UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2012
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission file number 001-9106 (Brandywine Realty Trust)
000-24407 (Brandywine Operating Partnership, L.P.)
Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
MARYLAND (Brandywine Realty Trust) | 23-2413352 |
DELAWARE (Brandywine Operating Partnership L.P.) | 23-2862640 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
555 East Lancaster Avenue | |
Radnor, Pennsylvania | 19087 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (610) 325-5600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Shares of Beneficial Interest, | New York Stock Exchange |
par value $0.01 per share | |
(Brandywine Realty Trust) | |
6.90% Series E Cumulative Redeemable Preferred | New York Stock Exchange |
Shares of Beneficial Interest | |
par value $0.01 per share | |
(Brandywine Realty Trust) | |
Securities registered pursuant to Section 12(g) of the Act:
Units of General Partnership Interest (Brandywine Operating Partnership, L.P.)
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Brandywine Realty Trust | Yes þ No o |
Brandywine Operating Partnership, L.P. | Yes þ No o |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Brandywine Realty Trust | Yes o No þ |
Brandywine Operating Partnership, L.P. | Yes o No þ |
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.
Brandywine Realty Trust | Yes þ No o |
Brandywine Operating Partnership, L.P. | Yes þ No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Brandywine Realty Trust | Yes þ No o |
Brandywine Operating Partnership, L.P. | Yes þ No o |
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Brandywine Realty Trust:
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
Brandywine Operating Partnership, L.P.:
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Brandywine Realty Trust | Yes o No þ |
Brandywine Operating Partnership, L.P. | Yes o No þ |
As of June 29, 2012, the aggregate market value of the Common Shares of Beneficial Interest held by non-affiliates of Brandywine Realty Trust was $1,744,730,587 based upon the last reported sale price of $12.34 per share on the New York Stock Exchange on June 29, 2012. An aggregate of 143,573,900 Common Shares of Beneficial Interest were outstanding as of February 21, 2013.
As of June 29, 2012, the aggregate market value of the 1,786,092 common units of limited partnership (“Units”) held by non-affiliates of Brandywine Operating Partnership, L.P. was $22,040,372 based upon the last reported sale price of $12.34 per share on the New York Stock Exchange on June 29, 2012 of the Common Shares of Beneficial Interest of Brandywine Realty Trust, the sole general partner of Brandywine Operating Partnership, L.P. (For this computation, the Registrant has excluded the market value of all Units beneficially owned by Brandywine Realty Trust.)
Documents Incorporated By Reference
Portions of the proxy statement for the 2013 Annual Meeting of Shareholders of Brandywine Realty Trust are incorporated by reference into Part III of this Form 10-K.
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EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2012 of Brandywine Realty Trust (the “Parent Company”) and Brandywine Operating Partnership, L.P. (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust, or REIT, that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company”. In addition, terms such as “we”, “us”, or “our” used in this report may refer to the Company, the Parent Company, or the Operating Partnership.
The Parent Company is the sole general partner of the Operating Partnership and as of December 31, 2012, owned a 98.7% interest in the Operating Partnership. The remaining 1.3% interest consists of common units of limited partnership interest issued by the Operating Partnership to third parties in exchange for contributions of properties to the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.
The Company believes that combining the annual reports on Form 10-K of the Parent Company and the Operating Partnership into a single report will result in the following benefits:
• | facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business; |
• | remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and |
• | create time and cost efficiencies through the preparation of one combined report instead of two separate reports. |
Management operates the Parent Company and the Operating Partnership as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership. These members are officers of both the Parent Company and of the Operating Partnership.
There are few differences between the Parent Company and the Operating Partnership, which are reflected in the footnote disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as an interrelated consolidated company. The Parent Company is a REIT, whose only material asset is its ownership of the partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units of the Operating Partnership or equity interests in subsidiaries of the Operating Partnership.
The equity and non-controlling interests in the Parent Company and the Operating Partnership’s equity are the main areas of difference between the consolidated financial statements of the Parent Company and the Operating Partnership. The common units of limited partnership interest in the Operating Partnership are accounted for as partners’ equity in the Operating Partnership’s financial statements while the common units of limited partnership interests held by parties other than the Parent Company are presented as non-controlling interests in the Parent Company’s financial statements. The differences between the Parent Company and the Operating Partnership’s equity relate to the differences in the equity issued at the Parent Company and Operating Partnership levels.
To help investors understand the significant differences between the Parent Company and the Operating Partnership, this report presents the following as separate notes or sections for each of the Parent Company and the Operating Partnership:
• | Consolidated Financial Statements; |
• | Parent Company’s and Operating Partnership’s Equity |
• | Liquidity and Capital Resources in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
This report also includes separate Item 9A. (Controls and Procedures) disclosures and separate Exhibit 31 and 32 certifications for each of the Parent Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief
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Financial Officer of each entity have made the requisite certifications and that the Parent Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.
As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company operations on a consolidated basis and how management operates the Company.
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TABLE OF CONTENTS
Page | |
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Exhibit 3.1.29 | |
Exhibit 12.1 | |
Exhibit 12.2 | |
Exhibit 21 | |
Exhibit 23.1 | |
Exhibit 23.2 | |
Exhibit 31.1 | |
Exhibit 31.2 | |
Exhibit 31.3 | |
Exhibit 31.4 | |
Exhibit 32.1 | |
Exhibit 32.2 | |
Exhibit 32.3 | |
Exhibit 32.4 | |
Exhibit 99.1 | |
EX-101 INSTANCE DOCUMENT | |
EX-101 SCHEMA DOCUMENT | |
EX-101 CALCULATION LINKBASE DOCUMENT | |
EX-101 LABELS LINKBASE DOCUMENT | |
EX-101 PRESENTATION LINKBASE DOCUMENT | |
EX-101 DEFINITION LINKBASE DOCUMENT | |
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Filing Format
This combined Form 10-K is being filed separately by Brandywine Realty Trust (the “Parent Company”) and Brandywine Operating Partnership, L.P. (the “Operating Partnership”).
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This Annual Report on Form 10-K and other materials filed by us with the Securities and Exchange Commission (the "SEC") (as well as information included in oral or other written statements made by us) contain statements that are forward-looking, including statements relating to business and real estate development activities, acquisitions, dispositions, future capital expenditures, financing sources, governmental regulation (including environmental regulation) and competition. We intend such forward-looking statements to be covered by the safe-harbor provisions of the 1995 Act. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. As forward-looking statements, these statements involve important risks, uncertainties and other factors that could cause actual results to differ materially from the expected results and, accordingly, such results may differ from those expressed in any forward-looking statements made by us or on our behalf. Factors that could cause actual results to differ materially from our expectations include, but are not limited to:
• | the continuing impact of modest global economic growth, which is having and may continue to have a negative effect on the following, among other things: |
• | the fundamentals of our business, including overall market occupancy, demand for office space and rental rates; |
• | the financial condition of our tenants, many of which are financial, legal and other professional firms, our lenders, counterparties to our derivative financial instruments and institutions that hold our cash balances and short-term investments, which may expose us to increased risks of default by these parties; |
• | the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue acquisition and development opportunities and refinance existing debt; and |
• | a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis. |
• | changes in local real estate conditions (including changes in rental rates and the number of properties that compete with our properties); |
• | changes in the economic conditions affecting industries in which our principal tenants compete; |
• | the unavailability of equity and debt financing; |
• | our failure to lease unoccupied space in accordance with our projections; |
• | our failure to re-lease occupied space upon expiration of leases; |
• | tenant defaults and the bankruptcy of major tenants; |
• | increases in interest rates; |
• | failure of interest rate hedging contracts to perform as expected and the effectiveness of such arrangements; |
• | failure of acquisitions to perform as expected; |
• | unanticipated costs associated with the acquisition, integration and operation of our acquisitions; |
• | unanticipated costs to complete, lease-up and operate our developments and redevelopments; |
• | unanticipated costs associated with land development, including building moratoriums and inability to obtain necessary zoning, land-use, building, occupancy and other required governmental approvals, construction cost increases or overruns and construction delays; |
• | impairment charges; |
• | increased costs for, or lack of availability of, adequate insurance, including for terrorist acts; |
• | actual or threatened terrorist attacks; |
• | demand for tenant services beyond those traditionally provided by landlords; |
• | liability under environmental or other laws; |
• | failure or bankruptcy of real estate venture partners; |
• | inability of real estate venture partners to fund venture obligations; |
• | failure of dispositions to close in a timely manner; |
• | failure of buyers of our properties to comply with terms of their financing agreements to us; |
• | earthquakes and other natural disasters; |
• | the unforeseen impact of climate change and compliance costs relating to laws and regulations governing climate change; |
• | risks associated with federal, state and local tax audits; |
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• | complex regulations relating to our status as a REIT and the adverse consequences of our failure to qualify as a REIT; and |
• | the impact of newly adopted accounting principles on our accounting policies and on period-to-period comparisons of financial results. |
Given these uncertainties, and the other risks identified in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, we caution readers not to place undue reliance on forward-looking statements. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.
PART I
Item 1. | Business |
Introduction
We are a self-administered and self-managed REIT that provides leasing, property management, development, redevelopment, acquisition and other tenant-related services for a portfolio of office, mixed-use and industrial properties. As of December 31, 2012, we owned 221 properties, consisting of 193 office properties, 19 industrial facilities, five mixed-use properties, two redevelopment properties and two re-entitlement properties (collectively, the “Properties”) containing an aggregate of approximately 25.1 million net rentable square feet. In addition, as of December 31, 2012, we owned economic interests in 19 unconsolidated real estate ventures that contain approximately 7.0 million net rentable square feet (collectively, the “Real Estate Ventures”). As of December 31, 2012, we also owned 434 acres of undeveloped land, and held options to purchase approximately 52 additional acres of undeveloped land. The Properties and the properties owned by the Real Estate Ventures are located in or near Philadelphia, Pennsylvania; Metropolitan Washington, D.C.; Southern and Central New Jersey; Richmond, Virginia; Wilmington, Delaware; Austin, Texas and Oakland, Concord, Carlsbad and Rancho Bernardo, California. In addition to managing properties that we own, as of December 31, 2012, we were managing approximately 7.4 million net rentable square feet of office and industrial properties for third parties and the Real Estate Ventures. Unless otherwise indicated, all references to square feet represent net rentable area.
Organization
The Parent Company was organized and commenced its operations in 1986 as a Maryland REIT. The Parent Company owns its assets and conducts its operations through the Operating Partnership and subsidiaries of the Operating Partnership. The Operating Partnership was formed in 1996 as a Delaware limited partnership. The Parent Company controls the Operating Partnership as its sole general partner. As of December 31, 2012, the Parent Company owned a 98.7% interest in the Operating Partnership. The remaining 1.3% interest in the Operating Partnership consists of common units of limited partnership interest issued to the holders in exchange for contributions of properties to the Operating Partnership. Our structure as an “UPREIT” is designed, in part, to permit persons contributing properties to us to defer some or all of the tax liability they might otherwise incur in a sale of properties. Our executive offices are located at 555 East Lancaster Avenue, Suite 100, Radnor, Pennsylvania 19087 and our telephone number is (610) 325-5600. We have offices in Philadelphia, Pennsylvania; Falls Church, Virginia; Mount Laurel, New Jersey; Richmond, Virginia; Austin, Texas; and Carlsbad, California. We have an internet website at www.brandywinerealty.com. We are not incorporating by reference into this Annual Report on Form 10-K any material from our website. The reference to our website is an inactive textual reference to the uniform resource locator (URL) and is for your reference only.
2012 Transactions
Real Estate Acquisitions/Dispositions
On December 31, 2012, we acquired a two-building office property totaling 136,075 of net rentable square feet in Austin, Texas known as 7000 West at Lantana for $32.1 million. This property was 100.0% occupied as of December 31, 2012.
On December 11, 2012, we acquired an office property containing 456,922 net rentable square feet in Philadelphia, Pennsylvania known as 1900 Market Street for $34.8 million. This property was 76.3% occupied as of December 31, 2012, with redevelopment expected to commence in early 2013 in anticipation of the lead tenant's departure in late 2015.
On November 20, 2012, we acquired a ten-acre parcel of land in Herndon, Virginia for $2.1 million.
On January 6, 2012, we acquired a vacant office property containing 154,392 net rentable square feet in Plymouth Meeting, Pennsylvania known as 660 West Germantown Pike for $9.1 million. We are currently redeveloping this property.
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On July 18, 2012, we sold a portfolio of 11 flex/office properties, totaling 466,719 square feet, in Exton, Pennsylvania, for a sales price of $52.7 million. These properties, collectively known as the Oaklands Corporate Center, were 81.6% occupied as of the date of sale.
On June 22, 2012, we sold Pacific Ridge Corporate Center, a 121,381 net rentable square feet, two-building office property located in Carlsbad, California, for a sales price of $29.0 million. The property was 83.7% occupied as of the sale date.
On March 22, 2012, we sold South Lake at Dulles Corner, a 268,240 net rentable square feet office property located in Herndon, Virginia, for a sales price of $91.1 million. The property was 100.0% occupied as of the date of sale.
On January 17, 2012, we sold 304 Harper Drive, a 32,978 net rentable square feet office property located in Moorestown, New Jersey, for a sales price of $3.0 million. The property was 90.1% occupied as of the date of sale.
Brandywine/Toll Brothers Venture
On September 5, 2012, we formed a joint venture, TB-BDN Plymouth Apartments, L.P., (the "Venture"), with Toll Brothers, Inc. ("Toll Brothers"), a residential home builder. We, along with Toll Brothers, each own a 50% interest in the Venture. The Venture owns a 20-acre parcel of land located in Plymouth Meeting, Pennsylvania, which we contributed to the Venture upon its formation. Concurrent with our contribution of the aforementioned land parcel, Toll Brothers contributed $15.5 million of cash to the venture, equivalent to the fair value of the land parcel we contributed. The Venture will use the cash contributed by Toll Brothers to fund predevelopment costs for construction of a 398 unit apartment complex.
Based on the facts and circumstances at the date of formation of the Venture, and in accordance with the applicable accounting standards for the consolidation of variable interest entities, or VIEs, we determined that the Venture is not a VIE. Accordingly, we used the voting interest model under the accounting standards for consolidation to determine whether to consolidate the Venture. Under the joint venture agreement for the Venture, we, along with Toll Brothers, each has significant participating rights and we do not have exclusive control over the development or construction phases of the Venture's project. Because each partner has significant participating rights, we deconsolidated the land parcel that we contributed to the Venture, and we are accounting for the Venture under the equity method of accounting. As of December 31, 2012, the carrying amount of our investment in the Venture equaled $15.2 million, with an associated $0.3 million permanent basis adjustment accounting for the difference between the fair value and carrying amount of the land parcel we contributed. This basis adjustment will remain unamortized until the property is sold to a third party or until the Venture is dissolved, in accordance with the accounting standard for equity method investments.
Brandywine AI Venture - Station Square Acquisition
On July 10, 2012, we contributed $26.1 million to a joint venture, Brandywine AI Venture, that we formed in 2011 with an affiliate of Allstate Insurance. Our contribution funded our share of partner capital for the Venture's $120.6 million acquisition of three office properties containing 497,896 net rentable square feet in Silver Spring, Maryland. The properties were 93.2% occupied as of December 31, 2012.
Unsecured Debt Activity and New Credit Facility
During the year ended December 31, 2012, we repurchased $165.0 million of our unsecured Notes as summarized in the table below (excluding accrued interest, in thousands):
Notes | Repurchase Amount | Principal | Loss | Deferred Financing Amortization | |||||||||||
2012 5.750% Guaranteed Notes | $ | 309 | $ | 301 | $ | 2 | $ | — | |||||||
2014 5.400% Guaranteed Notes | 4,630 | 4,302 | 264 | 8 | |||||||||||
2015 7.500% Guaranteed Notes | 69,549 | 60,794 | 8,712 | 183 | |||||||||||
2016 6.000% Guaranteed Notes | 113,942 | 99,571 | 12,961 | 260 | |||||||||||
$ | 188,430 | $ | 164,968 | $ | 21,939 | $ | 451 | ||||||||
We funded these repurchases from a combination of proceeds from asset sales, cash flow from operations, borrowings under our unsecured Credit Facility and proceeds from a recent debt offering (as indicated below).
We use borrowings under our unsecured Credit Facility for general business purposes, including the acquisition, development and redevelopment of properties and the repayment of other debt.
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On February 1, 2012, we closed on a new $600.0 million four-year unsecured revolving credit facility (the "New Credit Facility") and three unsecured term loans in the aggregate amount of $600.0 million (collectively, the “New Term Loans”), consisting of a $150.0 million three-year loan, a $250.0 million four-year loan (with $150.0 million swapped to fixed and repaid as of December 31, 2012) and a $200.0 million seven-year loan. We used a portion of the net proceeds from the New Term Loans to repay all balances outstanding under, and concurrently terminate, our then existing $600.0 million unsecured revolving credit facility (the "Prior Credit Facility") and $183.0 million unsecured term loan (the "Prior Term Loan"), each of which had been scheduled to mature on June 29, 2012.
We have the option to increase the amounts available to be advanced under the New Credit Facility, the $150.0 million three-year term loan, and the $100.0 million four-year term loan by an aggregate of $200.0 million, subject to customary conditions and limitations, by obtaining additional commitments from the current lenders and other financial institutions. We also have the option to extend the maturity dates of each of the New Credit Facility, the $150.0 million three-year term loan and the $250.0 million four-year term loan by one year, subject to payment of an extension fee and other customary conditions and limitations. We can prepay the $150.0 million three-year term and the $100.0 million four-year term loans at any time without penalty. The $200.0 million seven-year term loan is subject to a declining prepayment penalty (3.00% commencing one year after closing, 2.00% after two years, 1.00% after three years and without penalty thereafter).
The spread to LIBOR for LIBOR-based loans under the New Credit Facility and New Term Loans will depend on our unsecured senior debt credit rating. Based on our current credit rating, the spread for such loans will be 150, 175, 175 and 190 basis points under the New Credit Facility, the $150.0 million three-year term loan, the $250.0 million four-year term loan and the $200.0 million seven-year term loan, respectively. At our option, advances under the New Credit Facility and New Term Loans may also bear interest at a per annum floating rate equal to the higher of the prime rate or the federal funds rate plus 0.50% per annum. The New Credit Facility contains a competitive bid option that allows banks that are part of the lender consortium to bid to make loans to us at a reduced rate. We executed hedging transactions that fix the rate on the $200.0 million seven-year term loan at a 3.623% average for its full term, and the rate on the $150.0 million three-year term loan at a 2.596% average rate for periods of three to four years. All hedges commenced on February 1, 2012 and the rates are inclusive of the LIBOR spread based on our current investment grade rating.
The New Credit Facility and New Term Loans, consistent with the Prior Credit Facility and Prior Term Loan, contain financial and operating covenants and restrictions, including covenants that relate to our incurrence of additional debt; granting liens; consummation of mergers and consolidations; the disposition of assets and interests in subsidiaries; the making of loans and investments; and the payment of dividends. The restriction on dividends permits us to pay dividends to the greater of (i) an amount required for us to retain our qualification as a REIT and (ii) 95% of our funds from operations. The New Credit Facility and New Term Loans include financial covenants that require us to maintain an interest coverage ratio, a fixed charge coverage ratio, an unsecured debt ratio and an unencumbered cash flow ratio above specified levels; to maintain a minimum net worth above an amount determined on a specified formula; and to maintain a leverage ratio and a secured debt ratio below certain maximum levels. Another financial covenant limits the ratio of our unsecured debt to the value of our unencumbered properties.
We were in compliance with all financial and non-financial covenants under the New Credit Facility and our credit agreements as of December 31, 2012. We continuously monitor our compliance with all covenants. Certain covenants restrict our ability to obtain alternative sources of capital. While we believe that we will remain in compliance with our covenants, a slow-down in the economy and a decrease in availability of debt financing could result in non-compliance with covenants.
On December 18, 2012, we closed a registered offering of $250.0 million in aggregate principal amount of our 3.95% Guaranteed Notes due 2023. We used a portion of the net proceeds from this offering, which amounted to $246.1 million after deducting underwriting discounts and offering expenses, to fund our repurchase, through a tender offer, of 7.50% Guaranteed Notes due May 15, 2015 and 6.00% Guaranteed Notes due April 1, 2016, as well as for general corporate purposes.
On December 27, 2012, in connection with the aforementioned offering, we repurchased $50.3 million of our 7.50% Guaranteed Notes due 2015, and $99.6 million of our 6.00% Guaranteed Notes due 2016. Our tender offer resulted in a $20.4 million loss on early extinguishment of debt as of December 31, 2012. We funded the total tender offer consideration of $171.5 million from net proceeds of the registered offering, as well as available cash balances.
On December 31, 2012, we repaid the entire $150.0 million remaining fixed portion of our four-year term loan due February 1, 2016. In connection with this repayment, we also incurred a $3.0 million charge on the termination of associated interest rate swap contracts.
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Secured Debt Activity
During the year ended December 31, 2012, we prepaid an aggregate of $56.0 million of our secured debt, incurring prepayment penalties of $0.1 million (included within loss on early extinguishment of debt on our consolidated statements of operations), using a combination of proceeds from asset sales, cash flow from operations and borrowings under the New Credit Facility. The prepayments are summarized as follows (excluding accrued interest, in thousands):
Mortgage Note | Payment Date | Amount | ||||
Newtown, Berwyn, Libertyview | Dec-12 | $ | 54,858 | |||
Southpoint III | Dec-12 | 1,120 | ||||
Total | $ | 55,978 | ||||
Additional Financing Activity
On April 11, 2012, we closed on a registered public offering of 4,000,000 shares of 6.90% Series E Cumulative Redeemable Preferred Shares, or Series E Preferred Shares, at a price to the public of $25.00 per share. Dividends on the Series E Preferred Shares are payable quarterly in arrears on or about the 15th day of each January, April, July, and October, commencing July 15, 2012, at a rate per annum of 6.90% of the liquidation value of $25.00 per share (equivalent to $1.725 per share per annum). Net proceeds from this offering totaled approximately $96.3 million, after deducting the underwriting discount and our related expenses.
On May 3, 2012, we used a portion of the net proceeds from the sale of the Series E Preferred Shares to redeem all 2,000,000 shares of our then outstanding 7.50% Series C Cumulative Redeemable Preferred Shares at a redemption price of $50.0 million plus $0.2 million of dividends accrued through the redemption date.
On December 28, 2012 we used a portion of available cash balances to redeem all 2,300,000 shares of our previously outstanding 7.375% Series D Cumulative Redeemable Preferred Shares at an aggregate redemption price of $57.5 million plus $0.8 million of dividends accrued through the redemption date.
We maintain a continuous equity offering program (the “Offering Program”), under which we may sell up to an aggregate amount of 15,000,000 common shares until March 10, 2013 in at-the-market offerings. During the year ended December 31, 2012, we did not sell any shares under the Offering Program. From the inception of the Offering Program in March 2010 through December 31, 2012, we have sold 6,421,553 common shares under the Offering Program, leaving 8,578,447 shares available for sale. We have contributed the net proceeds from the sale of shares to the Operating Partnership in exchange for the issuance of 6,421,553 common partnership units to the Parent Company. The Operating Partnership used the net proceeds contributed by the Parent Company to repay balances on our credit facilities and for general corporate purposes. We are currently evaluating an extension of the Offering Program subsequent to its scheduled expiration date.
Business Objective and Strategies for Growth
Our business objective is to deploy capital effectively to maximize our return on investment and thereby maximize our total return to shareholders. To accomplish this objective we seek to:
• | maximize cash flow through leasing strategies designed to capture rental growth as rental rates increase and as leases are renewed; |
• | attain a high tenant retention rate by providing a full array of property management and maintenance services and tenant service programs responsive to the varying needs of our diverse tenant base; |
• | form joint venture opportunities with high-quality partners having attractive real estate holdings or significant financial resources; |
• | utilize our reputation as a full-service real estate development and management organization to identify acquisition and development opportunities that will expand our business and create long-term value; and |
• | increase the economic diversification of our tenant base while maximizing economies of scale. |
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We also consider the following to be important objectives:
• | to acquire and develop high-quality office and industrial properties at attractive yields in markets that we expect will experience economic growth and where we can achieve operating efficiencies; |
• | to monetize or deploy our land inventory for development of high-quality office and industrial properties, or rezone from office/industrial to residential, retail and hotel to align with market and demand shifts as appropriate; and |
• | to capitalize on our redevelopment expertise to selectively develop, redevelop and reposition properties in desirable locations. |
We expect to concentrate our real estate activities in markets where we believe that:
• | current and projected market rents and absorption statistics justify construction activity; |
• | we can maximize market penetration by accumulating a critical mass of properties and thereby enhance operating efficiencies; |
• | barriers to entry (such as zoning restrictions, utility availability, infrastructure limitations, development moratoriums and limited developable land) will create supply constraints on office and industrial space; and |
• | there is potential for economic growth, particularly job growth and industry diversification. |
Operating Strategy
We currently expect to continue to operate in markets where we have a concentration advantage due to economies of scale. We believe that where possible, it is best to operate with a strong base of properties in order to benefit from the personnel allocation and the market strength associated with managing several properties in the same market. However, we intend to selectively dispose of properties and redeploy capital if we determine a property cannot meet our long term earnings growth expectations. We believe that recycling capital is an important aspect of maintaining the overall quality of our portfolio.
Our broader strategy remains focused on continuing to enhance liquidity and strengthen our balance sheet through capital retention, targeted sales activity and management of our existing and prospective liabilities.
In the long term, we believe that we are well positioned in our current markets and have the expertise to take advantage of both development and acquisition opportunities, as warranted by market and economic conditions, in new markets that have healthy long-term fundamentals and strong growth projections. This capability, combined with what we believe is a conservative financial structure, should allow us to achieve disciplined growth. These abilities are integral to our strategy of having a geographically and physically diverse portfolio of assets, which will meet the needs of our tenants.
We use experienced on site construction superintendents, operating under the supervision of project managers and senior management, to control the construction process and mitigate the various risks associated with real estate development.
In order to fund developments, redevelopments and acquisitions, as well as refurbish and improve existing Properties, we must use excess cash from operations after satisfying our dividend and other requirements. The availability of funds for new investments and maintenance of existing Properties depends in large measure on capital markets and liquidity factors over which we can exert little control. In addition, downgrades of our public debt ratings by Standard & Poor’s and Moody’s Investor Service could increase our cost of capital.
Policies With Respect To Certain Activities
The following is a discussion of our investment, financing and other policies. These policies have been determined by our Board of Trustees and our Board of Trustees may revise these policies without a vote of shareholders.
Investments in Real Estate or Interests in Real Estate
We may develop, purchase or lease income-producing properties for long-term investment, expand and improve the properties presently owned or other properties purchased, or sell such properties, in whole or in part, as circumstances warrant. Although there is no limitation on the types of development activities that we may undertake, we expect that our development activities will meet current market demand and will generally be on a build-to-suit basis for particular tenants where a significant portion of the building is pre-leased before construction begins. We continue to participate with other entities in property ownership through existing joint ventures or other types of co-ownership. Our equity investments may be subject to existing or future mortgage financing and other indebtedness that will have priority over our equity investments.
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Securities of or Interests in Entities Primarily Engaged in Real Estate Activities and Other Issuers
Subject to the percentage of ownership limitations and gross income tests necessary for REIT qualification, we may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers. We may enter into joint ventures or partnerships for the purpose of obtaining an equity interest in a particular property. We do not currently intend to invest in the securities of other issuers except in connection with joint ventures or acquisitions of indirect interests in properties.
Investments in Real Estate Mortgages
While our current portfolio consists of, and our business objectives emphasize, equity investments in commercial real estate, we may, at the discretion of management or our Board of Trustees, invest in other types of equity real estate investments, mortgages and other real estate interests. We do not presently intend to invest to a significant extent in mortgages or deeds of trust, but may invest in participating mortgages if we conclude that we may benefit from the cash flow or any appreciation in the value of the property securing a mortgage. From time to time, we provide seller financing to buyers of our properties. We do this when the buyer requires additional funds for the purchase and provision of seller financing will be beneficial to us and the buyer compared to a mortgage loan from a third party lender.
Dispositions
Our disposition of properties is based upon management’s periodic review of our portfolio and the determination by management or our Board of Trustees that a disposition would be in our best interests. We intend to use selective dispositions to fund our capital and refinancing needs.
Financing Policies
A primary objective of our financing policy has been to manage our financial position to allow us to raise capital from a variety of sources at competitive rates. Our mortgages, credit facilities and unsecured debt securities contain restrictions on our ability to incur indebtedness. Our charter documents do not limit the indebtedness that we may incur. Our financing strategy is to maintain a strong and flexible financial position by limiting our debt to a prudent level and minimizing our variable interest rate exposure. We intend to finance future growth and future maturing debt with the most advantageous source of capital then available to us. These sources may include selling common or preferred equity and debt securities sold through public offerings or private placements, utilizing availability under our New Credit Facility or incurring additional indebtedness through secured or unsecured borrowings. To qualify as a REIT, we must distribute to our shareholders each year at least ninety percent of our net taxable income, excluding any net capital gain. This distribution requirement limits our ability to fund future capital needs, including for acquisitions and developments, from income from operations. Therefore, we expect to continue to rely on third party sources of capital to fund future capital needs.
Working Capital Reserves
We maintain working capital reserves and access to borrowings in amounts that our management determines to be adequate to meet our normal contingencies.
Policies with Respect to Other Activities
We expect to issue additional common and preferred equity in the future and may authorize our Operating Partnership to issue additional common and preferred units of limited partnership interest, including to persons who contribute their interests in properties to us in exchange for such units. We have not engaged in trading, underwriting or agency distribution or sale of securities of unaffiliated issuers and we do not intend to do so. We intend to make investments consistent with our qualification as a REIT, unless because of circumstances or changes in the Internal Revenue Code of 1986, as amended (or the Treasury Regulations), our Board of Trustees determines that it is no longer in our best interests to qualify as a REIT. We may make loans to third parties, including to joint ventures in which we participate and to buyers of our real estate. We intend to make investments in such a way that we will not be treated as an investment company under the Investment Company Act of 1940.
Management Activities
We provide third-party real estate management services primarily through wholly-owned subsidiaries of the Operating Partnership (collectively, the “Management Companies”). As of December 31, 2012, the Management Companies were managing properties containing an aggregate of approximately 32.5 million net rentable square feet, of which approximately 25.1 million net rentable square feet related to Properties owned by us and approximately 7.4 million net rentable square feet related to properties owned by third parties and unconsolidated Real Estate Ventures.
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Geographic Segments
As of December 31, 2012, we were managing our portfolio within seven segments: (1) Pennsylvania Suburbs, (2) Philadelphia Central Business District (“CBD”), (3) Metropolitan Washington D.C., (4) New Jersey/Delaware, (5) Richmond, Virginia, (6) Austin, Texas and (7) California. The Pennsylvania Suburbs segment includes properties in Chester, Delaware, and Montgomery counties in the Philadelphia suburbs. The Philadelphia CBD segment includes properties located in the City of Philadelphia in Pennsylvania. The Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban Maryland. The New Jersey/Delaware segment includes properties in Burlington, Camden and Mercer counties in New Jersey, and in New Castle county in the state of Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle, Chesterfield, Goochland and Henrico counties and Durham, North Carolina. The Austin, Texas segment includes properties in Austin. The California segment includes properties in Oakland, Concord, Carlsbad and Rancho Bernardo. Our corporate group is responsible for cash and investment management, development of certain real estate properties during the construction period, and certain other general support functions.
Competition
The real estate business is highly competitive. Our Properties compete for tenants with similar properties primarily on the basis of location, total occupancy costs (including base rent and operating expenses), services provided, and the design and condition of the improvements. We also face competition when attempting to acquire or develop real estate, including competition from domestic and foreign financial institutions, other REITs, life insurance companies, pension funds, partnerships and individual investors. Additionally, our ability to compete depends upon trends in the economies of our markets, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, land availability, our ability to obtain necessary construction approvals, taxes, governmental regulations, legislation and population trends.
Insurance
We maintain commercial general liability and “all risk” property insurance on our properties. We intend to obtain similar coverage for properties we acquire in the future. There are types of losses, generally of a catastrophic nature, such as losses from war, terrorism, environmental issues, floods, hurricanes and earthquakes that are subject to limitations in certain areas or which may be uninsurable risks. We exercise our discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance on our investments at a reasonable cost and on suitable terms. If we suffer a substantial loss, our insurance coverage may not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impractical to use insurance proceeds to fully replace or restore a property after it has been damaged or destroyed.
Employees
As of December 31, 2012, we had 391 full-time employees, including 19 union employees.
Government Regulations Relating to the Environment
Many laws and governmental regulations relating to the environment apply to us and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently and may adversely affect us.
Existing conditions at some of our Properties. Independent environmental consultants have conducted Phase I or similar environmental site assessments on our Properties. We generally obtain these assessments prior to the acquisition of a Property and may later update them as required for subsequent financing of the property or as requested by a tenant. Site assessments are generally performed to ASTM standards then existing for Phase I site assessments, and typically include a historical review, a public records review, a visual inspection of the surveyed site, and the issuance of a written report. These assessments do not generally include any soil samplings or subsurface investigations. Depending on the age of the property, the Phase I may have included an assessment of asbestos-containing materials. For properties where asbestos-containing materials were identified or suspected, an operations and maintenance plan was generally prepared and implemented. See Note 2 to our consolidated financial statements for our evaluation in accordance with the accounting standard governing asset retirement obligations.
Historical operations at or near some of our properties, including the operation of underground storage tanks, may have caused soil or groundwater contamination. We are not aware of any such condition, liability or concern by any other means that would give rise to material, uninsured environmental liability. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns; there may be material environmental conditions, liabilities or compliance concerns that a review failed to detect or which arose at a property after the review was completed; future laws, ordinances or regulations
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may impose material additional environmental liability; and current environmental conditions at our Properties may be affected in the future by tenants, third parties or the condition of land or operations near our Properties, such as the presence of underground storage tanks. We cannot be certain that costs of future environmental compliance will not affect our ability to make distributions to our shareholders.
Use of hazardous materials by some of our tenants. Some of our tenants handle hazardous substances and wastes on our properties as part of their routine operations. Environmental laws and regulations may subject these tenants, and potentially us, to liability resulting from such activities. We generally require our tenants, in their leases, to comply with these environmental laws and regulations and to indemnify us for any related liabilities. These tenants are primarily involved in the life sciences and the light industrial and warehouse businesses. We are not aware of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our Properties, and we do not believe that on-going activities by our tenants will have a material adverse effect on our operations.
Costs related to government regulation and private litigation over environmental matters. Under environmental laws and regulations, we may be liable for the costs of removal, remediation or disposal of hazardous or toxic substances present or released on our Properties. These laws could impose liability without regard to whether we are responsible for, or knew of, the presence or release of the hazardous materials. Government investigations and remediation actions may entail substantial costs and the presence or release of hazardous substances on a property could result in governmental cleanup actions or personal injury or similar claims by private plaintiffs.
Potential environmental liabilities may exceed our environmental insurance coverage limits. We carry what we believe to be sufficient environmental insurance to cover potential liability for soil and groundwater contamination, mold impact, and the presence of asbestos-containing materials at the affected sites identified in our environmental site assessments. Our insurance policies are subject to conditions, qualifications and limitations. Therefore, we cannot provide any assurance that our insurance coverage will be sufficient to cover all liabilities for losses.
Potential environmental liabilities may adversely impact our ability to use or sell assets. The presence of contamination or the failure to remediate contamination may impair our ability to sell or lease real estate or to borrow using the real estate as collateral.
Other
We do not have any foreign operations and our business is not seasonal. Our operations are not dependent on a single tenant or a few tenants and no single tenant accounted for more than 10% of our total 2012 revenue.
Code of Conduct
We maintain a Code of Business Conduct and Ethics applicable to our Board of Trustees and all of our officers and employees, including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. A copy of our Code of Business Conduct and Ethics is available on our website, www.brandywinerealty.com. In addition to being accessible through our website, copies of our Code of Business Conduct and Ethics can be obtained, free of charge, upon written request to Investor Relations, 555 East Lancaster Avenue, Suite 100, Radnor, PA 19087. Any amendments to or waivers of our Code of Business Conduct and Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions and that relate to any matter enumerated in Item 406(b) of Regulation S-K promulgated by the SEC will be disclosed on our website.
Corporate Governance Principles and Board Committee Charters
Our Corporate Governance Principles and the charters of the Executive Committee, Audit Committee, Compensation Committee and Corporate Governance Committee of the Board of Trustees of Brandywine Realty Trust and additional information regarding our corporate governance are available on our website, www.brandywinerealty.com. In addition to being accessible through our website, copies of our Corporate Governance Principles and charters of our Board Committees can be obtained, free of charge, upon written request to Investor Relations, 555 Lancaster Avenue, Suite 100, Radnor, PA 19087.
Availability of SEC Reports
We file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other information with the SEC. Members of the public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Members of the public may also obtain information on the Public Reference Room by calling the SEC at 1-800-732-0330. The SEC also maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers, including us, that file electronically with the SEC. The address of that site is http://www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other
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information filed by us with the SEC are available, without charge, on our Internet web site, http://www.brandywinerealty.com as soon as reasonably practicable after they are filed electronically with the SEC. Copies are also available, free of charge, upon written request to Investor Relations, Brandywine Realty Trust, 555 East Lancaster Avenue, Suite 100, Radnor, PA 19087.
