net cash from operating activites 59,211 53,078
Cash flows from investing activities:
Acquisitions of properties - (22,887)
Sales of properties 4,078 59,054
Capital expenditures (19,140) (22,179)
Investment in real estate ventures (192) (476)
Escrowed cash (1,287) 997
Cash distributions from real estate ventures in excess
of equity in income 388 461
Leasing costs (3,640) (6,518)
-------- --------
Net cash from investing activities (19,793) 8,452
Cash flows from financing activites:
Proceeds from notes payable, Credit Facility 21,000 15,000
Repayments of notes payable, Credit Facility (64,000) (26,000)
Proceeds from mortgage notes payable - 14,021
Repayments of mortgage notes payable (21,890) (4,229)
Debt financing costs (50) -
Repayments on employee stock loans 1,613 1,618
Proceeds from issuance of shares, net 47,042 -
Repurchases of Common Shares and minority interest units - (7,905)
Distributions paid to shareholders (37,307) (37,605)
Distributions to minority interest holders (5,107) (5,413)
-------- --------
Net cash from financing activities (58,699) (50,513)
-------- --------
(Decrease) increase in cash and cash equivalents (19,281) 11,017
Cash and cash equivalents at beginning of period 26,801 13,459
-------- --------
Cash and cash equivalents at end of period $ 7,520 $ 24,476
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
BRANDYWINE REALTY TRUST
-----------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
JUNE 30, 2003
-------------
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 June 30, 2003, the Company's portfolio included 209
office properties, 27 industrial properties and one mixed-use property
(collectively, the "Properties") that contained an aggregate of 16.2 million net
rentable square feet. The Properties are located in the office and industrial
markets in and surrounding Philadelphia, Pennsylvania, New Jersey and Richmond,
Virginia. As of June 30, 2003, the Company also held economic interests in ten
unconsolidated real estate ventures (the "Real Estate Ventures") formed with
third parties to develop commercial properties.
The Company owns its assets and conducts its operations through Brandywine
Operating Partnership, L.P. (the "Operating Partnership"). The Company is the
sole general partner of the Operating Partnership and, as of June 30, 2003, was
entitled to approximately 95.6% of the Operating Partnership's distributions
after distributions by the Operating Partnership to holders of its Series B
Preferred Units (defined below). The Operating Partnership owns a 95% interest
in Brandywine Realty Services Corporation (the "Management Company"), a taxable
REIT subsidiary that, as of June 30, 2003, was performing management and leasing
services for 39 properties owned by third-parties.
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 Units to
persons that contributed assets to the Operating Partnership. The Operating
Partnership is obligated to redeem each Class A Unit, at the request of the
holder, 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 cumulative preferred distribution of 7.25% per
annum ($3.625 per unit per annum), subject to an increase in the event quarterly
distributions paid to holders of Common Shares exceed $0.51 per share. Income
allocated to minority interest includes the amount of the Series B Preferred
Unit distribution and the pro rata share of net income of the Operating
Partnership allocated to the Class A Units held by third parties. As of June 30,
2003, 1,737,203 Class A Units and 1,950,000 Series B Preferred Units were
outstanding and held by third party investors. Minority interest also includes
the 5% interest in the Management Company that is owned by a partnership
comprised of two Company executives.
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, 2002,
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 accounting principles generally accepted in the United States of America
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 management, all
adjustments (consisting solely of normal recurring matters) necessary to fairly
present the financial position of the Company as of June 30, 2003, the results
of its operations for the three- and six-month periods ended June 30, 2003 and
2002, and its cash flows for the six-month periods ended June 30, 2003 and 2002
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, 2002. Certain
prior period amounts have been reclassified to conform with the current period
presentation.
6
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include all accounts of the
Company, its majority-owned and/or controlled subsidiaries, which consist
principally of Operating Partnership as well as the Management Company
(consolidated subsequent to January 1, 2001, see below). The portion of these
entities not owned by the Company is presented as minority interest as of and
during the periods consolidated. All intercompany accounts and transactions have
been eliminated in consolidation.
See Investments in Unconsolidated Real Estate Ventures in Note 4 for the
Company's treatment of unconsolidated real estate venture interests. All
significant intercompany accounts and transactions have been eliminated.
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, 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. Costs incurred for the acquisition and
renovation of an operating property are capitalized to the Company's investment
in that property. Maintenance and repairs are charged to expense as incurred.
Depreciation and Amortization
- -----------------------------
The costs of buildings and improvements are depreciated using the straight-line
method based on the following useful lives: buildings and improvements (five to
40 years) and tenant improvements (the shorter of the lease term or the life of
the asset).
Construction in Progress
- ------------------------
Project costs directly associated with the development and construction of a
real estate project are capitalized as construction in progress. In addition,
interest, real estate taxes and general and administrative expenses that are
directly associated with the Company's development activities are capitalized
until completion of the building shell. Once the building shell of a real estate
project is completed, the costs capitalized to construction in progress are
transferred to land and buildings. The Company capitalized direct construction
costs totaling $.4 million and $.9 million for the three- and six-month periods
ended June 30, 2003, and $.3 million and $.7 million for the three- and
six-month periods ended June 30, 2002. The Company capitalized interest totaling
$.2 million and $.6 million for the three- and six-month periods ended June 30,
2003 and $.7 million and $1.6 million for the three- and six-month periods ended
June 30, 2002 related to development of certain Properties and land holdings.
Impairment of Long-Lived Assets
- -------------------------------
In accordance with Statement of Financial Accounting Standards No. 144 ("SFAS
144"), Accounting for the Impairment or Disposal of Long-Lived Assets,
long-lived assets, such as real estate investments and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are separately presented in
the balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated. The other assets and
liabilities related to assets classified as held-for-sale are presented
separately in the consolidated balance sheet.
No impairment losses were recorded for the three- and six-month periods ended
June 30, 2003 and 2002.
7
Cash and cash equivalents
- -------------------------
Cash and cash equivalents are highly liquid investments with original maturities
of three months or less. The Company maintains cash equivalents in financial
institutions in excess of insured limits.
Investments in Unconsolidated Real Estate Ventures
- --------------------------------------------------
The Company accounts for its investments in unconsolidated Real Estate Ventures
under the equity method of accounting as the Company exercises significant
influence, but does not control these entities under the provisions of the
entities' governing agreements. These investments are recorded initially at
cost, as Investments in Real Estate Ventures, and subsequently adjusted for
equity in earnings and cash contributions and distributions.
On a periodic basis, management assesses whether there are any indicators that
the value of the Company's investments in unconsolidated Real Estate Ventures
may be impaired. An investment is impaired only if management's estimate of the
value of the investment is less than the carrying value of the investment. 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.
Management does not believe that the value of any of the Company's investments
in Real Estate Ventures is impaired. See Note 4.
Deferred Costs
- --------------
Costs incurred in connection with property leasing are capitalized as deferred
leasing costs. Deferred leasing costs consist primarily of leasing commissions
that are amortized on the straight-line method over the term of the respective
lease. Lease terms generally range from one to 15 years. Management re-evaluates
the deferred leasing costs for potential impairment as economic and market
conditions change. Internal direct leasing costs deferred totaled $1.0 million
and $1.9 million for the three-and six-month periods ended June 30, 2003, and
$1.0 million and $1.7 million for the three-and six-month periods ended June 30,
2002.
Costs incurred in obtaining long-term financing are amortized on a straight line
basis and charged to interest expense over the terms of the related debt
agreements. This approach approximates the effective interest rate method.
Intangible Assets
- -----------------
The Company allocates the purchase price of properties to net tangible and
identified intangible assets (included in Other 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 Company's estimate of the fair market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining
non-cancellable term of the lease. Capitalized above-market lease values are
amortized as a reduction of rental income over the remaining non-cancellable
terms of the respective leases. Capitalized below-market lease values amortized
as an increase of rental income over the remaining non-cancellable terms of the
respective leases, including any fixed-rate renewal periods.
The aggregate value of other intangibles acquired is measured based on the
difference between (i) the property valued with in-place leases adjusted to
market rental rates and (ii) the property valued as if it was vacant. The
Company allocates a portion of the purchase price to lease origination costs.
The Company estimates the cost to execute leases with terms similar to the
remaining lease terms of the in-place leases, include leasing commissions, legal
and other related expenses. This intangible asset is amortized to expense over
the remaining term of the respective leases. Company estimates of value are made
using methods similar to those used by independent appraisers. Factors
considered by the Company in their analysis include an estimate of the carrying
costs during the expected lease-up periods considering current market conditions
and costs to execute similar leases. 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. 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.