Item 1A. | Risk Factors |
Our business, financial condition, results from operations and ability to make distributions on our equity and to pay debt service on our indebtedness may be affected by the risk factors set forth below. All investors should consider the following risk factors before deciding to purchase our securities.
Adverse economic and geopolitical conditions could have a material adverse effect on our results of operations, financial condition and our ability to pay distributions to you.
Our business is affected by the continued volatility in the financial and credit markets, the ongoing recovery in the global economy, and other market or economic challenges experienced by the U.S. economy or the real estate industry as a whole. While there are signs of recovery in the U.S. economy, the recovery rate has been much slower than anticipated. Moreover, the impact of the government's legislative and administrative efforts aimed at restoring liquidity to credit markets remains unclear, both as it pertains to the economy as a whole, as well as the demand for commercial leasing. Our portfolio consists primarily of office buildings (as compared to a more diversified real estate portfolio); if economic conditions again deteriorate, then our results of operations, financial condition, financial results and ability to service current debt and to pay distributions to our shareholders may be adversely affected by the following, among other potential conditions:
• | significant job losses in the financial and professional services industries may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted; |
• | our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to complete development opportunities and refinance existing debt; |
• | reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; |
• | the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold our cash deposits or the institutions or assets in which we have made short-term investments, the dislocation of the markets for our short-term investments, increased volatility in market rates for such investments or other factors; |
• | reduced liquidity in debt markets and increased credit risk premiums for certain market participants may impair our ability to access capital; and |
• | one or more lenders under our line of credit could refuse or be unable to fund their financing commitment to us and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all. |
These conditions, which could have a material adverse effect on our results of operations, financial condition and ability to pay distributions, may continue or worsen in the future.
Our performance is subject to risks associated with our properties and with the real estate industry.
Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our shareholders will be adversely affected. Events or conditions beyond our control that may adversely affect our operations or the value of our properties include:
• | downturns in the national, regional and local economic climate including increases in the unemployment rate and inflation; |
• | competition from other office, mixed use, industrial and commercial buildings; |
• | local real estate market conditions, such as oversupply or reduction in demand for office, industrial or commercial space; |
• | changes in interest rates and availability of financing; |
• | vacancies, changes in market rental rates and the need to periodically repair, renovate and re-lease space; |
• | increased operating costs, including insurance expense, utilities, real estate taxes, janitorial costs, state and local taxes, labor shortages and heightened security costs; |
• | civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses; |
• | significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property; and |
• | declines in the financial condition of our tenants and our ability to collect rents from our tenants. |
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Any disruption in the debt capital markets could adversely affect us.
Notwithstanding the recent improvement in capital and credit markets, these markets are still considered volatile and disruptions in these markets are still possible. Disruption events could have an adverse effect on the availability of credit, the terms on which credit can be sourced and the overall cost of debt capital. This could negatively affect us by:
• | increasing our costs to finance our ongoing operations and fund our development and redevelopment activities; |
• | reducing the availability of potential bidders for, and the amounts offered for, any properties we may wish to sell; and |
• | preventing us from accessing necessary debt capital on a timely basis leading us to consider potentially more dilutive capital transactions such as undesirable sales of properties or equity securities. |
We may suffer adverse consequences due to the financial difficulties, bankruptcy or insolvency of our tenants.
The current economic conditions have caused some of our tenants to experience financial difficulties. If more of our tenants were to continue to experience financial difficulties, including bankruptcy, insolvency or a general downturn in their business, there could be an adverse effect on our financial performance and distributions to shareholders. We cannot assure you that any tenant that files for bankruptcy protection will continue to pay us rent. A bankruptcy filing by or relating to one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its property, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. Any such unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors that May Influence Future Results of Operations - Tenant Credit Risk."
The terms and covenants relating to our indebtedness could adversely impact our economic performance.
Like other real estate companies which incur debt, we are subject to risks associated with debt financing, such as the insufficiency of cash flow to meet required debt service payment obligations and the inability to refinance existing indebtedness. If our debt cannot be paid, refinanced or extended at maturity, we may not be able to make distributions to shareholders at expected levels or at all. Furthermore, an increase in our interest expense could adversely affect our cash flow and ability to make distributions to shareholders. If we do not meet our debt service obligations, any properties securing such indebtedness could be foreclosed on, which would have a material adverse effect on our cash flow and ability to make distributions and, depending on the number of properties foreclosed on, could threaten our continued viability.
Our New Credit Facility, New Term Loans and the indenture governing our unsecured public debt securities contain (and any new or amended facility will contain) restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which we must maintain. Our ability to borrow under our credit facilities is subject to compliance with such financial and other covenants. In the event that we fail to satisfy these covenants, we would be in default under the credit facilities, the term loan and the indenture and may be required to repay such debt with capital from other sources. Under such circumstances, other sources of capital may not be available to us, or may be available only on unattractive terms. In addition, the mortgages on our properties contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. If we breach covenants in our secured debt agreements, the lenders can declare a default and take possession of the property securing the defaulted loan.
Increases in interest rates on variable rate indebtedness will increase our interest expense, which could adversely affect our cash flow and ability to make distributions to shareholders. Rising interest rates could also restrict our ability to refinance existing debt when it matures. In addition, an increase in interest rates could decrease the amounts that third parties are willing to pay for our assets, thereby limiting our ability to alter our portfolio promptly in relation to economic or other conditions. We entered into and may, from time to time, enter into agreements such as interest rate hedges, swaps, floors, caps and other interest rate hedging contracts with respect to a portion of our variable rate debt. Although these agreements may lessen the impact of rising interest rates on us, they also expose us to the risk that other parties to the agreements will not perform or that we cannot enforce the agreements.
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Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our equity shares or debt securities.
Our degree of leverage could affect our ability to obtain additional financing for working capital expenditures, development, acquisitions or other general corporate purposes. In the event that our unsecured debt is downgraded by Moody’s Investor Services or Standard & Poor’s from the current ratings, we would likely incur higher borrowing costs and the market prices of our common shares and debt securities might decline. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy in general.
We may experience increased operating costs, which might reduce our profitability.
Our properties are subject to increases in operating expenses such as for cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping and repairs and maintenance of our properties. In general, under our leases with tenants, we pass through all or a portion of these costs to them. We cannot assure you, however, that tenants will actually bear the full burden of these higher costs, or that such increased costs will not lead them, or other prospective tenants, to seek office space elsewhere. If operating expenses increase, the availability of other comparable office space in our core geographic markets might limit our ability to increase rents; if operating expenses increase without a corresponding increase in revenues, our profitability could diminish and limit our ability to make distributions to shareholders.
Our investment in property development or redevelopment may be more costly or difficult to complete than we anticipate.
We intend to continue to develop properties where market conditions warrant such investment. Once made, these investments may not produce results in accordance with our expectations. Risks associated with our development and construction activities include:
• | the unavailability of favorable financing alternatives in the private and public debt markets; |
• | having sufficient capital to pay development costs; |
• | unprecedented market volatility in the share price of REITs; |
• | dependence on the financial services sector as part of our tenant base; |
• | construction costs exceeding original estimates due to rising interest rates, diminished availability of materials and labor, and increases in the costs of materials and labor; |
• | construction and lease-up delays resulting in increased debt service, fixed expenses and construction or renovation costs; |
• | expenditure of funds and devotion of management’s time to projects that we do not complete; |
• | the unavailability or scarcity of utilities; |
• | occupancy rates and rents at newly completed properties may fluctuate depending on a number of factors, including market and economic conditions, resulting in lower than projected rental rates and a corresponding lower return on our investment; |
• | complications (including building moratoriums and anti-growth legislation) in obtaining necessary zoning, occupancy and other governmental permits; and |
• | increased use restrictions by local zoning or planning authorities limiting our ability to develop and impacting the size of developments. |
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors that May Influence Future Results of Operations - Development Risk."
We face risks associated with property acquisitions.
We have recently acquired properties, and may in the future continue to acquire properties and portfolios of properties, including large portfolios that would increase our size and potentially alter our capital structure. Although we believe that the acquisitions that we have completed and that we expect to undertake in the future have, and will, enhance our future financial performance, the success of such transactions is subject to a number of factors, including the risks that:
• | we may not be able to obtain financing for acquisitions on favorable terms; |
• | acquired properties may fail to perform as expected; |
• | the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates; |
• | acquired properties may be located in new markets where we may have limited knowledge and understanding of the local economy, an absence of business relationships in the area or unfamiliarity with local governmental and permitting procedures; and |
• | we may not be able to efficiently integrate acquired properties, particularly portfolios of properties, into our organization and manage new properties in a way that allows us to realize cost savings and synergies. |
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We acquired in the past and in the future may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our Operating Partnership. This acquisition structure has the effect, among other factors, of reducing the amount of tax depreciation we can deduct over the tax life of the acquired properties, and typically requires that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions on dispositions could limit our ability to sell an asset or pay down partnership debt during a specified time, or on terms, that would be favorable absent such restrictions.
Acquired properties may subject us to known and unknown liabilities.
Properties that we acquire may be subject to known and unknown liabilities for which we would have no recourse, or only limited recourse, to the former owners of such properties. As a result, if a liability were asserted against us based upon ownership of an acquired property, we might be required to pay significant sums to settle it, which could adversely affect our financial results and cash flow. Unknown liabilities relating to acquired properties could include:
• | liabilities for clean-up of pre-existing disclosed or undisclosed environmental contamination; |
• | claims by tenants, vendors or other persons arising on account of actions or omissions of the former owners of the properties; and |
• | liabilities incurred in the ordinary course of business. |
We have agreed not to sell certain of our properties and to maintain indebtedness subject to guarantees.
We agreed not to sell some of our properties for varying periods of time, in transactions that would trigger taxable income to the former owners, and we may enter into similar arrangements as a part of future property acquisitions. These agreements generally provide that we may dispose of the subject properties only in transactions that qualify as tax-free exchanges under Section 1031 of the Internal Revenue Code or in other tax deferred transactions. Such transactions can be difficult to complete and can result in the property acquired in exchange for the disposed of property inheriting the tax attributes (including tax protection covenants) of the sold property. Violation of these tax protection agreements would impose significant costs on us. As a result, we are restricted with respect to decisions related to financing, encumbering, expanding or selling these properties.
We have also entered into agreements that provide prior owners of properties with the right to guarantee specific amounts of indebtedness and, in the event that the specific indebtedness that they guarantee is repaid or reduced, we would be required to provide substitute indebtedness for them to guarantee. These agreements may hinder actions that we may otherwise desire to take to repay or refinance guaranteed indebtedness because we would be required to make payments to the beneficiaries of such agreements if we violate these agreements.
We may be unable to renew leases or re-lease space as leases expire; certain leases may expire early.
If tenants do not renew their leases upon expiration, we may be unable to re-lease the space. Even if the tenants do renew their leases or if we can re-lease the space, the terms of renewal or re-leasing (including the cost of required renovations) may be less favorable than the current lease terms. Certain leases grant the tenants an early termination right upon payment of a termination penalty or if we fail to comply with certain material lease terms. Our inability to renew or release spaces and the early termination of certain leases could affect our ability to make distributions to shareholders. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors that May Influence Future Results of Operations - Tenant Rollover Risk."
We face significant competition from other real estate developers.
We compete with real estate developers, operators and institutions for tenants and acquisition and development opportunities. Some of these competitors may have significantly greater financial resources than we have. Such competition may reduce the number of suitable investment opportunities available to us, may interfere with our ability to attract and retain tenants and may increase vacancies, which could result in increased supply and lower market rental rates, reducing our bargaining leverage and adversely affect our ability to improve our operating leverage. In addition, some of our competitors may be willing (e.g., because their properties may have vacancy rates higher than those for our properties) to make space available at lower rental rates or with higher tenant concession percentages than available space in our properties. We cannot assure you that this competition will not adversely affect our cash flow and our ability to make distributions to shareholders.
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Property ownership through joint ventures may limit our ability to act exclusively in our interest.
We develop, acquire, and contribute properties in joint ventures with other persons or entities when we believe circumstances warrant the use of such structures. As of December 31, 2012, we had investments in 19 unconsolidated real estate ventures. Our net investments in the 19 unconsolidated real estate ventures aggregated approximately $193.6 million as of December 31, 2012. We could become engaged in a dispute with one or more of our joint venture partners that might affect our ability to operate a jointly-owned property. Moreover, our joint venture partners may, at any time, have business, economic or other objectives that are inconsistent with our objectives, including objectives that relate to the appropriate timing and terms of any sale or refinancing of a property. In some instances, our joint venture partners may have competing interests in our markets that could create conflicts of interest. If the objectives of our joint venture partners or the lenders to our joint ventures are inconsistent with our own objectives, we may not be able to act exclusively in our interests. Furthermore, if the current constrained credit conditions in the capital markets persist or deteriorate further, the value of our investments could deteriorate and we could be required to reduce the carrying value of our equity method investments if a loss in the carrying value of the investment is other than a temporary decline pursuant to the accounting standard governing the equity method of accounting.
Because real estate is illiquid, we may not be able to sell properties when in our best interest.
Real estate investments generally, and in particular large office and industrial/flex properties like those that we own, often cannot be sold quickly. The capitalization rates at which properties may be sold could be higher than historic rates, thereby reducing our potential proceeds from sale. Consequently, we may not be able to alter our portfolio promptly in response to changes in economic or other conditions. In addition, the Internal Revenue Code limits our ability to sell properties that we have held for fewer than two years without potential adverse consequences to our shareholders. Furthermore, properties that we have developed and have owned for a significant period of time or that we acquired in exchange for partnership interests in our operating partnership often have a low tax basis. If we were to dispose of any of these properties in a taxable transaction, we may be required under provisions of the Internal Revenue Code applicable to REITs to distribute a significant amount of the taxable gain to our shareholders and this could, in turn, impact our cash flow. In some cases, tax protection agreements with third parties will prevent us from selling certain properties in a taxable transaction without incurring substantial costs. In addition, purchase options and rights of first refusal held by tenants or partners in joint ventures may also limit our ability to sell certain properties. All of these factors reduce our ability to respond to changes in the performance of our investments and could adversely affect our cash flow and ability to make distributions to shareholders as well as the ability of someone to purchase us, even if a purchase were in our shareholders’ best interests.
Some potential losses are not covered by insurance.
We currently carry comprehensive “all-risk” property, and rental loss insurance and commercial general liability coverage on all of our properties. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are, however, types of losses, such as lease and other contract claims, biological, radiological and nuclear hazards and acts of war that generally are not insured. We cannot assure you that we will be able to renew insurance coverage in an adequate amount or at reasonable prices. In addition, insurance companies may no longer offer coverage against certain types of losses, such as losses due to earthquake, terrorist acts and mold, flood, or, if offered, these types of insurance may be prohibitively expensive. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. We cannot assure you that material losses in excess of insurance proceeds will not occur in the future. If any of our properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Such events could adversely affect our cash flow and ability to make distributions to shareholders. If one or more of our insurance providers were to fail to pay a claim as a result of insolvency, bankruptcy or otherwise, the nonpayment of such claims could have an adverse effect on our financial condition and results of operations. In addition, if one or more of our insurance providers were to become subject to insolvency, bankruptcy or other proceedings and our insurance policies with the provider were terminated or cancelled as a result of those proceedings, we cannot guarantee that we would be able to find alternative coverage in adequate amounts or at reasonable prices. In such case, we could experience a lapse in any or adequate insurance coverage with respect to one or more properties and be exposed to potential losses relating to any claims that may arise during such period of lapsed or inadequate coverage.
Terrorist attacks and other acts of violence or war may adversely impact our performance and may affect the markets on which our securities are traded.
Terrorist attacks against our properties, or against the United States or our interests, may negatively impact our operations and the value of our securities. Attacks or armed conflicts could result in increased operating costs; for example, it might cost more in the future for building security, property and casualty insurance, and property maintenance. As a result of terrorist activities and other market conditions, the cost of insurance coverage for our properties could also increase. We might not be able to pass through the
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increased costs associated with such increased security measures and insurance to our tenants, which could reduce our profitability and cash flow. Furthermore, any terrorist attacks or armed conflicts could result in increased volatility in or damage to the United States and worldwide financial markets and economy. Such adverse economic conditions could affect the ability of our tenants to pay rent and our cost of capital, which could have a negative impact on our results.
Our ability to make distributions is subject to various risks.
Historically, we have paid quarterly distributions to our shareholders. Our ability to make distributions in the future will depend upon:
• | the operational and financial performance of our properties; |
• | capital expenditures with respect to existing, developed and newly acquired properties; |
• | general and administrative costs associated with our operation as a publicly-held REIT; |
• | the amount of, and the interest rates on, our debt; and |
• | the absence of significant expenditures relating to environmental and other regulatory matters. |
Certain of these matters are beyond our control and any significant difference between our expectations and actual results could have a material adverse effect on our cash flow and our ability to make distributions to shareholders.
Changes in the law may adversely affect our cash flow.
Because increases in income and service taxes are generally not passed through to tenants under leases, such increases may adversely affect our cash flow and ability to make expected distributions to shareholders. Our properties are also subject to various regulatory requirements, such as those relating to the environment, fire and safety. Our failure to comply with these requirements could result in the imposition of fines and damage awards and could result in a default under some of our tenant leases. Moreover, the costs to comply with any new or different regulations could adversely affect our cash flow and our ability to make distributions. Although we believe that our properties are in material compliance with all such requirements, we cannot assure you that these requirements will not change or that newly imposed requirements will not require significant expenditures in order to be compliant.
Potential liability for environmental contamination could result in substantial costs.
Under various federal, state and local laws, ordinances and regulations, we may be liable for the costs to investigate and remove or remediate hazardous or toxic substances on or in our properties, often regardless of whether we know of or are responsible for the presence of these substances. These costs may be substantial. While we do maintain environmental insurance, we can not be assured that our insurance coverage will be sufficient to protect us from all of the aforesaid remediation costs. Also, if hazardous or toxic substances are present on a property, or if we fail to properly remediate such substances, our ability to sell or rent the property or to borrow using that property as collateral may be adversely affected.
Other laws and regulations govern indoor and outdoor air quality including those that can require the abatement or removal of asbestos-containing materials in the event of damage, demolition, renovation or remodeling and also govern emissions of and exposure to asbestos fibers in the air. The maintenance and removal of lead paint and certain electrical equipment containing polychlorinated biphenyls (PCBs) and underground storage tanks are also regulated by federal and state laws. We are also subject to risks associated with human exposure to chemical or biological contaminants such as molds, pollens, viruses and bacteria which, above certain levels, can be alleged to be connected to allergic or other health effects and symptoms in susceptible individuals. We could incur fines for environmental compliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or tanks or related claims arising out of environmental contamination or human exposure to contamination at or from our properties.
Additionally, we develop, manage, lease and/or operate various properties for third parties. Consequently, we may be considered to have been or to be an operator of these properties and, therefore, potentially liable for removal or remediation costs or other potential costs that could relate to hazardous or toxic substances.
An earthquake or other natural disasters could adversely affect our business.
Some of our properties are located in California which is a high risk geographical area for earthquakes or other natural disasters. Depending upon its magnitude, an earthquake could severely damage our properties which would adversely affect our business. We maintain earthquake insurance for our California properties and the resulting business interruption. We cannot assure you that our insurance will be sufficient if there is a major earthquake.
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Americans with Disabilities Act compliance could be costly.
The Americans with Disabilities Act of 1990, as amended (“ADA”), requires that all public accommodations and commercial facilities, including office buildings, meet certain federal requirements related to access and use by disabled persons. Compliance with ADA requirements could involve the removal of structural barriers from certain disabled persons’ entrances which could adversely affect our financial condition and results of operations. Other federal, state and local laws may require modifications to or restrict further renovations of our properties with respect to such accesses. Although we believe that our properties are in material compliance with present requirements, noncompliance with the ADA or similar or related laws or regulations could result in the United States government imposing fines or private litigants being awarded damages against us. In addition, changes to existing requirements or enactments of new requirements could require significant expenditures. Such costs may adversely affect our cash flow and ability to make distributions to shareholders.
Our status as a REIT (or any of our REIT subsidiaries) is dependent on compliance with federal income tax requirements.
If we (or any of our subsidiaries that elects to be taxable as a REIT) fail to qualify as a REIT, we or the affected REIT subsidiaries would be subject to federal income tax at regular corporate rates. Also, unless the Internal Revenue Service, or IRS, granted us or our affected REIT subsidiaries, as the case may be, relief under certain statutory provisions, we or it would remain disqualified as a REIT for four years following the year it first failed to qualify. If we or any of our REIT subsidiaries fails to qualify as a REIT, we or they would be required to pay significant income taxes and would, therefore, have less money available for investments or for distributions to shareholders. This would likely have a material adverse effect on the value of the combined company’s securities. In addition, we or our affected REIT subsidiaries would no longer be required to make any distributions to shareholders.
Failure of the Operating Partnership (or a subsidiary partnership) to be treated as a partnership would have serious adverse consequences to our shareholders. If the IRS were to successfully challenge the tax status of the Operating Partnership or any of its subsidiary partnerships for federal income tax purposes, the Operating Partnership or the affected subsidiary partnership would be taxable as a corporation. In such event we would cease to qualify as a REIT and the imposition of a corporate tax on the Operating Partnership or a subsidiary partnership would reduce the amount of cash available for distribution from the Operating Partnership to us and ultimately to our shareholders.
Even if we qualify as a REIT, we will be required to pay certain federal, state and local taxes on our income and properties. In addition, our taxable REIT subsidiaries will be subject to federal, state and local income tax at regular corporate rates on their net taxable income derived from management, leasing and related service business. If we have net income from a prohibited transaction, such income will be subject to a 100% tax.
Failure to qualify as a REIT would subject us to U.S. federal income tax which would reduce the cash available for distribution to our shareholders.
We operate our business to qualify to be taxed as a REIT for federal income tax purposes. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT, and the statements in this Annual Report on Form 10-K are not binding on the IRS or any court. As a REIT, we generally will not be subject to federal income tax on the income that we distribute currently to our shareholders. Many of the REIT requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must come from specific passive sources, such as rent, that are itemized in the REIT tax laws. In addition, to qualify as a REIT, we cannot own specified amounts of debt and equity securities of some issuers. We also are required to distribute to our shareholders with respect to each year at least 90% of our REIT taxable income (excluding net capital gains). The fact that we hold substantially all of our assets through the Operating Partnership and its subsidiaries further complicates the application of the REIT requirements for us. Even a technical or inadvertent mistake could jeopardize our REIT status and, given the highly complex nature of the rules governing REITs and the ongoing importance of factual determinations, we cannot provide any assurance that we will continue to qualify as a REIT. Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult, or impossible, for us to remain qualified as a REIT. If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the statutory savings provisions in order to maintain our REIT status, we would nevertheless be required to pay penalty taxes of $50,000 or more for each such failure.
If we fail to qualify as a REIT for federal income tax purposes, and are unable to avail ourselves of certain savings provisions set forth in the Internal Revenue Code, we would be subject to federal income tax at regular corporate rates on all of our income. As a taxable corporation, we would not be allowed to take a deduction for distributions to shareholders in computing our taxable income or pass through long term capital gains to individual shareholders at favorable rates. We also could be subject to the federal alternative minimum tax and possibly increased state and local taxes. We would not be able to elect to be taxed as a REIT for four years following the year we first failed to qualify unless the IRS were to grant us relief under certain statutory provisions. If we
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failed to qualify as a REIT, we would have to pay significant income taxes, which would reduce our net earnings available for investment or distribution to our shareholders. This likely would have a significant adverse effect on our earnings and likely would adversely affect the value of our securities. In addition, we would no longer be required to pay any distributions to shareholders.
Failure of the Operating Partnership (or a subsidiary partnership) to be treated as a partnership would have serious adverse consequences to our shareholders. If the IRS were to successfully challenge the tax status of the Operating Partnership or any of its subsidiary partnerships for federal income tax purposes, the Operating Partnership or the affected subsidiary partnership would be taxable as a corporation. In such event we would cease to qualify as a REIT and the imposition of a corporate tax on the Operating Partnership or a subsidiary partnership would reduce the amount of cash available for distribution from the Operating Partnership to us and ultimately to our shareholders.
To maintain our REIT status, we may be forced to borrow funds on a short term basis during unfavorable market conditions.
As a REIT, we are subject to certain distribution requirements, including the requirement to distribute 90% of our REIT taxable income, that may result in our having to make distributions at a disadvantageous time or to borrow funds at unfavorable rates. Compliance with this requirement may hinder our ability to operate solely on the basis of maximizing profits.
We will pay some taxes even if we qualify as a REIT, which will reduce the cash available for distribution to our shareholders.
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property. For example, we will be subject to income tax to the extent we distribute less than 100% of our REIT taxable income, including capital gains. Additionally, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. We cannot guarantee that sales of our properties would not be prohibited transactions unless we comply with certain statutory safe-harbor provisions.
In addition, any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our shareholders.
We face possible federal, state and local tax audits.
Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but are subject to certain state and local taxes. Certain entities through which we own real estate either have undergone, or are currently undergoing, tax audits. Although we believe that we have substantial arguments in favor of our positions in the ongoing audits, in some instances there is no controlling precedent or interpretive guidance on the specific point at issue. There can be no assurance that these or future audits will not have a material adverse effect on our results of operations. The Operating Partnership has been audited by the Internal Revenue Service for its 2004 tax year. The audit concerned the tax treatment of a transaction in September 2004 in which we acquired a portfolio of properties through the acquisition of a limited partnership. On December 17, 2010, the IRS proposed an adjustment to the allocation of recourse liabilities allocated to the contributor of the properties. The Operating Partnership has appealed the proposed adjustment. The proposed adjustment, if upheld, would not result in a material tax liability for us. However, an adjustment could raise a question as to whether a contributor of partnership interests in the 2004 transaction could assert a claim against us under the tax protection agreement entered into as part of the transaction.
Competition for skilled personnel could increase labor costs.
We compete with various other companies in attracting and retaining qualified and skilled personnel. We depend on our ability to attract and retain skilled management personnel who are responsible for the day-to-day operations of our company. Competitive pressures may require that we enhance our pay and benefits package to compete effectively for such personnel. We may not be
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able to offset such added costs by increasing the rates we charge our tenants. If there is an increase in these costs or if we fail to attract and retain qualified and skilled personnel, our business and operating results could be harmed.
We are dependent upon our key personnel.
We are dependent upon our key personnel whose continued service is not guaranteed. We are dependent on our executive officers for strategic business direction and real estate experience. Loss of their services could adversely affect our operations.
Although we have an employment agreement with Gerard H. Sweeney, our President and Chief Executive Officer, this agreement does not restrict his ability to become employed by a competitor following the termination of his employment. We do not have key man life insurance coverage on our executive officers.
Certain limitations will exist with respect to a third party’s ability to acquire us or effectuate a change in control.
Limitations imposed to protect our REIT status. In order to protect us against the loss of our REIT status, our Declaration of Trust limits any shareholder from owning more than 9.8% in value of our outstanding shares, subject to certain exceptions. The ownership limit may have the effect of precluding acquisition of control of us. If anyone acquires shares in excess of the ownership limit, we may:
• | consider the transfer to be null and void; |
• | not reflect the transaction on our books; |
• | institute legal action to stop the transaction; |
• | not pay dividends or other distributions with respect to those shares; |
• | not recognize any voting rights for those shares; and |
• | consider the shares held in trust for the benefit of a person to whom such shares may be transferred. |
Limitation due to our ability to issue preferred shares. Our Declaration of Trust authorizes our Board of Trustees to cause us to issue preferred shares, without limitation as to amount and without shareholder consent. Our Board of Trustees is able to establish the preferences and rights of any preferred shares issued and these shares could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our shareholders’ best interests.
Limitation imposed by the Maryland Business Combination Law. The Maryland General Corporation Law, as applicable to Maryland REITs, establishes special restrictions against “business combinations” between a Maryland REIT and “interested shareholders” or their affiliates unless an exemption is applicable. An interested shareholder includes a person, who beneficially owns, and an affiliate or associate of the trust who, at any time within the two-year period prior to the date in question, was the beneficial owner of, ten percent or more of the voting power of our then-outstanding voting shares. Among other things, Maryland law prohibits (for a period of five years) a merger and certain other transactions between a Maryland REIT and an interested shareholder unless the board of trustees had approved the transaction before the party became an interested shareholder. The five-year period runs from the most recent date on which the interested shareholder became an interested shareholder. Thereafter, any such business combination must be recommended by the board of trustees and approved by two super-majority shareholder votes unless, among other conditions, the common shareholders receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for our shares or unless the board of trustees approved the transaction before the party in question became an interested shareholder. The business combination statute could have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating any such offers, even if the acquisition would be in our shareholders’ best interests.
Maryland Control Share Acquisition Act. Maryland law provides that “control shares” of a REIT acquired in a “control share acquisition” shall have no voting rights except to the extent approved by a vote of two-thirds of the vote eligible to be cast on the matter under the Maryland Control Share Acquisition Act. “Control Shares” means shares that, if aggregated with all other shares previously acquired by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing trustees within one of the following ranges of voting power: one-tenth or more but less than one-third, one-third or more but less than a majority or a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions. If voting rights or control shares acquired in a control share acquisition are not approved at a shareholder’s meeting, then subject to certain conditions and limitations the issuer may redeem any or all of the control shares for fair value. If voting rights of such control shares are approved at a shareholder’s meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other shareholders may exercise appraisal rights. Any control shares acquired in a control share acquisition which are not exempt under our Bylaws are subject to the Maryland Control Share Acquisition Act. Our Bylaws contain
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a provision exempting from the control share acquisition statute any and all acquisitions by any person of our shares. We cannot assure you that this provision will not be amended or eliminated at any time in the future.
Advance Notice Provisions for Shareholder Nominations and Proposals. Our bylaws require advance notice for shareholders to nominate persons for election as trustees at, or to bring other business before, any meeting of our shareholders. This bylaw provision limits the ability of shareholders to make nominations of persons for election as trustees or to introduce other proposals unless we are notified in a timely manner prior to the meeting.
Many factors can have an adverse effect on the market value of our securities.
A number of factors might adversely affect the price of our securities, many of which are beyond our control. These factors include:
• | increases in market interest rates, relative to the dividend yield on our shares. If market interest rates go up, prospective purchasers of our securities may require a higher yield. Higher market interest rates would not, however, result in more funds for us to distribute and, to the contrary, would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common shares to go down; |
• | anticipated benefit of an investment in our securities as compared to investment in securities of companies in other industries (including benefits associated with tax treatment of dividends and distributions); |
• | perception by market professionals of REITs generally and REITs comparable to us in particular; |
• | level of institutional investor interest in our securities; |
• | relatively low trading volumes in securities of REITs; |
• | our results of operations and financial condition; and |
• | investor confidence in the stock market generally. |
The market value of our common shares is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash distributions. Consequently, our common shares may trade at prices that are higher or lower than our net asset value per common share. If our future earnings or cash distributions are less than expected, it is likely that the market price of our common shares will diminish.
Additional issuances of equity securities may be dilutive to shareholders.
The interests of our shareholders could be diluted if we issue additional equity securities to finance future developments or acquisitions or to repay indebtedness. Our Board of Trustees may authorize the issuance of additional equity securities without shareholder approval. Our ability to execute our business strategy depends upon our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including the issuance of common and preferred equity.
The issuance of preferred securities may adversely affect the rights of holders of our common shares.
Because our Board of Trustees has the power to establish the preferences and rights of each class or series of preferred shares, we may afford the holders in any series or class of preferred shares preferences, distributions, powers and rights, voting or otherwise, senior to the rights of holders of common shares. Our Board of Trustees also has the power to establish the preferences and rights of each class or series of units in the Operating Partnership, and may afford the holders in any series or class of preferred units preferences, distributions, powers and rights, voting or otherwise, senior to the rights of holders of common units.
The acquisition of new properties or the development of new properties which lack operating history with us may give rise to difficulties in predicting revenue potential.
We may continue to acquire additional properties and may seek to develop our existing land holdings strategically as warranted by market conditions. These acquisitions and developments could fail to perform in accordance with expectations. If we fail to accurately estimate occupancy levels, operating costs or costs of improvements to bring an acquired property or a development property up to the standards established for our intended market position, the performance of the property may be below expectations. Acquired properties may have characteristics or deficiencies affecting their valuation or revenue potential that we have not yet discovered. We cannot assure you that the performance of properties acquired or developed by us will increase or be maintained under our management.
Our performance is dependent upon the economic conditions of the markets in which our properties are located.
Our properties are located in Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Texas, and California. Like other real estate markets, these commercial real estate markets have been impacted by the ongoing economic recovery from the recent
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recession, and any adverse changes in economic conditions in the future in any of these economies or real estate markets could negatively affect cash available for distribution. Our financial performance and ability to make distributions to our shareholders will be particularly sensitive to the economic conditions in these markets. The local economic climate, which may be adversely impacted by business layoffs or downsizing, industry slowdowns, changing demographics and other factors, and local real estate conditions, such as oversupply of or reduced demand for office, industrial and other competing commercial properties, may affect revenues and the value of properties, including properties to be acquired or developed. We cannot assure you that these local economies will grow in the future.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
Property Acquisitions
On December 31, 2012, we acquired a two-building office property totaling 136,075 of net rentable square feet in Austin, Texas known as 7000 West at Lantana for $32.1 million. This property was 100.0% occupied as of December 31, 2012. We funded the acquisition price with available corporate funds.
On December 11, 2012, we acquired an office property containing 456,922 net rentable square feet in Philadelphia, Pennsylvania known as 1900 Market Street for $34.8 million. This property was 76.3% occupied as of December 31, 2012, with redevelopment expected to commence in early 2013 in anticipation of the lead tenant's departure in late 2015. We funded the acquisition price with available corporate funds.
On November 20, 2012, we acquired a ten-acre parcel of land in Herndon, Virginia for $2.1 million. We funded the acquisition price with available corporate funds.
On January 6, 2012, we acquired a vacant office property containing 154,392 net rentable square feet in Plymouth Meeting, Pennsylvania known as 660 West Germantown Pike for $9.1 million. We are currently redeveloping this property. We funded the acquisition price with available corporate funds.
Development and Redevelopment Properties Placed in Service
During 2012, we did not place any development or redevelopment properties into service. At December 31, 2012, we were proceeding on the following redevelopment activity:
Month of Transaction | Property/Portfolio Name | Location | Number of Buildings | Square Footage | ||||||
Jan-12 | 660 West Germantown Pike | Plymouth Meeting, PA | 1 | 154,392 | ||||||
Dec-12 | 1900 Market Street | Philadelphia, PA | 1 | 456,922 | ||||||
Total Redevelopment Properties | 2 | 611,314 | ||||||||
Property Sales
We sold the following office properties during the year ended December 31, 2012:
Month of Sale | Property/Portfolio Name | Location | # of Properties | Rentable Square Feet/ Acres | Property/Portfolio Occupancy % at Date of Sale | Sales Price (in thousands) | |||||||||||
Jul-12 | Oakland's Corporate Center | Exton, PA | 11 | 466,719 | 81.6 | % | 52,700 | ||||||||||
Jun-12 | Pacific Ridge Corporate Center | Carlsbad, CA | 1 | 121,381 | 83.7 | % | 29,000 | ||||||||||
Mar-12 | South Lake at Dulles Corner | Herndon, VA | 1 | 268,240 | 100.0 | % | 91,100 | ||||||||||
Jan-12 | 304 Harper Drive | Moorestown, NJ | 1 | 32,978 | 90.1 | % | 2,975 | ||||||||||
Total Office Properties Sold | 14 | 889,318 | $ | 175,775 | |||||||||||||
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Properties
As of December 31, 2012, we owned 221 properties, consisting of 193 office properties, 19 industrial facilities, five mixed-use properties (217 core properties), two redevelopment properties and two re-entitlement properties that contain an aggregate of approximately 25.1 million net rentable square feet. The properties are located in or near Philadelphia, Pennsylvania, Metropolitan Washington, D.C., Southern and Central New Jersey, Richmond, Virginia, Wilmington, Delaware, Austin, Texas, and Oakland, Concord, Carlsbad and Rancho Bernardo, California. As of December 31, 2012, the Properties were approximately 88.3% occupied by 1,399 tenants and had an average age of approximately 20.3 years. The office properties are primarily suburban office buildings containing an average of approximately 0.1 million net rentable square feet. The industrial and mixed-use properties accommodate a variety of tenant uses, including light manufacturing, assembly, distribution and warehousing. We carry comprehensive liability, fire, extended coverage and rental loss insurance covering all of the properties, with policy specifications and insured limits which we believe are adequate.