8
The total amount of these other intangible assets is further allocated to tenant
relationships and in-place leases based on the Company's evaluation of the
specific characteristics of each tenant's lease and the Company's overall
relationship with the respective tenant. Characteristics considered by the
Company in allocating value to its tenant relationships include the nature and
extent of the Company's business relationship with the tenant, growth prospects
for developing new business with the tenant, the tenant's credit quality and
expectations of lease renewals, among other factors. The value of tenant
relationship intangibles is amortized over the remaining initial lease term and
renewals, but in no event longer than the remaining depreciable life of the
building. The value of in-place leases is amortized over the remaining
non-cancellable 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 market rate adjustments, lease origination costs, in-place
lease values and tenant relationship values, would be charged to expense.
Revenue Recognition
- -------------------
Rental revenue is recognized on the straight-line basis from the later of the
date of the origination of the lease or the date of acquisition of the facility
subject to existing leases, which averages minimum rents over the terms of the
leases. The cumulative difference between lease revenue recognized under this
method and contractual lease payment terms is recorded as "accrued rent
receivable"on the accompanying balance sheets. The straight-line rent adjustment
increased revenue by approximately $1.4 million and $2.9 million for the three-
and six-month periods ended June 30, 2003 and approximately $1.6 million and
$2.9 million for the three- and six-month periods ended June 30, 2002. Tenant
receivables and accrued rent receivables are carried net of the allowances for
doubtful accounts of $1.8 million and $2.4 million as of June 30, 2003 and $2.3
million and $2.3 million as of December 31, 2002. The allowance is based on
management's evaluation of the collectability of receivables, taking into
account tenant specific considerations as well as the overall tenant credit
portfolio. The leases also typically provide for tenant reimbursement of common
area maintenance and other operating expenses. Deferred rental revenue
represents rental revenue received from tenants prior to their due dates.
Stock-Based Compensation Plans
- ------------------------------
In December 2002, the Financial Accounting Standards Board issued SFAS 148
("SFAS 148"), Accounting for Stock-Based Compensation - Transition and
Disclosure. SFAS 148 amends SFAS 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, to provide alternative methods of transition for an entity that
voluntarily adopts the fair value recognition method of recording stock option
expense. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB
Opinion No. 28, Interim Financial Reporting, to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock options on reported net income and
earnings per share in annual and interim financial statements.
Prior to 2002, the Company accounted for stock options issued under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees and Related Interpretations. The following table
illustrates the effect on net income and earnings per share if the fair value
based method had been applied to all outstanding and unvested awards in each
period (in thousands, except per share amounts):
Three-month period Six-month period
ended June 30, ended June 30,
--------------------- -------------------
2003 2002 2003 2002
------- ------ ------- -------
Net income available to Common Shares, as reported $10,548 $9,823 $21,489 $30,315
Add: Stock based compensation expense included in reported net income 688 582 1,372 1,229
Deduct: Total stock based compensation expense determined under
fair value recognition method for all awards (801) (762) (1,597) (1,589)
------- ------ ------- -------
Pro forma net income available to Common Shares $10,435 $9,643 $21,264 $29,955
======= ====== ======= =======
Earnings per Common Share
Basic - as reported $ 0.29 $ 0.26 $ 0.59 $ 0.83
======= ====== ======= =======
Basic - pro forma $ 0.28 $ 0.26 $ 0.58 $ 0.82
======= ====== ======= =======
Diluted - as reported $ 0.29 $ 0.26 $ 0.58 $ 0.82
======= ====== ======= =======
Diluted - pro forma $ 0.28 $ 0.26 $ 0.58 $ 0.81
======= ====== ======= =======
9
Accounting for Derivative Instruments and Hedging Activities
- ------------------------------------------------------------
The Company accounts for its derivative instruments and hedging activities under
SFAS No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging
Activities, and its corresponding amendments under SFAS No. 138, Accounting for
Certain Derivative Instruments and Hedging Activities - An Amendment of SFAS
133. 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. For the six-month
period ended June 30, 2003, the Company was not party to any derivative contract
designated as a fair value hedge.
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, in which it agrees to
exchange various combinations of fixed and/or variable interest rates based on
agreed upon notional amounts.
Income Taxes
- ------------
The 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
maintain its qualification as a REIT, among other things, the Company is
required to distribute at least 90% of its REIT taxable income to its
shareholders and meet certain tests regarding the nature of its income and
assets. As a REIT, the Company is not subject to federal income tax with respect
to that portion of its income which meets certain criteria and is distributed
annually to the shareholders. Accordingly, no provision for federal income taxes
is included in the accompanying consolidated financial statements. The Company
plans to continue to operate so that it meets the requirements for taxation as a
REIT. Many of these requirements, however, are highly technical and complex. If
the Company were to fail to meet these requirements, the Company would be
subject to federal income tax. The Company is subject to certain state and local
taxes. Provision for such taxes has been included in general and administrative
expenses in the Company's consolidated statement of operations.
Recently Issued Accounting Standards
- ------------------------------------
In May 2003, the FASB issued SFAS No. 150 ("SFAS 150"), Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 generally applies to instruments that are mandatorily redeemable, that
represent obligations that will be settled with a variable number of the
Company's shares, or that represent an obligation to purchase a fixed number of
the Company's shares. For instruments within its scope, the statement requires
classification as a liability with initial measurement at fair value. Subsequent
measurement depends upon the certainty of the terms of the settlement (amount,
timing) and whether the obligation will be settled by a transfer of assets or by
issuance of a fixed or variable number of equity shares. SFAS No. 150 is
applicable now for instruments issued since SFAS No. 150 was issued, and as of
July 1, 2003, for instruments that predate SFAS No. 150's issuance. The Company
does not expect the adoption of SFAS No. 150 to have a significant effect to the
Company's financial position, results of operations or comprehensive income.
3. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS
--------------------------------------------------------
2003
- ----
During the six-month period ended June 30, 2003, the Company sold one office
property and three units of one office property containing 31,000 net rentable
square feet and one parcel of land containing 3.1 acres for an aggregate of $4.6
million, realizing a net gain of $2.1 million. During the three-month period
ended June 30, 2003, the Company sold one office property containing 2,500 net
rentable square feet for $.9 million, realizing a gain of $.4 million.
2002
- ----
During the six-month period ended June 30, 2002, the Company sold 16 office
properties containing an aggregate of 1.1 million net rentable square feet, 20
industrial properties containing an aggregate of .9 million net rentable square
feet and one parcel of land containing 10.0 acres for an aggregate of $168.1
million, realizing a net gain of $8.6 million. The Company also purchased five
office properties containing 503,000 net rentable square feet for an aggregate
of $82.0 million. During the three-month period ended June 30, 2002, the Company
sold six office properties containing an aggregate of 364,000 net rentable
square feet, 10 industrial properties containing an aggregate of 297,000 net
rentable square feet and one parcel of land containing 10.0 acres for an
aggregate of $50.2 million, realizing a net gain of $.1 million, and purchased
one office property containing 143,000 net rentable square feet for $14.8
million.
10
4. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES
-------------------------------------------------
As of June 30, 2003, the Company had an aggregate investment of approximately
$14.6 million in ten Real Estate Ventures (net of returns of investment received
by the Company). The Company formed these ventures with unaffiliated third
parties to develop office properties or to acquire land in anticipation of
possible development of office properties. Eight of the Real Estate Ventures own
eight office buildings that contain an aggregate of approximately 1.2 million
net rentable square feet; one Real Estate Venture developed a hotel property
that contains 137 rooms; and one Real Estate Venture holds approximately 3.0
acres of land for future development.
The Company accounts for its non-controlling interests in the Real Estate
Ventures using the equity method. Non-controlling ownership interests generally
range from 6% to 65%, subject to specified priority allocations in certain of
the Real Estate Ventures. The Company's investments, initially recorded at cost,
are subsequently adjusted for the Company's net equity in the ventures' income
or loss and cash contributions and distributions.
The following is a summary of the financial position of the unconsolidated Real
Estate Ventures in which the Company had interests as of June 30, 2003 and
December 31, 2002 (in thousands):
June 30, December 31,
2003 2002
-------- --------
Net property $198,489 $193,552
Other assets 18,071 20,163
Liabilities 2,283 3,186
Debt 149,739 149,129
Equity 64,538 61,400
Company's share of equity 14,646 14,842
The following is a summary of results of operations of the unconsolidated Real
Estate Ventures in which the Company had interests as of June 30, 2003 and 2002
(in thousands):
For the six-month periods ended June 30,
----------------------------------------
2003 2002
------- -------
Revenue $14,142 $13,713
Operating expenses 7,143 4,770
Interest expense, net 4,077 4,715
Depreciation and amortization 2,624 2,309
Net (loss) income 298 1,919
Company's share of income 569 693
The following is a summary of the financial position as of June 30, 2003 and the
results of operations for the six-month period ended June 30, 2003 for each of
the unconsolidated Real Estate Ventures in which the Company had interests as of
June 30, 2003:
11
1000
Chesterbrook Two Tower Four Tower Five Tower Six Tower Eight Tower
Boulevard Bridge Bridge Bridge Bridge Bridge
Partnership Associates Associates Associates Associates Associates
----------- ---------- ----------- ----------- ----------- -----------
Assets
Net Property $31,296,358 $9,621,708 $11,177,114 $42,623,411 $12,680,977 $59,182,417
Other Assets 3,635,242 207,364 3,137,185 3,749,710 3,776,864 1,743,812
----------- ---------- ----------- ----------- ----------- -----------
Total Assets $34,931,600 $9,829,072 $14,314,299 $46,373,121 $16,457,841 $60,926,229
=========== ========== =========== =========== =========== ===========
Liabilities and Equity
Other Liabilities $ 266,638 $ 55,362 $ 147,976 $ 888,153 $ 144,800 $ 271,866
Debt 28,047,624 7,213,000 11,000,000 27,600,000 15,821,000 37,370,328
----------- ---------- ----------- ----------- ----------- -----------
Total Liabilities 28,314,262 7,268,362 11,147,976 28,488,153 15,965,800 37,642,194
Equity 6,617,338 2,560,710 3,166,323 17,884,968 492,041 23,284,035
----------- ---------- ----------- ----------- ----------- -----------
Total Liabilities and Equity $34,931,600 $9,829,072 $14,314,299 $46,373,121 $16,457,841 $60,926,229
=========== ========== =========== =========== =========== ===========
Revenues
Revenues $ 2,598,687 $1,130,610 $ 1,278,096 $ 3,151,440 $ 1,505,039 $ 508,184
Tenant reimbursements and other 313,702 155,490 142,965 118,564 205,086 36,155
----------- ---------- ----------- ----------- ----------- -----------
Total Revenue 2,912,389 1,286,100 1,421,061 3,270,004 1,710,125 544,339
Operating Expenses
Property Operating Expenses 590,883 542,568 455,268 1,152,956 567,450 1,017,021
Real Estate Taxes 209,125 88,801 77,164 187,220 123,161 182,834
Depreciation and Amortization 448,531 153,030 305,050 93,051 348,005 828,624
Interest 967,934 209,761 303,416 964,959 625,313 348,186
Administrative Expenses 1,875 - 81,056 54,636 69,017 -
----------- ---------- ----------- ----------- ----------- -----------
Total Operating Expenses 2,218,348 994,160 1,221,954 2,452,822 1,732,946 2,376,665
----------- ---------- ----------- ----------- ----------- -----------
Net Income $ 694,041 $ 291,940 $ 199,107 $ 817,182 $ (22,821) $(1,832,326)
=========== ========== =========== =========== =========== ===========
[RESTUBBED TABLE]
Tower TBFA PJP PJP
Bridge Inn Partners, Building Building
Associates LP Two, LC Five, LC Total
----------- ---------- ---------- ---------- ------------
Assets
Net Property $15,584,590 $3,848,740 $5,673,043 $6,800,208 $198,488,566
Other Assets 855,829 - 477,777 487,612 18,071,395
----------- ---------- ---------- ---------- ------------
Total Assets $16,440,419 $3,848,740 $6,150,820 $7,287,820 $216,559,961
=========== ========== ========== ========== ============
Liabilities and Equity
Other Liabilities $ 292,211 $ - $ 117,743 $ 98,348 $ 2,283,097
Debt 11,681,340 - 5,172,367 5,833,047 149,738,706
----------- ---------- ---------- ---------- ------------
Total Liabilities 11,973,551 - 5,290,110 5,931,395 152,021,803
Equity 4,466,868 3,848,740 860,710 1,356,425 64,538,158
----------- ---------- ---------- ---------- ------------
Total Liabilities and Equity $16,440,419 $3,848,740 $6,150,820 $7,287,820 $216,559,961
=========== ========== ========== ========== ============
Revenues
Revenues $ 2,027,928 $ - $ 381,161 $ 443,809 $ 13,024,954
Tenant reimbursements and other - - 3,668 141,081 1,116,711
----------- ---------- ---------- ---------- ------------
Total Revenue 2,027,928 - 384,829 584,890 14,141,665
Operating Expenses
Property Operating Expenses 1,237,425 - 163,773 193,053 5,920,397
Real Estate Taxes 98,427 - 22,800 26,599 1,016,131
Depreciation and Amortization 289,195 - 77,506 80,572 2,623,564
Interest 497,250 - 67,262 93,039 4,077,120
Administrative Expenses - - - - 206,584
----------- ---------- ---------- ---------- ------------
Total Operating Expenses 2,122,297 - 331,341 393,263 13,843,796
----------- ---------- ---------- ---------- ------------
Net Income $ (94,369) $ - $ 53,488 $ 191,627 $ 297,869
=========== ========== ========== ========== ============
12
As of June 30, 2003, the aggregate maturities of non-recourse debt of Real
Estate Ventures payable to third-parties was as follows (in thousands):
2003 $ 1,550
2004 6,658
2005 37,406
2006 8,452
2007 and thereafter 95,673
--------
$149,739
========
As of June 30, 2003, the Company had guaranteed repayment of approximately $1.6
million of loans for the Real Estate Ventures. The Company also guaranteed a
$16.2 million loan on behalf of a former Real Estate Venture. Payment under the
guaranty, which expires in January 2004, would be required only in the event of
a default on the loan and if and to the extent the collateral for the loan were
insufficient to provide for payment in full of the loan. 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.
The Company will implement the consolidation guidance established in
Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities,
by July 1, 2003 for the Variable Interest Entities ("VIEs") with which the
Company became involved prior to February 1, 2003. The Company is in process of
determining whether it will need to consolidate previously unconsolidated VIEs
or to deconsolidate previously consolidated VIEs. Based upon its relationships
with such entities, the Company believes that the implementation of the
consolidation guidance will not have a material effect on the Company's
consolidated financial position.
5. INDEBTEDNESS
------------
The Company utilizes credit facility borrowings for general business purposes,
including the acquisition of properties and the repayment of other debt. The
Company maintains a $500 million unsecured credit facility (the "Credit
Facility") that matures in June 2004. Borrowings under the Credit Facility bear
interest at LIBOR (LIBOR was 1.10% at June 30, 2003) plus 1.5%, with the spread
over LIBOR subject to reductions from .10% to .25% or increases of .25% based on
the Company's leverage. As of June 30, 2003, the Company had $264.0 million of
borrowings and $11.0 million of letters of credit outstanding under the Credit
Facility, leaving $225.0 million of unused availability.
The Company also maintains a $100 million term loan. The term loan is unsecured
and matures on July 15, 2005, subject to two extensions of one year each upon
payment of an extension fee and the absence of any defaults at the time of each
extension. There are no scheduled principal payments prior to maturity. The term
loan bears interest at a spread over the one, two, three or six month LIBOR that
varies between 1.05% and 1.90% (1.65% as of June 30, 2003), based on the
Company's leverage ratio. The average interest rate on the Company's term loan
was 3.00% for the six-month period ended June 30, 2003.
As of June 30, 2003, the Company had $575.8 million of mortgage notes payable,
secured by 103 of the Properties and certain land holdings. Fixed rate
mortgages, totaling $515.4 million, require payments of principal and/or
interest (or imputed interest) at rates ranging from 6.80% to 9.25% and mature
on dates from December 2003 through July 2027. Variable rate mortgages, totaling
$60.5 million, require payments of principal and/or interest at rates ranging
from LIBOR plus .76% to 1.75% or 75% of prime (prime rate was 4.00% at June 30,
2003) and mature on dates from March 2004 through July 2027. The
weighted-average interest rate on the Company's mortgages was 7.11% for the
six-month period ended June 30, 2003 and 7.25% for the six-month period ended
June 30, 2002.
For the three- and six-month periods ended June 30, 2003 and 2002, the Company
paid interest (net of capitalized interest) totaling $13.2 million and $27.8
million in 2003 and $16.6 million and $31.3 million in 2002.
6. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
------------------------------------------------
Risk Management
- ---------------
In the normal 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 the risk of inability or
unwillingness of tenants to make contractually required payments. Market risk is
the risk of declines in the value of properties due to changes in rental rates,
interest rates or other market factors affecting the valuation of properties
held by the Company.
13
Use of Derivative Financial Instruments
- ---------------------------------------
The Company's use of derivative instruments is primarily 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
Company's 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.
The Company formally assesses, both at inception of the hedge and on an on-going
basis, whether each derivative is highly-effective in offsetting changes in cash
flows of the hedged item. If management determines that a derivative is not
highly-effective as a hedge or if a derivative ceases to be a highly-effective
hedge, the Company will discontinue hedge accounting prospectively.
The following table summarizes the terms and fair values of the Company's
derivative financial instruments at June 30, 2003 (in thousands).