The following table sets forth information with respect to our core properties at December 31, 2012:
Location | State | Year Built/ Renovated | Net Rentable Square Feet | Percentage Leased as of December 31, 2012 (a) | Total Base Rent for the Twelve Months Ended December 31, 2012 (b) (000's) | Average Annualized Rental Rate as of December 31, 2012 (c) | ||||||||||||||||
PENNSYLVANIA SUBURBS SEGMENT | ||||||||||||||||||||||
150 Radnor Chester Road | Radnor | PA | 1983 | 340,380 | 99.3 | % | $ | 9,907 | $ | 32.72 | ||||||||||||
201 King of Prussia Road | Radnor | PA | 2001 | 251,434 | 98.4 | % | 6,546 | 28.71 | ||||||||||||||
555 Lancaster Avenue | Radnor | PA | 1973 | 241,687 | 100.0 | % | 6,562 | 31.56 | ||||||||||||||
401 Plymouth Road | Plymouth Meeting | PA | 2001 | 202,252 | 82.3 | % | 4,885 | 30.84 | ||||||||||||||
One Radnor Corporate Center | Radnor | PA | 1998 | 201,874 | 100.0 | % | 5,372 | 26.30 | ||||||||||||||
101 West Elm Street | W. Conshohocken | PA | 1999 | 173,827 | 97.8 | % | 4,250 | 26.77 | ||||||||||||||
Five Radnor Corporate Center | Radnor | PA | 1998 | 164,677 | 100.0 | % | 4,515 | 30.30 | ||||||||||||||
Four Radnor Corporate Center | Radnor | PA | 1995 | 164,464 | 100.0 | % | 4,191 | 27.28 | ||||||||||||||
751-761 Fifth Avenue | King Of Prussia | PA | 1967 | 158,000 | 100.0 | % | 629 | 4.03 | ||||||||||||||
630 Allendale Road | King of Prussia | PA | 2000 | 150,000 | 61.9 | % | 2,382 | 25.31 | ||||||||||||||
640 Freedom Business Center | (d) | King Of Prussia | PA | 1991 | 132,000 | 98.0 | % | 2,472 | 20.29 | |||||||||||||
52 Swedesford Square | East Whiteland Twp. | PA | 1988 | 131,017 | 35.1 | % | 948 | — | ||||||||||||||
400 Berwyn Park | Berwyn | PA | 1999 | 124,182 | 90.7 | % | 2,524 | 16.55 | ||||||||||||||
4000 Chemical Road | Plymouth Meeting | PA | 2007 | 120,877 | 100.0 | % | 3,083 | 27.56 | ||||||||||||||
Three Radnor Corporate Center | Radnor | PA | 1998 | 119,087 | 100.0 | % | 3,045 | 29.21 | ||||||||||||||
101 Lindenwood Drive | Malvern | PA | 1988 | 118,121 | 98.4 | % | 2,321 | 19.48 | ||||||||||||||
300 Berwyn Park | Berwyn | PA | 1989 | 107,702 | 96.8 | % | 2,241 | 24.59 | ||||||||||||||
Two Radnor Corporate Center | Radnor | PA | 1998 | 97,576 | 100.0 | % | 1,679 | 19.61 | ||||||||||||||
301 Lindenwood Drive | Malvern | PA | 1984 | 97,813 | 94.2 | % | 1,570 | 20.30 | ||||||||||||||
1 West Elm Street | W. Conshohocken | PA | 1999 | 97,737 | 100.0 | % | 2,611 | 28.68 | ||||||||||||||
555 Croton Road | King of Prussia | PA | 1999 | 96,909 | 69.8 | % | 2,054 | 14.80 | ||||||||||||||
500 North Gulph Road | King Of Prussia | PA | 1979 | 93,082 | 74.1 | % | 1,127 | 19.82 | ||||||||||||||
620 West Germantown Pike | Plymouth Meeting | PA | 1990 | 90,183 | 94.2 | % | 1,470 | 24.12 | ||||||||||||||
610 West Germantown Pike | Plymouth Meeting | PA | 1987 | 90,088 | 94.2 | % | 1,566 | 15.43 | ||||||||||||||
630 West Germantown Pike | Plymouth Meeting | PA | 1988 | 89,870 | 97.2 | % | 2,282 | 29.77 | ||||||||||||||
600 West Germantown Pike | Plymouth Meeting | PA | 1986 | 89,626 | 100.0 | % | 1,563 | 25.11 | ||||||||||||||
630 Freedom Business Center | (d) | King Of Prussia | PA | 1989 | 86,683 | 100.0 | % | 1,532 | 21.04 | |||||||||||||
1200 Swedesford Road | Berwyn | PA | 1994 | 86,622 | 100.0 | % | 1,722 | 29.27 | ||||||||||||||
620 Freedom Business Center | (d) | King Of Prussia | PA | 1986 | 86,570 | 94.3 | % | 1,711 | 24.29 | |||||||||||||
595 East Swedesford Road | Wayne | PA | 1998 | 81,890 | 100.0 | % | 1,672 | 22.18 | ||||||||||||||
1050 Westlakes Drive | Berwyn | PA | 1984 | 80,000 | 100.0 | % | 1,984 | 27.35 | ||||||||||||||
One Progress Drive | Horsham | PA | 1986 | 79,204 | 80.0 | % | 798 | 16.21 | ||||||||||||||
1060 First Avenue | (d) | King Of Prussia | PA | 1987 | 77,718 | 91.0 | % | 1,330 | 22.12 | |||||||||||||
741 First Avenue | King Of Prussia | PA | 1966 | 77,184 | 100.0 | % | 376 | 5.85 | ||||||||||||||
1040 First Avenue | (d) | King Of Prussia | PA | 1985 | 75,488 | 23.4 | % | 726 | 24.87 | |||||||||||||
200 Berwyn Park | Berwyn | PA | 1987 | 75,025 | 77.1 | % | 1,277 | 21.33 | ||||||||||||||
1020 First Avenue | (d) | King Of Prussia | PA | 1984 | 74,556 | 100.0 | % | 1,608 | 22.07 | |||||||||||||
1000 First Avenue | (d) | King Of Prussia | PA | 1980 | 74,139 | 96.5 | % | 1,550 | 23.71 | |||||||||||||
27
Location | State | Year Built/ Renovated | Net Rentable Square Feet | Percentage Leased as of December 31, 2012 (a) | Total Base Rent for the Twelve Months Ended December 31, 2012 (b) (000's) | Average Annualized Rental Rate as of December 31, 2012 (c) | ||||||||||||||||
130 Radnor Chester Road | Radnor | PA | 1983 | 71,349 | 100.0 | % | 2,150 | 33.19 | ||||||||||||||
14 Campus Boulevard | Newtown Square | PA | 1998 | 69,542 | 100.0 | % | 1,815 | 27.46 | ||||||||||||||
170 Radnor Chester Road | Radnor | PA | 1983 | 68,143 | 100.0 | % | 1,688 | 29.60 | ||||||||||||||
500 Enterprise Road | Horsham | PA | 1990 | 66,751 | 100.0 | % | 823 | 20.04 | ||||||||||||||
575 East Swedesford Road | Wayne | PA | 1985 | 66,265 | 100.0 | % | 1,229 | 27.56 | ||||||||||||||
610 Freedom Business Center | (d) | King Of Prussia | PA | 1985 | 62,991 | 78.2 | % | 641 | 17.56 | |||||||||||||
925 Harvest Drive | Blue Bell | PA | 1990 | 62,957 | 85.9 | % | 902 | 21.37 | ||||||||||||||
980 Harvest Drive | Blue Bell | PA | 1988 | 62,379 | 85.9 | % | 1,022 | 15.84 | ||||||||||||||
426 Lancaster Avenue | Devon | PA | 1990 | 61,102 | 100.0 | % | 1,213 | 21.88 | ||||||||||||||
1180 Swedesford Road | Berwyn | PA | 1987 | 60,371 | 45.8 | % | 624 | 4.11 | ||||||||||||||
1160 Swedesford Road | Berwyn | PA | 1986 | 60,099 | 51.1 | % | 802 | 22.68 | ||||||||||||||
100 Berwyn Park | Berwyn | PA | 1986 | 57,730 | 86.9 | % | 923 | 22.94 | ||||||||||||||
640 Allendale Road | (f) | King of Prussia | PA | 2000 | 56,034 | 100.0 | % | 316 | 7.37 | |||||||||||||
565 East Swedesford Road | Wayne | PA | 1984 | 55,456 | 100.0 | % | 1,029 | 23.35 | ||||||||||||||
650 Park Avenue | King Of Prussia | PA | 1968 | 54,338 | 92.0 | % | 794 | 17.89 | ||||||||||||||
910 Harvest Drive | Blue Bell | PA | 1990 | 52,611 | 100.0 | % | 1,040 | 21.45 | ||||||||||||||
2240/50 Butler Pike | Plymouth Meeting | PA | 1984 | 52,229 | 100.0 | % | 969 | 16.86 | ||||||||||||||
920 Harvest Drive | Blue Bell | PA | 1990 | 51,875 | 95.3 | % | 936 | 21.67 | ||||||||||||||
660 Allendale Road | King of Prussia | PA | 2011 | 50,635 | 100.0 | % | 677 | 16.30 | ||||||||||||||
875 First Avenue | King Of Prussia | PA | 1966 | 50,000 | 100.0 | % | 1,037 | 23.96 | ||||||||||||||
620 Allendale Road | King Of Prussia | PA | 1961 | 50,000 | 100.0 | % | 600 | 12.99 | ||||||||||||||
15 Campus Boulevard | Newtown Square | PA | 2002 | 49,621 | 100.0 | % | 1,223 | 26.98 | ||||||||||||||
17 Campus Boulevard | Newtown Square | PA | 2001 | 48,565 | 100.0 | % | 1,137 | 26.89 | ||||||||||||||
11 Campus Boulevard | Newtown Square | PA | 1998 | 47,699 | 81.8 | % | 1,117 | 26.25 | ||||||||||||||
585 East Swedesford Road | Wayne | PA | 1998 | 43,683 | 100.0 | % | 771 | 28.93 | ||||||||||||||
1100 Cassett Road | Berwyn | PA | 1997 | 43,480 | 100.0 | % | 1,106 | 32.40 | ||||||||||||||
1336 Enterprise Drive | West Goshen | PA | 1989 | 39,330 | — | % | — | — | ||||||||||||||
600 Park Avenue | King Of Prussia | PA | 1964 | 39,000 | 100.0 | % | 234 | 6.00 | ||||||||||||||
18 Campus Boulevard | Newtown Square | PA | 1990 | 37,374 | 100.0 | % | 864 | 24.73 | ||||||||||||||
100 Arrandale Boulevard | Exton | PA | 1997 | 34,931 | 100.0 | % | 456 | 18.53 | ||||||||||||||
300 Lindenwood Drive | Malvern | PA | 1991 | 33,000 | 100.0 | % | 794 | 25.30 | ||||||||||||||
2260 Butler Pike | Plymouth Meeting | PA | 1984 | 31,892 | 100.0 | % | 447 | 23.10 | ||||||||||||||
120 West Germantown Pike | Plymouth Meeting | PA | 1984 | 30,574 | 100.0 | % | 561 | 21.77 | ||||||||||||||
1700 Paoli Pike | Malvern | PA | 2000 | 28,000 | — | % | — | — | ||||||||||||||
140 West Germantown Pike | Plymouth Meeting | PA | 1984 | 25,357 | 100.0 | % | 515 | 24.11 | ||||||||||||||
100 Lindenwood Drive | Malvern | PA | 1985 | 18,400 | 100.0 | % | 373 | 22.58 | ||||||||||||||
200 Lindenwood Drive | Malvern | PA | 1984 | 12,600 | 100.0 | % | 212 | 18.74 | ||||||||||||||
SUBTOTAL - PENNSYLVANIA SUBURBS SEGMENT | 6,505,907 | 91.3 | % | 129,121 | 23.85 | |||||||||||||||||
PHILADELPHIA CENTRAL BUSINESS DISTRICT SEGMENT | ||||||||||||||||||||||
1717 Arch Street | (d) | Philadelphia | PA | 1990 | 1,029,413 | 92.7 | % | 17,932 | 17.41 | |||||||||||||
2970 Market Street | Philadelphia | PA | 2010 | 862,692 | 100.0 | % | 19,543 | 31.34 | ||||||||||||||
2929 Arch Street | (d) | Philadelphia | PA | 2005 | 730,187 | 99.7 | % | 24,730 | 35.94 | |||||||||||||
100 North 18th Street | (e) | Philadelphia | PA | 1988 | 708,844 | 80.7 | % | 19,025 | 33.74 | |||||||||||||
130 North 18th Street | Philadelphia | PA | 1989 | 595,041 | 89.9 | % | 12,112 | 30.36 | ||||||||||||||
101 - 103 Juniper Street | (i) | Philadelphia | PA | 2011 | N/A | — | % | — | — | |||||||||||||
2930 Chestnut Street | (d), (g) | Philadelphia | PA | 2010 | 553,421 | 100.0 | % | 117 | 11.39 | |||||||||||||
3020 Market Street | (d) | Philadelphia | PA | 1959 | 190,925 | 68.7 | % | 2,201 | 21.46 | |||||||||||||
Philadelphia Marine Center | (d), (g) | Philadelphia | PA | Various | 181,900 | 100.0 | % | 1,139 | 4.85 | |||||||||||||
28
Location | State | Year Built/ Renovated | Net Rentable Square Feet | Percentage Leased as of December 31, 2012 (a) | Total Base Rent for the Twelve Months Ended December 31, 2012 (b) (000's) | Average Annualized Rental Rate as of December 31, 2012 (c) | ||||||||||||||||
SUBTOTAL - PHILADELPHIA CENTRAL BUSINESS DISTRICT | 4,852,423 | 93.1 | % | 96,799 | 25.64 | |||||||||||||||||
METROPOLITAN WASHINGTON D.C. SEGMENT | ||||||||||||||||||||||
1676 International Drive | McLean | VA | 1999 | 299,387 | 93.8 | % | 9,006 | 34.48 | ||||||||||||||
2340 Dulles Corner Boulevard | Herndon | VA | 1987 | 264,405 | 100.0 | % | 8,011 | 32.36 | ||||||||||||||
2291 Wood Oak Drive | Herndon | VA | 1999 | 230,389 | 100.0 | % | 7,813 | 31.78 | ||||||||||||||
1900 Gallows Road | Vienna | VA | 1989 | 210,632 | 85.3 | % | 3,670 | 23.72 | ||||||||||||||
3141 Fairview Park Drive | (h) | Falls Church | VA | 1988 | 183,618 | 84.4 | % | 8,627 | 28.83 | |||||||||||||
2411 Dulles Corner Park | Herndon | VA | 1990 | 180,510 | 78.4 | % | 4,543 | 0.03 | ||||||||||||||
2355 Dulles Corner Boulevard | Herndon | VA | 1988 | 179,176 | 73.9 | % | 4,117 | 32.56 | ||||||||||||||
1880 Campus Commons Drive | Reston | VA | 1985 | 172,943 | 95.7 | % | 3,450 | 22.20 | ||||||||||||||
2121 Cooperative Way | Herndon | VA | 2000 | 162,578 | 89.0 | % | 4,167 | 17.29 | ||||||||||||||
6600 Rockledge Drive | (d) | Bethesda | MD | 1981 | 160,173 | 91.3 | % | 4,511 | 30.65 | |||||||||||||
8260 Greensboro Drive | McLean | VA | 1980 | 158,961 | 79.1 | % | 3,360 | 27.55 | ||||||||||||||
2251 Corporate Park Drive | Herndon | VA | 2000 | 158,016 | 100.0 | % | 4,294 | 25.72 | ||||||||||||||
12015 Lee Jackson Memorial Highway | Fairfax | VA | 1985 | 153,255 | 94.8 | % | 3,907 | 22.80 | ||||||||||||||
13880 Dulles Corner Lane | Herndon | VA | 1997 | 151,853 | 71.6 | % | 1,412 | 26.22 | ||||||||||||||
8521 Leesburg Pike | Vienna | VA | 1984 | 150,897 | 93.2 | % | 2,114 | 26.50 | ||||||||||||||
2273 Research Boulevard | Rockville | MD | 1999 | 147,689 | 100.0 | % | 4,165 | 30.37 | ||||||||||||||
2275 Research Boulevard | Rockville | MD | 1990 | 147,650 | 97.9 | % | 4,045 | 31.48 | ||||||||||||||
2201 Cooperative Way | Herndon | VA | 1990 | 128,173 | 43.3 | % | 1,172 | 22.90 | ||||||||||||||
2277 Research Boulevard | Rockville | MD | 1986 | 137,045 | 100.0 | % | 3,528 | 31.30 | ||||||||||||||
11781 Lee Jackson Memorial Highway | Fairfax | VA | 1982 | 130,935 | 76.5 | % | 2,936 | 27.70 | ||||||||||||||
11720 Beltsville Drive | Beltsville | MD | 1987 | 128,903 | 58.8 | % | 1,828 | 24.36 | ||||||||||||||
13825 Sunrise Valley Drive | Herndon | VA | 1989 | 104,150 | 61.4 | % | 802 | 16.54 | ||||||||||||||
198 Van Buren Street | Herndon | VA | 1996 | 98,934 | 46.5 | % | 1,347 | 30.95 | ||||||||||||||
196 Van Buren Street | Herndon | VA | 1991 | 98,291 | 81.5 | % | 1,546 | 18.15 | ||||||||||||||
11700 Beltsville Drive | Beltsville | MD | 1981 | 96,843 | 82.8 | % | 2,210 | 24.99 | ||||||||||||||
11710 Beltsville Drive | Beltsville | MD | 1987 | 81,281 | 67.6 | % | 1,373 | 19.12 | ||||||||||||||
4401 Fair Lakes Court | Fairfax | VA | 1988 | 55,972 | 92.5 | % | 1,539 | 27.15 | ||||||||||||||
11740 Beltsville Drive | Beltsville | MD | 1987 | 6,783 | 100.0 | % | 138 | 22.79 | ||||||||||||||
SUBTOTAL - METROPOLITAN WASHINGTON D.C. SEGMENT | 4,179,442 | 85.3 | % | 99,631 | 30.39 | |||||||||||||||||
NEW JERSEY/DELAWARE SEGMENT | ||||||||||||||||||||||
300 Delaware Avenue | Wilmington | DE | 1989 | 298,071 | 79.0 | % | 3,056 | 15.27 | ||||||||||||||
920 North King Street | Wilmington | DE | 1989 | 203,328 | 96.7 | % | 4,192 | 27.34 | ||||||||||||||
10000 Midlantic Drive | Mt. Laurel | NJ | 1990 | 186,908 | 87.3 | % | 1,207 | 20.98 | ||||||||||||||
1009 Lenox Drive | Lawrenceville | NJ | 1989 | 180,734 | 83.7 | % | 4,134 | 24.32 | ||||||||||||||
400 Commerce Drive | Newark | DE | 1997 | 154,086 | 100.0 | % | 2,332 | 17.78 | ||||||||||||||
457 Haddonfield Road | Cherry Hill | NJ | 1990 | 121,737 | 93.2 | % | 1,836 | 21.33 | ||||||||||||||
2000 Midlantic Drive | Mt. Laurel | NJ | 1989 | 121,658 | 92.6 | % | 1,387 | 20.91 | ||||||||||||||
2000 Lenox Drive | Lawrenceville | NJ | 2000 | 119,731 | 100.0 | % | 3,207 | 27.79 | ||||||||||||||
700 East Gate Drive | Mt. Laurel | NJ | 1984 | 119,272 | 94.9 | % | 1,807 | 19.78 | ||||||||||||||
989 Lenox Drive | Lawrenceville | NJ | 1984 | 112,055 | 60.8 | % | 1,485 | 23.61 | ||||||||||||||
993 Lenox Drive | Lawrenceville | NJ | 1985 | 111,124 | 100.0 | % | 2,920 | 20.76 | ||||||||||||||
1000 Howard Boulevard | Mt. Laurel | NJ | 1988 | 105,312 | 97.4 | % | 754 | 10.31 | ||||||||||||||
One Righter Parkway | (d) | Wilmington | DE | 1989 | 104,761 | 97.3 | % | 1,995 | 24.06 | |||||||||||||
1000 Atrium Way | Mt. Laurel | NJ | 1989 | 99,668 | 89.8 | % | 1,076 | 17.47 | ||||||||||||||
997 Lenox Drive | Lawrenceville | NJ | 1987 | 97,277 | 81.5 | % | 2,096 | 27.46 | ||||||||||||||
29
Location | State | Year Built/ Renovated | Net Rentable Square Feet | Percentage Leased as of December 31, 2012 (a) | Total Base Rent for the Twelve Months Ended December 31, 2012 (b) (000's) | Average Annualized Rental Rate as of December 31, 2012 (c) | ||||||||||||||||
Two Righter Parkway | (d) | Wilmington | DE | 1987 | 95,514 | 96.5 | % | 1,617 | 22.21 | |||||||||||||
1120 Executive Boulevard | Mt. Laurel | NJ | 1987 | 95,183 | 40.5 | % | 486 | 21.65 | ||||||||||||||
15000 Midlantic Drive | Mt. Laurel | NJ | 1991 | 84,056 | 94.1 | % | 1,055 | 21.60 | ||||||||||||||
220 Lake Drive East | Cherry Hill | NJ | 1988 | 78,509 | 85.9 | % | 895 | 23.08 | ||||||||||||||
1200 Lenox Drive | Lawrenceville | NJ | 2007 | 76,419 | 100.0 | % | 2,241 | 30.06 | ||||||||||||||
200 Lake Drive East | Cherry Hill | NJ | 1989 | 76,352 | 88.7 | % | 1,047 | 23.96 | ||||||||||||||
200 Commerce Drive | Newark | DE | 1998 | 68,034 | 100.0 | % | 1,327 | 20.99 | ||||||||||||||
9000 Midlantic Drive | Mt. Laurel | NJ | 1989 | 67,299 | 74.2 | % | 817 | 24.60 | ||||||||||||||
100 Commerce Drive | Newark | DE | 1989 | 62,787 | 76.5 | % | 680 | 18.82 | ||||||||||||||
701 East Gate Drive | Mt. Laurel | NJ | 1986 | 61,794 | 82.2 | % | 609 | 19.95 | ||||||||||||||
210 Lake Drive East | Cherry Hill | NJ | 1986 | 60,604 | 50.5 | % | 598 | 23.25 | ||||||||||||||
308 Harper Drive | Moorestown | NJ | 1976 | 59,500 | 83.3 | % | 560 | 18.24 | ||||||||||||||
305 Fellowship Drive | Mt. Laurel | NJ | 1980 | 56,824 | 68.6 | % | 575 | 18.83 | ||||||||||||||
309 Fellowship Drive | Mt. Laurel | NJ | 1982 | 55,911 | 92.6 | % | 640 | 22.68 | ||||||||||||||
307 Fellowship Drive | Mt. Laurel | NJ | 1981 | 54,485 | 93.6 | % | 657 | 19.77 | ||||||||||||||
303 Fellowship Drive | Mt. Laurel | NJ | 1979 | 53,768 | 79.1 | % | 410 | 16.18 | ||||||||||||||
1000 Bishops Gate | Mt. Laurel | NJ | 2005 | 53,281 | 100.0 | % | 1,049 | 28.64 | ||||||||||||||
1000 Lenox Drive | Lawrenceville | NJ | 1982 | 52,264 | 100.0 | % | 1,329 | 31.24 | ||||||||||||||
100 Lenox Drive | Lawrenceville | NJ | 1991 | 50,942 | 100.0 | % | 971 | 23.82 | ||||||||||||||
2 Foster Avenue | (f) | Gibbsboro | NJ | 1974 | 50,761 | 94.6 | % | 220 | 4.66 | |||||||||||||
4000 Midlantic Drive | Mt. Laurel | NJ | 1998 | 46,945 | 100.0 | % | 575 | 21.19 | ||||||||||||||
Five Eves Drive | Marlton | NJ | 1986 | 45,564 | 97.8 | % | 665 | 21.07 | ||||||||||||||
161 Gaither Drive | Mount Laurel | NJ | 1987 | 44,739 | 93.2 | % | 543 | 22.30 | ||||||||||||||
Main Street - Piazza | Voorhees | NJ | 1990 | 44,708 | 100.0 | % | 548 | 16.88 | ||||||||||||||
20 East Clementon Road | Gibbsboro | NJ | 1986 | 38,260 | 93.5 | % | 390 | 18.65 | ||||||||||||||
Two Eves Drive | Marlton | NJ | 1987 | 37,532 | 100.0 | % | 404 | 15.78 | ||||||||||||||
Main Street - Promenade | Voorhees | NJ | 1988 | 31,445 | 90.3 | % | 251 | 12.78 | ||||||||||||||
Four B Eves Drive | Marlton | NJ | 1987 | 27,011 | 83.3 | % | 373 | 15.37 | ||||||||||||||
815 East Gate Drive | Mt. Laurel | NJ | 1986 | 25,500 | 65.1 | % | 100 | 18.57 | ||||||||||||||
817 East Gate Drive | Mt. Laurel | NJ | 1986 | 25,351 | 100.0 | % | 276 | 15.57 | ||||||||||||||
Four A Eves Drive | Marlton | NJ | 1987 | 24,687 | 82.2 | % | 270 | 16.54 | ||||||||||||||
1 Foster Avenue | (f) | Gibbsboro | NJ | 1972 | 24,255 | 100.0 | % | 111 | 4.58 | |||||||||||||
4 Foster Avenue | (f) | Gibbsboro | NJ | 1974 | 23,372 | 100.0 | % | 162 | 7.96 | |||||||||||||
7 Foster Avenue | Gibbsboro | NJ | 1983 | 22,158 | 82.3 | % | 156 | 8.76 | ||||||||||||||
10 Foster Avenue | Gibbsboro | NJ | 1983 | 18,651 | 100.0 | % | 166 | 17.34 | ||||||||||||||
5 U.S. Avenue | (f) | Gibbsboro | NJ | 1987 | 5,000 | 100.0 | % | 24 | 5.00 | |||||||||||||
50 East Clementon Road | Gibbsboro | NJ | 1986 | 3,080 | 100.0 | % | 160 | 51.90 | ||||||||||||||
5 Foster Avenue | Gibbsboro | NJ | 1968 | 2,000 | 100.0 | % | — | — | ||||||||||||||
SUBTOTAL - NEW JERSEY/DELAWARE SEGMENT | 3,940,267 | 88.3 | % | 56,441 | 20.79 | |||||||||||||||||
RICHMOND, VA SEGMENT | ||||||||||||||||||||||
300 Arboretum Place | Richmond | VA | 1988 | 212,228 | 84.0 | % | 3,261 | 18.74 | ||||||||||||||
6800 Paragon Place | Richmond | VA | 1986 | 145,647 | 86.4 | % | 2,272 | 14.27 | ||||||||||||||
6802 Paragon Place | Richmond | VA | 1989 | 143,788 | 99.3 | % | 2,442 | 17.57 | ||||||||||||||
7501 Boulders View Drive | Richmond | VA | 1990 | 136,654 | 100.0 | % | 1,997 | 14.87 | ||||||||||||||
2511 Brittons Hill Road | (f) | Richmond | VA | 1987 | 132,548 | 100.0 | % | 680 | 7.14 | |||||||||||||
2100-2116 West Laburnam Avenue | Richmond | VA | 1976 | 128,337 | 97.0 | % | 1,813 | 15.20 | ||||||||||||||
7300 Beaufont Springs Drive | Richmond | VA | 2000 | 120,665 | 100.0 | % | 1,690 | 20.29 | ||||||||||||||
1025 Boulders Parkway | Richmond | VA | 1994 | 93,143 | 66.1 | % | 1,147 | 17.64 | ||||||||||||||
2201-2245 Tomlynn Street | (f) | Richmond | VA | 1989 | 85,861 | 97.2 | % | 446 | 6.42 | |||||||||||||
7401 Beaufont Springs Drive | Richmond | VA | 1998 | 82,706 | 78.3 | % | 838 | 17.05 | ||||||||||||||
7325 Beaufont Springs Drive | Richmond | VA | 1999 | 75,218 | 75.5 | % | 1,064 | 21.45 | ||||||||||||||
100 Gateway Centre Parkway | Richmond | VA | 2001 | 74,991 | 39.0 | % | 568 | 11.26 | ||||||||||||||
30
Location | State | Year Built/ Renovated | Net Rentable Square Feet | Percentage Leased as of December 31, 2012 (a) | Total Base Rent for the Twelve Months Ended December 31, 2012 (b) (000's) | Average Annualized Rental Rate as of December 31, 2012 (c) | ||||||||||||||||
6806 Paragon Place | Richmond | VA | 2007 | 74,480 | 100.0 | % | 1,609 | 18.81 | ||||||||||||||
9011 Arboretum Parkway | Richmond | VA | 1991 | 73,183 | 48.7 | % | 683 | 18.10 | ||||||||||||||
4870 Sadler Road | Glen Allen | VA | 2000 | 63,832 | 100.0 | % | 1,402 | 21.70 | ||||||||||||||
4880 Sadler Road | Glen Allen | VA | 1998 | 63,427 | 100.0 | % | 1,251 | 19.33 | ||||||||||||||
4805 Lake Brooke Drive | Glen Allen | VA | 1996 | 60,867 | 100.0 | % | 730 | 20.48 | ||||||||||||||
9100 Arboretum Parkway | Richmond | VA | 1988 | 58,446 | 80.6 | % | 752 | 16.38 | ||||||||||||||
2812 Emerywood Parkway | Henrico | VA | 1980 | 56,984 | 100.0 | % | 894 | 17.07 | ||||||||||||||
4364 South Alston Avenue | Durham | NC | 1985 | 56,601 | 60.8 | % | 572 | 16.22 | ||||||||||||||
2277 Dabney Road | (f) | Richmond | VA | 1986 | 50,400 | 100.0 | % | 278 | 6.35 | |||||||||||||
9200 Arboretum Parkway | Richmond | VA | 1988 | 49,542 | 100.0 | % | 748 | 16.74 | ||||||||||||||
9210 Arboretum Parkway | Richmond | VA | 1988 | 48,012 | 59.1 | % | 427 | 15.35 | ||||||||||||||
2212-2224 Tomlynn Street | (f) | Richmond | VA | 1985 | 45,353 | 100.0 | % | 327 | 7.74 | |||||||||||||
2221-2245 Dabney Road | (f) | Richmond | VA | 1994 | 45,250 | 100.0 | % | 273 | 6.98 | |||||||||||||
2251 Dabney Road | (f) | Richmond | VA | 1983 | 42,000 | 100.0 | % | 223 | 7.28 | |||||||||||||
2161-2179 Tomlynn Street | (f) | Richmond | VA | 1985 | 41,550 | 100.0 | % | 177 | 5.59 | |||||||||||||
2256 Dabney Road | (f) | Richmond | VA | 1982 | 33,413 | 100.0 | % | 219 | 8.07 | |||||||||||||
2246 Dabney Road | (f) | Richmond | VA | 1987 | 33,271 | 100.0 | % | 282 | 9.92 | |||||||||||||
2244 Dabney Road | (f) | Richmond | VA | 1993 | 33,050 | 100.0 | % | 280 | 9.80 | |||||||||||||
9211 Arboretum Parkway | Richmond | VA | 1991 | 30,791 | 100.0 | % | 210 | 10.74 | ||||||||||||||
2248 Dabney Road | (f) | Richmond | VA | 1989 | 30,184 | 100.0 | % | 212 | 8.94 | |||||||||||||
2130-2146 Tomlynn Street | (f) | Richmond | VA | 1988 | 29,700 | 100.0 | % | 224 | 10.12 | |||||||||||||
2120 Tomlyn Street | (f) | Richmond | VA | 1986 | 23,850 | 86.2 | % | 143 | 8.55 | |||||||||||||
2240 Dabney Road | (f) | Richmond | VA | 1984 | 15,389 | 100.0 | % | 130 | 10.01 | |||||||||||||
SUBTOTAL - RICHMOND, VA SEGMENT | 2,491,361 | 89.2 | % | 30,264 | 14.57 | |||||||||||||||||
AUSTIN, TX SEGMENT | ||||||||||||||||||||||
1250 Capital of Texas Highway South | Austin | TX | 1984 | 270,711 | 98.9 | % | 3,741 | 25.6 | ||||||||||||||
1301 Mopac Expressway | Austin | TX | 2001 | 222,580 | 100.0 | % | 3,305 | 23.04 | ||||||||||||||
3711 South Mopac Expressway | Austin | TX | 2007 | 205,195 | 100.0 | % | 3,803 | 31.19 | ||||||||||||||
1601 Mopac Expressway | Austin | TX | 2000 | 195,639 | 100.0 | % | 3,101 | 29.29 | ||||||||||||||
1501 South Mopac Expressway | Austin | TX | 1999 | 195,324 | 100.0 | % | 2,729 | 25.33 | ||||||||||||||
1221 Mopac Expressway | Austin | TX | 2001 | 173,302 | 100.0 | % | 2,940 | 27.38 | ||||||||||||||
7000 West William Cannon Drive | Austin | TX | 1999 | 136,075 | 100 | % | 6 | 24.93 | ||||||||||||||
SUBTOTAL - AUSTIN, TX SEGMENT | 1,398,826 | 99.8 | % | 19,625 | 26.65 | |||||||||||||||||
CALIFORNIA SEGMENT | ||||||||||||||||||||||
155 Grand Avenue | Oakland | CA | 1990 | 204,336 | 73.6 | % | 4,343 | 29.77 | ||||||||||||||
2 Kaiser Land | (g) | Oakland | CA | N/A | — | — | % | — | — | |||||||||||||
Oakland Lot B | (g) | Oakland | CA | N/A | — | — | % | — | — | |||||||||||||
1220 Concord Avenue | Concord | CA | 1984 | 175,153 | 100.0 | % | 4,204 | 24.28 | ||||||||||||||
1200 Concord Avenue | Concord | CA | 1984 | 175,103 | 100 | % | 4,427 | 25.74 | ||||||||||||||
5900 & 5950 La Place Court | Carlsbad | CA | 1988 | 80,506 | 70.8 | % | 707 | 13.98 | ||||||||||||||
16870 West Bernardo Drive | Rancho Bernardo | CA | 2002 | 68,708 | 100.0 | % | 1,561 | 26.02 | ||||||||||||||
5963 La Place Court | Carlsbad | CA | 1987 | 61,587 | 75.8 | % | 812 | 17.77 | ||||||||||||||
2035 Corte Del Nogal | Carlsbad | CA | 1991 | 53,982 | 82.4 | % | 814 | 20.31 | ||||||||||||||
5973 Avenida Encinas | Carlsbad | CA | 1986 | 51,695 | 89.3 | % | 927 | 23.18 | ||||||||||||||
SUBTOTAL - CALIFORNIA SEGMENT | 871,070 | 87.7 | % | 17,795 | 24.34 | |||||||||||||||||
TOTAL CORE PORTFOLIO | 24,239,296 | 90.3 | % | $ | 449,676 | 23.93 | ||||||||||||||||
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(a) | Calculated by dividing net rentable square feet included in leases signed on or before December 31, 2012 at the property by the aggregate net rentable square feet of the property. |
(b) | “Total Base Rent” for the twelve months ended December 31, 2012 represents base rents earned during such period, excluding tenant reimbursements and deferred market rent adjustments, calculated in accordance with generally accepted accounting principles (GAAP) determined on a straight-line basis. |
(c) | “Average Annualized Rental Rate” is calculated by taking: (i) for office leases written on a triple net basis, the sum of the annualized base rent utilizing contractual rental rates pursuant to executed leases as of December 31, 2012 exclusive of concessions and abatements plus the prorata 2012 budgeted operating expense reimbursements excluding tenant electricity; and (ii) for office leases written on a full service basis, the annualized base rent utilizing contractual rental rates pursuant to executed leases as of December 31, 2012 exclusive of concessions and abatements, and dividing the sum of such amounts by the total square footage occupied as of December 31, 2012. |
(d) | These properties are subject to a ground lease with a third party. |
(e) | We hold our interest in Two Logan Square (100 North 18th Street) through our ownership of second and third mortgages that are secured by this property and that are junior to a first mortgage with a third party. Our ownership of these two mortgages currently provides us with all of the cash flows from Two Logan Square after the payment of operating expenses and debt service on the first mortgage. |
(f) | These properties are industrial facilities. |
(g) | These are mixed-use properties. |
(h) | We contributed this property to an unconsolidated real estate venture, however, we will continue to consolidate this property due to our continuing involvement resulting from our ongoing lease of space, and our 50% ownership interest in the venture. Please see Note 3 to the consolidated financial financial statements for additional information. |
(i) | This is a 220-space parking garage facility. |
The following table shows information regarding rental rates and lease expirations for the Properties at December 31, 2012 and assumes that none of the tenants exercises renewal options or termination rights, if any, at or prior to scheduled expirations:
Year of Lease Expiration December 31, | Number of Leases Expiring Within the Year | Rentable Square Footage Subject to Expiring Leases | Final Annualized Base Rent Under Expiring Leases (a) | Final Annualized Base Rent Per Square Foot Expiring Leases | Percentage of Total Final Annualized Base Rent Under Expiring Leases | Cumulative Total | ||||||||||||||
2012 (b) | 69 | 52,113 | $ | 428,593 | $ | 8.22 | 0.1 | % | 0.1 | % | ||||||||||
2013 | 268 | 2,009,429 | 43,083,802 | 21.44 | 7.7 | % | 7.8 | % | ||||||||||||
2014 | 239 | 2,309,224 | 58,042,589 | 25.14 | 10.4 | % | 18.2 | % | ||||||||||||
2015 | 227 | 2,550,005 | 62,346,498 | 24.45 | 11.1 | % | 29.3 | % | ||||||||||||
2016 | 216 | 1,982,205 | 50,094,198 | 25.27 | 8.9 | % | 38.2 | % | ||||||||||||
2017 | 219 | 2,982,391 | 83,267,061 | 27.92 | 14.9 | % | 53.1 | % | ||||||||||||
2018 | 123 | 1,880,856 | 55,369,834 | 29.44 | 9.9 | % | 63.0 | % | ||||||||||||
2019 | 85 | 1,067,619 | 33,500,480 | 31.38 | 6.0 | % | 69.0 | % | ||||||||||||
2020 | 57 | 1,112,540 | 28,381,762 | 25.51 | 5.1 | % | 74.1 | % | ||||||||||||
2021 | 42 | 1,107,147 | 29,629,044 | 26.76 | 5.3 | % | 79.4 | % | ||||||||||||
2022 | 36 | 1,428,919 | 45,121,856 | 31.58 | 8.1 | % | 87.5 | % | ||||||||||||
2023 and thereafter | 43 | 2,908,703 | 70,607,640 | 24.27 | 12.6 | % | 100.0 | % | ||||||||||||
1,624 | 21,391,151 | $ | 559,873,357 | $ | 26.17 | 100.0 | % | |||||||||||||
(a) | “Final Annualized Base Rent” for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges. |
(b) | Relates to existing month-to-month tenancy leases and to expired leases that we executed, which converted to month-to-month tenancies until a written notice to vacate is provided by us or a new lease agreement is agreed upon with the tenant. |
32
At December 31, 2012, our Properties were leased to 1,399 tenants that are engaged in a variety of businesses. The following table sets forth information regarding leases at the Properties with the 20 tenants with the largest amounts leased based upon Annualized Base Rent as of December 31, 2012:
Tenant Name (a) | Number of Leases | Weighted Average Remaining Lease Term Months | Aggregate Leased Square Feet | Aggregate Leased Square Square Feet | Annualized Base Rent (in 000) (b) | Percentage of Aggregate Annualized Base Rent | |||||||||||||
General Services Administration — U.S. Govt. | 17 | 180 | 1,547,532 | 7.2 | % | $ | 34,606 | 7.2 | % | ||||||||||
Northrop Grumman Corporation | 4 | 43 | 432,776 | 2.0 | % | 13,422 | 2.8 | % | |||||||||||
Pepper Hamilton LLP | 2 | 33 | 296,432 | 1.4 | % | 11,302 | 2.4 | % | |||||||||||
Wells Fargo Bank, N.A. | 10 | 53 | 438,723 | 2.1 | % | 11,219 | 2.3 | % | |||||||||||
Lockheed Martin | 9 | 16 | 547,616 | 2.6 | % | 10,246 | 2.1 | % | |||||||||||
KPMG, LLP | 2 | 104 | 241,828 | 1.1 | % | 8,070 | 1.7 | % | |||||||||||
Dechert LLP | 1 | 82 | 218,565 | 1.0 | % | 7,534 | 1.6 | % | |||||||||||
Lincoln National Management Co. | 1 | 91 | 198,079 | 0.9 | % | 6,612 | 1.4 | % | |||||||||||
Blank Rome LLP | 1 | 121 | 236,903 | 1.1 | % | 6,294 | 1.3 | % | |||||||||||
Drinker Biddle & Reath LLP | 1 | 18 | 209,584 | 1.0 | % | 6,101 | 1.3 | % | |||||||||||
Comcast Corporation | 4 | 291 | 247,169 | 1.2 | % | 5,923 | 1.2 | % | |||||||||||
Deltek Systems, Inc. | 1 | 116 | 157,900 | 0.7 | % | 5,176 | 1.1 | % | |||||||||||
Freescale Semiconductor, Inc. | 1 | 8 | 144,438 | 0.7 | % | 4,211 | 0.9 | % | |||||||||||
Hewlett Packard | 2 | 42 | 141,339 | 0.7 | % | 4,179 | 0.9 | % | |||||||||||
Intel Corporation | 1 | 1 | 164,061 | 0.8 | % | 4,025 | 0.8 | % | |||||||||||
Executive Health Resources, Inc. | 4 | 48 | 152,819 | 0.7 | % | 4,020 | 0.8 | % | |||||||||||
VWR Management Services LLC | 1 | 144 | 149,858 | 0.7 | % | 3,818 | 0.8 | % | |||||||||||
Woodcock Washburn, LLP | 1 | 108 | 109,323 | 0.5 | % | 3,714 | 0.8 | % | |||||||||||
Computer Sciences | 3 | 20 | 197,077 | 0.9 | % | 3,677 | 0.8 | % | |||||||||||
Solarwinds.net, Inc. | 1 | 41 | 109,645 | 0.5 | % | 3,558 | 0.7 | % | |||||||||||
Consolidated Total/Weighted Average | 67 | 58 | 5,941,667 | 27.8 | % | $ | 157,707 | 32.9 | % | ||||||||||
(a) | The identified tenant includes affiliates in certain circumstances. |
(b) | Annualized Base Rent represents the monthly base rent, excluding tenant reimbursements, for each lease in effect at December 31, 2012 multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges. |
Real Estate Ventures
As of December 31, 2012, we had an aggregate investment (net of returns of investment) of approximately $193.6 million in 19 unconsolidated Real Estate Ventures. We formed these ventures with unaffiliated third parties to develop or manage office properties or to acquire land in anticipation of possible development of office properties. As of December 31, 2012, 15 of the Real Estate Ventures owned 54 office buildings that contain an aggregate of approximately 7.0 million net rentable square feet, three Real Estate Ventures owned 24 acres of undeveloped land, and one Real Estate Venture developed a hotel property that contains 137 rooms in Conshohocken, PA.