Notional Fair
Hedge Product Hedge Type Amount Strike Maturity Value
------------- ---------- ------------ ------ --------- -----------
Cap Cash flow $ 28,000,000 8.700% 7/12/2004 $ -
Swap Cash flow 100,000,000 4.230% 6/29/2004 (3,313,633)
Swap Cash flow 50,000,000 4.215% 6/29/2004 (1,648,820)
Swap Cash flow 25,000,000 4.215% 6/29/2004 (824,410)
-----------
$(5,786,863)
===========
The Company has entered into interest rate swap and rate cap agreements
designated as cash flow hedges that are designed to reduce the impact of
interest rate changes on its variable rate debt. At June 30, 2003, the Company
had interest rate swap agreements for notional principal amounts aggregating
$175 million. The swap agreements effectively fix the LIBOR interest rate on
$100 million of Credit Facility borrowings at 4.230% and on $75 million of
Credit Facility borrowings at 4.215%, in each case until June 2004. The
weighted-average interest rate on borrowings under the Credit Facility,
including the effect of cash flow hedges, was 4.66% for the six-month period
ended June 30, 2003 and 5.32% for the six-month period ended June 30, 2002. The
interest rate cap agreement effectively limits the interest rate on a mortgage
with a notional value of $28 million at 8.7% until July 2004. The notional
amount at June 30, 2003 provides an indication of the extent of the Company's
involvement in these instruments at that time, but does not represent exposure
to credit, interest rate or market risks.
As of June 30, 2003, the maximum length of time until which the Company was
hedging its exposure to the variability in future cash flows was through June
2004. There was no gain or loss reclassified from accumulated other
comprehensive loss into earnings during the three-and six-month periods ended
June 30, 2003 as a result of the discontinuance of a cash flow hedge due to the
probability of the original forecasted transaction not occurring.
Over time, the unrealized gains and losses held in Other Comprehensive Income
("OCI") will be reclassified to earnings in the same period(s) in which the
hedged items are recognized in earnings. The current balance held in OCI is
expected to be reclassified to earnings over the lives of the current hedging
instruments, or for realized losses on forecasted debt transactions, over the
related term of the debt obligation, as applicable.
The Company recorded a gain of $.9 million and $1.4 million in OCI to recognize
the change in value of derivatives accounted for as cash flow hedges during the
three- and six-month periods ended June 30, 2003. The unrealized gains/losses
and the transition adjustment recorded in accumulated OCI will be reclassified
into earnings as the underlying hedged items affect earnings, such as when the
forecasted interest payments occur. The Company expects that $5.5 million of net
losses will be reclassified into earnings over the next twelve months.
14
Concentration of Credit Risk
- ----------------------------
Concentrations of credit risk arise when a number of tenants related to the
Company's 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 5% or more of the Company's rents during the six-month
periods ended June 30, 2003 and 2002. See note 10 for geographic segment
information.
7. DISCONTINUED OPERATIONS
-----------------------
For the three- and six-month periods ended June 30, 2003 and 2002, income from
discontinued operations relates to 44 properties containing 2.3 million net
rentable square feet that the Company sold between January 1, 2002 and June 30,
2003 and eight properties containing 384,000 net rentable square feet that the
Company has designated as "held-for-sale" as of June 30, 2003. The following
table summarizes information for the eight properties designated as
held-for-sale as of June 30, 2003 (in thousands):
Real Estate Investments:
Operating Properties $28,089
Accumulated depreciation (5,423)
-------
22,666
Construction-in-progress 75
-------
22,741
Accrued rent receivable 234
Deferred costs, net 199
Other assets 88
-------
$23,262
=======
Tenant security deposits and deferred rents $ 254
=======
The following table summarizes revenue and expense information for the above
properties sold or held-for-sale (in thousands):
Three-month periods Six-month periods
ended June 30, ended June 30,
---------------------- -----------------------
2003 2002 2003 2002
------ ------ ------ -------
Revenue:
Rents $1,173 $2,580 $2,478 $ 9,971
Tenant reimbursements 175 503 353 1,774
Other 5 322 16 523
------ ------ ------ -------
Total revenue 1,353 3,405 2,847 12,268
Expenses:
Property operating expenses 522 980 1,051 3,076
Real estate taxes 223 416 454 1,572
Depreciation and amortization 213 593 447 2,039
------ ------ ------ -------
Total operating expenses 958 1,989 1,952 6,687
Income from discontinued operations before net gain on sale
of interests in real estate and minority interest 395 1,416 895 5,581
Net gain on sales of interest in real estate 390 116 951 8,562
Minority interest (37) (77) (88) (789)
------ ------ ------ -------
Income from discontinued operations $ 748 $1,455 $1,758 $13,354
====== ====== ====== =======
Discontinued operations have not been segregated in the condensed consolidated
statements of cash flows. Therefore, amounts for certain captions will not agree
with respective data in the condensed consolidated statements of operations.
8. BENEFICIARIES EQUITY
--------------------
In June 2003, the Company consummated a public offering and sold 2,000,000
Common Shares for net proceeds (after deduction of transaction costs) of $47.0
million.
15
On June 27, 2003, the Company declared a distribution of $0.44 per Common Share,
totaling $16.6 million, which was paid on July 15, 2003 to shareholders of
record as of July 7, 2003. The Operating Partnership simultaneously declared a
$0.44 per unit cash distribution to holders of Class A Units totaling $.8
million.
On June 27, 2003, 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 currently entitled to a
cumulative preferential return of 7.25%, 8.75% and 7.25%, respectively.
Distributions paid on July 15, 2003 to holders of Series A Preferred Shares,
Series B Preferred Shares and Series B Preferred Units totaled $.7 million, $2.3
million and $1.8 million, respectively.
9. COMPREHENSIVE INCOME
--------------------
Comprehensive income represents net income, plus the results of certain
non-shareholders' equity changes not reflected in the Condensed Consolidated
Statements of Operations. The components of comprehensive income are as follows
(in thousands):
Three-month period Six-month period
Ended June 30, Ended June 30,
------------------------ --------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income $13,524 $12,800 $27,441 $36,269
Other comprehensive income (loss):
Reclassification adjustments for losses reclassified
into operations 1,287 1,909 2,544 3,758
Unrealized derivative loss on cash flow hedges (363) (4,478) (1,110) (3,962)
Unrealized gain (loss) on available-for-sale securities 77 60 (46) 115
------- ------- ------- -------
Comprehensive income $14,525 $10,291 $28,829 $36,180
======= ======= ======= =======
10. SEGMENT INFORMATION
-------------------
The Company currently manages its portfolio within three segments: (1)
Pennsylvania, (2) New Jersey (including New York in 2002 periods) and (3)
Virginia. Corporate is responsible for cash and investment management and
certain other general support functions.