We account for our investments in these Real Estate Ventures using the equity method. Our ownership interests range from 20% to 65%, subject to specified priority allocations in certain of the Real Estate Ventures. Our investments, initially recorded at cost, are subsequently adjusted for our share of the Real Estate Ventures’ income or loss and contributions to capital and distributions, unless we have no intent or obligation to fund losses in which case our investment would not go below zero.
On November 1, 2012, we contributed $13.3 million to our Real Estate Venture known as Six Tower Bridge. This Real Estate Venture used proceeds of our contribution to repay the balance of its mortgage indebtedness. Of the $13.3 million that we advanced, $8.4 million is classified as a partner loan that pays interest at 9.0% per annum and $4.9 million is classified as a partner loan that accrues interest at 9.0% per annum (the additional funds contributed from the partner and priority loans were used for operations
33
of the venture). We accounted for our contribution as additional basis in our investment in the Real Estate Venture. We are treating interest payments to us as distributions that decrease our basis in the Real Estate Venture.
On September 19, 2012, we made a one-time payment of $1.0 million to terminate an agreement with a third party who provided services related to the Real Estate Venture known as Brandywine AI Ventures. Our agreement with the third party provided for commissions and fees related to acquisitions undertaken through this venture. We paid the termination fee in order to terminate and discharge any future obligations of commissions and fees associated with acquisitions by the venture. The termination payment is recorded in our consolidated statements of operations as "Loss on real estate venture formation" because the fee is associated with a contract executed upon formation of the venture. There were no comparable charges for the prior period.
On September 5, 2012, we formed a joint venture, TB-BDN Plymouth Apartments, L.P., (the "Venture"), with Toll Brothers, Inc. ("Toll Brothers"), a residential home builder. We, along with Toll Brothers, each own a 50% interest in the Venture. The Venture owns a 20-acre parcel of land located in Plymouth Meeting, Pennsylvania, which we contributed to the Venture upon its formation. Concurrent with our contribution of the aforementioned land parcel, Toll Brothers contributed $15.5 million of cash to the venture, equivalent to the fair value of the land parcel we contributed. The Venture will use the cash contributed by Toll Brothers to fund predevelopment costs for construction of a 398 unit apartment complex.
On July 10, 2012, we contributed $26.1 million to our Real Estate Venture known as Brandywine AI Ventures to fund our share of partner capital for the Venture's $120.6 million acquisition of three office properties containing 497,896 net rentable square feet in Silver Spring, Maryland. The properties were 93.2% occupied as of December 31, 2012.
As of December 31, 2012, we had guaranteed repayment of approximately $0.6 million of loans on behalf of the Real Estate Ventures. We also provide customary environmental indemnities and completion guarantees in connection with construction and permanent financing both for our own account and on behalf of the Real Estate Ventures.
Item 3. | Legal Proceedings |
We are involved from time to time in legal proceedings, including tenant disputes, employee disputes, disputes arising out of agreements to purchase or sell properties and disputes relating to state and local taxes. We generally consider these disputes to be routine to the conduct of our business and management believes that the final outcome of such proceedings will not have a material adverse effect on our financial position, results of operations or liquidity.
Item 4. | Mine Safety Disclosures |
Not applicable.
34
PART II
Item 5. | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
The common shares of Brandywine Realty Trust are traded on the New York Stock Exchange (“NYSE”) under the symbol “BDN.” There is no established trading market for units of partnership interests in the Operating Partnership. On February 21, 2013, there were 698 holders of record of our common shares and 37 holders of record (in addition to Brandywine Realty Trust) of Class A units of the Operating Partnership. On February 21, 2013, the last reported sales price of the common shares on the NYSE was $13.20. The following table sets forth the quarterly high and low sales price per common share reported on the NYSE for the indicated periods and the distributions paid by us with respect to each such period.
Share Price High | Share Price Low | Distributions Paid During Quarter | |||||||||
First Quarter 2011 | $ | 12.32 | $ | 11.09 | $ | 0.15 | |||||
Second Quarter 2011 | $ | 12.76 | $ | 11.06 | $ | 0.15 | |||||
Third Quarter 2011 | $ | 12.34 | $ | 7.88 | $ | 0.15 | |||||
Fourth Quarter 2011 | $ | 9.63 | $ | 7.09 | $ | 0.15 | |||||
First Quarter 2012 | $ | 11.48 | $ | 9.40 | $ | 0.15 | |||||
Second Quarter 2012 | $ | 12.34 | $ | 10.66 | $ | 0.15 | |||||
Third Quarter 2012 | $ | 12.88 | $ | 11.28 | $ | 0.15 | |||||
Fourth Quarter 2012 | $ | 12.66 | $ | 11.07 | $ | 0.15 | |||||
For each quarter in 2012 and 2011, the Operating Partnership paid a cash distribution per Class A unit in an amount equal to the dividend paid on a common share for each such quarter.
In order to maintain the status of Brandywine Realty Trust as a REIT, we must make annual distributions to shareholders of at least 90% of our taxable income (not including net capital gains). Future distributions will be declared at the discretion of our Board of Trustees and will depend on our actual cash flow, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as our Board of Trustees deems relevant.
On December 11, 2012, our Board of Trustees declared a quarterly dividend distribution of $0.15 per common share that was paid on January 18, 2013. On December 13, 2011, our Board of Trustees declared a quarterly dividend distribution of $0.15 per common share that was paid on January 19, 2012. Our Board of Trustees has adopted a dividend policy designed to match our distributions to our projected, normalized taxable income for 2013.
On June 28, 2012, we filed with the NYSE our annual CEO Certification and Annual Written Affirmation pursuant to Section 303A.12 of the NYSE Listed Company Manual, each certifying that we were in compliance with all of the listing standards of the NYSE.
The following table provides information as of December 31, 2012, with respect to compensation plans under which our common shares are authorized for issuance:
(a) | (b) | (c) | ||||||||
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||
Equity compensation plans approved by security holders (1) | 3,337,549 | $ | 14.85 | 5,311,022 | ||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||
Total | 3,337,549 | $ | 14.85 | 5,311,022 | ||||||
35
(1) | Relates to our Amended and Restated 1997 Long-Term Incentive Plan (the “1997 Plan”) and 46,667 options awarded prior to adoption of the 1997 Plan. In June 2010, our shareholders approved amendments to the 1997 Plan. The amendments, among other things, increased the number of common shares available for awards under the 1997 Plan by 6,000,000 (of which 3,600,000 were made available solely for awards of options and share appreciation rights). |
The following table presents information related to our common share repurchases during the year ended December 31, 2012:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (a) | |||||||||||
January 1 to January 31 | 3,817 | (b) | $ | 9.66 | — | 539,200 | |||||||||
February 1 to February 29 | — | — | — | 539,200 | |||||||||||
March 1 to March 31 | 146,822 | (b) | 11.04 | — | 539,200 | ||||||||||
April 1 to April 30 | 104,671 | (b) | 11.48 | — | 539,200 | ||||||||||
May 1 to May 31 | — | — | — | 539,200 | |||||||||||
June 1 to June 30 | — | — | — | 539,200 | |||||||||||
July 1 to July 31 | — | — | — | 539,200 | |||||||||||
August 1 to August 31 | — | — | — | 539,200 | |||||||||||
September 1 to September 30 | — | — | — | 539,200 | |||||||||||
October 1 to October 31 | 22,345 | (b) | 11.61 | — | 539,200 | ||||||||||
November 1 to November 30 | — | — | — | 539,200 | |||||||||||
December 1 to December 31 | — | — | — | 539,200 | |||||||||||
Total | 277,655 | — | |||||||||||||
(a) | Relates to the remaining common share repurchase availability under our share repurchase program. There is no expiration date on the common share repurchase program. Our Board of Trustees initially authorized this program in 1998 and has periodically replenished capacity under the program. |
(b) | Represents common shares cancelled upon vesting of restricted common shares previously awarded to employees in satisfaction of tax withholding obligations. Such shares do not reduce the total number of shares that remain available to be purchased under the share repurchase program. |
36
SHARE PERFORMANCE GRAPH
The SEC requires us to present a chart comparing the cumulative total shareholder return on the common shares with the cumulative total shareholder return of (i) a broad equity index and (ii) a published industry or peer group index. The following chart compares the cumulative total shareholder return for the common shares with the cumulative shareholder return of companies on (i) the S&P 500 Index (ii) the Russell 2000 and (iii) the NAREIT ALL-REIT Total Return Index as provided by NAREIT for the period beginning December 31, 2007 and ending December 31, 2012 and assumes an investment of $100, with reinvestment of all dividends, has been made in the common shares and in each index on December 31, 2007.
Year Ended | ||||||||||||||||||
Index | 12/31/2007 | 12/31/2008 | 12/31/2009 | 12/31/2010 | 12/31/2011 | 12/31/2012 | ||||||||||||
Brandywine Realty Trust | 100.00 | 47.84 | 77.99 | 83.93 | 72.57 | 98.21 | ||||||||||||
S&P 500 | 100.00 | 63.00 | 79.68 | 91.68 | 93.61 | 108.59 | ||||||||||||
Russell 2000 | 100.00 | 66.21 | 84.20 | 106.82 | 102.36 | 119.09 | ||||||||||||
NAREIT All Equity REIT Index | 100.00 | 62.27 | 79.70 | 101.98 | 110.42 | 132.18 | ||||||||||||
Item 6. Selected Financial Data
The following table sets forth selected financial and operating data and should be read in conjunction with the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. The selected data have been revised to reflect disposition of all properties since January 1, 2008, which have been reclassified as discontinued operations for all periods presented in accordance with the accounting standard governing discontinued operations.
37
Brandywine Realty Trust
(in thousands, except per common share data and number of properties)
Year Ended December 31, | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Operating Results | ||||||||||||||||||||
Total revenue | $ | 559,833 | $ | 561,753 | $ | 540,432 | $ | 551,822 | $ | 561,756 | ||||||||||
Loss from continuing operations | (30,154 | ) | (18,965 | ) | (37,325 | ) | (781 | ) | (6,750 | ) | ||||||||||
Net income (loss) | 6,529 | (4,715 | ) | (17,606 | ) | 8,089 | 38,525 | |||||||||||||
Income (loss) allocated to Common Shares | (8,238 | ) | (12,996 | ) | (25,578 | ) | (245 | ) | 28,462 | |||||||||||
Loss from continuing operations per Common Share | ||||||||||||||||||||
Basic | $ | (0.31 | ) | $ | (0.20 | ) | $ | (0.34 | ) | $ | (0.08 | ) | $ | (0.17 | ) | |||||
Diluted | $ | (0.31 | ) | $ | (0.20 | ) | $ | (0.34 | ) | $ | (0.08 | ) | $ | (0.17 | ) | |||||
Earnings (loss) per Common Share | ||||||||||||||||||||
Basic | $ | (0.06 | ) | $ | (0.10 | ) | $ | (0.19 | ) | $ | — | $ | 0.32 | |||||||
Diluted | $ | (0.06 | ) | $ | (0.10 | ) | $ | (0.19 | ) | $ | — | $ | 0.32 | |||||||
Cash distributions paid per Common Share | $ | 0.60 | $ | 0.60 | $ | 0.60 | $ | 0.60 | $ | 1.76 | ||||||||||
Balance Sheet Data | ||||||||||||||||||||
Real estate investments, net of accumulated depreciation | $ | 3,922,893 | $ | 4,061,461 | $ | 4,201,410 | $ | 4,164,992 | $ | 4,191,367 | ||||||||||
Total assets | 4,506,709 | 4,557,718 | 4,690,378 | 4,663,750 | 4,742,619 | |||||||||||||||
Total indebtedness | 2,465,330 | 2,393,995 | 2,430,446 | 2,454,577 | 2,741,495 | |||||||||||||||
Total liabilities | 2,733,193 | 2,668,022 | 2,712,604 | 2,742,010 | 3,020,121 | |||||||||||||||
Noncontrolling interest | 21,238 | 33,105 | 128,272 | 38,308 | 52,961 | |||||||||||||||
Brandywine Realty Trust’s equity | 1,752,278 | 1,856,591 | 1,849,502 | 1,883,432 | 1,669,537 | |||||||||||||||
Other Data | ||||||||||||||||||||
Cash flows from: | ||||||||||||||||||||
Operating activities | $ | 157,283 | $ | 178,749 | $ | 185,127 | $ | 220,405 | $ | 233,867 | ||||||||||
Investing activities | (73,037 | ) | (47,665 | ) | (171,936 | ) | (102,549 | ) | 164,046 | |||||||||||
Financing activities | (83,107 | ) | (147,239 | ) | 1,807 | (120,213 | ) | (399,589 | ) | |||||||||||
Property Data | ||||||||||||||||||||
Number of properties owned at year end | 221 | 232 | 233 | 245 | 248 | |||||||||||||||
Net rentable square feet owned at year end | 25,079 | 25,221 | 25,633 | 25,563 | 26,257 | |||||||||||||||
38
Brandywine Operating Partnership, L.P.
(in thousands, except per common partnership unit data and number of properties)
Year Ended December 31, | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Operating Results | ||||||||||||||||||||
Total revenue | $ | 559,833 | $ | 561,753 | $ | 540,432 | $ | 551,822 | $ | 561,756 | ||||||||||
Loss from continuing operations | (30,154 | ) | (18,965 | ) | (37,325 | ) | (781 | ) | (6,750 | ) | ||||||||||
Net income (loss) | 6,529 | (4,715 | ) | (17,606 | ) | 8,089 | 38,525 | |||||||||||||
Loss from continuing operations per Common Partnership Unit | ||||||||||||||||||||
Basic | $ | (0.31 | ) | $ | (0.19 | ) | $ | (0.33 | ) | $ | (0.08 | ) | $ | (0.17 | ) | |||||
Diluted | $ | (0.31 | ) | $ | (0.19 | ) | $ | (0.33 | ) | $ | (0.08 | ) | $ | (0.17 | ) | |||||
Earnings (loss) per Common Partnership Units | ||||||||||||||||||||
Basic | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.19 | ) | $ | — | $ | 0.32 | |||||||
Diluted | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.19 | ) | $ | — | $ | 0.32 | |||||||
Cash distributions paid per Common Partnership Unit | $ | 0.60 | $ | 0.60 | $ | 0.60 | $ | 0.60 | $ | 1.76 | ||||||||||
Balance Sheet Data | ||||||||||||||||||||
Real estate investments, net of accumulated depreciation | $ | 3,922,893 | $ | 4,061,461 | $ | 4,201,410 | $ | 4,164,992 | $ | 4,191,367 | ||||||||||
Total assets | 4,506,709 | 4,557,718 | 4,690,378 | 4,657,320 | 4,737,584 | |||||||||||||||
Total indebtedness | 2,465,330 | 2,393,995 | 2,430,446 | 2,454,577 | 2,741,495 | |||||||||||||||
Total liabilities | 2,733,193 | 2,668,022 | 2,712,604 | 2,742,010 | 3,020,121 | |||||||||||||||
Redeemable limited partnership units | 26,777 | 38,370 | 132,855 | 44,620 | 54,166 | |||||||||||||||
Non-controlling interest | — | — | — | 65 | — | |||||||||||||||
Brandywine Operating Partnership’s equity | 1,746,739 | 1,851,326 | 1,844,919 | 1,871,155 | 1,663,534 | |||||||||||||||
Other Data | ||||||||||||||||||||
Cash flows from: | ||||||||||||||||||||
Operating activities | $ | 157,283 | $ | 178,749 | $ | 185,127 | $ | 220,405 | $ | 233,867 | ||||||||||
Investing activities | (73,037 | ) | (47,665 | ) | (171,936 | ) | (102,549 | ) | 164,046 | |||||||||||
Financing activities | (83,107 | ) | (147,239 | ) | 1,807 | (120,213 | ) | (399,589 | ) | |||||||||||
Property Data | ||||||||||||||||||||
Number of properties owned at year end | 221 | 232 | 233 | 245 | 248 | |||||||||||||||
Net rentable square feet owned at year end | 25,079 | 25,221 | 25,663 | 25,563 | 26,257 | |||||||||||||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the consolidated financial statements appearing elsewhere herein and is based primarily on our consolidated financial statements for the years ended December 31, 2012, 2011 and 2010.
OVERVIEW
As of December 31, 2012, we manage our portfolio within seven segments: (1) Pennsylvania Suburbs, (2) Philadelphia CBD, (3) Metropolitan Washington D.C., (4) New Jersey/Delaware, (5) Richmond, Virginia, (6) Austin, Texas and (7) California. The Pennsylvania Suburbs segment includes properties in Chester, Delaware, and Montgomery counties in the Philadelphia suburbs. The Philadelphia CBD segment includes properties located in the City of Philadelphia in Pennsylvania. The Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban Maryland. The New Jersey/Delaware segment includes properties in Burlington, Camden and Mercer counties in New Jersey and in New Castle county in the state of Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle, Chesterfield, Goochland and Henrico counties and
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Durham, North Carolina. The Austin, Texas segment includes properties in Austin. The California segment includes properties in Oakland, Concord, Carlsbad and Rancho Bernardo.
We generate cash and revenue from leases of space at our properties and, to a lesser extent, from the management of properties owned by third parties and from investments in the Real Estate Ventures. Factors that we evaluate when leasing space include rental rates, costs of tenant improvements, tenant creditworthiness, current and expected operating costs, the length of the lease, vacancy levels and demand for office and industrial space. We also generate cash through sales of assets, including assets that we do not view as core to our portfolio, either because of location or expected growth potential, and assets that are commanding premium prices from third party investors.
Factors that May Influence Future Results of Operations
Global Market and Economic Conditions
In the U.S., market and economic conditions have been challenging, characterized by tight credit conditions and modest growth. While recent economic data reflects modest growth, the cost and availability of credit may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued volatility in the U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our tenants. If these market conditions continue, they may limit our ability and the ability of our tenants, to timely refinance maturing liabilities and access the capital markets to meet liquidity needs.
Real Estate Asset Valuation
General economic conditions and the resulting impact on market conditions or a downturn in tenants’ businesses may adversely affect the value of our assets. Challenging economic conditions in the U.S., declining demand for leased office, mixed use, or industrial properties and/or a decrease in market rental rates and/or market values of real estate assets in our submarkets could have a negative impact on the value of our properties and related tenant improvements. If we were required under GAAP to write down the carrying value of any of our properties to the lower of cost or fair value due to impairment, or if as a result of an early lease termination we were required to remove or dispose of material amounts of tenant improvements that are not reusable to another tenant, our financial condition and results of operations could be negatively affected.
Leasing Activity and Rental Rates
The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods.
Development and Redevelopment Programs
Historically, a significant portion of our growth has come from our development and redevelopment efforts. We have a proactive planning process by which we continually evaluate the size, timing, costs and scope of our development and redevelopment programs and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our strategic submarkets. We are currently proceeding on certain redevelopment projects, and we take a cautious and selective approach when determining if a certain development or redevelopment project will benefit our portfolio.
In addition, we may be unable to lease committed development or redevelopment properties at expected rental rates or within projected timeframes or complete development or redevelopment properties on schedule or within budgeted amounts, which could adversely affect our financial condition, results of operations and cash flow.
Financial and Operating Performance
Our financial and operating performance is dependent upon the demand for office, industrial and other commercial space in our markets, our leasing results, our acquisition, disposition and development activity, our financing activity, our cash requirements and economic and market conditions, including prevailing interest rates.
Volatile economic conditions could result in a reduction of the availability of financing and potentially in higher borrowing costs. These factors, coupled with an ongoing economic recovery, have reduced the volume of real estate transactions and created credit
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stresses on some businesses. Vacancy rates may increase, and rental rates may decline, through 2013 and possibly beyond as the current economic climate may negatively impacts tenants.
We expect that the impact of the current state of the economy, including high unemployment and potential volatility in the financial and credit markets, could have a dampening effect on the fundamentals of our business, including increases in past due accounts, tenant defaults, lower occupancy and reduced effective rents. These conditions would negatively affect our future net income and cash flows and could have a material adverse effect on our financial condition. We believe that the quality of our assets and our strong balance sheet will enable us to raise debt capital, if necessary, in various forms and from different sources, including traditional term or secured loans from banks, pension funds and life insurance companies. However, there can be no assurance that we will be able to borrow funds on terms that are economically attractive or at all.
We seek revenue growth throughout our portfolio by increasing occupancy and rental rates. Occupancy at our wholly owned properties at December 31, 2012 was 88.3%.
The table below summarizes selected operating and leasing statistics of our wholly owned operating properties for the year ended December 31, 2012:
Year ended | |||
December 31, 2012 | |||
Leasing Activity: | |||
Total net rentable square feet owned (1) | 24,239,296 | ||
Occupancy percentage (end of period) | 88.3 | % | |
Average occupancy percentage | 88.3 | % | |
New leases and expansions commenced (square feet) | 1,801,876 | ||
Leases renewed (square feet) | 1,716,736 | ||
Net absorption (square feet) (2) | 284,870 | ||
Percentage change in rental rates per square feet (3): | |||
New and expansion rental rates | 3.8 | % | |
Renewal rental rates | 1.2 | % | |
Combined rental rates | 2.0 | % | |
Capital Costs Committed (4): | |||
Leasing commissions (per square feet) | $4.79 | ||
Tenant Improvements (per square feet) | $13.11 | ||
(1) For each period, includes all properties in the core portfolio (i.e. not under development or redevelopment), including properties that were sold during these periods. | |||
(2) Includes leasing related to completed developments and redevelopments, as well as sold properties. | |||
(3) Rental rates include base rent plus reimbursement for operating expenses and real estate taxes. | |||
(4) Calculated on an average basis. | |||
In seeking to increase revenue through our operating, financing and investment activities, we also seek to minimize operating risks, including (i) tenant rollover risk, (ii) tenant credit risk and (iii) development risk.
Tenant Rollover Risk:
We are subject to the risks that tenant leases, upon expiration, are not renewed, that space may not be relet; and that the terms of renewal or reletting (including the cost of renovations) may be less favorable to us than the current lease terms. Leases accounting for approximately 8.5% of our aggregate final annualized base rents as of December 31, 2012 (representing approximately 7.7% of the net rentable square feet of the properties) expire without penalty in 2013. We maintain an active dialogue with our tenants in an effort to maximize lease renewals. Our retention rate for leases that were scheduled to expire in 2012 was 66.2%. If we are unable to renew leases or relet space under expiring leases, at anticipated rental rates, or if tenants terminate their leases early, our cash flow would be adversely impacted.
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Tenant Credit Risk:
In the event of a tenant default, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. Our management regularly evaluates our accounts receivable reserve policy in light of our tenant base and general and local economic conditions. Our accounts receivable allowance was $16.6 million or 10.9% of total receivables (including accrued rent receivable) as of December 31, 2012 compared to $15.5 million or 11.2% of total receivables (including accrued rent receivable) as of December 31, 2011.
If economic conditions persist or deteriorate further, we may experience increases in past due accounts, defaults, lower occupancy and reduced effective rents. This condition would negatively affect our future net income and cash flows and could have a material adverse effect on our financial condition.
Development Risk:
As of December 31, 2012, we owned approximately 434 acres of undeveloped land, and held options to purchase approximately 52 additional acres of undeveloped land. As market conditions warrant, we will seek to opportunistically monetize those parcels through sale or development. For parcels of land that we ultimately develop, we will be subject to risks and costs associated with land development, including building moratoriums and inability to obtain necessary zoning, land-use, building, occupancy and other required governmental approvals, construction cost increases or overruns and construction delays, and insufficient occupancy rates and rental rates.
We also entered into development agreements related to two parcels of land under option for ground lease that required us to commence development by December 31, 2012. During the current year, we were granted an extension to commence development by December 31, 2015 related to these development agreements, and will incur a $3.5 million extension fee over the extension period. If we determine that we will not be able to start the construction by the date specified, or if we determine that development is not in our best economic interest and an additional extension of the development period cannot be negotiated, we will have to write off all costs that we have incurred in preparing these parcels of land for development, amounting to $13.6 million as of December 31, 2012. We expect to commence development on one of the land parcels during 2013.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting periods. Certain accounting policies are considered to be critical accounting policies, as they require management to make assumptions about matters that are highly uncertain at the time the estimate is made and changes in the accounting estimate are reasonably likely to occur from period to period. Management believes the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For a summary of all of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this report.
Revenue Recognition
We recognize rental revenue on the straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Lease incentives, which are included as reductions of rental revenue are recognized on a straight-line basis over the term of the lease. Certain lease agreements contain provisions that require tenants to reimburse a pro rata share of real estate taxes and common area maintenance costs. For certain leases in the portfolio, there are significant assumptions and judgments made by management in determining the lease term such as when termination options are provided to the tenant. The lease term impacts the period over which minimum rents are determined and recorded and also considers the period over which lease related costs are amortized. In addition, our rental revenue is impacted by our determination of whether the improvements made by us or the tenant are landlord assets. The determination of whether an asset is a landlord asset requires judgment and principally considers whether improvements would be utilizable by another tenant upon move out by the existing tenant. To the extent they are determined not to be landlord assets, and we fund them, they are considered as lease incentives. To the extent the tenant funds the improvements that we consider to be landlord assets, we treat them as deferred revenue which is amortized to revenue over the lease term.
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Real Estate Investments
Real estate investments are carried at cost. We record acquisition of real estate investments under the acquisition method of accounting and allocate the purchase price to land, buildings and intangible assets on a relative fair value basis. Depreciation is computed using the straight-line method over the useful lives of buildings and capital improvements (5 to 55 years) and over the shorter of the lease term or the life of the asset for tenant improvements. Direct construction costs related to the development of Properties and land holdings are capitalized as incurred. Capitalized costs include pre-construction costs essential to the development of the property, development and constructions costs, interest, property taxes, insurance, salaries and other project costs during the period of development. Estimates and judgments are required in determining when capitalization of certain costs such as interest should commence and cease. We expense routine repair and maintenance expenditures and capitalize those items that extend the useful lives of the underlying assets.
Real Estate Ventures
When we obtain an economic interest in an entity, we evaluate the entity to determine if the entity is deemed a variable interest entity (“VIE”), and if we are deemed to be the primary beneficiary, in accordance with the accounting standard for the consolidation of variable interest entities. This accounting standard requires significant use of judgments and estimates in determining its application. If the entity is not deemed to be a VIE, and we serve as the general partner or managing member within the entity, we evaluate to determine if our presumed control as the general partner or managing member is overcome by the “kick out” rights and other substantive participating rights of the limited partners or non-managing members in accordance with the same accounting standard.
We consolidate (i) entities that are VIEs and of which we are deemed to be the primary beneficiary and (ii) entities that are non-VIEs which we control. Entities that we account for under the equity method (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions) include (i) entities that are VIEs and of which we are not deemed the primary beneficiary (ii) entities that are non-VIEs which we do not control, but over which we have the ability to exercise significant influence and (iii) entities that are non-VIEs which we maintain an ownership interest through our general partner status, but in which the limited partners in the entity have the substantive ability to dissolve the entity or remove us without cause or have substantive participating rights. We continuously assess our determination of whether an entity is a VIE and who the primary beneficiary is, and whether or not the limited partners in an entity have substantive rights, including if certain events occur that are likely to cause a change in original determinations.
On a periodic basis, management assesses whether there are any indicators that the value of our investments in unconsolidated joint 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, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the fair value of the investment. Our estimates of value for each investment (particularly in commercial real estate joint ventures) are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and operating costs. These factors are difficult to predict and are subject to future events that may alter management’s assumptions; accordingly, the values estimated by management in its impairment analyses may not be realized.
Impairment of Long-Lived Assets
We review long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair-value of the property. We are required to make subjective assessments as to whether there are impairments in the values of the investments in long-lived assets. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Operating properties are also evaluated if they have been identified for potential sale. No impairment was determined; however, if actual cash flows or the estimated holding periods change, an impairment could be recorded in the future and it could be material. Although our strategy is generally to hold our properties over the long-term, we will dispose of properties to meet our liquidity needs or for other strategic needs. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair value less costs to sell, and such loss could be material. If we determine that impairment has occurred and the assets are classified as held and used, the affected assets must be reduced to their fair-value.
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Where properties have been identified as having a potential for sale, additional judgments are required related to the determination as to the appropriate period over which the undiscounted cash flows should include the operating cash flows and the amount included as the estimated residual value. Management determines the amounts to be included based on a probability weighted cash flow analysis. This requires significant judgment. In some cases, the results of whether an impairment is indicated are sensitive to changes in assumptions input into the estimates, including the hold period until expected sale.
During our impairment review for 2012 and 2011, we determined that no impairment charges were necessary.
We also entered into development agreements related to two parcels of land under option for ground lease that required us to commence development by December 31, 2012. During the current year, we were granted an extension to commence development by December 31, 2015 related to these development agreements, and will incur a $3.5 million extension fee over the extension period. If we determine that we will not be able to start the construction by the date specified, or if we determine that development is not in our best economic interest and an additional extension of the development period cannot be negotiated, we will have to write off all costs that we have incurred in preparing these parcels of land for development, amounting to $13.6 million as of December 31, 2012. We expect to commence development on one of the land parcels during 2013.
Income Taxes
Parent Company
The Parent Company has elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). In addition, the Parent Company may elect to treat one or more of its subsidiaries as REITs. In order to continue to qualify as a REIT, the Parent Company and each of its REIT subsidiaries are required to, among other things, distribute at least 90% of their REIT taxable income to their stockholders and meet certain tests regarding the nature of their income and assets. As REITs, the Parent Company and its REIT subsidiaries are not subject to federal income tax with respect to the portion of their income that meets certain criteria and is distributed annually to the stockholders. Accordingly, no provision for federal income taxes is included in the accompanying consolidated financial statements with respect to the operations of these REITs. The Parent Company and its REIT subsidiaries, if any, intend to continue to operate in a manner that allows them to continue to meet the requirements for taxation as REITs. Many of these requirements, however, are highly technical and complex. If the Parent Company or one of its REIT subsidiaries were to fail to meet these requirements, they would be subject to federal income tax.
The Parent Company may elect to treat one or more of its subsidiaries as a taxable REIT subsidiary, or TRS. In general, a TRS may perform additional services for our tenants and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the provision to any person, under a franchise, license or otherwise, of rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal income tax. The Parent Company has elected to treat certain of its corporate subsidiaries as TRSs; these entities provide third party property management services and certain services to tenants that could not otherwise be provided.
Operating Partnership
In general, the Operating Partnership is not subject to federal and state income taxes, and accordingly, no provision for income taxes has been made in the accompanying consolidated financial statements. The partners of the Operating Partnership are required to include their respective share of the Operating Partnership’s profits or losses in their respective tax returns. The Operating Partnership’s tax returns and the amount of allocable Partnership profits and losses are subject to examination by federal and state taxing authorities. If such examination results in changes to the Operating Partnership profits or losses, then the tax liability of the partners would be changed accordingly.
The Operating Partnership may elect to treat one or several of its subsidiaries as REITs under Sections 856 through 860 of the Internal Revenue Code. Each subsidiary REIT has met or intends to meet the requirements for treatment as a REIT under Sections 856 through 860 of the Internal Revenue Code, and, accordingly, no provision has been made for federal and state income taxes in the accompanying consolidated financial statements. If any subsidiary REIT fails to qualify as a REIT in any taxable year, that subsidiary REIT will be subject to federal and state income taxes and may not be able to qualify as a REIT for the four subsequent taxable years. Also, each subsidiary REIT may be subject to certain local income taxes.
The Operating Partnership has elected to treat several of its subsidiaries as taxable TRSs, which are subject to federal, state and local income tax.
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Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts that represents an estimate of losses that may be incurred from the inability of tenants to make required payments. The allowance is an estimate based on two calculations that are combined to determine the total amount reserved. First, we evaluate specific accounts where we have determined that a tenant may have an inability to meet its financial obligations. In these situations, we use our judgment, based on the facts and circumstances, and record a specific reserve for that tenant against amounts due to reduce the receivable to the amount that we expect to collect. These reserves are re-evaluated and adjusted as additional information becomes available. Second, a reserve is established for all tenants based on a range of percentages applied to receivable aging categories. If the financial condition of our tenants were to deteriorate, additional allowances may be required. For accrued rent receivables, we consider the results of the evaluation of specific accounts as well as other factors including assigning risk factors to different industries based on our tenants standard industrial classification. Considering various factors including assigning a risk factor to different industries, these percentages are based on historical collection and write-off experience adjusted for current market conditions.
Deferred Costs
We incur direct costs related to the financing, development and leasing of our properties. Management exercises judgment in determining whether such costs, particularly internal costs, meet the criteria for capitalization or must be expensed. Capitalized financing fees are amortized over the related loan term on a basis that approximates the effective interest method while capitalized leasing costs are amortized over the related lease term. Management re-evaluates the remaining useful lives of leasing costs as the creditworthiness of our tenants and economic and market conditions change.
Purchase Price Allocation
We allocate the purchase price of properties to net tangible and identified intangible assets acquired based on fair values. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our 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 (includes the below market fixed renewal period, if applicable). Capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancellable terms of the respective leases. Capitalized below-market lease values are amortized as an increase of rental income over the remaining non-cancellable terms of the respective leases, including any fixed-rate renewal periods.
Other intangible assets also include amounts representing the value of tenant relationships and in-place leases based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the respective tenant. We estimate 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 and any fixed-rate bargain renewal periods. We estimate fair value through methods similar to those used by independent appraisers or by using independent appraisals. Factors that we consider in our analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, we include 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.
Characteristics that we consider in allocating value to our tenant relationships include the nature and extent of our business relationship with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of tenant relationship intangibles is amortized over the remaining initial lease term and expected renewals, but in no event longer than the remaining depreciable life of the building. The value of in-place leases is 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 prior to the end of the lease term, the unamortized portion of each intangible, including market rate adjustments, in-place lease values and tenant relationship values, would be charged to expense.
RESULTS OF OPERATIONS
The following discussion is based on our Consolidated Financial Statements for the years ended December 31, 2012, 2011 and 2010. We believe that presentation of our consolidated financial information, without a breakdown by segment, will effectively present important information useful to our investors.
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Net operating income (“NOI”) as presented in the comparative analysis below is defined as total revenue less property operating expenses, real estate taxes and third party management expenses. Property operating expenses that are included in determining NOI consist of costs that are necessary and allocable to our operating properties such as utilities, property-level salaries, repairs and maintenance, property insurance, management fees and bad debt expense. General and administrative expenses that are not reflected in NOI primarily consist of corporate-level salaries, amortization of share awards and professional fees that are incurred as part of corporate office management. NOI is a non-GAAP financial measure that we use internally to evaluate the operating performance of our real estate assets by segment, as presented in Note 18 to the consolidated financial statements, and of our business as a whole. We believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. While NOI is a relevant and widely used measure of operating performance of real estate investment trusts, it does not represent cash flow from operations or net income as defined by GAAP and should not be considered as an alternative to those measures in evaluating our liquidity or operating performance. NOI also does not reflect general and administrative expenses, interest expenses, real estate impairment losses, depreciation and amortization costs, capital expenditures and leasing costs. Trends in development and construction activities that could materially impact our results from operations are also not included in NOI. We believe that net income, as defined by GAAP, is the most appropriate earnings measure. See Note 18 to the Consolidated Financial Statements for a reconciliation of NOI to our consolidated net income (loss).
Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011
The table below shows selected operating information for the “Same Store Property Portfolio” and the “Total Portfolio.” The Same Store Property Portfolio consists of 211 properties containing an aggregate of approximately 23.7 million net rentable square feet, and represents properties that we owned for the twelve-month periods ended December 31, 2012 and 2011. The Same Store Property Portfolio includes properties acquired or placed in service on or prior to January 1, 2011 and owned through December 31, 2012. The Total Portfolio includes the effects of other properties that were either placed into service, acquired or redeveloped after January 1, 2011 or disposed prior to December 31, 2012. A property is excluded from our Same Store Property Portfolio and moved into the redevelopment column in the period that we determine that a redevelopment would be the best use of the asset, and when said asset is taken out of service or is undergoing re-entitlement for a future development strategy. This table also includes a reconciliation from the Same Store Property Portfolio to the Total Portfolio net income (i.e., all properties owned by us during the twelve-month period ended December 31, 2012 and 2011) by providing information for the properties which were acquired, placed into service, under development or redevelopment and administrative/elimination information for the three-month periods ended December 31, 2012 and 2011 (in thousands).
The Total Portfolio net income presented in the table is equal to the net income of the Parent Company and the Operating Partnership.
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Comparison of Year Ended December 31, 2012 to the Year Ended December 31, 2011
Same Store Property Portfolio | Recently Completed Properties (a) | Development Properties (b) | Other (Eliminations) (c) | Total Portfolio | |||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2012 | 2011 | Increase/ (Decrease) | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | Increase/ (Decrease) | |||||||||||||||||||||||||||||||||||
Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
Cash rents | $ | 426,730 | $ | 425,080 | $ | 1,650 | $ | 5,326 | $ | 2,945 | $ | 1,309 | $ | 1,002 | $ | (2,959 | ) | $ | 8,821 | $ | 430,406 | $ | 437,848 | $ | (7,442 | ) | |||||||||||||||||||||
Straight-line rents | 21,682 | 18,537 | 3,145 | 825 | 370 | 765 | 46 | — | 525 | 23,272 | 19,478 | 3,794 | |||||||||||||||||||||||||||||||||||
Above/below market rent amortization | 5,608 | 5,147 | 461 | 487 | 156 | 82 | — | — | 142 | 6,177 | 5,445 | 732 | |||||||||||||||||||||||||||||||||||
Total rents | 454,020 | 448,764 | 5,256 | 6,638 | 3,471 | 2,156 | 1,048 | (2,959 | ) | 9,488 | 459,855 | 462,771 | (2,916 | ) | |||||||||||||||||||||||||||||||||
Tenant reimbursements | 76,986 | 77,659 | (673 | ) | 702 | 309 | 998 | 1,008 | (73 | ) | 132 | 78,613 | 79,108 | (495 | ) | ||||||||||||||||||||||||||||||||
Termination fees | 3,233 | 2,951 | 282 | — | — | — | — | — | — | 3,233 | 2,951 | 282 | |||||||||||||||||||||||||||||||||||
Third party management fees, labor reimbursement and leasing | — | — | — | — | — | — | — | 12,116 | 11,536 | 12,116 | 11,536 | 580 | |||||||||||||||||||||||||||||||||||
Other | 5,636 | 3,392 | 2,244 | 28 | 13 | 13 | 60 | 339 | 1,922 | 6,016 | 5,387 | 629 | |||||||||||||||||||||||||||||||||||
Total revenue | 539,875 | 532,766 | 7,109 | 7,368 | 3,793 | 3,167 | 2,116 | 9,423 | 23,078 | 559,833 | 561,753 | (1,920 | ) | ||||||||||||||||||||||||||||||||||
Property operating expenses | 164,091 | 170,904 | 6,813 | 3,018 | 1,565 | 1,914 | 1,898 | (9,727 | ) | (7,290 | ) | 159,296 | 167,077 | (7,781 | ) | ||||||||||||||||||||||||||||||||
Real estate taxes | 54,470 | 51,794 | (2,676 | ) | 257 | 206 | 650 | 591 | 592 | 1,580 | 55,969 | 54,171 | 1,798 | ||||||||||||||||||||||||||||||||||
Third party management expenses | — | — | — | — | — | — | — | 5,127 | 5,590 | 5,127 | 5,590 | (463 | ) | ||||||||||||||||||||||||||||||||||
Net operating income | 321,314 | 310,068 | 11,246 | 4,093 | 2,022 | 603 | (373 | ) | 13,431 | 23,198 | 339,441 | 334,915 | 4,526 | ||||||||||||||||||||||||||||||||||
General & administrative expenses | — | 74 | (74 | ) | 150 | 538 | 96 | — | 25,167 | 23,990 | 25,413 | 24,602 | 811 | ||||||||||||||||||||||||||||||||||
Depreciation and amortization | 190,553 | 200,653 | (10,100 | ) | 3,742 | 1,850 | 1,284 | 857 | 262 | 6,974 | 195,841 | 210,334 | (14,493 | ) | |||||||||||||||||||||||||||||||||
Operating income (loss) | $ | 130,761 | $ | 109,341 | $ | 21,420 | $ | 201 | $ | (366 | ) | $ | (777 | ) | $ | (1,230 | ) | $ | (11,998 | ) | $ | (7,766 | ) | $ | 118,187 | $ | 99,979 | $ | 18,208 | ||||||||||||||||||
Number of properties | 211 | 211 | 6 | 4 | 221 | ||||||||||||||||||||||||||||||||||||||||||
Square feet | 23,734 | 23,734 | 505 | 840 | 25,079 | ||||||||||||||||||||||||||||||||||||||||||
Core Occupancy % (d) | 88.3 | % | 86.4 | % | 83.9 | % | N/A | 88.3 | % | ||||||||||||||||||||||||||||||||||||||
Other Income (Expense): | |||||||||||||||||||||||||||||||||||||||||||||||
Interest income | 3,012 | 1,813 | 1,199 | ||||||||||||||||||||||||||||||||||||||||||||
Historic tax credit transaction income | 11,840 | 12,026 | (186 | ) | |||||||||||||||||||||||||||||||||||||||||||
Interest expense | (132,939 | ) | (131,405 | ) | (1,534 | ) | |||||||||||||||||||||||||||||||||||||||||
Interest expense — Deferred financing costs | (6,208 | ) | (4,991 | ) | (1,217 | ) | |||||||||||||||||||||||||||||||||||||||||
Recognized hedge activity | (2,985 | ) | — | (2,985 | ) | ||||||||||||||||||||||||||||||||||||||||||
Interest expense —Financing Obligation | (850 | ) | — | (850 | ) | ||||||||||||||||||||||||||||||||||||||||||
Equity in income of real estate ventures | 2,741 | 3,775 | (1,034 | ) | |||||||||||||||||||||||||||||||||||||||||||
Net gain on sale of interests in real estate | — | 2,791 | (2,791 | ) | |||||||||||||||||||||||||||||||||||||||||||
Net gain on sale of undepreciated real estate | — | 45 | (45 | ) | |||||||||||||||||||||||||||||||||||||||||||
Loss on real estate venture formation | (950 | ) | (222 | ) | (728 | ) | |||||||||||||||||||||||||||||||||||||||||
Loss on early extinguishment of debt | (22,002 | ) | (2,776 | ) | (19,226 | ) | |||||||||||||||||||||||||||||||||||||||||
Loss from continuing operations | (30,154 | ) | (18,965 | ) | (11,189 | ) | |||||||||||||||||||||||||||||||||||||||||
Income from discontinued operations | 36,683 | 14,250 | 22,433 | ||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 6,529 | $ | (4,715 | ) | $ | 11,244 | ||||||||||||||||||||||||||||||||||||||||
Loss per common share | $ | (0.06 | ) | $ | (0.10 | ) | $ | 0.04 | |||||||||||||||||||||||||||||||||||||||
EXPLANATORY NOTES
(a) | Results include: Five assets placed in service and one acquired property. |
(b) | Results include: Two redevelopments and two re-entitlement properties. |
(c) | Represents certain revenues and expenses at the corporate level as well as various intercompany costs that are eliminated in consolidation and third-party management fees. This also includes two properties that were contributed to an unconsolidated real estate venture in which the Company has a 50% ownership interest. |
(d) | Pertains to properties that are part of our core portfolio (i.e. not under development, redevelopment, or re-entitlement). |
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Total Revenue
Cash rents from the Total Portfolio decreased by $7.4 million from 2011 to 2012 primarily reflecting a decrease of $11.8 million of rental income as a result of contributing two properties to one of our unconsolidated joint ventures during the fourth quarter of 2011.
This decrease was offset by:
• | an increase of $1.7 million due to an increase in same store occupancy of 190 basis points from 2011 to 2012; |
• | an increase of $2.4 million related to the placement into service of the Juniper Street Garage and 660 Allendale Road during the third quarter of 2011, the acquisition of 3020 Market Street during the third quarter of 2011, and the acquisition of 7000 West at Lantana during the fourth quarter of 2012, and; |
• | an increase of $0.3 million related to the the redevelopment of 660 West Germantown Pike and 1900 Market Street during 2012. |
Straight-line rents increased by $3.8 million from 2011 to 2012, consistent with the factors described above: an increase of $3.1 million due to an increase in same store occupancy of 190 basis points from 2011 to 2012, and an increase of $1.2 million due to the placement in service, acquisition, and redevelopment of the above mentioned properties. This increase was offset by $0.5 million as a result of contributing two properties to one of our unconsolidated joint ventures during the fourth quarter of 2011.
Tenant reimbursements decreased $0.5 million from 2011 to 2012 as a direct result of the $7.8 million decrease in operating expenses over the same period. Please see the Property Operating Expenses explanations below and note that certain costs, such as snow removal costs, carry a higher tenant reimbursement percentage.
Termination fees at our Total Portfolio increased by $0.3 million due to timing and volume of tenant move-outs during 2012 when compared to 2011.
Other income at our Total Portfolio increased by $0.6 million during 2012 compared to 2011 as a result of real estate tax refunds received related to prior years tax assessment appeals.
Property Operating Expenses
Property operating expenses across our total portfolio decreased by $7.8 million from 2011 to 2012, mainly attributable to the following: (i) a decrease of $3.4 million in snow removal costs as a result of the mild winter experienced in our Pennsylvania and New Jersey submarkets during 2012 as compared to 2011, (ii) a decrease of $2.8 million related to lower utility costs, (iii) a decrease of $2.4 million as a result of contributing two properties to one of our unconsolidated joint ventures during the fourth quarter of 2011, (iv) a decrease of $1.7 million in repairs and maintenance expenses, directly attributable to timing and tenant needs, and (v) a decrease of $1.0 million in contracted janitorial and landscaping expenses as a result of entering into contracts at more favorable rates during 2012 as compared to 2011. These decreases were offset by: (i) an increase of $1.5 million in salaries, bonuses and related benefits from 2011 to 2012, (ii) an increase of $1.5 million due to the acquisition or placement in service of certain properties throughout 2011 and 2012, as mentioned above, and (iii) an increase of $0.5 million in state and local taxes during 2012, consistent with an increase in tax rates during the year.
Real Estate Taxes
Real estate taxes across our total portfolio increased by $1.8 million, primarily as a result of an increase in real estate tax rates across our same store portfolio during 2012 compared to 2011 of $2.7 million. The increase was offset by a $1.0 million decrease in real estate tax expenses for the two properties contributed to an unconsolidated real estate venture in 2011.
General and Administrative Expenses
General and administrative expenses increased by $0.8 million from 2011 to 2012, mainly attributable to an increase in the amortization of performance-based compensation of $1.2 million. This increase is due to the fact that we accelerated the amortization of such compensation subsequent to certain of our executive personnel meeting qualifying retirement conditions during 2012, causing their associated performance-based compensation to fully vest (please refer to Footnote 14 of the notes to the consolidated financial statements for further discussion). This increase is offset by a decrease in acquisition costs of $0.4 million from 2011 to 2012.
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Depreciation and Amortization
Depreciation and amortization expense decreased by $14.5 million, mainly attributable to a decrease of $6.7 million as a result of contributing two properties to one of our unconsolidated joint ventures during the fourth quarter of 2011. During 2011, we also recorded a $4.7 million out-of-period adjustment for intangible assets representing tenant relationships and in-place leases that should have been written-off in prior years. The remaining decreases are due to decreases related to asset write-offs related to early move-outs and fully amortized assets in 2012, without comparable expenses in 2011. These decreases were offset by an increase of $2.3 million related to the additional depreciation and amortization expense from the aforementioned properties that we acquired, placed into service, or redeveloped during 2012.
Interest Income
Interest income increased by $1.2 million primarily due to the recognition of $1.0 million of accrued interest income related to the payoff of the Trenton note receivable during the year ended December 31, 2012. The installment sale method was used to account for the transaction as a result of the note receivable, and therefore interest income is recognized on a cash basis. We recognized all of the interest income accrued to date during the year ended December 31, 2012 upon receipt of payment from the borrower. See "Discontinued Operations" section below.
Interest Expense
The increase in interest expense of $1.5 million is primarily due to the following:
• | an increase of $11.4 million as a result of the incurrence of $600.0 million in New Term Loans which closed on February 1, 2012; |
• | an increase of $5.8 million in swap interest expense. We have entered into interest rate swap agreements related to all of our variable rate debt except $100.0 million of term loan indebtedness and $69.0 million outstanding under our revolving credit facility; |
• | an increase of $4.4 million related to our $325.0 million 4.950% Guaranteed Notes due 2018 issued in April 2011, and; |
• | an increase of $0.4 million related to our $250.0 million 3.950% Guaranteed Notes Due 2023 issued in December 2012. |
The increase of $22.0 million in interest expense described above was offset by the following decreases in interest expense during 2012 compared to 2011:
• | decrease of $7.1 million related to our $151.5 million 5.400% Guaranteed Notes that matured and were repaid in full during April 2012; |
• | decrease of $5.4 million in mortgage interest expense which is directly related to the $208.4 million decrease in mortgage indebtedness during 2011 and the $60.0 million decrease during 2012; |
• | decrease of $5.3 million related to the repurchases of debt subsequent to the fourth quarter of 2011, including (i) $4.3 million of our 5.400% Guaranteed Notes due 2014, (ii) $60.8 million of our 7.500% Guaranteed Notes due 2015, and (iii) $99.6 million of our 6.000% Guaranteed Notes due 2016; |
• | decrease of $2.1 million related to the extinguishment of our Prior Term Loans, and; |
• | decrease in interest expense of $0.6 million related to an increase in capitalized interest. |
Interest Expense - Deferred Financing Costs
Deferred financing costs increased $1.2 million during 2012 compared to 2011 mainly due to the write-off of costs related to repurchases of debt during 2012, which included, (i) $0.3 million of our 5.750% Guaranteed Notes due 2012, (ii) $4.3 million of our 5.400% Guaranteed Notes due 2014, (iii) $60.8 million of our 7.500% Guaranteed Notes due 2015, (iv) $99.6 million of our 6.000% Guaranteed Notes due 2016 and (v) $150.0 million of term loan indebtedness.
Recognized Hedge Activity
Recognized hedge activity increased $3.0 million during 2012 due to the recognition of $3.0 million of early termination fees related to the termination of interest rate swap contracts. The interest rate swap contracts were terminated in connection with the repayment of the Company's $150.0 million fixed portion of its four-year term loan due February 1, 2016 during the fourth quarter of 2012 (see Note 7 of the notes to the consolidated financial statements for further details of these transactions). There were no comparable charges incurred during 2011.
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Interest Expense - Financing obligation
Financing obligation interest expense relates to a property that we contributed to a joint venture in the fourth quarter of 2011 that did not qualify for sale accounting, and therefore increased by $0.8 million during 2012 as compared to 2011. The interest primarily represents our partner's 50% share of the net operating income of the property.
Equity in income of real estate ventures
The decrease in equity in income of real estate ventures of $1.0 million is primarily due to lower net income at the real estate venture properties during 2012 compared to 2011. We also recognized $0.7 million of net losses (inclusive of depreciation and amortization) related to the BDN AI Venture which was formed in the fourth quarter of 2011, of which $0.2 million related to acquisition costs incurred to acquire three properties during 2012.
Net Gain on Sales of Interests in Real Estate
During the year ended December 31, 2011, we recognized a $2.8 million net gain upon the sale of the remaining 11% ownership interest in three properties that we partially sold to one of our unconsolidated Real Estate Ventures in December 2007. We had retained an 11% equity interest in these properties subject to a put/call at fixed prices for a period of three years from the time of the sale. In January 2011, we exercised the put/call which then transferred full ownership in the three properties to the Real Estate Venture. Accordingly, our direct continuing involvement through our 11% interest in the properties ceased as a result of the transfer of the ownership interest. There were no comparable gains for the year ended December 31, 2012.
Loss on Real Estate Venture Formation
Loss on real estate venture formation increased by $0.7 million primarily due to our termination of an agreement with a third party broker that was entered into upon contributing two properties into a joint venture in December 2011. During 2012, we determined that it was in our best interest to terminate the contract in order to avoid additional commissions and fees on future joint venture acquisitions, recognizing the fee as an additional cost of forming the real estate venture.
Loss on early extinguishment of debt
During 2012, we repurchased (i) $150.0 million of term loan indebtedness, (ii) $99.6 million of our 6.000% Guaranteed Notes due 2016, (iii) $60.8 million of our 7.500% Guaranteed Notes due 2015, (iv) $4.3 million of our 5.400% Guaranteed Notes due 2014, and (v) $0.3 million of our 5.750% Guaranteed Notes due 2012, which resulted in a net loss on early extinguishment of debt of $21.9 million. In addition, we prepaid the remaining balances on two of our existing mortgages, totaling $58.4 million, for which we incurred associated prepayment penalties of $0.1 million.
During 2011, we repurchased (i) $23.7 million of our 5.750% Guaranteed Notes due 2012 and (ii) $22.7 million of our 7.500% Guaranteed Notes due 2015, which resulted in a net loss on early extinguishment of debt of $3.3 million. The loss was offset by the write-off of the unamortized fixed-rate debt premium of $0.5 million related to the prepayment of two of our mortgage loans during 2011.
Discontinued Operations
During 2012, we sold one property located in Moorestown, New Jersey, one property located in Herndon, Virginia, one property located in Carlsbad, California, and 11 flex/office properties located in Exton, Pennsylvania. These properties had total revenues of $7.3 million, property operating expenses of $2.6 million, and $2.8 million of depreciation and amortization expense. In addition, we recognized a deferred gain related to two properties located in Trenton, New Jersey that were sold during the fourth quarter of 2009. The gain was deferred as a result of a note receivable that we held from the buyer in the amount of $22.5 million. The note receivable and accrued interest was paid in full during the second quarter of 2012, prior to its maturity date of October 2016. We recognized a net gain on sale related to these transactions of $34.8 million during the year ended December 31, 2012.
The amounts for the year ended December 31, 2011 are reclassified to include the operations of the properties sold during the twelve-months period ended December 31, 2012, as well as all properties that were sold through the year ended December 31, 2011. Therefore, the discontinued operations amount for the twelve-month period ended December 31, 2011 includes total revenue of $25.0 million, operating expense of $9.2 million, and depreciation and amortization of $8.8 million.
Net income (loss)
Net income (loss) increased by $11.2 million from the twelve-month period ended December 31, 2011 to the twelve-month period ended December 31, 2012 as a result of the factors described above. Net income is significantly impacted by depreciation of
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operating properties and amortization of acquired intangibles. These non-cash charges do not directly affect our ability to pay dividends. Amortization of acquired intangibles will continue over the related lease terms or estimated duration of the tenant relationships.
Loss per Common Share
Loss per share was $0.06 during the twelve months ended December 31, 2012 as compared to a loss per share of $0.10 during the twelve months ended December 31, 2011 as a result of the factors described above.
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RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 2011 to the Year Ended December 31, 2010
The table below shows selected operating information for the “Same Store Property Portfolio” and the “Total Portfolio.” The Same Store Property Portfolio consists of 223 properties containing an aggregate of approximately 22.2 million million net rentable square feet that we owned for the entire twelve-month periods ended December 31, 2011 and 2010. The Same Store Property Portfolio includes properties acquired or placed in service on or prior to January 1, 2010 and owned through December 31, 2011. The Total Portfolio includes the effects of other properties that were either placed into service, acquired or redeveloped after January 1, 2010 or disposed of prior to December 31, 2011. A property is excluded from our Same Store Property Portfolio and moved into the redevelopment column in the period that we determine that a redevelopment would be the best use of the asset, and when said asset is taken out of service or is undergoing re-entitlement for a future development strategy. This table also includes a reconciliation from the Same Store Property Portfolio to the Total Portfolio net income (i.e., all properties owned by us during the twelve-month periods ended December 31, 2011 and 2010) by providing information for the properties which were acquired, under development (including lease-up assets) or placed into service and administrative/elimination information for the twelve-month periods ended December 31, 2011 and 2010 (in thousands). We present the comparative data for the twelve-month periods ended December 31, 2011 and 2010 using information that was included in the previously filed Form 10-K on February 24, 2012, and, as a result of varying levels of acquisition, disposition, redevelopment and re-entitlement activities by the Company in 2012, the operating results set forth below do not lend themselves to direct comparison to the current year results of operations shown above.
The Total Portfolio net income presented in the table is equal to the net income of Brandywine Realty Trust and Brandywine Operating Partnership, L.P.
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Comparison of Year Ended December 31, 2011 to the Year Ended December 31, 2010
Same Store Property Portfolio | Recently Completed Properties | Other (Eliminations) (a) | Total Portfolio | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2011 | 2010 | Increase/ (Decrease) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | Increase/ (Decrease) | |||||||||||||||||||||||||||||
Revenue: | |||||||||||||||||||||||||||||||||||||||
Cash rents | $ | 400,969 | $ | 417,100 | $ | (16,131 | ) | $ | 45,076 | $ | 15,003 | $ | 8,823 | $ | 9,294 | $ | 454,868 | $ | 441,397 | $ | 13,471 | ||||||||||||||||||
Straight-line rents | 15,840 | 11,152 | 4,688 | 3,923 | 2,197 | 524 | 402 | 20,287 | 13,751 | 6,536 | |||||||||||||||||||||||||||||
Above/below market rent amortization | 5,345 | 5,898 | (553 | ) | (41 | ) | (102 | ) | 141 | 157 | 5,445 | 5,953 | (508 | ) | |||||||||||||||||||||||||
Total rents | 422,154 | 434,150 | (11,996 | ) | 48,958 | 17,098 | 9,488 | 9,853 | 480,600 | 461,101 | 19,499 | ||||||||||||||||||||||||||||
Tenant reimbursements | 70,818 | 73,321 | (2,503 | ) | 9,781 | 3,194 | 637 | 624 | 81,236 | 77,139 | 4,097 | ||||||||||||||||||||||||||||
Termination fees | 2,993 | 5,471 | (2,478 | ) | — | 105 | — | — | 2,993 | 5,576 | (2,583 | ) | |||||||||||||||||||||||||||
Third party management fees, labor reimbursement and leasing | — | — | — | — | — | 11,536 | 11,830 | 11,536 | 11,830 | (294 | ) | ||||||||||||||||||||||||||||
Other | 3,093 | 2,703 | 390 | 426 | 60 | 1,921 | 1,547 | 5,440 | 4,310 | 1,130 | |||||||||||||||||||||||||||||
Total revenue | 499,058 | 515,645 | (16,587 | ) | 59,165 | 20,457 | 23,582 | 23,854 | 581,805 | 559,956 | 21,849 | ||||||||||||||||||||||||||||
Property operating expenses | 160,370 | 166,110 | (5,740 | ) | 18,387 | 6,774 | (6,766 | ) | (4,973 | ) | 171,991 | 167,911 | 4,080 | ||||||||||||||||||||||||||
Real estate taxes | 49,805 | 49,639 | 166 | 4,785 | 2,166 | 1,640 | 1,759 | 56,230 | 53,564 | 2,666 | |||||||||||||||||||||||||||||
Third party management expenses | — | — | — | — | — | 5,590 | 5,866 | 5,590 | 5,866 | (276 | ) | ||||||||||||||||||||||||||||
Net Operating Income | 288,883 | 299,896 | (11,013 | ) | 35,993 | 11,517 | 23,118 | 21,202 | 347,994 | 332,615 | 15,379 | ||||||||||||||||||||||||||||
General & administrative expenses | — | 1 | (1 | ) | 612 | 304 | 23,990 | 23,001 | 24,602 | 23,306 | 1,296 | ||||||||||||||||||||||||||||
Depreciation and amortization | 183,729 | 189,341 | (5,612 | ) | 26,861 | 11,567 | 7,090 | 9,684 | 217,680 | 210,592 | 7,088 | ||||||||||||||||||||||||||||
Operating Income (loss) | $ | 105,154 | $ | 110,554 | $ | (5,400 | ) | $ | 8,520 | $ | (354 | ) | $ | (7,962 | ) | $ | (11,483 | ) | $ | 105,712 | $ | 98,717 | $ | 6,995 | |||||||||||||||
Number of properties | 223 | 223 | 9 | 232 | 232 | ||||||||||||||||||||||||||||||||||
Square feet | 22,207 | 22,207 | 3,014 | 25,221 | 25,221 | ||||||||||||||||||||||||||||||||||
Core Occupancy % (b) | 86.6 | % | 86.5 | % | 85.9 | % | 86.5 | % | |||||||||||||||||||||||||||||||
Other Income (Expense): | |||||||||||||||||||||||||||||||||||||||
Interest income | 1,813 | 3,222 | (1,409 | ) | |||||||||||||||||||||||||||||||||||
Historic tax credit transaction income | 12,026 | — | 12,026 | ||||||||||||||||||||||||||||||||||||
Interest expense | (131,405 | ) | (132,640 | ) | 1,235 | ||||||||||||||||||||||||||||||||||
Interest expense — Deferred financing costs | (4,991 | ) | (3,770 | ) | (1,221 | ) | |||||||||||||||||||||||||||||||||
Equity in income of real estate ventures | 3,775 | 5,305 | (1,530 | ) | |||||||||||||||||||||||||||||||||||
Net gain on sale of interests in real estate | 2,791 | — | 2,791 | ||||||||||||||||||||||||||||||||||||
Net gain on sale of undepreciated real estate | 45 | — | 45 | ||||||||||||||||||||||||||||||||||||
Loss on real estate venture formation | (222 | ) | — | (222 | ) | ||||||||||||||||||||||||||||||||||
Loss on early extinguishment of debt | (2,776 | ) | (2,110 | ) | (666 | ) | |||||||||||||||||||||||||||||||||
Loss from continuing operations | $ | (13,232 | ) | $ | (31,276 | ) | $ | 18,044 | |||||||||||||||||||||||||||||||
Income from discontinued operations | 8,517 | 13,670 | (5,153 | ) | |||||||||||||||||||||||||||||||||||
Net Loss | $ | (4,715 | ) | $ | (17,606 | ) | $ | 12,891 | |||||||||||||||||||||||||||||||
Loss per common share | $ | (0.10 | ) | $ | (0.19 | ) | $ | 0.09 | |||||||||||||||||||||||||||||||
EXPLANATORY NOTES
(a) | Represents certain revenues and expenses at the corporate level as well as various intercompany costs that are eliminated in consolidation and third-party management fees. This also includes two properties that were contributed to an unconsolidated real estate venture in which the Company has a 50% ownership interest. |
(b) | Pertains to properties that are part of our core portfolio (i.e. not under development, redevelopment, or re-entitlement). |
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Total Revenue
Cash rents from the Total Portfolio increased by $13.5 million from 2010 to 2011, primarily reflecting:
• | an increase of $30.1 million in rental income due to our acquisition of Three Logan Square, the completion and placement in service of the IRS Philadelphia Campus and Cira South Garage during the third quarter of 2010, the acquisition of Overlook I and II during the first quarter of 2011, the placement in service of the Juniper Street Parking Garage during the second quarter of 2011, and the acquisition of 3020 Market Street during the third quarter of 2011; and |
• | an offsetting decrease of $16.6 million of rental income at the same store and corporate-level portfolio's as a result of declining renewal rates and the commencement of leases with free rent periods during 2011 compared to 2010. |
Straight-line rents increased by $6.5 million due to the aforementioned properties that were acquired and placed in service in 2011 and also due to leases that commenced during 2011 with free rent periods at our same store properties.
Tenant reimbursements increased by $4.1 million from 2010 to 2011 primarily due to $6.6 million of additional reimbursements from the aforementioned properties that were acquired and placed in service during 2011. These increases were offset by a $2.5 million decrease in tenant reimbursements in our same store portfolio resulting from decreases in property operating expenses at our same store portfolio. These changes in tenant reimbursements are consistent with the changes in property operating expenses and real estate taxes.
Termination fees at the Total Portfolio decreased by $2.6 million from 2010 to 2011 mainly due to timing and volume of tenant move-outs during 2011.
Other Income
Other Income increased by $1.1 million mainly as a result of the expiration of a third party purchase option on a parcel of land in the Pennsylvania suburbs that was entered into during March of 2007. Upon expiration of this purchase option, we recognized the value of the option as other income.
Property Operating Expenses
Property operating expenses at the Total Portfolio increased by $4.1 million mainly due to $11.6 million of additional expenses from the aforementioned properties that we acquired and placed in service during 2011. This increase was offset by the decreases in repairs and maintenance costs of $4.5 million, utilities costs of $1.2 million, and bad debt expense of $2.0 million during 2011 compared to 2010 within our same store portfolio. The reduction in repairs and maintenance costs are a result of contract negotiations that took place across our portfolio during 2011. The reduction in utilities costs reflects our entry in 2011 into two year contracts at lower prices within our Pennsylvania and New Jersey portfolios. Bad debt expense decreased as a result of fewer early lease terminations during 2011 compared to 2010 with such terminations requiring the write off to bad debt expense of any remaining straight line receivable balances.
Real Estate Taxes
Real estate taxes increased by $2.7 million mainly due to additional real estate taxes from the aforementioned properties that we acquired and placed into service during 2011.
General & Administrative Expenses
General and Administrative Expense increased by $1.3 million primarily due to:
• | an increase of $0.8 million in benefits claims expense as a result of more insurance claims being made compared to the prior year; and |
• | a decrease in capitalized salaries of $0.8 million due to less construction activity compared to the prior year |
These increases were offset by a decrease of $0.3 million in various corporate level expenses during 2011, none of which were individually significant.
Depreciation and Amortization
Depreciation and amortization increased by $7.1 million from 2010 to 2011, primarily due to the additional $15.3 million of depreciation and amortization expense from the aforementioned properties that we acquired and placed into service during 2011. We also recorded $4.7 million of an out of period depreciation and amortization expense adjustment during the second quarter of
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2011 for intangible assets representing tenant relationships and in-place leases that should have been written off in prior years (see Note 2 to the consolidated financial statements). These increases were offset by $12.9 million in expense decreases related to asset write-offs related to early move-outs and fully amortized assets in 2010, without comparable expenses in 2011.
Interest Income
Interest income decreased by $1.4 million primarily due to our receipt during the third quarter of 2010 of the repayment of the $40.0 million purchase money mortgage note that we extended to the buyer of our properties in Oakland, California in October 2008.
Historic Tax Credit Transaction Income
During the third quarter of 2011, we recognized $12.0 million of income related to our historic tax credit financing. We expect to recognize approximately the same amount of income each year over the remaining four year tax credit recapture period as defined in the Internal Revenue Code. See Note 16 to the consolidated financial statements for additional details of our historic tax credit transaction.
Interest Expense
The decrease in interest expense of $1.2 million is primarily due to the following:
• | decrease of $10.6 million related to our $300.0 million 5.625% Guaranteed Notes that matured during December of 2010; |
• | decrease of $7.5 million as a result of our prior year hedges maturing during the fourth quarter of 2010; |
• | decrease of $2.0 million related to the repurchase of our $345.0 million 3.875% Guaranteed exchangeable notes; |
• | decrease of $1.1 million in mortgage interest expense which is directly related to the $199.8 million decrease in mortgage indebtedness during the year ended December 31, 2011; and, |
• | decrease of $1.3 million resulting from our buybacks of unsecured notes during 2011. The details of various repurchases made during 2011 are noted in "Loss on early extinguishment of debt" section below. |
The decrease of $22.5 million in interest expense described above was offset by the following increases in interest expense during 2011 compared to 2010:
• | increase of $12.3 million related our issuance in April 2011 of $325.0 million 4.950% Guaranteed Notes due 2018; |
• | decrease of $8.4 million of capitalized interest expense as a result of lower development activity during 2011; |
• | increase of $0.3 million related to the Historic Tax Credit interest accretion. We accrete interest related to the preferred return due to our partner in the Philadelphia IRS Campus transaction; and, |
• | increase of $0.3 million of interest on our Prior Credit Facility due to a higher outstanding balance during 2011 compared to 2010. |
Interest Expense - Amortization of Deferred Financing Costs
The increase in amortization of deferred financing costs of $1.2 million is mainly attributable to the acceleration of $0.8 million of deferred financing costs in connection with the mortgage debt prepayments we made during 2011. The remainder of the increase is due to the closing of the forward financing on the IRS Philadelphia Campus and Cira South Garage during the third quarter of 2010.
Equity in Income of Real Estate Ventures
The decrease in equity in income of real estate ventures of $1.5 million is primarily due to lower net income at the real estate venture properties during 2011 compared to 2010 and the recognition of $0.5 million of acquisition costs related to a real estate venture formed during the fourth quarter of 2011. These decreases were offset by $0.6 million of income from the sale of a building to one of the unconsolidated real estate ventures and by $0.5 million of preferred returns from the two unconsolidated real estate ventures in which we acquired a 25% interest during the third quarter of 2010 (see Note 4 of the notes to the consolidated financial statements for details of these two transactions).