16
Segment information for the three-month periods ended June 30, 2003 and 2002 is
as follows (in thousands):
Pennsylvania New Jersey Virginia Corporate Total
------------ ---------- -------- --------- ----------
As of June 30, 2003:
- --------------------
Real estate investments, at cost
Operating properties $1,194,473 $487,564 $214,660 $ - $1,896,697
Construction-in-progress 36,984 4,305 2,335 - 43,624
Land held for development 24,977 10,476 8,184 43,637
Assets held for sale, at cost - 23,262 - - 23,262
For three months ended June 30, 2003:
- -------------------------------------
Total revenue $ 46,525 $ 21,070 $ 6,995 $ 286 $ 74,876
Property operating expenses
and real estate taxes 15,717 7,994 2,389 - 26,100
---------- -------- -------- ------- ----------
Net operating income $ 30,808 $ 13,076 $ 4,606 $ 286 $ 48,776
========== ======== ======== ======= ==========
As of December 31, 2002:
- ------------------------
Real estate investments, at cost:
Operating properties $1,169,919 $506,818 $213,272 $ - $1,890,009
Construction-in-progress 51,469 3,619 3,039 - 58,127
Land held for development 25,051 10,023 8,001 - 43,075
Assets held for sale, at cost - 7,666 - - 7,666
For three months ended June 30, 2002:
- -------------------------------------
Total revenue $ 44,931 $ 21,037 $ 6,286 $ 660 $ 72,914
Property operating expenses
and real estate taxes 14,936 7,231 2,183 - 24,350
---------- -------- -------- ------- ----------
Net operating income $ 29,995 $ 13,806 $ 4,103 $ 660 $ 48,564
========== ======== ======== ======= ==========
Segment information for the six-month periods ended June 30, 2003 and 2002 is as
follows (in thousands):
Pennsylvania New Jersey Virginia Corporate Total
------------ ---------- -------- --------- ----------
For six months ended June 30, 2003:
- -----------------------------------
Total revenue $ 92,532 $ 43,363 $ 13,854 $ 779 $ 150,528
Property operating expenses
and real estate taxes 32,471 16,780 4,971 - 54,222
---------- -------- -------- ------- ----------
Net operating income $ 60,061 $ 26,583 $ 8,883 $ 779 $ 96,306
========== ======== ======== ======= ==========
For six months ended June 30, 2002:
- -----------------------------------
Total revenue $ 86,800 $ 41,360 $ 12,989 $ 1,210 $ 142,359
Property operating expenses
and real estate taxes 29,043 14,775 4,489 48,307
---------- -------- -------- ------- ----------
Net operating income $ 57,757 $ 26,585 $ 8,500 $ 1,210 $ 94,052
========== ======== ======== ======= ==========
Net operating income is defined as total revenue less property operating
expenses and real estate taxes. Below is a reconciliation of consolidated net
operating income to consolidated income from continuing operations (in
thousands):
Three-month periods Six-month periods
ended June 30, ended June 30,
------------------------ ------- --------
2003 2002 2003 2002
-------- ------- ------- --------
Consolidated net operating income $ 48,776 $48,564 $96,306 $ 94,052
Less:
Interest expense 15,241 16,105 30,547 31,835
Depreciation and amortization 15,062 15,268 29,856 27,542
Administrative expenses 3,809 3,805 7,323 7,841
Minority interest attributable to continuing
operations 2,299 2,270 4,618 4,612
Plus:
Equity in income of real estate ventures 411 229 569 693
Net gains on sales of interests in real estate - - 1,152 -
-------- ------- ------- --------
Consolidated income from continuing operations $ 12,776 $11,345 $25,683 $ 22,915
======== ======= ======= ========
17
11. 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 share and
per share amounts):
Three-month periods ended June 30,
-------------------------------------------------------------
2003 2002
----------------------------- ----------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
Income from continuing operations $ 12,776 $ 12,776 $ 11,345 $ 11,345
Income from discontinued operations 748 748 1,455 1,455
Income allocated to Preferred Shares (2,976) (2,976) (2,977) (2,977)
----------- ----------- ----------- -----------
10,548 10,548 9,823 9,823
Preferred Share discount amortization (369) (369) (369) (369)
----------- ----------- ----------- -----------
Net income available to common shareholders $ 10,179 $ 10,179 $ 9,454 $ 9,454
=========== =========== =========== ===========
Weighted-average shares outstanding 35,603,061 35,603,061 35,684,100 35,684,100
Options and warrants - 86,395 - 74,688
----------- ----------- ----------- -----------
Total weighted-average shares outstanding 35,603,061 35,689,456 35,684,100 35,758,788
=========== =========== =========== ===========
Earnings per Common Share:
Continuing operations $ 0.27 $ 0.27 $ 0.22 $ 0.22
Discontinued operations 0.02 0.02 0.04 0.04
----------- ----------- ----------- -----------
$ 0.29 $ 0.29 $ 0.26 $ 0.26
=========== =========== =========== ===========
Six-month periods ended June 30,
-------------------------------------------------------------
2003 2002
----------------------------- ----------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
Income from continuing operations $ 25,683 $ 25,683 $ 22,915 $ 22,915
Income from discontinued operations 1,758 1,758 13,354 13,354
Income allocated to Preferred Shares (5,952) (5,952) (5,954) (5,954)
----------- ----------- ----------- -----------
21,489 21,489 30,315 30,315
Preferred Share discount amortization (738) (738) (738) (738)
----------- ----------- ----------- -----------
Net income available to common shareholders $ 20,751 $ 20,751 $ 29,577 $ 29,577
=========== =========== =========== ===========
Weighted-average shares outstanding 35,452,855 35,452,855 35,692,678 35,692,678
Options and warrants - 102,832 - 162,216
----------- ----------- ----------- -----------
Total weighted-average shares outstanding 35,452,855 35,555,687 35,692,678 35,854,894
=========== =========== =========== ===========
Earnings per Common Share:
Continuing operations $ 0.54 $ 0.53 $ 0.46 $ 0.45
Discontinued operations 0.05 0.05 0.37 0.37
----------- ----------- ----------- -----------
$ 0.59 $ 0.58 $ 0.83 $ 0.82
=========== =========== =========== ===========
Securities (including Series A Preferred Shares and Series B Preferred Shares of
the Company, and Series B Preferred Units and Class A Units of the Operating
Partnership) totaling 11,244,632 and 11,250,670 for the three- and six-month
periods ended June 30, 2003 and 11,393,401and 11,500,577 for the three- and
six-month periods ended June 30, 2002 were excluded from the earnings per share
computations above as their effect would have been antidilutive.
12. SUBSEQUENT EVENTS
-----------------
Subsequent to June 30, 2003, the Company repaid $56.5 million of debt, without
prepayment fees, scheduled to mature in December 2003. In addition, the Company
sold two properties, containing 51,000 net rentable square feet, for $3.0
million.
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
----------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto 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 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 management's current expectations
include, but are not limited to, changes in general economic conditions, changes
in local real estate conditions (including changes in rental rates and the
number of competing properties), changes in the economic conditions affecting
industries in which the Company's principal tenants compete, the Company's
failure to lease unoccupied space in accordance with the Company's projections,
the failure of the Company to re-lease occupied space upon expiration of leases,
the bankruptcy of major tenants, changes in prevailing interest rates, the
unavailability of equity and debt financing, unanticipated costs associated with
the acquisition and integration of the Company's acquisitions, costs to complete
and lease-up pending developments, increased costs for, or lack of availability
of, adequate insurance, including for terrorist acts, demand for tenant services
beyond those traditionally provided by landlords, potential liability under
environmental or other laws, the existence of complex regulations relating to
the Company's status as a REIT and to the Company's acquisition, disposition and
development activities, the adverse consequences of the Company's failure to
qualify as a REIT and the other risks identified in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002.
OVERVIEW
The Company currently manages its portfolio within three segments: (1)
Pennsylvania, (2) New Jersey and (3) Virginia. As of June 30, 2003, the
Company's portfolio consisted of 209 office properties, 27 industrial facilities
and one mixed-use property that contain an aggregate of approximately 16.2
million net rentable square feet. As of June 30, 2003, the Company held economic
interests in ten Real Estate Ventures.
The Company receives income primarily from rental revenue (including tenant
reimbursements) from the Properties and, to a lesser extent, from the management
of properties owned by third parties and from investments in the Real Estate
Ventures.
The Company's financial performance is dependent upon the demand for office and
other commercial space in its markets. Current economic conditions, including
recessionary pressures and capital market volatility, have enhanced the
challenges facing the Company.
In the current economic climate, the Company continues to seek revenue growth
through an increase in occupancy of its portfolio (90.9% at June 30, 2003).
However, with a downturn in general leasing activity, owners of commercial real
estate, including the Company, are experiencing longer periods in which to lease
unoccupied space, and may face higher capital costs and leasing commissions to
achieve targeted tenancies.
As the Company seeks to increase revenues, management also focuses on strategies
to minimize operating risks, including (i) tenant rollover risk, (ii) tenant
credit risk and (iii) development risk.
Tenant Rollover Risk:
- ---------------------
The Company is subject to the risk that, upon expiration, leases may not be
renewed, the space may not be relet, or the terms of renewal or reletting
(including the cost of renovations) may be less favorable than the current lease
terms. Leases totaling approximately 6.1% of the net rentable square feet of the
Properties as of June 30, 2003 expire without penalty through the end of 2003.
In addition, leases totaling approximately 14.5% of the net rentable square feet
of the Properties as of June 30, 2003 are scheduled to expire without penalty in
2004. The Company maintains an active dialogue with its tenants in an effort to
achieve a high level of lease renewals. The Company's retention rate for leases
that were scheduled to expire in the six-month period ended June 30, 2003 was
80.0%. If the Company is unable to renew leases for a substantial portion of the
space under expiring leases, or promptly relet this space at anticipated rental
rates, the Company's cash flow could be adversely impacted.
19
Tenant Credit Risk:
- -------------------
In the event of a tenant default, the Company may experience delays in enforcing
its rights as a landlord and may incur substantial costs in protecting its
investment. Management regularly evaluates its accounts receivable reserve
policy in light of its tenant base and general and local economic conditions.
The accounts receivable allowances were $4.2 million or 10.7% of total
receivables (including accrued rent receivable) as of June 30, 2003 compared to
$4.6 million or 12.5% of total receivables (including accrued rent receivable)
as of December 31, 2002.
Development Risk:
- -----------------
As of June 30, 2003, the Company has in development two office properties and
has in redevelopment two office properties. These four properties aggregate
328,000 square feet. The total cost of these projects is estimated to be $31.8
million of which $17.7 million was incurred as of June 30, 2003. As of June 30,
2003, these projects were approximately 46% leased. While the Company is
actively marketing space at these projects to prospective tenants, management
cannot provide assurance as to the timing or terms of any leases of such space.