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Net Gain on Sales of Interests in Real Estate
During the year ended December 31, 2011, we recognized a $2.8 million net gain upon the sale of the remaining 11% ownership interest in three properties that we partially sold to one of our unconsolidated Real Estate Ventures in December 2007. We had retained an 11% equity interest in these properties subject to a put/call at fixed prices for a period of three years from the time of the sale. In January 2011, we exercised the put/call which then transferred full ownership in the three properties to the Real Estate Venture. Accordingly, our direct continuing involvement through our 11% interest in the properties ceased as a result of the transfer of the ownership interest.
Loss on Early Extinguishment of Debt
During 2011, we repurchased (i) $23.7 million of our 5.750% Guaranteed Notes due 2012 and (ii) $22.7 million of our 7.500% Guaranteed Notes due 2015, which resulted in a net loss on early extinguishment of debt of $3.3 million. The loss was offset by the write-off of the unamortized fixed-rate debt premium of $0.5 million related to the prepayment of two of our mortgage loans during 2011.
During 2010, we repurchased (i) $68.1 million of our $345.0 million 3.875% Exchangeable Notes, (ii) $1.9 million of our $300.0 million 5.625% Guaranteed Notes due 2010 and (iii) $12.6 million of our $300.0 million 5.750% Guaranteed Notes due 2012 which resulted in a net loss on early extinguishment of debt of $2.2 million. The net loss was offset by a gain from the write-off of the remaining premium on the Plymouth Meeting Executive Campus note at the time of pay-off of $0.1 million resulting in an aggregate net loss on early extinguishment of debt of $2.1 million.
Discontinued Operations
During 2011, we sold three properties in Marlton, New Jersey, and one property in Exton, PA. These properties had total revenues of $5.0 million, operating expense of $2.3 million and $1.4 million of depreciation and amortization expense. We recognized a gain on sale of these properties of $7.3 million.
The amounts for the year ended December 31, 2010 are reclassified to include the operations of the properties sold during the twelve months period ended December 31, 2011, as well as all properties that were sold through the year ended December 31, 2010. Therefore, the discontinued operations amount for the twelve-month period ended December 31, 2010 includes total revenue of $13.3 million, operating expenses of $6.4 million and depreciation and amortization expense of $4.2 million.
Net Loss
Net loss decreased by $12.9 million from the twelve-month period ended December 31, 2010 as a result of the factors described above. Net income is significantly impacted by depreciation of operating properties and amortization of acquired intangibles. These non-cash charges do not directly affect our ability to pay dividends. Such charges can be expected to continue until lease intangibles are fully amortized. These intangibles are amortizing over the related lease terms or estimated duration of the tenant relationship.
Loss per Common Share
Loss per share was $0.10 for the twelve-month period ended December 31, 2011 as compared to loss per share of $0.19 for the twelve-month period ended December 31, 2010 as a result of the factors described above and an increase in the average number of common shares outstanding. The increase in the average number of common shares outstanding is primarily due to issuances pursuant to the Offering Program in 2011 and the redemption of 7.1 million of redeemable limited partnership units in exchange for our common shares.
LIQUIDITY AND CAPITAL RESOURCES OF THE PARENT COMPANY
The Parent Company conducts its business through the Operating Partnership and the Parent Company's only material asset is its ownership of interests in the Operating Partnership. The Parent Company, other than acting as the sole general partner of the Operating Partnership, issues equity from time to time, the proceeds of which it contributes to the Operating Partnership in exchange for additional interests in the Operating Partnership, and guarantees debt obligations of the Operating Partnership. The Parent Company’s principal funding requirement is the payment of dividends on its common shares and preferred shares. The Parent Company’s source of funding for its dividend payments and other obligations is the distributions it receives from the Operating Partnership.
As of December 31, 2012, the Parent Company owned a 98.7% interest in the Operating Partnership. The remaining interest of approximately 1.3% pertains to common limited partnership interests owned by non-affiliated investors who contributed property
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to the Operating Partnership in exchange for their interests. As the sole general partner of the Operating Partnership, the Parent Company has full and complete responsibility for the Operating Partnership’s day-to-day operations and management.
As noted above, the Parent Company’s only source of capital (other than proceeds of equity issuances which the Parent Company contributes to the Operating Partnership) is distributions it receives from the Operating Partnership. The Parent Company believes that the Operating Partnership’s sources of working capital, particularly its cash flows from operations and borrowings available under its Credit Facility, are adequate for the Operating Partnership to make its distributions to the Parent Company, which in turn enables the Parent Company to make dividend payments to its shareholders.
The Parent Company’s ability to sell common shares and preferred shares is dependent on, among other things, general market conditions for REITs, market perceptions about the Company as a whole and the current trading price of the Parent Company's shares. The Parent Company regularly analyzes which source of capital is most advantageous to it at any particular point in time.
In March 2010, the Parent Company commenced a continuous equity offering program (the “Offering Program”), under which it may sell, in at-the-market offerings, up to an aggregate amount of 15,000,000 common shares until March 10, 2013. The Parent Company may sell common shares in amounts and at times to be determined by the Parent Company. Actual sales will depend on a variety of factors to be determined by the Parent Company, including market conditions, the trading price of its common shares and determinations by the Parent Company of the appropriate sources of funding. In conjunction with the Offering Program, the Parent Company engages sales agents who receive compensation, in aggregate, of up to 2% of the gross sales price per share sold. During the twelve months ended December 31, 2012, the Parent Company did not sell any shares under the Offering Program. From inception of the Offering Program through December 31, 2012, the Parent Company has sold 6,421,553 shares under the program at an average sales price of $12.50 per share, resulting in 8,578,447 remaining shares available for sale. The Parent Company contributed the net proceeds from the sales to the Operating Partnership, which the Operating Partnership in turn used to repay its debt and for general corporate purposes. The Parent Company is currently evaluating an extension of the Offering Program subsequent to its scheduled expiration date.
On April 11, 2012, the Parent Company closed on a registered public offering of 4,000,000 shares of 6.90% Series E Preferred Shares at a price to the public of $25.00 per share. Dividends on the Series E Preferred Shares are payable quarterly in arrears on or about the 15th day of each January, April, July, and October, commencing July 15, 2012, at a rate per annum of 6.90% of the liquidation value of $25.00 per share (equivalent to $1.725 per share per annum). Net proceeds from this offering totaled approximately $96.3 million, after deducting the underwriting discount and our related expenses.
On May 3, 2012, the Parent Company used a portion of the net proceeds from the sale of Series E Preferred Shares to redeem all 2,000,000 shares of its then outstanding 7.50% Series C Preferred Shares at a redemption price of $50.0 million plus $0.2 million of dividends accrued through the redemption date.
On December 28, 2012 the Parent Company used available cash balances to redeem all 2,300,000 shares of its then outstanding 7.375% Series D Cumulative Redeemable Preferred Shares at a redemption price of $57.5 million plus $0.8 million of dividends accrued through the redemption date.
The Company recognized $4.1 million of redemption costs ($2.1 million and $2.0 million related to the Series C and Series D redemptions, respectively) associated with the total aforementioned redemptions as a reduction in net earnings to arrive at net income applicable to common shares. These costs are shown within the Company's consolidated statements of operations as "Preferred share redemption charge". There were no comparable charges for the prior year.
On December 11, 2012, the Parent Company declared a distribution of $0.15 per common share, totaling $21.6 million, which it paid on January 18, 2013 to its shareholders of record as of January 4, 2013. In addition, the Parent Company declared distributions on its 6.90% Series E Preferred Shares to holders of record as of December 30, 2012, and paid the declared distributions on January 15, 2013 in the aggregate amount of $1.7 million.
The Parent Company also maintains a share repurchase program under which its Board of Trustees has authorized the Parent Company to repurchase its common shares from time to time. As of December 31, 2012, there were approximately 0.5 million shares remaining to be repurchased under this program. The Parent Company’s Board of Trustees has not limited the duration of the program and it may be terminated, or replenished by the Board of Trustees, at any time.
Together with the Operating Partnership, the Parent Company maintains a shelf registration statement that has registered the offering and sale of common shares, preferred shares, depositary shares, warrants and unsecured debt securities. Subject to the Company’s ongoing compliance with securities laws, and if warranted by market conditions, the Parent Company and the Operating Partnership may offer and sell equity and debt securities from time to time under the shelf registration statement.
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The Parent Company unconditionally guarantees the Operating Partnership’s secured and unsecured obligations, which, as of December 31, 2012, amounted to $443.9 million and $2,028.0 million, respectively. If the Operating Partnership fails to comply with its debt requirements, the Parent Company will be required to fulfill the Operating Partnership’s commitments under such guarantees. However, the Parent Company's only material asset is its interest in the Operating Partnership. As of December 31, 2012, the Operating Partnership was in compliance with all of its debt covenant and requirement obligations.
In order to maintain its qualification as a REIT, the Parent Company is required to, among other things, pay dividends to its shareholders of at least 90% of its REIT taxable income. The Parent Company has historically satisfied this requirement.
Overall, and as discussed above, the liquidity of the Parent Company is dependent on the Operating Partnership’s distributions to the Parent Company and thus is dependent on the Operating Partnership’s access to sources of capital.
LIQUIDITY AND CAPITAL RESOURCES OF THE OPERATING PARTNERSHIP
General
The Operating Partnership’s principal liquidity needs for the next twelve months are as follows:
• | fund normal recurring expenses, |
• | fund capital expenditures, including capital and tenant improvements and leasing costs, |
• | fund principal payments on our secured debt, |
• | fund current development and redevelopment costs, and |
• | fund distributions to the Parent Company. |
The Operating Partnership believes that with uncertain economic conditions, vacancy rates may increase, effective rental rates on new and renewed leases may decrease and tenant installation costs, including concessions, may increase in most or all of its markets throughout 2013 and possibly beyond. As a result, the Operating Partnership’s revenues and cash flows could be insufficient to cover operating expenses, including increased tenant installation costs over the short-term. If this situation were to occur, the Operating Partnership expects that it would finance cash deficits through borrowings under the New Credit Facility and other sources of debt and equity financings.
The Operating Partnership believes that its liquidity needs will be satisfied through available cash balances and cash flows generated by operations, financing activities and selective property sales. Rental revenue, expense recoveries from tenants, and other income from operations are its principal sources of cash that it uses to pay operating expenses, debt service, recurring capital expenditures and the minimum distributions required to maintain its REIT qualification. The Operating Partnership seeks to increase cash flows from its properties by maintaining quality standards for its properties that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. The Operating Partnership’s revenue also includes third-party fees generated by its property management, leasing, development and construction businesses. The Operating Partnership believes that its revenue, together with proceeds from property sales and debt financings, will continue to provide funds for its short-term liquidity needs. However, material changes in its operating or financing activities may adversely affect its net cash flows. Such changes, in turn, would adversely affect its ability to fund distributions to the Parent Company, debt service payments and tenant improvements. In addition, a material adverse change in cash provided by operations would affect the financial performance covenants under its Credit Facility, unsecured term loans and unsecured notes, and the availability of borrowings under the Credit Facility.
Financial markets have experienced unusual volatility and uncertainty. The Operating Partnership’s ability to fund development projects, as well as its ability to repay or refinance debt maturities could be adversely affected by its inability to secure financing at reasonable terms beyond those already completed. It is possible, in these unusual and uncertain times that one or more lenders in its Credit Facility could fail to fund a borrowing request. Such an event could adversely affect its ability to access funds from its Credit Facility when needed.
The Operating Partnership’s liquidity management remains a priority. The Operating Partnership regularly pursues new financing opportunities to ensure an appropriate balance sheet position. As a result of these dedicated efforts, the Operating Partnership is comfortable with its ability to meet future debt maturities and development or property acquisition funding needs. The Operating Partnership believes that its current balance sheet is in an adequate position at the date of this filing, despite the volatility in the credit and financial markets.
The Operating Partnership uses multiple financing sources to fund its long-term capital needs. When needed, it will use borrowings under its New Credit Facility for general business purposes, including the acquisition, development and redevelopment of properties
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and the repayment of other debt. It will also consider other properties within its portfolio as necessary, where it may be in its best interest to obtain a secured mortgage.
The Operating Partnership’s ability to incur additional debt is dependent upon a number of factors, including its credit ratings, the value of its unencumbered assets, its degree of leverage and borrowing restrictions imposed by its current lenders. If more than one rating agency were to downgrade its credit rating, the Operating Partnership's access to capital in the unsecured debt market would be more limited and the interest rate under its New Credit Facility and the New Term Loans would increase.
The ability of the Parent Company and the Operating Partnership to sell their equity securities is dependent on, among other things, general market conditions for REITs, market perceptions about the Company and the current trading price of the Parent Company’s shares. The Parent Company contributes the proceeds it receives from its equity issuances to the Operating Partnership in exchange for partnership units of the Operating Partnership in accordance with the Operating Partnership’s partnership agreement. The Operating Partnership uses the net proceeds from the sales contributed by the Parent Company to repay its debt and for general corporate purposes. The Operating Partnership, from time to time, also issues its own partnership units as consideration for property acquisitions and developments.
The Operating Partnership will also consider sales of selected Properties as another source of managing its liquidity. Asset sales during 2011 and through 2012 have been a source of cash. During 2012, the Parent Company sold 14 properties containing 0.9 million in net rentable square feet for net cash proceeds of $171.9 million. During 2012, the Parent Company also contributed $26.1 million to fund the acquisition of three office buildings, containing 0.5 million in net rentable square feet, to an unconsolidated joint venture in Silver Spring, Maryland, as well as a 20-acre parcel of land to an unconsolidated joint venture in Plymouth Meeting, Pennsylvania, receiving a 50% interest in each of the respective ventures. The Operating Partnership has used proceeds from asset sales to repay existing indebtedness, provide capital for its development activities and strengthen its financial condition. There is no guarantee that it will be able to raise similar or even lesser amounts of capital from future asset sales.
Cash Flows
The following discussion of the Operating Partnership’s cash flows is based on the consolidated statement of cash flows and is not meant to be a comprehensive discussion of the changes in our cash flows for the periods presented.
As of December 31, 2012 and 2011, the Operating Partnership maintained cash and cash equivalents of $1.5 million and $0.4 million, respectively. The following are the changes in cash flow from its activities for the nine-month periods ended September 30 (in thousands):
Activity | 2012 | 2011 | 2010 | |||||||||
Operating | $ | 157,283 | $ | 178,749 | $ | 185,127 | ||||||
Investing | (73,037 | ) | (47,665 | ) | (171,936 | ) | ||||||
Financing | (83,107 | ) | (147,239 | ) | 1,807 | |||||||
Net cash flows | $ | 1,139 | $ | (16,155 | ) | $ | 14,998 | |||||
The Operating Partnership’s principal source of cash flows is from the operation of its properties. The Operating Partnership does not restate its cash flow for discontinued operations.
The net decrease of $21.5 million in cash from operating activities of the Operating Partnership during the year-ended December 31, 2012 compared to the year-ended December 31, 2011 is primarily attributable to the following:
• | a decrease in the number of operating properties due to dispositions. The Operating Partnership sold a total of 14 properties during 2012. |
• | the timing of cash receipts and cash expenditures in the normal course of operations. |
The net increase of $25.4 million in cash used in investing activities of the Operating Partnership during the year-ended December 31, 2012 compared to the year-ended December 31, 2011 is primarily attributable to the following:
• | an increase of $60.1 million of investments in unconsolidated Real Estate Ventures during the year-ended December 31, 2012, primarily reflecting $26.1 million that was contributed to fund our share of an acquisition of three office properties by the Brandywine AI venture, $24.2 million that was contributed to two real estate ventures to repay our share of their mortgage indebtedness, and $9.7 million that was contributed to a real estate venture to fund our share of its operations; |
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• | a increase of $36.9 million in funds used to acquire operating properties, mainly attributable to the Operating Partnership acquiring the 660 West Germantown Pike development, 1900 Market Street, and 7000 West at Lantana during 2012, compared to the acquisition of Overlook I and II during 2011; |
• | a decrease in cash distributions from unconsolidated Real Estate Ventures of $5.2 million during the year-ended December 31, 2012 compared to the year-ended December 31, 2011; |
• | a decrease in advances for purchase of tenant assets, net of repayments of $1.1 million during the year-ended December 31, 2012 when compared to the year-ended December 31, 2011, and; |
• | a decrease of $0.8 million in loan proceeds received from an unconsolidated real estate venture partner. |
The increase in cash used in investing activities was partially offset by the following transactions:
• | a decrease in capital expenditures for tenant and building improvements and leasing commissions by $39.2 million during the year-ended December 31, 2012 compared to the year-ended December 31, 2011; |
• | an increase of $23.4 million related to proceeds received in connection with the repayment of two mortgage notes receivable during the year-ended December 31, 2012. There were no comparable mortgage notes receivable repayments during the year-ended December 31, 2011; |
• | an increase of $15.0 million of net proceeds from 14 property sales during 2012, compared to five property sales during 2011 (see Note 3 of the notes to the consolidated financial statements for details), and; |
• | a decrease of $1.1 million related to a loan provided to an unconsolidated real estate venture partner during 2011. There were no comparable loans provided during 2012. |
The net increase of $64.1 million in cash from financing activities of the Operating Partnership during the year-ended December 31, 2012 compared to the year-ended December 31, 2011 is mainly due to the following:
• | an increase in proceeds from New Term Loans of $600.0 million during the year-ended December 31, 2012 with no comparable term loan funding during the year-ended December 31, 2011; |
• | a decrease in repayments of the Prior Credit Facility and mortgage notes payable of $469.8 million during the year-ended December 31, 2012 compared to the year-ended December 31, 2011; |
• | an increase in net proceeds received from the issuance of common and preferred shares of the Parent Company of $88.3 million during the year-ended December 31, 2012 compared to the year-ended December 31, 2011; |
• | deferred financing obligations of $0.9 million during the year-ended December 31, 2012, with no comparable amount during the year-ended December 31, 2011; |
• | a increase in the exercise of stock options of $0.6 million for the year-ended December 31, 2012 compared to the year-ended December 31, 2011, and; |
• | an increase of the net settlement of hedge transactions amounting to $0.7 million during the year-ended December 31, 2012 compared to the year-ended December 31, 2011. |
The net increase in cash from financing activities described above was offset by the following:
• | a decrease in proceeds from the New Credit Facility and unsecured notes of $688.8 million during the year-ended December 31, 2012 compared to the year-ended December 31, 2011; |
• | an increase in the repayment of unsecured notes of $232.7 million during the year-ended December 31, 2012 compared to the year-ended December 31, 2011; |
• | the redemption of our 7.50% Series C Preferred Shares and 7.375% Series D Preferred Shares in the amount of $108.5 million during the year-ended December 31, 2012, with no comparable charges for the year-ended December 31, 2011; |
• | the repayment of an unsecured term loan of $45.0 million during 2012; |
• | the redemption of partnership units of $9.7 million during 2012, with no comparable redemptions for 2011; |
• | an increase in debt financing costs of $5.9 million during the year-ended December 31, 2012 compared to the year-ended December 31, 2011, and; |
• | an increase in distributions paid by the Parent Company to its shareholders and on non-controlling interests from $91.9 million during the year-ended December 31, 2011 to $97.5 million during the year-ended December 31, 2012. |
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Capitalization
Indebtedness
The Operating Partnership is the issuer of our unsecured notes and the Parent Company has fully and unconditionally guaranteed the payment of principal and interest on the notes. During the year-ended December 31, 2012, we repurchased $165.0 million of our outstanding unsecured notes in a series of transactions which are summarized in the table below (in thousands):
Notes | Repurchase Amount | Principal | Loss | Deferred Financing Amortization | |||||||||||
2012 5.750% Notes | $ | 309 | $ | 301 | $ | 2 | $ | — | |||||||
2014 5.400% Notes | 4,630 | 4,302 | 264 | 8 | |||||||||||
2015 7.500% Notes | 69,549 | 60,794 | 8,712 | 183 | |||||||||||
2016 6.000% Notes | 113,942 | 99,571 | 12,961 | 260 | |||||||||||
$ | 188,430 | $ | 164,968 | $ | 21,939 | $ | 451 | ||||||||
As of December 31, 2012, the Operating Partnership had approximately $2.5 billion of outstanding indebtedness. The following table summarizes the Operating Partnership’s indebtedness under its mortgage notes payable, its unsecured notes and its Credit Facility (excluding applicable premiums/discounts) at December 31, 2012 and December 31, 2011:
December 31, 2012 | December 31, 2011 | ||||||
(dollars in thousands) | |||||||
Balance: | |||||||
Fixed rate | $ | 2,302,895 | $ | 2,061,728 | |||
Variable rate — unhedged | 169,000 | 338,774 | |||||
Total | $ | 2,471,895 | $ | 2,400,502 | |||
Percent of Total Debt: | |||||||
Fixed rate | 93.2 | % | 85.9 | % | |||
Variable rate — unhedged | 6.8 | % | 14.1 | % | |||
Total | 100 | % | 100 | % | |||
Weighted-average interest rate at period end: | |||||||
Fixed rate | 5.3 | % | 6.0 | % | |||
Variable rate — unhedged | 1.9 | % | 1.1 | % | |||
Total | 5.1 | % | 5.3 | % | |||
The variable rate debt shown above generally bear interest based on various spreads over a LIBOR term selected by the Operating Partnership.
The Operating Partnership will use New Credit Facility borrowings for general business purposes, including the acquisition, development and redevelopment of properties and the repayment of other debt. It has the option to increase the maximum borrowings under the New Credit Facility to $200.0 million subject to the absence of any defaults and its ability to obtain additional commitments from its existing or new lenders. The New Credit Facility requires the maintenance of financial covenants, including ratios related to minimum net worth, debt to total capitalization and fixed charge coverage and customary non-financial covenants. The Operating Partnership is in compliance with all covenants as of December 31, 2012.
The indenture under which the Operating Partnership issued its unsecured notes contains financial covenants, including (i) a leverage ratio not to exceed 60%, (ii) a secured debt leverage ratio not to exceed 40%, (iii) a debt service coverage ratio of greater than 1.5 to 1.0 and (iv) an unencumbered asset value of not less than 150% of unsecured debt. The Operating Partnership is in compliance with all covenants as of December 31, 2012.
The Operating Partnership has mortgage loans that are collateralized by certain of its Properties. Payments on mortgage loans are generally due in monthly installments of principal and interest, or interest only. The Operating Partnership intends to refinance or repay its mortgage loans as they mature through the use of proceeds from selective Property sales and secured or unsecured borrowings. However, in the current and expected future economic environment one or more of these sources may not be available on attractive terms or at all.
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The charter documents of the Parent Company and Operating Partnership do not limit the amount or form of indebtedness that the Operating Partnership may incur, and its policies on debt incurrence are solely within the discretion of the Parent Company’s Board of Trustees, subject to the financial covenants in the Credit Facility, indenture and other credit agreements.
On February 1, 2012, the Parent Company and the Operating Partnership closed on a new $600.0 million four-year unsecured credit facility and three unsecured term loans in the aggregate amount of $600.0 million, consisting of a $150.0 million three-year loan, a $250.0 million four-year loan and a $200.0 million seven-year loan. The new credit facility and term loans are referred to earlier in this Form 10-K as our "New Credit Facility" and "New Term Loans", respectively, and the Parent Company used the proceeds from the initial advances under the New Term Loans to repay all balances outstanding under, and concurrently terminate, the Prior Credit Facility and Prior Term Loan. The New Credit Facility has terms that are generally comparable to those under the Prior Revolving Credit Facility.
On December 18, 2012, the Operating Partnership closed a registered offering of $250.0 million in aggregate principal amount of its 3.95% Guaranteed Notes due 2023. The Operating Partnership used a portion of the net proceeds from this offering, which amounted to $246.1 million after deducting underwriting discounts and offering expenses, to fund its repurchase, through a tender offer, of 7.50% Guaranteed Notes due May 15, 2015 and 6.00% Guaranteed Notes due April 1, 2016, as well as for general corporate purposes.
On December 27, 2012, in connection with the aforementioned offering, the Operating Partnership repurchased $50.3 million of our 7.50% Guaranteed Notes due 2015, and $99.6 million of our 6.00% Guaranteed Notes due 2016. The Operating Partnership's tender offer resulted in a $20.4 million loss on early extinguishment of debt as of December 31, 2012. The Operating Partnership funded the total tender offer consideration of $171.5 million from net proceeds of the registered offering, as well as available cash balances.
On December 31, 2012, the Parent Company and the Operating Partnership repaid the entire $150.0 million remaining fixed portion of the four-year term loan due February 1, 2016. In connection with this repayment, the Parent Company and the Operating Partnership also incurred a $3.0 million charge on the termination of associated interest rate swap contracts, as reflected in the Company's consolidated statements of operations. Please refer to Footnote 9 of the notes to the consolidated financial statements for further information.
As of December 31, 2012, the Operating Partnership had guaranteed repayment of approximately $0.6 million of loans on behalf of one Real Estate Venture. The Operating Partnership also provides customary environmental indemnities and completion guarantees in connection with construction and permanent financing both for its own account and on behalf of certain of the Real Estate Ventures.
Equity
On April 11, 2012, the Operating Partnership issued 6.90% Series E-Linked Preferred Mirror Units to the Parent Company, in connection with the previously mentioned offering of Series E Preferred Shares. On May 3, 2012, the Operating Partnership also redeemed all of its Series D Preferred Mirror Units as a result of the aforementioned redemption of Series C Preferred Shares.
On December 28, 2012, the Operating Partnership redeemed all of its Series E Preferred Mirror Units as a result of the redemption of Series D Preferred Shares.
In accordance with GAAP, the Operating Partnership also recognized $4.1 million of redemption costs ($2.1 million and $2.0 million related to the Series D and Series E redemptions, respectively) associated with the total aforementioned redemptions as a reduction in net earnings to arrive at net income applicable to common units. These costs are listed above and shown within the Operating Partnership's consolidated statements of operations as "Preferred unit redemption charge". There were no comparable charges for the prior year.
On December 17, 2012, the Operating Partnership redeemed 811,984 limited partnership units from the estate of a former unit holder for a total cash consideration of $9.7 million, based on a calculated price of $12.00 per unit on the date of redemption.
On December 11, 2012, the Operating Partnership declared a distribution of $0.15 per common partnership unit, totaling $21.6 million, which was paid on January 18, 2013 to unitholders of record as of January 4, 2013.
On December 11, 2012, the Operating Partnership declared distributions on its Series E-Linked Preferred Mirror Units to holders of record as of December 30, 2012. These units are entitled to a preferential return of 6.90%. Distributions paid on January 15, 2013 to holders of Series E-Linked Preferred Mirror Units totaled $1.7 million.
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During the twelve months ended December 31, 2012, the Parent Company did not sell any shares under the Offering Program, and accordingly, the Operating Partnership did not issue any common partnership units in connection with the Parent Company's Offering Program. During the twelve months ended December 31, 2012, the Parent Company did not repurchase any shares under its share repurchase program, and accordingly, the Operating Partnership did not repurchase any units in connection with the Parent Company's share repurchase program. From the inception of the Offering Program in March 2010 through December 31, 2012, the Operating Partnership has issued an aggregate of 6,421,553 common partnership units to the Parent Company. The Operating Partnership has used the net proceeds from such sales to repay balances on its unsecured revolving Credit Facility and for general corporate purposes.
Together with the Operating Partnership, the Parent Company maintains a shelf registration statement that registered common shares, preferred shares, depositary shares, warrants and unsecured debt securities. Subject to the Company’s ongoing compliance with securities laws, if warranted by market conditions, the Parent Company and the Operating Partnership may offer and sell equity and debt securities from time to time under the shelf registration statement.
Short- and Long-Term Liquidity
The Operating Partnership believes that its available cash balances and cash flow from operations are adequate to fund its short-term liquidity requirements, including principal payments under its debt obligations. Cash flow from operations is generated primarily from rental revenues and operating expense reimbursements from tenants and management services income from providing services to third parties. The Operating Partnership intends to use these funds to meet short-term liquidity needs, which are to fund operating expenses, recurring capital expenditures, tenant allowances, leasing commissions, interest expense and the minimum distributions required to maintain the Parent Company’s REIT qualification under the Internal Revenue Code. As of December 31, 2012, the Operating Partnership had $2,028.0 million of total unsecured debt and $443.9 million of mortgage debt with $11.2 million of mortgage principal payments scheduled to be repaid through December 31, 2013. The Company closed on the New Credit Facility and New Term Loans on February 1, 2012 and used the initial advances under the New Term Loans to repay all balances outstanding under, and concurrently terminate, its Prior Credit Facility and the Prior Term Loans, both of which were scheduled to mature on June 29, 2012.
During 2012, the Operating Partnership sold its entire remaining portfolio of available-for-sale securities, all purchased during 2012 and totaling $106.2 million, recognizing a $0.2 million loss associated with the sale. This transaction was completed after determining that a strategy of liquidation was in the Operating Partnership's best interest.
The Operating Partnership expects to meet its long-term liquidity requirements, such as for property acquisitions, development, investments in real estate ventures, scheduled debt maturities, major renovations, expansions and other significant capital improvements, through cash from operations, borrowings under the New Credit Facility, additional secured and unsecured indebtedness, the issuance of equity securities, contributions from joint venture investors and proceeds from asset dispositions.
Inflation
A majority of the Operating Partnership’s leases provide for tenant reimbursement of real estate taxes and operating expenses either on a triple net basis or over a base amount. In addition, many of its office leases provide for fixed base rent increases. The Operating Partnership believes that inflationary increases in expenses will be partially offset by expense reimbursement and contractual rent increases.
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Commitments and Contingencies
The following table outlines the timing of payment requirements related to the Operating Partnership’s contractual commitments as of December 31, 2012:
Payments by Period (in thousands) | |||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
Mortgage notes payable (a) | $ | 443,942 | $ | 11,237 | $ | 111,976 | $ | 126,932 | $ | 193,797 | |||||||||
Revolving credit facility | 69,000 | 69,000 | — | — | — | ||||||||||||||
Unsecured term loan | 450,000 | — | 250,000 | — | 200,000 | ||||||||||||||
Unsecured debt (a) | 1,508,953 | — | 404,914 | 775,429 | 328,610 | ||||||||||||||
Ground leases (b) | 297,798 | 1,818 | 5,545 | 5,727 | 284,708 | ||||||||||||||
Development contracts (c) | 1,147 | 1,147 | — | — | — | ||||||||||||||
Interest expense (d) | 555,807 | 104,985 | 183,117 | 122,688 | 145,017 | ||||||||||||||
Other liabilities (e) | 12,674 | — | — | — | 12,674 | ||||||||||||||
$ | 3,339,321 | $ | 188,187 | $ | 955,552 | $ | 1,030,776 | $ | 1,164,806 | ||||||||||
(a) | Amounts do not include unamortized discounts and/or premiums. |
(b) | Future minimum rental payments under the terms of all non-cancelable ground leases under which we are the lessee are expensed on a straight-line basis regardless of when payments are due. The table above does not include the future minimum annual rental payments related to the ground lease that we assumed in connection with our acquisition of Three Logan Square in Philadelphia, Pennsylvania as the amounts cannot be determined at this time. The table also does not include the future minimum rental payments related to the ground lease in connection with our acquisition of 3020 Market Street in Philadelphia, Pennsylvania. Both of these ground leases are discussed below. |
(c) | Represents contractual obligations for development projects and does not contemplate all costs expected to be incurred for such developments. |
(d) | Variable rate debt future interest expense commitments are calculated using December 31, 2012 interest rates. |
(e) | Other liabilities consists of deferred compensation liability and the interest accretion on the existing transfer tax liability on Two Logan Square in Philadelphia, Pennsylvania (see related discussion below), as of December 31, 2012. |
The Operating Partnership obtained ground tenancy rights under a long term ground lease agreement when it acquired Three Logan Square on August 5, 2010. The annual rental payment under this ground lease is ten dollars through August 2022, which is when the initial term of the ground lease will end. After the initial term, the Operating Partnership has various options to renew the lease until 2091. The Operating Partnership also obtained the option to purchase the land at fair market value after providing a written notice to the owner. The annual rental payment after 2022 will be adjusted at the lower of $3.0 million or the prevailing market rent at that time until 2030. Subsequent to 2030, the annual rental payment will be adjusted at the lower of $4.0 million or the prevailing market rent at that time until 2042 and at fair market value until 2091. The Operating Partnership believes that based on conditions as of the date the lease was assigned (August 5, 2010), the lease will reset to market after the initial term. Using the estimated fair market rent as of the date of the acquisition over the extended term of the ground lease (assuming the purchase option is not exercised), the future payments will aggregate $27.4 million. The Operating Partnership has not included the amounts in the table above since such amounts are not fixed and determinable.
The Operating Partnership also acquired ground tenancy rights under a long term ground lease agreement related to its acquisition of an office building in Philadelphia, Pennsylvania on August 12, 2011. The annual rental payments under this ground lease are equal to a percentage of the NOI generated by the property. The Company has not included the amounts in the table above since such amounts are not fixed or determinable.
As part of the Operating Partnership’s September 2004 acquisition of a portfolio of properties from the Rubenstein Company (which the Operating Partnership refers to as the “TRC acquisition”), the Operating Partnership acquired its interest in Two Logan Square, a 708,844 square foot office building in Philadelphia, primarily through its ownership of a second and third mortgage secured by this property. This property is consolidated as the borrower is a variable interest entity and the Operating Partnership, through its ownership of the second and third mortgages, is the primary beneficiary. The Operating Partnership currently does not expect to take title to Two Logan Square until, at the earliest, September 2019. If the Operating Partnership takes fee title to Two Logan Square upon a foreclosure of its mortgage, the Operating Partnership has agreed to pay an unaffiliated third party that holds
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a residual interest in the fee owner of this property an amount equal to $2.9 million. On the TRC acquisition date, the Operating Partnership recorded a liability of $0.7 million and this amount will accrete up to $2.9 million through September 2019. As of December 31, 2012, the Operating Partnership has a balance of $1.5 million for this liability on its consolidated balance sheet.
The Operating Partnership was audited by the IRS for its 2004 tax year. The audit concerned the tax treatment of the TRC acquisition in September 2004 in which the Operating Partnership acquired a portfolio of properties through the acquisition of a limited partnership. On December 17, 2010, the Operating Partnership received notice that the IRS proposed an adjustment to the allocation of recourse liabilities allocated to the contributor of the properties. The Operating Partnership appealed the proposed adjustment and expects to enter into a settlement agreement with the IRS which will not result in a material tax liability for the Operating Partnership. Assuming that the settlement agreement is finalized as expected, the contributor of partnership interests in the 2004 transaction has agreed not to assert a claim against the Operating Partnership under the tax protection agreement entered into as part of the transaction.
As part of the Operating Partnership’s 2006 merger with Prentiss Properties Trust, the 2004 TRC acquisition and several of its other transactions, it agreed not to sell certain of the properties it acquired in transactions that would trigger taxable income to the former owners. In the case of the TRC acquisition, the Operating Partnership agreed not to sell acquired properties for periods up to 15 years from the date of the TRC acquisition as follows at December 31, 2012: One Rodney Square and 130/150/170 Radnor Financial Center (January, 2015); and One Logan Square, Two Logan Square and Radnor Corporate Center (January, 2020). In the Prentiss acquisition, the Operating Partnership assumed the obligation of Prentiss not to sell Concord Airport Plaza before March, 2018. The Operating Partnership’s agreements generally provide that we may dispose of the subject properties only in transactions that qualify as tax-free exchanges under Section 1031 of the Internal Revenue Code or in other tax deferred transactions. If the Operating Partnership was to sell a restricted property before expiration of the restricted period in a non-exempt transaction, it would be required to make significant payments to the parties who sold the applicable property to the Operating Partnership for tax liabilities triggered to them.
As part of the Operating Partnership’s acquisition of properties from time to time in tax-deferred transactions, it has agreed to provide certain of the prior owners of the acquired properties with the right to guarantee its indebtedness. If the Operating Partnership were to seek to repay the indebtedness guaranteed by the prior owner before the expiration of the applicable agreement, it will be required to provide the prior owner an opportunity to guarantee a qualifying replacement debt. These debt maintenance agreements may limit its ability to refinance indebtedness on terms that will be favorable to the Operating Partnership.
In connection with the development of the IRS Philadelphia Campus and the Cira South Garage, during 2008, the Operating Partnership entered into a historic tax credit and new markets tax credit arrangement, respectively. The Operating Partnership is required to be in compliance with various laws, regulations and contractual provisions that apply to its historic and new market tax credit arrangements. Non-compliance with applicable requirements could result in projected tax benefits not being realized and therefore, require a refund to US Bancorp or a reduction of investor capital contributions, which are reported as deferred income in the Operating Partnership’s consolidated balance sheet, until such time as its obligation to deliver tax benefits is relieved. The remaining compliance periods for its tax credit arrangements runs through 2015. The Operating Partnership does not anticipate that any material refunds or reductions of investor capital contributions will be required in connection with these arrangements.
The Operating Partnership entered into development agreements related to two parcels of land under option for ground lease that required the Operating Partnership to commence development by December 31, 2012. During 2012, the Operating Partnership was granted an extension to commence development by December 31, 2015 related to these development agreements, and will incur a $3.5 million extension fee over the extension period. If the Operating Partnership determines that it will not be able to start the construction by the date specified, or if the Operating Partnership determines development is not in its best economic interest and an additional extension of the development period cannot be negotiated, the Operating Partnership will have to write off all costs that it has incurred in preparing these parcels of land for development, amounting to $13.6 million as of December 31, 2012. The Operating Partnership expects to commence development on one of these land parcels in 2013.