As of June 30, 2003, the Company owned approximately 425 acres of undeveloped
land and held options to purchase approximately 61 additional acres. Risks
associated with development of this land include construction cost overruns and
construction delays, insufficient occupancy rates and inability to obtain
necessary zoning, land-use, building, occupancy and other required governmental
approvals. If the Company's assumptions regarding the successful efforts of
development and leasing are incorrect, the resulting adjustments could impact
earnings.
RECENT ACTIVITY
The Company sold or disposed of the following properties during the six-month
period ended June 30, 2003:
Sale # of Rentable Sales/Disposition
Date Property/Portfolio Name Location Bldgs. Square Feet Price
- ------------ ------------------------------------ ---------------- --------- ----------- -----------------
Feb-03 Greentree Executive Campus (3 units) Mount Laurel, NJ - 28,444 $ 2,559,960
May-03 200 Nationwide Drive Harrisburg, PA 1 2,500 $ 875,000
---------- ---------- ------------
Total Properties Sold 1 30,944 $ 3,434,960
========== ========== ============
During the six-month period ended June 30, 2003, the Company sold one parcel of
land containing an aggregate of 3.1 acres for $1.2 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's condensed 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 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. 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, allowance for
doubtful accounts, deferred costs, contingencies and litigation. Actual results
may differ from those estimates and assumptions.
The Company's Annual Report on Form 10-K for the year ended December 31, 2002
contains a discussion of the Company's critical accounting policies. See also
Note 2 in the Company's unaudited condensed consolidated financial statements
for the six-month period ended June 30, 2003 as set forth herein. Management
discusses the Company's critical accounting policies and estimates with the
Company's Audit Committee.
20
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 2003 and June 30, 2002
Three months ended
June 30,
-------------------------- Dollar Percent
2003 2002 Change Change
----------- ----------- ----------- ----------
(amounts in thousands)
-----------------------------------------
Revenue:
Rents $ 64,961 $ 62,095 $ 2,866 4.6%
Tenant reimbursements 8,559 8,102 457 5.6%
Other 1,356 2,717 (1,361) -50.1%
---------- ---------- ---------- ---------
Total revenue 74,876 72,914 1,962 2.7%
Operating Expenses:
Property operating expenses 19,281 18,232 1,049 5.8%
Real estate taxes 6,819 6,118 701 11.5%
Interest 15,241 16,105 (864) -5.4%
Depreciation and amortization 15,062 15,268 (206) -1.3%
Administrative expenses 3,809 3,805 4 0.1%
---------- ---------- ---------- ---------
Total operating expenses 60,212 59,528 684 1.1%
---------- ---------- ---------- ---------
Income from continuing operations before equity in
income of real estate ventures, net gain on sales
and minority interest 14,664 13,386 1,278 9.5%
Equity in income of real estate ventures 411 229 182 79.5%
---------- ---------- ---------- ---------
Income from continuing operations before net gain
on sales and minority interest 15,075 13,615 1,460 10.7%
Minority interest (2,299) (2,270) (29) -1.3%
---------- ---------- ---------- ---------
Income from continuing operations 12,776 11,345 1,431 12.6%
Income from discontinued operations, net of
minority interest 748 1,455 (707) -48.6%
---------- ---------- ---------- ---------
Net income $ 13,524 $ 12,800 $ 724 5.7%
========== ========== ========== =========
Of the 237 Properties owned by the Company as of June 30, 2003, a total of 230
Properties containing an aggregate of 15.4 million net rentable square feet
("Same Store Properties") were owned for the entire three-month periods ended
June 30, 2003 and 2002. The following table sets forth revenue and expense
information for these Same Store Properties for the three-month periods ended
June 30, 2003 and 2002:
Three Months Ended
June 30,
------------------------ Dollar Percent
2003 2002 Change Change
----------- ----------- ---------- ---------
(amounts in thousands)
------------------------------------
Revenue:
Rents $ 62,648 $ 61,855 $ 793 1.3%
Tenant reimbursements 8,544 8,200 344 4.2%
Other 208 1,050 (842) -80.2%
---------- ---------- ----------
Total revenue 71,400 71,105 295 0.4%
Operating Expenses:
Property operating expenses 21,056 20,382 674 3.3%
Real estate taxes 6,513 5,993 520 8.7%
---------- ---------- ----------
Total operating expenses 27,569 26,375 1,194 4.5%
---------- ---------- ----------
Net operating income $ 43,831 $ 44,730 $ (899) -2.0%
========== ========== ==========
21
The following table is a reconciliation of income from continuing operations to
Same Store net operating income:
Three Months Ended
June 30,
---------------------------------
2003 2002
------------- --------------
(amounts in thousands)
Income from continuing operations $ 12,776 $ 11,345
Add/(deduct):
Interest expense 15,241 16,105
Depreciation and amortization 15,062 15,268
Adminstrative expenses 3,809 3,805
Equity in income of Real Estate Ventures (411) (229)
Net gain on sale of interest in real estate - -
Minority interest attributable to continuing operations 2,299 2,270
Income from discontinued operations 395 1,416
------------- --------------
Consolidated net operating income 49,171 49,980
Less: Net operating income of non same store properties (5,340) (5,250)
------------- --------------
Same Store net operating income $ 43,831 $ 44,730
============= ==============
Revenue increased to $74.9 million for the three-month period ended June 30,
2003 as compared to $72.9 million for the comparable period in 2002, primarily
due to properties added to the portfolio since second quarter 2002 partially
offset by decreased occupancy. The straight-line rent adjustment, which reflects
the difference between rents accrued in accordance with generally accepted
accounting principles and rents billed, increased revenues by $1.4 million for
the three-month period ended June 30, 2003 and $1.6 million for the comparable
period in 2002. Other revenue includes lease termination fees, leasing
commissions, third-party management fees and interest income. Other revenue
decreased to $1.4 million for the three-month period ended June 30, 2003 as
compared to $2.7 million for the comparable period in 2002 primarily due to
decreased termination fee income during 2003. Revenue for Same Store Properties
increased to $71.4 million for the three months ended June 30, 2003 as compared
to $71.1 million for the comparable period in 2002. This increase was the result
of increased rental rates offset by decreased occupancy in 2003 as compared to
2002. Average occupancy for the Same Store Properties for the three months ended
June 30, 2003 decreased to 91.2% from 91.6% for the comparable period in 2002.
Property operating expenses increased to $19.3 million for the three-month
period ended June 30, 2003 as compared to $18.2 million for the comparable
period in 2002, primarily due to additional properties in 2003. Property
operating expenses included a provision for doubtful accounts of $300,000 for
the three-month period ended June 30, 2003 and $700,000 for the comparable
period in 2002 to provide for increased credit risk. Property operating expenses
for the Same Store Properties increased to $21.1 million for the three months
ended June 30, 2003 as compared to $20.4 million for the comparable period in
2002 as a result of increased snow removal and insurance costs in 2003.
Real estate taxes increased to $6.8 million for the three-month period ended
June 30, 2003 as compared to $6.1 million for the comparable period in 2002,
primarily due to higher tax rates, property assessments and additional
properties in 2003. Real estate taxes for the Same Store Properties increased to
$6.5 million for the three months ended June 30, 2003 as compared to $6.0
million for the comparable period in 2002 as a result of higher tax rates and
property assessments in 2003.
Interest expense decreased to $15.2 million for the three-month period ended
June 30, 2003 as compared to $16.1 million for the comparable period in 2002,
primarily due to decreased interest rates and decreased average borrowings.
Average outstanding debt balances for the three months ended June 30, 2003 were
$963.2 million as compared to approximately $1.0 billion for the comparable
period in 2002. The Company's weighted-average interest rate after giving effect
to hedging activities on unsecured credit facility decreased to 4.80% for the
three months ended June 30, 2003 from 5.40% for the comparable period in 2002.
The weighted-average interest rate on mortgage notes payable decreased to 7.13%
for the three months ended June 30, 2003 from 7.15% for the comparable period in
2002.
Depreciation expense decreased to $13.3 million for the three-month period ended
June 30, 2003 as compared to $14.0 million for the comparable period in 2002
primarily due to the expense associated with early terminated leases in 2002
offset by additional properties in 2003. Amortization expense, related to
deferred leasing costs, increased to $1.7 million for the three-month period
ended June 30, 2003 as compared to $1.3 million for the comparable period in
2002, primarily due to increased leasing activity.
22
Administrative expenses were $3.8 million for the three-month periods ended June
30, 2003 and 2002.
Equity in income of Real Estate Ventures increased to $411,000 for the
three-month period ended June 30, 2003 as compared to $229,000 for the
comparable period in 2002 primarily due to increased returns related to one of
the ventures in 2003.