The Operating Partnership invests in properties and regularly incurs capital expenditures in the ordinary course of its business to maintain the properties. The Operating Partnership believes that such expenditures enhance its competitiveness. The Operating Partnership also enters into construction, utility and service contracts in the ordinary course of its business which may extend beyond one year. These contracts typically provide for cancellation with insignificant or no cancellation penalties.
Interest Rate Risk and Sensitivity Analysis
The analysis below presents the sensitivity of the market value of the Operating Partnership’s financial instruments to selected changes in market rates. The range of changes chosen reflects its view of changes which are reasonably possible over a one-year period. Market values are the present value of projected future cash flows based on the market rates chosen.
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The Operating Partnership’s financial instruments consist of both fixed and variable rate debt. As of December 31, 2012, its consolidated debt consisted of $443.9 million of mortgage loans and $1,430.3 million of unsecured notes, all of which are fixed rate borrowings. We also have variable rate debt consisting of $69.0 million in borrowings under our New Credit Facility, $78.6 million in trust preferred securities and $450.0 million of unsecured term loans, both of which are swapped to fixed except for $100.0 million of unsecured term loans which bear interest at a variable rate of interest. All financial instruments were entered into for other than trading purposes and the net market value of these financial instruments is referred to as the net financial position. Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position.
If market rates of interest increase by 100 basis points, the fair value of the Operating Partnership’s outstanding fixed-rate mortgage debt would decrease by approximately $26.0 million. If market rates of interest decrease by 100 basis points, the fair value of its outstanding fixed-rate mortgage debt would increase by approximately $28.5 million.
As of December 31, 2012, based on prevailing interest rates and credit spreads, the fair value of the Operating Partnership’s $1,430.3 million of unsecured notes was $1,553.1 million. For sensitivity purposes, a 100 basis point change in the discount rate equates to a change in the total fair value of the Operating Partnership’s debt of approximately $14.2 million at December 31, 2012.
From time to time or as the need arises, the Operating Partnership uses derivative instruments to manage interest rate risk exposures and not for speculative purposes. The total carrying value of the Operating Partnership’s variable rate debt (including variable swapped to fixed) was approximately $597.6 million and $391.6 million at December 31, 2012 and December 31, 2011, respectively. The total fair value of the Operating Partnership’s debt was approximately $595.7 million and $380.8 million at December 31, 2012 and December 31, 2011, respectively. For sensitivity purposes, a 100 basis point change in the discount rate equates to a change in the total fair value of its debt of $1.7 million at December 31, 2012 and a 100 basis point change in the discount rate equates to a change in the total fair value of its debt of approximately $3.4 million at December 31, 2011.
At December 31, 2012, the Operating Partnership’s outstanding variable rate debt based on LIBOR totaled approximately $597.6 million, of which $169.0 million remained variable, with the remaining $428.6 million being swapped to fixed. At December 31, 2012, the interest rate on the Operating Partnership's variable rate debt was approximately 1.2%. If market interest rates on its variable rate debt were to change by 100 basis points, total interest expense would have changed by approximately $0.4 million for year-ended December 31, 2012.
These amounts were determined solely by considering the impact of hypothetical interest rates on the Operating Partnership’s financial instruments. Due to the uncertainty of specific actions it may undertake to minimize possible effects of market interest rate increases, this analysis assumes no changes in its financial structure.
Funds from Operations (FFO)
Pursuant to the revised definition of FFO adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), we calculate FFO by adjusting net income/(loss) attributable to common unit holders (computed in accordance with GAAP) for gains (or losses) from sales of properties, impairment losses on depreciable consolidated real estate, impairment losses on investments in unconsolidated joint ventures driven by a measurable decrease in the fair value of depreciable real estate held by the unconsolidated joint ventures, real estate related depreciation and amortization, and after similar adjustments for unconsolidated real estate ventures. FFO is a non-GAAP financial measure. The Operating Partnership believes that the use of FFO combined with the required U.S. GAAP presentations, has been beneficial in improving the understanding of operating results of REITs among the investing public and making comparisons of REITs’ operating results more meaningful. The Operating Partnership considers FFO to be a useful measure for reviewing comparative operating and financial performance because, by excluding gains or losses related to sales of previously depreciated operating real estate assets and real estate depreciation and amortization, FFO can help the investing public compare the operating performance of a company’s real estate between periods or as compared to other companies. The Operating Partnership’s computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently.
The Operating Partnership considers net income, as defined by U.S. GAAP, to be the most comparable earnings measure to FFO. While FFO and FFO per unit are relevant and widely used measures of operating performance of REITs, FFO does not represent cash flow from operations or net income as defined by U.S. GAAP and should not be considered as alternatives to those measures in evaluating the Company’s liquidity or operating performance. The Operating Partnership believes that to further understand
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our performance, FFO should be compared with its reported net income/(loss) attributable to common unit holders and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.
The following table presents a reconciliation of net income (loss) attributable to common unit holders to FFO for the years ended December 31, 2012 and 2011:
Year-ended | Year-ended | |||||||
December 31, 2012 | December 31, 2011 | |||||||
(amounts in thousands, except share information) | ||||||||
Net income (loss) attributable to common unitholders | $ | (8,304 | ) | $ | (13,212 | ) | ||
Add (deduct): | ||||||||
Amount allocated to unvested restricted unitholders | 376 | 505 | ||||||
Net gain on sale of interests in real estate | — | (2,791 | ) | |||||
Net gain on sale of undepreciated real estate | — | (45 | ) | |||||
Loss on real estate venture formation | 950 | 222 | ||||||
Net gain on disposition of discontinued operations | (34,774 | ) | (7,264 | ) | ||||
Depreciation and amortization: | ||||||||
Real property — continuing operations | 156,620 | 160,001 | ||||||
Leasing costs including acquired intangibles — continuing operations | 38,983 | 49,286 | ||||||
Real property — discontinued operations | 2,459 | 8,560 | ||||||
Leasing costs including acquired intangibles — discontinued operations | 291 | 217 | ||||||
Company’s share of unconsolidated real estate ventures | 14,788 | 9,181 | ||||||
Funds from operations | $ | 171,389 | $ | 204,660 | ||||
Funds from operations allocable to unvested restricted shareholders | (856 | ) | (1,264 | ) | ||||
Funds from operations available to common share and unit holders (FFO) | $ | 170,533 | $ | 203,396 | ||||
Weighted-average shares/units outstanding — fully diluted | 146,500,828 | 146,299,625 | ||||||
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
See discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 herein.
Item 8. | Financial Statements and Supplementary Data |
The financial statements and supplementary financial data of the Parent Company and the Operating Partnership and the reports thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, with respect thereto are listed under Items 15(a) and 15(b) and filed as part of this Annual Report on Form 10-K. See Item 15.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
Item 9A. Controls and Procedures
Controls and Procedures (Parent Company)
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Parent Company’s management, including its principal executive officer and principal financial officer, the Parent Company’s management conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, the principal executive officer and the principal financial officer of the Parent Company concluded
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that the Parent Company’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
The management of the Parent Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of the Parent Company’s management, including its principal executive officer and principal financial officer, the Parent Company’s management conducted an evaluation of the effectiveness of the Parent Company's internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control — Integrated Framework, the Parent Company’s management concluded that the Parent Company's internal control over financial reporting was effective as of December 31, 2012.
The effectiveness of the Parent Company’s internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which is included herein.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Parent Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Parent Company’s internal control over financial reporting.
Controls and Procedures (Operating Partnership)
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Operating Partnership’s management, including its principal executive officer and principal financial officer, the Operating Partnership’s management conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, the principal executive officer and the principal financial officer of Operating Partnership concluded that the Operating Partnership’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
The management of the Operating Partnership is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of the Operating Partnership’s management, including its principal executive officer and principal financial officer, the Operating Partnership’s management conducted an evaluation of the effectiveness of the Operating Partnership's internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control — Integrated Framework, the Operating Partnership’s management concluded that the Operating Partnership's internal control over financial reporting was effective as of December 31, 2012.
The effectiveness of the Operating Partnership’s internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which is included herein.
Changes in Internal Control over Financial Reporting.
There have not been any changes in the Operating Partnership’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
Item 9B. Other Information
None.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2013 Annual Meeting of Shareholders.
Item 11. | Executive Compensation |
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2013 Annual Meeting of Shareholders.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2013 Annual Meeting of Shareholders.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2013 Annual Meeting of Shareholders.
Item 14. | Principal Accountant Fees and Services |
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2013 Annual Meeting of Shareholders.
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PART IV
Item 15. | Exhibits and Financial Statement Schedules. |
(a) | Financial Statements and Schedules of Brandywine Realty Trust |
(b) | Financial Statements and Schedules of Brandywine Operating Partnership |
The financial statements and schedules of the Parent Company and the Operating Partnership listed below are filed as part of this annual report on the pages indicated.
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Index to Financial Statements and Schedule
Page | |
Financial Statements of Brandywine Realty Trust | |
Financial Statements of Brandywine Operating Partnership, L.P. | |
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3. Exhibits
Exhibits No. | Description | |
3.1.1 | Amended and Restated Declaration of Trust of Brandywine Realty Trust (amended and restated as of May 12, 1997) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated June 9, 1997 and incorporated herein by reference) | |
3.1.2 | Articles of Amendment to Declaration of Trust of Brandywine Realty Trust (September 4, 1997) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated September 10, 1997 and incorporated herein by reference) | |
3.1.3 | Articles of Amendment to Declaration of Trust of Brandywine Realty Trust (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated June 3, 1998 and incorporated herein by reference) | |
3.1.4 | Articles Supplementary to Declaration of Trust of Brandywine Realty Trust (September 28, 1998) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 13, 1998 and incorporated herein by reference) | |
3.1.5 | Articles of Amendment to Declaration of Trust of Brandywine Realty Trust (March 19, 1999) (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference) | |
3.1.6 | Articles Supplementary to Declaration of Trust of Brandywine Realty Trust (April 19, 1999) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 26, 1999 and incorporated herein by reference) | |
3.1.7 | Articles Supplementary to Declaration of Trust of Brandywine Realty Trust (December 30, 2003) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-A dated December 29, 2003 and incorporated herein by reference) | |
3.1.8 | Articles Supplementary to Declaration of Trust of Brandywine Realty Trust (February 5, 2004) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-A dated February 5, 2004 and incorporated herein by reference) | |
3.1.9 | Articles of Amendment to Declaration of Trust of Brandywine Realty Trust (October 3, 2005) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 4, 2005 and incorporated herein by reference) | |
3.1.10 | Articles Supplementary to Declaration of Trust of Brandywine Realty Trust (April 6, 2012) classifying and designating Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share and liquidation preference $25 per share, of Brandywine Realty Trust (previously filed as an exhibit to Brandywine Realty Trust's Form 8-A dated April 6, 2012 and incorporated herein by reference) | |
3.1.11 | Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (the “Operating Partnership”) (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated December 17, 1997 and incorporated herein by reference) | |
3.1.12 | First Amendment to Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated December 17, 1997 and incorporated herein by reference) | |
3.1.13 | Second Amendment to the Amended and Restated Agreement of Limited Partnership Agreement of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 13, 1998 and incorporated herein by reference) | |
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3.1.14 | Third Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated May 14, 1998 and incorporated herein by reference) | |
3.1.15 | Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated October 13, 1998 and incorporated herein by reference) | |
3.1.16 | Fifth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated October 13, 1998 and incorporated herein by reference) | |
3.1.17 | Sixth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated October 13, 1998 and incorporated herein by reference) | |
3.1.18 | Seventh Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference) | |
3.1.19 | Eighth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference) | |
3.1.20 | Ninth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference) | |
3.1.21 | Tenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference) | |
3.1.22 | Eleventh Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference) | |
3.1.23 | Twelfth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference) | |
3.1.24 | Thirteenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated September 21, 2004 and incorporated herein by reference) | |
3.1.25 | Fourteenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated January 10, 2006 and incorporated herein by reference) | |
3.1.26 | Fifteenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated August 18, 2006 and incorporated herein by reference) | |
3.1.27 | Sixteenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated August 9, 2010 and incorporated herein by reference) | |
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3.1.28 | Seventeenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 11, 2012 and incorporated herein by reference) | |
3.1.29 | List of partners of Brandywine Operating Partnership, L.P. | |
3.2 | Amended and Restated Bylaws of Brandywine Realty Trust (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated June 4, 2010 and incorporated herein by reference) | |
4.1 | Form of 7.50% Series C Cumulative Redeemable Preferred Share Certificate (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-A dated December 29, 2003 and incorporated herein by reference) | |
4.2 | Form of 7.375% Series D Cumulative Redeemable Preferred Share Certificate (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-A dated February 5, 2004 and incorporated herein by reference) | |
4.3 | Form of 6.90% Series E Cumulative Redeemable Preferred Shares Certificate (previously filed as an exhibit to Brandywine Realty Trust's Form 8-A dated April 6, 2012 and incorporated herein by reference). | |
4.4.1 | Indenture dated October 22, 2004 by and among Brandywine Operating Partnership, L.P., Brandywine Realty Trust, certain subsidiaries of Brandywine Operating Partnership, L.P. named therein and The Bank of New York Mellon, as Trustee (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated October 22, 2004 and incorporated herein by reference) | |
4.4.2 | First Supplemental Indenture dated as of May 25, 2005 by and among Brandywine Operating Partnership, L.P., Brandywine Realty Trust, certain subsidiaries of Brandywine Operating Partnership, L.P. named therein and The Bank of New York Mellon, as Trustee (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated May 26, 2005 and incorporated herein by reference) | |
4.4.3 | Second Supplemental Indenture dated as of October 4, 2006 by and among Brandywine Operating Partnership, L.P., Brandywine Realty Trust and The Bank of New York Mellon, as Trustee (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated October 4, 2006 and incorporated herein by reference) | |
4.4.4 | Third Supplemental Indenture dated as of April 5, 2011 by and among Brandywine Operating Partnership, L.P., Brandywine Realty Trust and The Bank of New York Mellon, as Trustee (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 5, 2011 and incorporated herein by reference) | |
4.5 | Form of $250,000,000 5.40% Guaranteed Note due 2014 (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated October 22, 2004 and incorporated herein by reference) | |
4.6 | Form of $250,000,000 aggregate principal amount of 6.00% Guaranteed Note due 2016 (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated March 28, 2006 and incorporated herein by reference). | |
4.7 | Form of $300,000,000 aggregate principal amount of 5.70% Guaranteed Notes due 2017 (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 30, 2007 and incorporated herein by reference) | |
4.8 | Form of $250,000,000 aggregate principal amount of 7.50% Guaranteed Notes due 2015 (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated September 25, 2009 and incorporated herein by reference) | |
4.9 | Form of $325,000,000 aggregate principal amount of 4.95% Guaranteed Notes due 2018 (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 5, 2011 and incorporated herein by reference) | |
74
4.10 | Form of $250,000,000 aggregate principal amount of 3.95% Guaranteed Notes due 2023 (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated December 18, 2012 and incorporated herein by reference) | |
10.1 | Third Amended and Restated Revolving Credit Agreement dated as of December 15, 2011 (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2011 and incorporated herein by reference) | |
10.2 | Term Loan A Agreement dated as of December 15, 2011 (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2011 and incorporated herein by reference) | |
10.3 | Term Loan B Agreement dated as of December 15, 2011 (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2011 and incorporated herein by reference) | |
10.4 | Term Loan C Agreement dated as of December 15, 2011 (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2011 and incorporated herein by reference) | |
10.5 | Contribution Agreement dated August 18, 2004 with TRC Realty, Inc.-GP, TRC-LB LLC and TRC Associates Limited Partnership (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated August 19, 2004 and incorporated herein by reference) | |
10.6 | Registration Rights Agreement (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated September 21, 2004 and incorporated herein by reference) | |
10.7 | Tax Protection Agreement (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated September 21, 2004 and incorporated herein by reference) | |
10.8 | Registration Rights Agreement dated as of October 3, 2005 (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated October 4, 2005 and incorporated herein by reference) | |
10.9 | Letter to Cohen & Steers Capital Management, Inc. relating to waiver of share ownership limit (previously filed as an exhibit to Brandywine Realty Trust's Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference) | |
10.10 | Letter to RREEF America LLC relating to waiver of share ownership limit (previously filed as an exhibit to Brandywine Realty Trust's Form 10-K for the fiscal year ended December 31, 2009 and incorporated herein by reference) | |
10.11 | Sales Agency Financing Agreement dated as of March 10, 2010 with BNY Mellon Capital Markets, LLC (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated March 10, 2010 and incorporated herein by reference) | |
10.12 | Sales Agency Financing Agreement dated as of March 10, 2010 with Citigroup Global Markets Inc. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated March 10, 2010 and incorporated herein by reference) | |
10.13 | Sales Agency Financing Agreement dated as of March 10, 2010 with Deutsche Bank Securities Inc. (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated March 10, 2010 and incorporated herein by reference) | |
10.14 | Amended and Restated Employment Agreement dated as of February 9, 2007 of Gerard H. Sweeney** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated February 14, 2007 and incorporated herein by reference) | |
75
10.15 | Letter Agreement dated March 1, 2012 modifying Amended and Restated Employment Agreement of Gerard H. Sweeney** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated March 7, 2012 and incorporated herein by reference) | |
10.16 | Amended and Restated 1997 Long-Term Incentive Plan (as amended effective June 2, 2010)** (previously filed as an exhibit to Brandywine Realty Trust's Registration Statement on Form S-8, File No. 333-167266 and incorporated herein by reference) | |
10.17 | Amended and Restated Executive Deferred Compensation Plan dated January 1, 2013** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated December 11, 2012 and incorporated herein by reference) | |
10.18 | 2007 Non-Qualified Employee Share Purchase Plan** (previously filed as an exhibit to Brandywine Realty Trust's Form 10-Q for the quarter ended March 31, 2007 and incorporated herein by reference) | |
10.19 | 2007 Performance Share Award to Gerard H. Sweeney** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated February 14, 2007 and incorporated herein by reference) | |
10.20 | Form of 2007 Performance Share Award to executive officers (other than the President and Chief Executive Officer)** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated February 14, 2007 and incorporated herein by reference) | |
10.21 | Summary of Trustee Compensation** (previously filed as an exhibit to Brandywine Realty Trust's Form 10-Q for the quarter ended September 30, 2012 and incorporated herein by reference) | |
10.22 | Form of Non-Qualified Share Option Agreement to the President and CEO and Executive Vice President and CFO** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 11, 2008 and incorporated herein by reference) | |
10.23 | Form of Non-Qualified Share Option Agreement to the executive officers (other than the President and CEO and Executive Vice President and CFO)** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 11, 2008 and incorporated herein by reference) | |
10.24 | Form of Incentive Stock Option Agreement to the President and CEO and Executive Vice President and CFO ** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 11, 2008 and incorporated herein by reference) | |
10.25 | Form of Incentive Stock Option Agreement to the executive officers (other than the President and CEO and Executive Vice President and CFO)** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 11, 2008 and incorporated herein by reference) | |
10.26 | Forms of Non-Qualified Share Option Agreement for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 1, 2009 and incorporated herein by reference) | |
10.27 | Forms of Incentive Stock Option Agreement for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated April 1, 2009 and incorporated herein by reference) | |
10.28 | Form of Amended and Restated Change of Control Agreement with Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on February 4, 2010 and incorporated herein by reference) | |
10.29 | Employment Agreement dated February 3, 2010 with Howard M. Sipzner** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on February 4, 2010 and incorporated herein by reference) | |
76
10.30 | Form of Restricted Share Award (March 2010) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2010 and incorporated herein by reference) | |
10.31 | Form of Restricted Performance Share Unit and Dividend Equivalent Rights Award Agreement (March 2010) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2010 and incorporated herein by reference) | |
10.32 | Forms of Incentive Stock Option Agreement (March 2010) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2010 and incorporated herein by reference) | |
10.33 | Forms of Non-Qualified Share Option Agreement (March 2010) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2010 and incorporated herein by reference) | |
10.34 | 2010-2012 Restricted Performance Share Unit Program** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2010 and incorporated herein by reference) | |
10.35 | Form of Restricted Share Award (March 2011) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2011 and incorporated herein by reference) | |
10.36 | Form of Restricted Performance Share Unit and Dividend Equivalent Rights Award Agreement (March 2011) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2011 and incorporated herein by reference) | |
10.37 | Forms of Incentive Share Option Agreement (March 2011) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2011 and incorporated herein by reference) | |
10.38 | Forms of Non-Qualified Share Option Agreement (March 2011) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2011 and incorporated herein by reference) | |
10.39 | 2011-2013 Restricted Performance Share Unit Program** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 8, 2011 and incorporated herein by reference) | |
10.40 | Letter Agreement dated May 24, 2011 modifying options of President and Chief Executive Officer** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on May 24, 2011 and incorporated herein by reference) | |
10.41 | Form of Restricted Share Award (March 2012) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 7, 2012 and incorporated herein by reference) | |
10.42 | Form of Restricted Performance Share Unit and Dividend Equivalent Rights Award Agreement (March 2012) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 7, 2012 and incorporated herein by reference) | |
10.43 | 2012-2014 Restricted Performance Share Unit Program** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K filed on March 7, 2012 and incorporated herein by reference) | |
12.1 | Statement re Computation of Ratios of Brandywine Realty Trust | |
12.2 | Statement re Computation of Ratios of Brandywine Operating Partnership, L.P | |
14.1 | Code of Business Conduct and Ethics** (previously filed as an exhibit to Brandywine Realty Trust's Form 8-K dated December 22, 2004 and incorporated herein by reference) | |
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21 | List of subsidiaries | |
23.1 | Consent of PricewaterhouseCoopers LLP relating to financial statements of Brandywine Realty Trust | |
23.2 | Consent of PricewaterhouseCoopers LLP relating to financial statements of Brandywine Operating Partnership, L.P. | |
31.1 | Certification of the Chief Executive Officer of Brandywine Realty Trust pursuant to 13a-14 under the Securities Exchange Act of 1934 | |
31.2 | Certification of the Chief Financial Officer of Brandywine Realty Trust pursuant to 13a-14 under the Securities Exchange Act of 1934 | |
31.3 | Certification of the Chief Executive Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P., pursuant to 13a-14 under the Securities Exchange Act of 1934 | |
31.4 | Certification of the Chief Financial Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P., pursuant to 13a-14 under the Securities Exchange Act of 1934 | |
32.1 | Certification of the Chief Executive Officer of Brandywine Realty Trust pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of the Chief Financial Officer of Brandywine Realty Trust pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.3 | Certification of the Chief Executive Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P., pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.4 | Certification of the Chief Financial Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P., pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1 | Material Tax Consequences | |
** | Management contract or compensatory plan or arrangement |
(c) | Financial Statement Schedule: See Item 15 (a) and (b) above |
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||
By: | /s/ Gerard H. Sweeney | |
Gerard H. Sweeney | ||
President and Chief Executive Officer | ||
Date: February 25, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Walter D’Alessio | Chairman of the Board and Trustee | February 25, 2013 | ||
Walter D’Alessio | ||||
/s/ Gerard H. Sweeney | President, Chief Executive Officer and Trustee | February 25, 2013 | ||
Gerard H. Sweeney | (Principal Executive Officer) | |||
/s/ Howard M. Sipzner | Executive Vice President and Chief Financial Officer | February 25, 2013 | ||
Howard M. Sipzner | (Principal Financial Officer) | |||
/s/ Gabriel J. Mainardi | Vice President and Chief Accounting Officer (Principal | February 25, 2013 | ||
Gabriel J. Mainardi | Accounting Officer) | |||
/s/ Wyche Fowler | Trustee | February 25, 2013 | ||
Wyche Fowler | ||||
/s/ James Diggs | Trustee | February 25, 2013 | ||
James Diggs | ||||
/s/ Michael J. Joyce | Trustee | February 25, 2013 | ||
Michael J. Joyce | ||||
/s/ Anthony A. Nichols, Sr. | Trustee | February 25, 2013 | ||
Anthony A. Nichols, Sr. | ||||
/s/ Charles P. Pizzi | Trustee | February 25, 2013 | ||
Charles P. Pizzi | ||||
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRANDYWINE OPERATING PARTNERSHIP, L.P. | ||
By: | Brandywine Realty Trust, its General Partner | |
By: | /s/ Gerard H. Sweeney | |
Gerard H. Sweeney | ||
President and Chief Executive Officer | ||
Date: February 25, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Walter D’Alessio | Chairman of the Board and Trustee | February 25, 2013 | ||
Walter D’Alessio | ||||
/s/ Gerard H. Sweeney | President, Chief Executive Officer and Trustee | February 25, 2013 | ||
Gerard H. Sweeney | (Principal Executive Officer) | |||
/s/ Howard M. Sipzner | Executive Vice President and Chief Financial Officer | February 25, 2013 | ||
Howard M. Sipzner | (Principal Financial Officer) | |||
/s/ Gabriel J. Mainardi | Vice President and Chief Accounting Officer (Principal | February 25, 2013 | ||
Gabriel J. Mainardi | Accounting Officer) | |||
/s/ Wyche Fowler | Trustee | February 25, 2013 | ||
Wyche Fowler | ||||
/s/ James Diggs | Trustee | February 25, 2013 | ||
James Diggs | ||||
/s/ Michael J. Joyce | Trustee | February 25, 2013 | ||
Michael J. Joyce | ||||
/s/ Anthony A. Nichols, Sr. | Trustee | February 25, 2013 | ||
Anthony A. Nichols, Sr. | ||||
/s/ Charles P. Pizzi | Trustee | February 25, 2013 | ||
Charles P. Pizzi | ||||
80
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Brandywine Realty Trust:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of Brandywine Realty Trust and its subsidiaries (the “Company”) at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 2013
F-1
Report of Independent Registered Public Accounting Firm
To the Partners of Brandywine Operating Partnership, L.P.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(b) present fairly, in all material respects, the financial position of Brandywine Operating Partnership, L.P. and its subsidiaries (the “Partnership”) at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(b) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Partnership’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules and on the Partnership’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 2013
F-2
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
December 31, 2012 | December 31, 2011 | ||||||
ASSETS | |||||||
Real estate investments: | |||||||
Rental properties | $ | 4,726,169 | $ | 4,793,080 | |||
Accumulated depreciation | (954,665 | ) | (865,710 | ) | |||
Operating real estate investments, net | 3,771,504 | 3,927,370 | |||||
Construction-in-progress | 48,950 | 25,083 | |||||
Land inventory | 102,439 | 109,008 | |||||
Total real estate investments, net | 3,922,893 | 4,061,461 | |||||
Cash and cash equivalents | 1,549 | 410 | |||||
Accounts receivable, net | 13,232 | 14,718 | |||||
Accrued rent receivable, net | 122,066 | 108,101 | |||||
Investment in real estate ventures, at equity | 193,555 | 115,807 | |||||
Deferred costs, net | 122,243 | 115,362 | |||||
Intangible assets, net | 70,620 | 70,515 | |||||
Notes receivable | 7,226 | 18,186 | |||||
Other assets | 53,325 | 53,158 | |||||
Total assets | $ | 4,506,709 | $ | 4,557,718 | |||
LIABILITIES AND BENEFICIARIES’ EQUITY | |||||||
Mortgage notes payable | $ | 442,974 | $ | 511,061 | |||
Unsecured credit facility | 69,000 | 275,500 | |||||
Unsecured term loans | 450,000 | 37,500 | |||||
Unsecured senior notes, net of discounts | 1,503,356 | 1,569,934 | |||||
Accounts payable and accrued expenses | 71,579 | 69,929 | |||||
Distributions payable | 23,652 | 23,895 | |||||
Deferred income, gains and rent | 82,947 | 99,569 | |||||
Acquired lease intangibles, net | 33,859 | 35,106 | |||||
Other liabilities | 55,826 | 45,528 | |||||
Total liabilities | 2,733,193 | 2,668,022 | |||||
Commitments and contingencies (Note 20) | |||||||
Brandywine Realty Trust’s equity: | |||||||
Preferred Shares (shares authorized-20,000,000): | |||||||
7.50% Series C Preferred Shares, $0.01 par value; issued and outstanding- 0 in 2012 and 2,000,000 in 2011 | — | 20 | |||||
7.375% Series D Preferred Shares, $0.01 par value; issued and outstanding- 0 in 2012 and 2,300,000 in 2011 | — | 23 | |||||
6.90% Series E Preferred Shares, $0.01 par value; issued and outstanding- 4,000,000 in 2012 and 0 in 2011 | 40 | — | |||||
Common Shares of Brandywine Realty Trust’s beneficial interest, $0.01 par value; shares authorized 200,000,000; 143,538,733 and 142,690,755 issued and outstanding in 2012 and 2011, respectively | 1,434 | 1,424 | |||||
Additional paid-in capital | 2,780,194 | 2,776,197 | |||||
Deferred compensation payable in common shares | 5,352 | 5,631 | |||||
Common shares in grantor trust, 290,745 in 2012 and 292,646 in 2011 | (5,352 | ) | (5,631 | ) | |||
Cumulative earnings | 479,734 | 477,338 | |||||
Accumulated other comprehensive loss | (15,918 | ) | (6,079 | ) | |||
Cumulative distributions | (1,493,206 | ) | (1,392,332 | ) | |||
Total Brandywine Realty Trust’s equity | 1,752,278 | 1,856,591 | |||||
Non-controlling interests | 21,238 | 33,105 | |||||
Total equity | 1,773,516 | 1,889,696 | |||||
Total liabilities and equity | $ | 4,506,709 | $ | 4,557,718 | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share information)
Years ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Revenue: | |||||||||||
Rents | $ | 459,855 | $ | 462,771 | $ | 443,485 | |||||
Tenant reimbursements | 78,613 | 79,108 | 75,330 | ||||||||
Termination fees | 3,233 | 2,951 | 5,516 | ||||||||
Third party management fees, labor reimbursement and leasing | 12,116 | 11,536 | 11,830 | ||||||||
Other | 6,016 | 5,387 | 4,271 | ||||||||
Total revenue | 559,833 | 561,753 | 540,432 | ||||||||
Operating Expenses: | |||||||||||
Property operating expenses | 159,296 | 167,077 | 163,294 | ||||||||
Real estate taxes | 55,969 | 54,171 | 51,927 | ||||||||
Third party management expenses | 5,127 | 5,590 | 5,866 | ||||||||
Depreciation and amortization | 195,841 | 210,334 | 203,345 | ||||||||
General and administrative expenses | 25,413 | 24,602 | 23,306 | ||||||||
Total operating expenses | 441,646 | 461,774 | 447,738 | ||||||||
Operating income | 118,187 | 99,979 | 92,694 | ||||||||
Other Income (Expense): | |||||||||||
Interest income | 3,012 | 1,813 | 3,218 | ||||||||
Historic tax credit transaction income | 11,840 | 12,026 | — | ||||||||
Interest expense | (132,939 | ) | (131,405 | ) | (132,640 | ) | |||||
Interest expense — amortization of deferred financing costs | (6,208 | ) | (4,991 | ) | (3,770 | ) | |||||
Interest expense — financing obligation | (850 | ) | — | — | |||||||
Recognized hedge activity | (2,985 | ) | — | — | |||||||
Equity in income of real estate ventures | 2,741 | 3,775 | 5,305 | ||||||||
Net gain (loss) on sale of interests in real estate | — | 2,791 | (22 | ) | |||||||
Net gain on sale of undepreciated real estate | — | 45 | — | ||||||||
Loss on real estate venture formation | (950 | ) | (222 | ) | — | ||||||
Loss on early extinguishment of debt | (22,002 | ) | (2,776 | ) | (2,110 | ) | |||||
Loss from continuing operations | (30,154 | ) | (18,965 | ) | (37,325 | ) | |||||
Discontinued operations: | |||||||||||
Income from discontinued operations | 1,909 | 6,986 | 8,739 | ||||||||
Net gain on disposition of discontinued operations | 34,774 | 7,264 | 10,980 | ||||||||