Minority interest from continuing operations represents the equity in income
attributable to the portion of the Operating Partnership not owned by the
Company. Minority interest was $2.3 million for the three-month periods ended
June 30, 2003 and 2002.
Discontinued operations decreased to $.7 million for the three-month period
ended June 30, 2003 as compared to $1.5 million for the comparable period in
2002 primarily due to 43 properties sold during 2002. During the three-month
period ended June 30, 2003, the Company sold one office property containing
2,500 net rentable square feet for $.9 million, realizing a gain of $.4 million.
Comparison of the Six Months Ended June 30, 2003 and June 30, 2002
Six months ended
June 30,
--------------------------- Dollar Percent
2003 2002 Change Change
------------ ------------ ------------ -----------
(amounts in thousands)
------------------------------------------
Revenue:
Rents $ 129,281 $ 121,301 $ 7,980 6.6%
Tenant reimbursements 17,164 15,472 1,692 10.9%
Other 4,083 5,586 (1,503) -26.9%
------------ ------------ ------------ -----------
Total revenue 150,528 142,359 8,169 5.7%
Operating Expenses:
Property operating expenses 40,799 36,453 4,346 11.9%
Real estate taxes 13,423 11,854 1,569 13.2%
Interest 30,547 31,835 (1,288) -4.0%
Depreciation and amortization 29,856 27,542 2,314 8.4%
Administrative expenses 7,323 7,841 (518) -6.6%
------------ ------------ ------------ -----------
Total operating expenses 121,948 115,525 6,423 5.6%
------------ ------------ ------------ -----------
Income from continuing operations before equity in
income of real estate ventures, net gain on sales
and minority interest 28,580 26,834 1,746 6.5%
Equity in income of real estate ventures 569 693 (124) -17.9%
------------ ------------ ------------ -----------
Income from continuing operations before net gain
on sales and minority interest 29,149 27,527 1,622 5.9%
Net gain on sales of interest in real estate 1,152 - 1,152 100.0%
Minority interest (4,618) (4,612) (6) -0.1%
------------ ------------ ------------ -----------
Income from continuing operations 25,683 22,915 2,768 12.1%
Income from discontinued operations, net of
minority interest 1,758 13,354 (11,596) -86.8%
------------ ------------ ------------ -----------
Net income $ 27,441 $ 36,269 $ (8,828) -24.3%
============ ============ ============ ===========
Revenue increased to $150.5 million for the six-month period ended June 30, 2003
as compared to $142.4 million for the comparable period in 2002, primarily due
to properties added to the portfolio since the second quarter 2002 partially
offset by decreased occupancy. The straight-line rent adjustment, which reflects
the difference between rents accrued in accordance with generally accepted
accounting principles and rents billed, increased revenues by $2.9 million for
each of the six-month periods ended June 30, 2003 and 2002. Other revenue
includes lease termination fees, leasing commissions, third-party management
fees and interest income. Other revenue decreased to $4.1 million for the
six-month period ended June 30, 2003 as compared to $5.6 million for the
comparable period in 2002 primarily due to decreased lease termination fee
income in 2003.
Property operating expenses increased to $40.8 million for the six-month period
ended June 30, 2003 as compared to $36.5 million for the comparable period in
2002, primarily due to increased snow removal costs and additional properties in
2003. Property operating expenses included a provision for doubtful accounts of
$.3 million for the six-month period ended June 30, 2002 and $1.1 million for
the comparable period in 2002 to provide for increased credit risk.
23
Real estate taxes increased to $13.4 million for the six-month period ended June
30, 2003 as compared to $11.9 million for the comparable period in 2002,
primarily due to higher tax rates, property assessments and additional
properties in 2003.
Interest expense decreased to $30.5 million for the six-month period ended June
30, 2003 as compared to $31.8 million for the comparable period in 2002,
primarily due to decreased interest rates and decreased average borrowings.
Average outstanding debt balances for the six months ended June 30, 2003 were
$977.1 million as compared to approximately $1.0 billion for the comparable
period in 2002. The Company's weighted-average interest rate after giving effect
to hedging activities on unsecured credit facility decreased to 4.66% for the
six months ended June 30, 2003 from 5.32% for the comparable period in 2002. The
weighted-average interest rate on mortgage notes payable decreased to 7.11% for
the six months ended June 30, 2003 from 7.25% for the comparable period in 2002.
Depreciation expense increased to $26.5 million for the six-month period ended
June 30, 2003 as compared to $25.0 million for the comparable period in 2002
primarily due to additional properties in 2003. Amortization expense, related to
deferred leasing costs, increased to $3.4 million for the six-month period ended
June 30, 2003 as compared to $2.5 million for the comparable period in 2002,
primarily due to increased leasing activity.
Administrative expenses decreased to $7.3 million for the six-month period ended
June 30, 2003 as compared to $7.8 million for the comparable period in 2002
primarily due to decreased advertising and marketing expenses in 2003 as
compared to 2002.
Equity in income of Real Estate Ventures decreased to $569,000 for the six-month
period ended June 30, 2003 as compared to $693,000 for the comparable period in
2002. During the third quarter of 2002, the Company acquired the remaining
partnership interests in three Real Estate Ventures, and accordingly, the
results attributable to the properties owned by these Ventures are now
consolidated from the date of acquisition.
During the six-month period ended June 30, 2003, the Company sold one parcel of
land containing an aggregate of 3.1 acres for $1.2 million, realizing a net gain
of $1.2 million.
Minority interest from continuing operations represents the equity in income
attributable to the portion of the Operating Partnership not owned by the
Company. Minority interest was $4.6 million for the six-month periods ended June
30, 2003 and 2002.
Discontinued operations decreased to $1.8 million for the six-month period ended
June 30, 2003 as compared to $13.3 million for the comparable period in 2002
primarily due to 43 properties sold during 2002. During the six-month period
ended June 30, 2003, the Company sold one office property and three units of one
office property containing 31,000 net rentable square feet for an aggregate of
$3.4 million, realizing a net gain of $.9 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the six-month period ended June 30, 2003, the Company generated $59.2
million in cash flow from operating activities. Other sources of cash flow for
the six-month period consisted of: (i) $47.0 million in net proceeds from share
issuances, (ii) $21.0 million of proceeds from draws on the Credit Facility,
(iii) $4.1 million of proceeds from sales of properties, (iv) $1.6 million from
payments on employee loans and (v) $.4 million of cash distributions from Real
Estate Ventures. During the six-month period ended June 30, 2003, cash out-flows
consisted of: (i) $64.0 million of Credit Facility repayments, (ii) $42.4
million of distributions to shareholders and minority interest holders, (iii)
$21.9 million of mortgage note repayments, (iv) $19.1 million to fund
development and capital expenditures, (v) $3.6 million of leasing costs, (vi)
$1.3 million of escrowed cash and (vii) $.2 million of additional investment in
Real Estate Ventures.
24
During the six-month period ended June 30, 2002, the Company generated $53.1
million in cash flow from operating activities. Other sources of cash flow for
the six-month period consisted of: (i) $59.1 million of proceeds from sales of
properties, (ii) $15.0 million of proceeds from draws on the Credit Facility,
(iii) $14.0 million of proceeds of additional mortgage notes, (iv) $1.6 million
from repayments of employee loans, (v) $1.0 million of escrowed cash and (vi)
$.5 million of cash distributions from Real Estate Ventures. During the
six-month period ended June 30, 2002, cash out-flows consisted of: (i) $37.6
million of distributions to shareholders, (ii) $26.0 million of Credit Facility
repayments, (iii) $22.9 million for property acquisitions, (iv) $22.2 million to
fund development and capital expenditures, (v) $7.9 million to repurchase Common
Shares and minority interest units, (vi) $6.5 million of leasing costs, (vii)
$4.2 million of mortgage note repayments and (viii) $.5 million of additional
investments in unconsolidated Real Estate Ventures.
Capitalization
As of June 30, 2003, the Company had approximately $939.8 million of debt
outstanding, consisting of $264.0 million of borrowings under the Credit
Facility, $100 million under the Term Loan and $575.8 million of mortgage notes
payable. The mortgage notes payable consists of $515.4 million of fixed rate
loans and $60.5 million of variable rate loans. Additionally, the Company has
entered into interest rate swap and cap agreements to fix the interest rate on
$203.0 million of the Credit Facility and variable rate loans through July 2004.
The mortgage loans mature between December 2003 and July 2027. As of June 30,
2003, the Company also had $11.0 million of letters of credit outstanding under
the Credit Facility and $225.0 million of unused availability under the Credit
Facility. For the six-month period ended June 30, 2003, the weighted-average
interest rate under the Company's Credit Facility and the related swap
agreements was 4.66%, the average interest rate for the Term Loan was 3.0% and
the weighted-average interest rate for borrowings under mortgage notes payable
and the related cap agreements was 7.11%.
The following table outlines the timing of payment requirements related to the
Company's commitments as of June 30, 2003:
Payments by Period (in thousands)
--------------------------------------------------------------------------------
2008 and
Total 2003 2004 - 2005 2006 - 2007 Beyond
------------- -------------- ------------- ------------- --------------
Mortgage notes payable:
Fixed rate $ 515,366 $ 60,072 $ 70,548 $ 38,041 $ 346,705
Variable rate 24,950 79 364 767 23,740
Construction loans 35,523 - 35,523 -
------------- -------------- ------------- ------------- --------------
575,839 60,151 106,435 38,808 370,445
Revolving credit facility 264,000 - 264,000 - -
Term loan 100,000 - 100,000 - -
Other liabilities 11,838 569 11,269 - -
------------- -------------- ------------- ------------- --------------
$ 951,677 $ 60,720 $ 481,704 $ 38,808 $ 370,445
============= ============== ============= ============= ==============
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 and Term Loan prior to maturity or extend their
terms.
As of June 30, 2003, the Company's debt-to-market capitalization ratio was
44.0%. As a general policy, the Company intends, but is not obligated, to adhere
to a policy of maintaining a debt-to-market capitalization ratio of no more than
50%.
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 June 30, 2003, the Company had repurchased 3.2 million of its Common
Shares at an average price of $17.71 per share. Under the share repurchase
program, the Company has the authority to repurchase an additional 834,000
shares. No time limit has been placed on the duration of the share repurchase
program. The following table summarizes the share repurchases during the
six-month periods ended June 30, 2003 and 2002:
25
Six months ended
June 30,
-------------------------------
2003 2002
-------------- --------------
Repurchased amount (shares) - 28,274
Repurchased amount ($, in thousands) $ - $ 671
Average price per share $ - $ 23.72
The following table summarizes the Class A Units tendered for redemption in cash
during the six-month periods ended June 30, 2003 and 2002:
Six months ended
June 30,
-------------------------------
2003 2002
-------------- --------------
Repurchased amount (units) - 274,844
Repurchased amount ($, in thousands) $ - $ 6,659
Average price per share $ - $ 24.23
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.
On June 27, 2003, the Company declared a distribution of $0.44 per Common Share,
totaling $16.6 million, which was paid on July 15, 2003 to shareholders of
record as of July 7, 2003. The Operating Partnership simultaneously declared a
$0.44 per unit cash distribution to holders of Class A Units totaling $.8
million.
On June 27, 2003, 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 currently entitled to a
preferential return of 7.25%, 8.75% and 7.25%, respectively. Distributions paid
on July 15, 2003 to holders of Series A Preferred Shares, Series B Preferred
Shares and Series B Preferred Units totaled $.7 million, $2.3 million and $1.8
million, respectively.
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
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.
Non-GAAP Supplemental Financial Measure: Funds from Operations (FFO)
FFO is a widely recognized measure of REIT performance. Although FFO is a
non-GAAP financial measure, the Company believes that information regarding FFO
is helpful to shareholders and potential investors. The Company computes FFO in
accordance with standards established by the National Association of Real Estate
Investment Trusts (NAREIT), which may not be comparable to FFO reported by other
REITs that do not compute FFO in accordance with the NAREIT definition, or that
interpret the NAREIT definition differently than the Company. NAREIT defines FFO
as net income (loss) before minority interest of unitholders (preferred and
common) and excluding gains (losses) on sales of depreciable operating property
and extraordinary items (computed in accordance with GAAP); plus real estate
related depreciation and amortization (excluding amortization of deferred
financing costs and depreciation of non-real estate assets), and after
adjustment for unconsolidated joint ventures. The GAAP measure that the Company
believes to be most directly comparable to FFO, net income, includes
depreciation and amortization expenses, gains or losses on property sales and
minority interest. In computing FFO, the Company eliminates substantially all of
these items because, in the Company's view, they are not indicative of the
results from the Company's property operations. To facilitate a clear
understanding of the Company's historical operating results, FFO should be
examined in conjunction with net income (determined in accordance with GAAP) as
presented in the financial statements included elsewhere in this Quarterly
Report on Form 10-Q. FFO does not represent cash generated from operating
activities in accordance with GAAP and should not be considered to be an
alternative to net income (loss) (determined in accordance with GAAP) as an
indication of the Company's financial performance or to be an alternative to
cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available for
the Company's cash needs, including its ability to make cash distributions to
shareholders.
26
The following table summarizes FFO for the three- and six-month periods ended
June 30, 2003 and 2002 (in thousands, except share data):
Three months ended June 30, Six months ended June 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income $ 13,524 $ 12,800 $ 27,441 $ 36,269
Add/(deduct):
Minority interest attributable to continuing operations 2,299 2,270 4,618 4,612
Net gain on sale of interests in real estate - - (1,152) -
Minority interest attributable to discontinued operations 37 77 88 789
Net gain on disposition of discontinued operations (390) (116) (951) (8,562)
------------ ------------ ------------ ------------
Income before net gains on sales of interests in real estate and
minority interest 15,470 15,031 30,044 33,108
Add (deduct):
Depreciation:
Attributable to real property 13,511 14,522 26,899 26,875
Attributable to real estate ventures 520 739 1,013 1,320
Amortization attributable to leasing costs 1,764 1,339 3,404 2,706
------------ ------------ ------------ ------------
Funds from operations $ 31,265 $ 31,631 $ 61,360 $ 64,009
============ ============ ============ ============
Weighted-average Common Shares (including Common
Share equivalents) and Operating Partnership units 47,152,178 46,934,097 46,806,367 47,355,479
============ ============ ============ ============
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.
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 2003 from the disclosures included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002. Reference is made to Item 7 included
in the Company's Annual Report on Form 10-K for the year ended December 31, 2002
and the caption "Liquidity and Capital Resources" under Item 2 of this Quarterly
Report on Form 10-Q.
Item 4. 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 rules and forms of
the Securities and Exchange Commission.
27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
As indicated in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, the Company is a defendant in a case in which the plaintiffs
allege that the Company breached its obligation to purchase a portfolio of
properties for approximately $83.0 million. 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 thereafter returned to the Chancery
Division, where written and oral discovery was conducted in 2002 and in the
first quarter of 2003. Discovery terminated on February 14, 2003. The Company
filed a motion for summary judgment on all counts, seeking dismissal of all
counts against it, and judgment for the Company on its counterclaim. The
Chancery Division granted the Company's summary judgment motion on March 25,
2003. By order dated May 9, 2003, the Chancery Division dismissed the
plaintiffs' remaining claims and entered judgment in favor of the Company on its
counterclaims. Also on May 9, 2003, the plaintiffs filed a Notice of Appeal with
the Appellate Division seeking review of the Chancery Division's March 25, 2003
ruling (and resulting May 9, 2003 Order) and two earlier procedural decisions.
Briefing on this appeal is scheduled to commence on August 27, 2003 and a
decision from the Appellate Division is expected in 2004.
Item 4. Submission of Matters to a Vote on Security Holders
---------------------------------------------------
The Company held its annual meeting on May 5, 2003. At the meeting, each of the
six individuals nominated for election to the Company's Board of Trustees was
elected to the Board. These individuals will serve on the Board, together with a
seventh 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. 36,041,126 0 584,225
Gerard H. Sweeney 36,041,842 0 583,509
Donald E. Axinn 35,857,188 0 768,163
Walter D'Alessio 27,965,806 0 8,659,545
Robert C. Larson 27,955,032 0 8,670,319
Charles P. Pizzi 36,047,288 0 578,063
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
3.2 Amended and Restated Bylaws of the Company
10.1 Letter to Cohen & Steers Capital Management Inc.
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
28
(b) Reports on Form 8-K:
--------------------
During the three months ended June 30, 2003 and through August 13, 2003, the
Company filed the following:
(i) Current Report on Form 8-K filed April 25, 2003 (reporting under
Items 7, 9 and 12).
(ii) Current Report on Form 8-K filed June 12, 2003 (reporting under
Items 5 and 7).
(iii) Current Report on Form 8-K filed June 13, 2003 (reporting under
Items 5 and 7).
(iv) Current Report on Form 8-K filed June 25, 2003 (reporting under
Items 4 and 7).
(v) Current Report on Form 8-K filed July 25, 2003 (reporting under
Items 7 and 12).
29
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: August 13, 2003 By: /s/ Gerard H. Sweeney
--------------- ----------------------------------------------------------------------
Gerard H. Sweeney, President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 2003 By: /s/ Christopher P. Marr
--------------- ----------------------------------------------------------------------
Christopher P. Marr, Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2003 By: /s/ Bradley W. Harris
--------------- ----------------------------------------------------------------------
Bradley W. Harris, Vice President and Chief Accounting Officer
(Principal Accounting Officer)
30