Total discontinued operations | 36,683 | 14,250 | 19,719 | ||||||||
Net income (loss) | 6,529 | (4,715 | ) | (17,606 | ) | ||||||
Net (income) loss from discontinued operations attributable to non-controlling interests — LP units | (670 | ) | (553 | ) | (414 | ) | |||||
Net (income) loss attributable to non-controlling interests — LP units | 736 | 769 | 946 | ||||||||
Net (income) loss attributable to non-controlling interests | 66 | 216 | 532 | ||||||||
Net income (loss) attributable to Brandywine Realty Trust | 6,595 | (4,499 | ) | (17,074 | ) | ||||||
Distribution to Preferred Shares | (10,405 | ) | (7,992 | ) | (7,992 | ) | |||||
Preferred share redemption charge | (4,052 | ) | — | — | |||||||
Amount allocated to unvested restricted shareholders | (376 | ) | (505 | ) | (512 | ) | |||||
Net loss attributable to Common Shareholders of Brandywine Realty Trust | $ | (8,238 | ) | $ | (12,996 | ) | $ | (25,578 | ) | ||
Basic income (loss) per Common Share: | |||||||||||
Continuing operations | $ | (0.31 | ) | $ | (0.20 | ) | $ | (0.34 | ) | ||
Discontinued operations | 0.25 | 0.10 | 0.15 | ||||||||
$ | (0.06 | ) | $ | (0.10 | ) | $ | (0.19 | ) | |||
Diluted income (loss) per Common Share: | |||||||||||
Continuing operations | $ | (0.31 | ) | $ | (0.20 | ) | $ | (0.34 | ) | ||
Discontinued operations | 0.25 | 0.10 | 0.15 | ||||||||
$ | (0.06 | ) | $ | (0.10 | ) | $ | (0.19 | ) | |||
Basic weighted average shares outstanding | 143,257,097 | 135,444,424 | 131,743,275 | ||||||||
Diluted weighted average shares outstanding | 143,257,097 | 135,444,424 | 131,743,275 | ||||||||
Net income (loss) attributable to Brandywine Realty Trust | |||||||||||
Loss from continuing operations | $ | (29,418 | ) | $ | (18,196 | ) | $ | (36,379 | ) | ||
Income from discontinued operations | 36,013 | 13,697 | 19,305 | ||||||||
Net income (loss) | $ | 6,595 | $ | (4,499 | ) | $ | (17,074 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Net income (loss) | $ | 6,529 | $ | (4,715 | ) | $ | (17,606 | ) | |||
Comprehensive income (loss): | |||||||||||
Unrealized loss on derivative financial instruments | (7,338 | ) | (4,499 | ) | 7,320 | ||||||
Settlement of interest rate swaps | (2,985 | ) | — | — | |||||||
Reclassification of realized (gains)/losses on derivative financial instruments to operations, net | 297 | 153 | 28 | ||||||||
Total comprehensive income (loss) | (10,026 | ) | (4,346 | ) | 7,348 | ||||||
Comprehensive loss | (3,497 | ) | (9,061 | ) | (10,258 | ) | |||||
Comprehensive (income) loss attributable to non-controlling interest | 261 | 427 | 377 | ||||||||
Comprehensive loss attributable to Brandywine Realty Trust | $ | (3,236 | ) | $ | (8,634 | ) | $ | (9,881 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES’ EQUITY
For the Years Ended December 31, 2012, 2011, and 2010
(in thousands, except number of shares)
December 31, 2010
Number of Preferred Shares | Par Value of Preferred Shares | Number of Common Shares | Number of Treasury Shares | Number of Rabbi Trust/Deferred Compensation Shares | Common Shares of Brandywine Realty Trust’s beneficial interest | Additional Paid-in Capital | Common Shares in Treasury | Deferred Compensation Payable in Common Shares | Common Shares in Grantor Trust | Cumulative Earnings | Accumulated Other Comprehensive Income (Loss) | Cumulative Distributions | Non-Controlling Interests | Total | |||||||||||||||||||||||||||||||||||||||||
December 31, 2009 | 4,300,000 | $ | 43 | 128,849,176 | 251,764 | 255,700 | $ | 1,286 | $ | 2,610,421 | $ | (7,205 | ) | $ | 5,549 | $ | (5,549 | ) | $ | 501,384 | $ | (9,138 | ) | $ | (1,213,359 | ) | $ | 38,308 | $ | 1,921,740 | |||||||||||||||||||||||||
Net loss | (17,074 | ) | (532 | ) | (17,606 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 7,193 | 155 | 7,348 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Shares of Beneficial Interest | 5,742,268 | 57 | 71,924 | 71,981 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Equity issuance costs | (1,214 | ) | (1,214 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of LP Units | 77,732 | 77,732 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Bonus Share Issuance | (32,607 | ) | 32,607 | 871 | 369 | (369 | ) | (502 | ) | 369 | |||||||||||||||||||||||||||||||||||||||||||||
Vesting of Restricted Shares | (76,598 | ) | 8,989 | (1,114 | ) | 2,304 | 103 | (103 | ) | (1,417 | ) | (227 | ) | ||||||||||||||||||||||||||||||||||||||||||
Restricted Share Amortization | 3,483 | 3,483 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Performance Units Amortization | 965 | 965 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of LP Units to Common Shares | (17,468 | ) | 732 | (266 | ) | (466 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||
Share Issuance from/to Deferred Compensation Plan | (2,409 | ) | (9,035 | ) | (282 | ) | 282 | — | |||||||||||||||||||||||||||||||||||||||||||||||
Share Option Amortization | 1,131 | 1,131 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Outperformance Plan Amortization | 380 | 380 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Trustee Fees Paid in Shares | (8,412 | ) | 3,020 | 224 | 35 | (35 | ) | (125 | ) | 99 | |||||||||||||||||||||||||||||||||||||||||||||
Exercise of Shares | 12,761 | 37 | 37 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment for Non-controlling Interest | (14,796 | ) | 14,796 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative Effect of Accounting Change for Variable Interest Entities | 1,439 | (38 | ) | 1,401 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Share distributions | (7,992 | ) | (7,992 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions declared ($0.60 per share) | (80,170 | ) | (1,683 | ) | (81,853 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2010 | 4,300,000 | $ | 43 | 134,601,796 | 116,679 | 291,281 | $ | 1,343 | $ | 2,671,217 | $ | (3,074 | ) | $ | 5,774 | $ | (5,774 | ) | $ | 483,439 | $ | (1,945 | ) | $ | (1,301,521 | ) | $ | 128,272 | $ | 1,977,774 | |||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
December 31, 2011
Number of Preferred Shares | Par Value of Preferred Shares | Number of Common Shares | Number of Treasury Shares | Number of Rabbi Trust/Deferred Compensation Shares | Common Shares of Brandywine Realty Trust’s beneficial interest | Additional Paid-in Capital | Common Shares in Treasury | Deferred Compensation Payable in Common Shares | Common Shares in Grantor Trust | Cumulative Earnings | Accumulated Other Comprehensive Income (Loss) | Cumulative Distributions | Non-Controlling Interests | Total | |||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2010 | 4,300,000 | $ | 43 | 134,601,796 | 116,679 | 291,281 | $ | 1,343 | $ | 2,671,217 | $ | (3,074 | ) | $ | 5,774 | $ | (5,774 | ) | $ | 483,439 | $ | (1,945 | ) | $ | (1,301,521 | ) | $ | 128,272 | $ | 1,977,774 | |||||||||||||||||||||||||
Net loss | (4,500 | ) | (215 | ) | (4,715 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss | (4,134 | ) | (212 | ) | (4,346 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Shares of Beneficial Interest | 679,285 | 7 | 8,265 | 8,272 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Equity Issuance Costs | (345 | ) | (32 | ) | (377 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of LP Units to Common Shares | 7,204,104 | 72 | 85,966 | (86,038 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Bonus Share Issuance | (463 | ) | 463 | 12 | 6 | (6 | ) | (6 | ) | 6 | |||||||||||||||||||||||||||||||||||||||||||||
Vesting of Restricted Shares | 85,248 | (116,216 | ) | 9,043 | 1 | (1,818 | ) | 3,062 | (1,595 | ) | (350 | ) | |||||||||||||||||||||||||||||||||||||||||||
Restricted Share Amortization | 2,937 | 2,937 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Performance Units Amortization | 1,679 | 1,679 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of Share Options | 120,179 | 1 | 349 | 350 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share Option Amortization | 1,487 | 1,487 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Outperformance Plan Amortization | 123 | 123 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Share Issuance from/to Deferred Compensation Plan | (845 | ) | (8,141 | ) | (16 | ) | (149 | ) | 149 | (16 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Share Choice Plan Issuance | (1,684 | ) | (55 | ) | (55 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Trustees Fees Paid in Shares | 2,672 | 32 | 32 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment to Non-controlling Interest | 6,376 | (6,376 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Share distributions | (7,992 | ) | (7,992 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions declared ($0.60 per share) | (82,819 | ) | (2,294 | ) | (85,113 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2011 | 4,300,000 | $ | 43 | 142,690,755 | — | 292,646 | $ | 1,424 | $ | 2,776,197 | $ | — | $ | 5,631 | $ | (5,631 | ) | $ | 477,338 | $ | (6,079 | ) | $ | (1,392,332 | ) | $ | 33,105 | $ | 1,889,696 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
December 31, 2012
Number of Preferred Shares | Par Value of Preferred Shares | Number of Common Shares | Number of Treasury Shares | Number of Rabbi Trust/Deferred Compensation Shares | Common Shares of Brandywine Realty Trust’s beneficial interest | Additional Paid-in Capital | Common Shares in Treasury | Deferred Compensation Payable in Common Shares | Common Shares in Grantor Trust | Cumulative Earnings | Accumulated Other Comprehensive Income (Loss) | Cumulative Distributions | Non-Controlling Interests | Total | |||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2011 | 4,300,000 | $ | 43 | 142,690,755 | — | 292,646 | $ | 1,424 | $ | 2,776,197 | $ | — | $ | 5,631 | $ | (5,631 | ) | $ | 477,338 | $ | (6,079 | ) | $ | (1,392,332 | ) | $ | 33,105 | $ | 1,889,696 | ||||||||||||||||||||||||||
Net income | 6,595 | (66 | ) | 6,529 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive loss | (9,839 | ) | (187 | ) | (10,026 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Preferred Shares | 4,000,000 | 40 | 96,810 | 96,850 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Share Issuance Costs | (613 | ) | (613 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Redemption of Preferred Shares | (4,300,000 | ) | (43 | ) | (103,405 | ) | (103,448 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Conversion of LP Units to Common Shares | 20,464 | 1 | 149 | (49 | ) | (268 | ) | (167 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Conversion of LP Units to Cash | (4,185 | ) | (5,556 | ) | (9,741 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Bonus Share Issuance | 35,703 | 387 | 387 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of Restricted Shares | 293,614 | 9,036 | 4 | (1,389 | ) | (1,385 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Share Amortization | 3,271 | 3,271 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Share Forfeitures | 35 | 35 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of Restricted Performance Units | 272,131 | 3 | (1,498 | ) | (1,495 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Restricted Performance Units Amortization | 3,379 | 3,379 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of Share Options | 230,294 | 2 | 974 | 976 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share Option Amortization | 1,636 | 1,636 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Share Issuance from/to Deferred Compensation Plan | (5,564 | ) | (10,937 | ) | (279 | ) | 279 | — | |||||||||||||||||||||||||||||||||||||||||||||||
Trustee Fees Paid in Shares | 1,336 | 15 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment to Non-controlling Interest | 4,281 | (4,281 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Share distributions | (10,405 | ) | (10,405 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Share redemption charges | (4,052 | ) | (4,052 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Distributions declared ($0.60 per share) | (86,417 | ) | (1,509 | ) | (87,926 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2012 | 4,000,000 | $ | 40 | 143,538,733 | — | 290,745 | $ | 1,434 | $ | 2,780,194 | $ | — | $ | 5,352 | $ | (5,352 | ) | $ | 479,734 | $ | (15,918 | ) | $ | (1,493,206 | ) | $ | 21,238 | $ | 1,773,516 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-8
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 6,529 | $ | (4,715 | ) | $ | (17,606 | ) | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: | |||||||||||
Depreciation and amortization | 198,579 | 219,110 | 214,776 | ||||||||
Amortization of deferred financing costs | 6,208 | 4,991 | 3,770 | ||||||||
Amortization of debt discount/(premium), net | 1,760 | 1,567 | 831 | ||||||||
Amortization of stock compensation costs | 5,685 | 5,282 | 5,102 | ||||||||
Shares used for employee taxes upon vesting of share awards | (2,493 | ) | (1,012 | ) | (288 | ) | |||||
Recognized hedge activity | 2,985 | — | — | ||||||||
Straight-line rent income | (23,566 | ) | (20,298 | ) | (13,705 | ) | |||||
Amortization of acquired above (below) market leases to rental revenue, net | (6,084 | ) | (5,384 | ) | (5,960 | ) | |||||
Straight-line ground rent expense | 1,897 | 1,924 | 1,647 | ||||||||
Provision for doubtful accounts | 2,198 | 1,924 | 2,479 | ||||||||
Net gain on sale of interests in real estate | (34,774 | ) | (10,008 | ) | (11,011 | ) | |||||
Loss on real estate venture formation | 950 | 222 | — | ||||||||
Loss on early extinguishment of debt | 22,002 | 2,776 | 2,110 | ||||||||
Historic tax credit transaction income | (11,840 | ) | (12,026 | ) | — | ||||||
Real estate venture income in excess of distributions | (1,517 | ) | (1,175 | ) | (4,648 | ) | |||||
Cumulative interest accretion of repayments of unsecured notes | — | (4,005 | ) | (3,433 | ) | ||||||
Contributions from historic tax credit transaction, net of deferred costs | — | 2,694 | 27,396 | ||||||||
Deferred financing obligation | (1,803 | ) | — | — | |||||||
Changes in assets and liabilities: | |||||||||||
Accounts receivable | 262 | (856 | ) | (4,173 | ) | ||||||
Other assets | 2,417 | (2,349 | ) | (2,782 | ) | ||||||
Accounts payable and accrued expenses | (8,355 | ) | 7,732 | (7,980 | ) | ||||||
Deferred income, gains and rent | (2,167 | ) | (7,220 | ) | (6,412 | ) | |||||
Other liabilities | (1,590 | ) | (425 | ) | 5,014 | ||||||
Net cash from operating activities | 157,283 | 178,749 | 185,127 | ||||||||
Cash flows from investing activities: | |||||||||||
Acquisition of properties | (77,555 | ) | (40,674 | ) | (50,681 | ) | |||||
Investments in available-for-sale securities | (105,250 | ) | — | — | |||||||
Proceeds from the sale of available-for-sale securities | 105,250 | — | — | ||||||||
Sales of properties, net | 170,918 | 155,956 | 50,089 | ||||||||
Proceeds from repayment of mortgage notes receivable | 23,364 | — | 40,000 | ||||||||
Capital expenditures | (99,112 | ) | (131,156 | ) | (180,943 | ) | |||||
Advances for purchase of tenant assets, net of repayments | 270 | 1,365 | (1,715 | ) | |||||||
Loan proceeds received from an unconsolidated Joint Venture | 566 | 1,388 | — | ||||||||
Loan provided to an unconsolidated Real Estate Venture partner | — | (1,122 | ) | (826 | ) | ||||||
Investment in unconsolidated Real Estate Ventures | (65,354 | ) | (5,277 | ) | (5,180 | ) | |||||
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income | 5,109 | 10,316 | 2,205 | ||||||||
Decrease in cash due to the deconsolidation of variable interest entities | — | — | (1,382 | ) | |||||||
Leasing costs | (31,243 | ) | (38,461 | ) | (23,503 | ) | |||||
Net cash from (used in) investing activities | (73,037 | ) | (47,665 | ) | (171,936 | ) | |||||
Cash flows from financing activities: | |||||||||||
Proceeds from New Unsecured Term Loans | 600,000 | — | — | ||||||||
Proceeds from Credit Facility borrowings | 90,500 | 706,002 | 565,000 | ||||||||
Repayments of Credit Facility borrowings | (297,000 | ) | (613,502 | ) | (474,000 | ) | |||||
Proceeds from mortgage notes payable | — | — | 256,104 | ||||||||
Repayments of mortgage notes payable | (68,513 | ) | (221,856 | ) | (51,966 | ) | |||||
Proceeds from unsecured notes | 248,183 | 321,448 | — | ||||||||
Deferred financing obligation non-cash interest expense | 935 | — | — | ||||||||
Net proceeds from issuance of common shares | — | 7,930 | 70,867 | ||||||||
Net proceeds from issuance of preferred shares | 96,237 | — | — | ||||||||
Redemption of preferred shares | (108,536 | ) | — | — | |||||||
F-9
Redemption of partnership units | (9,676 | ) | — | — | |||||||
Repayments of unsecured notes | (338,097 | ) | (105,381 | ) | (276,270 | ) | |||||
Repayments of unsecured term loan | (190,485 | ) | (145,500 | ) | — | ||||||
Net settlement of hedge transactions | — | (613 | ) | — | |||||||
Debt financing costs | (10,128 | ) | (4,249 | ) | (595 | ) | |||||
Refund of deferred financing costs related to forward commitment | — | — | 1,659 | ||||||||
Exercise of stock options | 976 | 350 | 37 | ||||||||
Distributions paid to shareholders | (96,030 | ) | (89,559 | ) | (87,345 | ) | |||||
Distributions to noncontrolling interest | (1,473 | ) | (2,309 | ) | (1,684 | ) | |||||
Net cash from (used in) financing activities | (83,107 | ) | (147,239 | ) | 1,807 | ||||||
Increase (decrease) in cash and cash equivalents | 1,139 | (16,155 | ) | 14,998 | |||||||
Cash and cash equivalents at beginning of year | 410 | 16,565 | 1,567 | ||||||||
Cash and cash equivalents at end of year | $ | 1,549 | $ | 410 | $ | 16,565 | |||||
Supplemental disclosure: | |||||||||||
Cash paid for interest, net of capitalized interest during the years ended December 31, 2012, 2011 and 2010 of $2,560, $1,997 and $10,385, respectively | $ | 137,823 | $ | 135,210 | $ | 135,206 | |||||
Supplemental disclosure of non-cash activity: | |||||||||||
Settlement of note receivable through foreclosure of a parcel of land | $ | — | $ | — | $ | (2,795 | ) | ||||
Proceeds from mortgage notes payable retained by lender and included in other assets | — | — | 396 | ||||||||
Change in investments in joint venture related to a contribution of land at period end | (15,222 | ) | — | — | |||||||
Change in investments in joint venture related to a contribution of services | (711 | ) | — | — | |||||||
Change in capital expenditures financed through accounts payable at period end | 7,059 | (3,896 | ) | (5,126 | ) | ||||||
Change in capital expenditures financed through retention payable at period end | 566 | (6,213 | ) | (2,066 | ) | ||||||
Change in unfunded tenant allowance | (1,089 | ) | (1,717 | ) | — | ||||||
Change in real estate investments due to the deconsolidation of variable interest entities | — | — | (37,126 | ) | |||||||
Change in mortgage notes payable due to the deconsolidation of variable interest entities | — | — | (42,887 | ) | |||||||
Change in non-controlling interest from issuance of limited partnership units | — | — | 77,733 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-10
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit and per unit information)
December 31, 2012 | December 31, 2011 | ||||||
ASSETS | |||||||
Real estate investments: | |||||||
Operating properties | $ | 4,726,169 | $ | 4,793,080 | |||
Accumulated depreciation | (954,665 | ) | (865,710 | ) | |||
Operating real estate investments, net | 3,771,504 | 3,927,370 | |||||
Construction-in-progress | 48,950 | 25,083 | |||||
Land inventory | 102,439 | 109,008 | |||||
Total real estate investments, net | 3,922,893 | 4,061,461 | |||||
Cash and cash equivalents | 1,549 | 410 | |||||
Accounts receivable, net | 13,232 | 14,718 | |||||
Accrued rent receivable, net | 122,066 | 108,101 | |||||
Investment in real estate ventures, at equity | 193,555 | 115,807 | |||||
Deferred costs, net | 122,243 | 115,362 | |||||
Intangible assets, net | 70,620 | 70,515 | |||||
Notes receivable | 7,226 | 18,186 | |||||
Other assets | 53,325 | 53,158 | |||||
Total assets | $ | 4,506,709 | $ | 4,557,718 | |||
LIABILITIES AND EQUITY | |||||||
Mortgage notes payable | $ | 442,974 | $ | 511,061 | |||
Unsecured credit facility | 69,000 | 275,500 | |||||
Unsecured term loans | 450,000 | 37,500 | |||||
Unsecured senior notes, net of discounts | 1,503,356 | 1,569,934 | |||||
Accounts payable and accrued expenses | 71,579 | 69,929 | |||||
Distributions payable | 23,652 | 23,895 | |||||
Deferred income, gains and rent | 82,947 | 99,569 | |||||
Acquired lease intangibles, net | 33,859 | 35,106 | |||||
Other liabilities | 55,826 | 45,528 | |||||
Total liabilities | 2,733,193 | 2,668,022 | |||||
Commitments and contingencies (Note 20) | |||||||
Redeemable limited partnership units at redemption value; 1,845,737 and 2,698,648 issued and outstanding in 2012 and 2011, respectively | 26,777 | 38,370 | |||||
Brandywine Operating Partnership, L.P.’s equity: | |||||||
7.50% Series D Preferred Mirror Units; issued and outstanding- 0 in 2012 and 2,000,000 in 2011 | — | 47,912 | |||||
7.375% Series E Preferred Mirror Units; issued and outstanding- 0 in 2012 and 2,300,000 in 2011 | — | 55,538 | |||||
6.90% Series E-Linked Preferred Mirror Units; issued and outstanding- 4,000,000 in 2012 and 0 in 2011 | 96,850 | — | |||||
General Partnership Capital, 143,538,733 and 142,690,755 units issued and outstanding in 2012 and 2011, respectively | 1,666,341 | 1,754,302 | |||||
Accumulated other comprehensive loss | (16,452 | ) | (6,426 | ) | |||
Total Brandywine Operating Partnership, L.P.’s equity | 1,746,739 | 1,851,326 | |||||
Total liabilities and partners’ equity | $ | 4,506,709 | $ | 4,557,718 | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-11
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit and per unit information)
Years ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Revenue: | |||||||||||
Rents | $ | 459,855 | $ | 462,771 | $ | 443,485 | |||||
Tenant reimbursements | 78,613 | 79,108 | 75,330 | ||||||||
Termination fees | 3,233 | 2,951 | 5,516 | ||||||||
Third party management fees, labor reimbursement and leasing | 12,116 | 11,536 | 11,830 | ||||||||
Other | 6,016 | 5,387 | 4,271 | ||||||||
Total revenue | 559,833 | 561,753 | 540,432 | ||||||||
Operating Expenses: | |||||||||||
Property operating expenses | 159,296 | 167,077 | 163,294 | ||||||||
Real estate taxes | 55,969 | 54,171 | 51,927 | ||||||||
Third party management expenses | 5,127 | 5,590 | 5,866 | ||||||||
Depreciation and amortization | 195,841 | 210,334 | 203,345 | ||||||||
General & administrative expenses | 25,413 | 24,602 | 23,306 | ||||||||
Total operating expenses | 441,646 | 461,774 | 447,738 | ||||||||
Operating income | 118,187 | 99,979 | 92,694 | ||||||||
Other Income (Expense): | |||||||||||
Interest income | 3,012 | 1,813 | 3,218 | ||||||||
Historic tax credit transaction income | 11,840 | 12,026 | — | ||||||||
Interest expense | (132,939 | ) | (131,405 | ) | (132,640 | ) | |||||
Interest expense — amortization of deferred financing costs | (6,208 | ) | (4,991 | ) | (3,770 | ) | |||||
Interest expense — financing obligation | (850 | ) | — | — | |||||||
Recognized hedge activity | (2,985 | ) | — | — | |||||||
Equity in income of real estate ventures | 2,741 | 3,775 | 5,305 | ||||||||
Net gain (loss) on sale of interests in real estate | — | 2,791 | (22 | ) | |||||||
Net gain on sale of undepreciated real estate | — | 45 | — | ||||||||
Loss on real estate venture formation | (950 | ) | (222 | ) | — | ||||||
Loss on early extinguishment of debt | (22,002 | ) | (2,776 | ) | (2,110 | ) | |||||
Loss from continuing operations | (30,154 | ) | (18,965 | ) | (37,325 | ) | |||||
Discontinued operations: | |||||||||||
Income from discontinued operations | 1,909 | 6,986 | 8,739 | ||||||||
Net gain on disposition of discontinued operations | 34,774 | 7,264 | 10,980 | ||||||||
Total discontinued operations | 36,683 | 14,250 | 19,719 | ||||||||
Net income (loss) | 6,529 | (4,715 | ) | (17,606 | ) | ||||||
Distribution to Preferred Units | (10,405 | ) | (7,992 | ) | (7,992 | ) | |||||
Preferred unit redemption charge | (4,052 | ) | — | — | |||||||
Amount allocated to unvested restricted unitholders | (376 | ) | (505 | ) | (512 | ) | |||||
Net loss attributable to Common Partnership Unitholders of Brandywine Operating Partnership, L.P. | $ | (8,304 | ) | $ | (13,212 | ) | $ | (26,110 | ) | ||
Basic income (loss) per Common Partnership Unit: | |||||||||||
Continuing operations | $ | (0.31 | ) | $ | (0.19 | ) | (0.33 | ) | |||
Discontinued operations | 0.25 | 0.10 | 0.14 | ||||||||
$ | (0.06 | ) | $ | (0.09 | ) | $ | (0.19 | ) | |||
Diluted income (loss) per Common Partnership Unit: | |||||||||||
Continuing operations | $ | (0.31 | ) | $ | (0.19 | ) | $ | (0.33 | ) | ||
Discontinued operations | 0.25 | 0.10 | 0.14 | ||||||||
$ | (0.06 | ) | $ | (0.09 | ) | $ | (0.19 | ) | |||
Basic weighted average common partnership units outstanding | 145,883,217 | 145,118,841 | 137,454,796 | ||||||||
Diluted weighted average common partnership units outstanding | 145,883,217 | 145,118,841 | 137,454,796 | ||||||||
Net income (loss) attributable to Brandywine Operating Partnership, L.P. | |||||||||||
Loss from continuing operations | $ | (30,154 | ) | $ | (18,965 | ) | $ | (37,325 | ) | ||
Income from discontinued operations | 36,683 | 14,250 | 19,719 | ||||||||
Net income (loss) | $ | 6,529 | $ | (4,715 | ) | $ | (17,606 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-12
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Net income (loss) | $ | 6,529 | $ | (4,715 | ) | $ | (17,606 | ) | |||
Comprehensive income (loss): | |||||||||||
Unrealized loss on derivative financial instruments | (7,338 | ) | (4,499 | ) | 7,320 | ||||||
Settlement of interest rate swaps | (2,985 | ) | — | — | |||||||
Reclassification of realized (gains)/losses on derivative financial instruments to operations, net | 297 | 153 | 28 | ||||||||
Total comprehensive income (loss) | (10,026 | ) | (4,346 | ) | 7,348 | ||||||
Comprehensive loss attributable to Brandywine Operating Partnership, L.P. | $ | (3,497 | ) | $ | (9,061 | ) | $ | (10,258 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
F-13
BRANDYWINE OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY
For the Years Ended December 31, 2012, 2011, and 2010
(in thousands, except Units)
Series D Preferred Mirror Units | Series E Preferred Mirror Units | Series E-Linked Preferred Mirror Units | General Partner Capital | ||||||||||||||||||||||||||||||||||||
Units | Amount | Units | Amount | Units | Amount | Units | Amount | Accumulated Other Comprehensive Income | Non-controlling Interest Consolidated Real Estate Ventures | Total Partners’ Equity | |||||||||||||||||||||||||||||
BALANCE, December 31, 2009 | 2,000,000 | $ | 47,912 | 2,300,000 | $ | 55,538 | — | $ | — | 128,597,412 | $ | 1,783,033 | $ | (9,428 | ) | $ | 65 | $ | 1,877,120 | ||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (17,606 | ) | — | — | (17,606 | ) | ||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | — | — | 7,348 | — | 7,348 | ||||||||||||||||||||||||||||
Deferred compensation obligation | — | — | — | — | — | — | (2,409 | ) | — | — | — | — | |||||||||||||||||||||||||||
Issuance of LP Units | — | — | — | — | — | — | 5,742,268 | 71,981 | — | — | 71,981 | ||||||||||||||||||||||||||||
Bonus share issuance | — | — | — | — | — | — | 32,607 | 369 | — | — | 369 | ||||||||||||||||||||||||||||
Conversion of LP Units to common shares | — | — | — | — | — | — | 17,468 | 466 | — | — | 466 | ||||||||||||||||||||||||||||
Vesting of restricted units | — | — | — | — | — | — | 76,598 | (227 | ) | — | — | (227 | ) | ||||||||||||||||||||||||||
Restricted stock amortization | — | — | — | — | — | — | — | 3,483 | — | — | 3,483 | ||||||||||||||||||||||||||||
Restricted performance units amortization | — | — | — | — | — | — | — | 965 | — | — | 965 | ||||||||||||||||||||||||||||
Outperformance plan amortization | — | — | — | — | — | — | — | 380 | — | — | 380 | ||||||||||||||||||||||||||||
Option amortization | — | — | — | — | — | — | — | 1,132 | — | — | 1,132 | ||||||||||||||||||||||||||||
Trustee fees paid in shares | — | — | — | — | — | — | 8,412 | 98 | — | — | 98 | ||||||||||||||||||||||||||||
Exercise of options | — | — | — | — | — | — | 12,761 | 37 | — | — | 37 | ||||||||||||||||||||||||||||
Adjustment of redeemable partnership units to liquidation value at period end | — | — | — | — | — | — | — | (13,839 | ) | — | — | (13,839 | ) | ||||||||||||||||||||||||||
Adjustment to non-controlling interest | — | — | — | — | — | — | — | — | — | (27 | ) | (27 | ) | ||||||||||||||||||||||||||
Cumulative effect of accounting change for variable interest entities | — | — | — | — | — | — | — | 1,439 | — | (38 | ) | 1,401 | |||||||||||||||||||||||||||
Distributions to Preferred Mirror Units | — | — | — | — | — | — | — | (7,992 | ) | — | — | (7,992 | ) | ||||||||||||||||||||||||||
Distributions to general partnership unitholders | — | — | — | — | — | — | — | (80,170 | ) | — | — | (80,170 | ) | ||||||||||||||||||||||||||
BALANCE, December 31, 2010 | 2,000,000 | $ | 47,912 | 2,300,000 | $ | 55,538 | — | — | 134,485,117 | $ | 1,743,549 | $ | (2,080 | ) | $ | — | $ | 1,844,919 | |||||||||||||||||||||
F-14
Series D Preferred Mirror Units | Series E Preferred Mirror Units | Series E-Linked Preferred Mirror Units | General Partner Capital | ||||||||||||||||||||||||||||||||||||
Units | Amount | Units | Amount | Units | Amount | Units | Amount | Accumulated Other Comprehensive Income | Non-controlling Interest Consolidated Real Estate Ventures | Total Partners’ Equity | |||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (4,715 | ) | — | — | (4,715 | ) | ||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (4,346 | ) | — | (4,346 | ) | ||||||||||||||||||||||||||
Deferred compensation obligation | — | — | — | — | — | — | (845 | ) | (16 | ) | — | — | (16 | ) | |||||||||||||||||||||||||
Issuance of LP Units | — | — | — | — | — | — | 679,285 | 8,272 | — | — | 8,272 | ||||||||||||||||||||||||||||
Bonus share issuance | — | — | — | — | — | — | 463 | 6 | — | — | 6 | ||||||||||||||||||||||||||||
Conversion of LP Units to common shares | — | — | — | — | — | — | 7,204,104 | 86,038 | — | — | 86,038 | ||||||||||||||||||||||||||||
Share choice plan issuance | — | — | — | — | — | — | (1,684 | ) | (55 | ) | — | — | (55 | ) | |||||||||||||||||||||||||
Vesting of restricted units | — | — | — | — | — | — | 201,464 | (352 | ) | — | — | (352 | ) | ||||||||||||||||||||||||||
Restricted stock amortization | — | — | — | — | — | — | — | 2,937 | — | — | 2,937 | ||||||||||||||||||||||||||||
Restricted performance units amortization | — | — | — | — | — | — | — | 1,679 | — | — | 1,679 | ||||||||||||||||||||||||||||
Outperformance plan amortization | — | — | — | — | — | — | — | 123 | — | — | 123 | ||||||||||||||||||||||||||||
Option amortization | — | — | — | — | — | — | — | 1,487 | — | — | 1,487 | ||||||||||||||||||||||||||||
Trustee fees paid in shares | — | — | — | — | — | — | 2,672 | 32 | — | — | 32 | ||||||||||||||||||||||||||||
Exercise of options | — | — | — | — | — | — | 120,179 | 350 | — | — | 350 | ||||||||||||||||||||||||||||
Adjustment of redeemable partnership units to liquidation value at period end | — | — | — | — | — | — | — | 5,778 | — | — | 5,778 | ||||||||||||||||||||||||||||
Distributions to Preferred Mirror Units | — | — | — | — | — | — | — | (7,992 | ) | — | — | (7,992 | ) | ||||||||||||||||||||||||||
Distributions to general partnership unitholders | — | — | — | — | — | — | — | (82,819 | ) | — | — | (82,819 | ) | ||||||||||||||||||||||||||
BALANCE, December 31, 2011 | 2,000,000 | $ | 47,912 | 2,300,000 | $ | 55,538 | — | — | 142,690,755 | $ | 1,754,302 | $ | (6,426 | ) | $ | — | $ | 1,851,326 | |||||||||||||||||||||
F-15
Series D Preferred Mirror Units | Series E Preferred Mirror Units | Series E-Linked Preferred Mirror Units | General Partner Capital | ||||||||||||||||||||||||||||||||||||
Units | Amount | Units | Amount | Units | Amount | Units | Amount | Accumulated Other Comprehensive Income | Non-controlling Interest Consolidated Real Estate Ventures | Total Partners’ Equity | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 6,529 | — | — | 6,529 | ||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (10,026 | ) | — | (10,026 | ) | ||||||||||||||||||||||||||
Deferred compensation obligation | — | — | — | — | — | — | (5,564 | ) | — | — | — | — | |||||||||||||||||||||||||||
Issuance of preferred units | — | — | — | — | 4,000,000 | 96,850 | — | — | — | — | 96,850 | ||||||||||||||||||||||||||||
Preferred unit issuance costs | — | — | — | — | — | — | — | (613 | ) | — | — | (613 | ) | ||||||||||||||||||||||||||
Redemption of preferred units | (2,000,000 | ) | (47,912 | ) | (2,300,000 | ) | (55,538 | ) | — | — | — | — | — | — | (103,450 | ) | |||||||||||||||||||||||
Bonus share issuance | — | — | — | — | — | — | 35,703 | 387 | — | — | 387 | ||||||||||||||||||||||||||||
Conversion of LP Units to common units | — | — | — | — | — | — | 20,464 | (49 | ) | — | — | (49 | ) | ||||||||||||||||||||||||||
Conversion of LP Units to cash | — | — | — | — | — | — | — | (9,741 | ) | — | — | (9,741 | ) | ||||||||||||||||||||||||||
Vesting of restricted units | — | — | — | — | — | — | 293,614 | (1,385 | ) | — | — | (1,385 | ) | ||||||||||||||||||||||||||
Restricted stock amortization | — | — | — | — | — | — | — | 3,271 | — | — | 3,271 | ||||||||||||||||||||||||||||
Restricted stock forfeitures | — | — | — | — | — | — | — | 35 | — | — | 35 | ||||||||||||||||||||||||||||
Vesting of restricted performance units | — | — | — | — | — | — | 272,131 | (1,495 | ) | — | — | (1,495 | ) | ||||||||||||||||||||||||||
Restricted performance units amortization | — | — | — | — | — | — | — | 3,379 | — | — | 3,379 | ||||||||||||||||||||||||||||
Option amortization | — | — | — | — | — | — | — | 1,636 | — | — | 1,636 | ||||||||||||||||||||||||||||
Trustee fees paid in shares | — | — | — | — | — | — | 1,336 | 15 | — | — | 15 | ||||||||||||||||||||||||||||
Exercise of options | — | — | — | — | — | — | 230,294 | 976 | — | — | 976 | ||||||||||||||||||||||||||||
Adjustment of redeemable partnership units to liquidation value at period end | — | — | — | — | — | — | — | 9,968 | — | — | 9,968 | ||||||||||||||||||||||||||||
Distributions to Preferred Mirror Units | — | — | — | — | — | — | — | (10,405 | ) | — | — | (10,405 | ) | ||||||||||||||||||||||||||
Preferred Mirror Units redemption charges | — | — | — | — | — | — | — | (4,052 | ) | — | — | (4,052 | ) | ||||||||||||||||||||||||||
Distributions to general partnership unitholders | — | — | — | — | — | — | — | (86,417 | ) | — | — | (86,417 | ) | ||||||||||||||||||||||||||
BALANCE, December 31, 2012 | — | $ | — | — | $ | — | 4,000,000 | $ | 96,850 | 143,538,733 | $ | 1,666,341 | $ | (16,452 | ) | $ | — | $ | 1,746,739 | ||||||||||||||||||||
F-16
BRANDYWINE OPERATING PARTNERSHIP L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | 6,529 | $ | (4,715 | ) | $ | (17,606 | ) | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: | |||||||||||
Depreciation and amortization | 198,579 | 219,110 | 214,776 | ||||||||
Amortization of deferred financing costs | 6,208 | 4,991 | 3,770 | ||||||||
Amortization of debt discount/(premium), net | 1,760 | 1,567 | 831 | ||||||||
Amortization of stock compensation costs | 5,685 | 5,282 | 5,102 | ||||||||
Shares used for employee taxes upon vesting of share awards | (2,493 | ) | (1,012 | ) | (288 | ) | |||||
Recognized hedge activity | 2,985 | — | — | ||||||||
Straight-line rent income | (23,566 | ) | (20,298 | ) | (13,705 | ) | |||||
Amortization of acquired above (below) market leases to rental revenue, net | (6,084 | ) | (5,384 | ) | (5,960 | ) | |||||
Straight-line ground rent expense | 1,897 | 1,924 | 1,647 | ||||||||
Provision for doubtful accounts | 2,198 | 1,924 | 2,479 | ||||||||
Net gain on sale of interests in real estate | (34,774 | ) | (10,008 | ) | (11,011 | ) | |||||
Loss on real estate venture formation | 950 | 222 | — | ||||||||
Loss on early extinguishment of debt | 22,002 | 2,776 | 2,110 | ||||||||
Historic tax credit transaction income | (11,840 | ) | (12,026 | ) | — | ||||||
Real estate venture income in excess of distributions | (1,517 | ) | (1,175 | ) | (4,648 | ) | |||||
Cumulative interest accretion of repayments of unsecured notes | — | (4,005 | ) | (3,433 | ) | ||||||
Contributions from historic tax credit transaction, net of deferred costs | — | 2,694 | 27,396 | ||||||||
Deferred financing obligation | (1,803 | ) | — | — | |||||||
Changes in assets and liabilities: | |||||||||||
Accounts receivable | 262 | (856 | ) | (4,173 | ) | ||||||
Other assets | 2,417 | (2,349 | ) | (2,782 | ) | ||||||
Accounts payable and accrued expenses | (8,355 | ) | 7,732 | (7,980 | ) | ||||||
Deferred income, gains and rent | (2,167 | ) | (7,220 | ) | (6,412 | ) | |||||
Other liabilities | (1,590 | ) | (425 | ) | 5,014 | ||||||
Net cash from operating activities | 157,283 | 178,749 | 185,127 | ||||||||
Cash flows from investing activities: | |||||||||||
Acquisition of properties | (77,555 | ) | (40,674 | ) | (50,681 | ) | |||||
Investments in available-for-sale securities | (105,250 | ) | — | — | |||||||
Proceeds from sale of available-for-sale securities | 105,250 | — | — | ||||||||
Sales of properties, net | 170,918 | 155,956 | 50,089 | ||||||||
Proceeds from repayment of mortgage notes receivable | 23,364 | — | 40,000 | ||||||||
Capital expenditures | (99,112 | ) | (131,156 | ) | (180,943 | ) | |||||
Advances for purchase of tenant assets, net of repayments | 270 | 1,365 | (1,715 | ) | |||||||
Loan proceeds received from an unconsolidated Joint Venture | 566 | 1,388 | — | ||||||||
Loan provided to an unconsolidated Real Estate Venture partner | — | (1,122 | ) | (826 | ) | ||||||
Investment in unconsolidated Real Estate Ventures | (65,354 | ) | (5,277 | ) | (5,180 | ) | |||||
Cash distributions from unconsolidated Real Estate Ventures in excess of cumulative equity income | 5,109 | 10,316 | 2,205 | ||||||||
Decrease in cash due to the deconsolidation of variable interest entities | — | — | (1,382 | ) | |||||||
Leasing costs | (31,243 | ) | (38,461 | ) | (23,503 | ) | |||||
Net cash from (used in) investing activities | (73,037 | ) | (47,665 | ) | (171,936 | ) | |||||
Cash flows from financing activities: | |||||||||||
Proceeds from New Unsecured Term Loans | 600,000 | — | — | ||||||||
Proceeds from Credit Facility borrowings | 90,500 | 706,002 | 565,000 | ||||||||
Repayments of Credit Facility borrowings | (297,000 | ) | (613,502 | ) | (474,000 | ) | |||||
Proceeds from mortgage notes payable | — | — | 256,104 | ||||||||
Repayments of mortgage notes payable | (68,513 | ) | (221,856 | ) | (51,966 | ) | |||||
Proceeds from unsecured notes | 248,183 | 321,448 | — | ||||||||
Deferred financing obligation non-cash interest expense | 935 | — | — | ||||||||
Net proceeds from issuance of common units | — | 7,930 | 70,867 | ||||||||
Net proceeds from issuance of preferred units | 96,237 | — | — | ||||||||
Redemption of preferred units | (108,536 | ) | — | — | |||||||
F-17
Redemption of partnership units | (9,676 | ) | — | — | |||||||
Repayments of unsecured notes | (338,097 | ) | (105,381 | ) | (276,270 | ) | |||||
Repayments of unsecured term loan | (190,485 | ) | (145,500 | ) | — | ||||||
Net settlement of hedge transactions | — | (613 | ) | — | |||||||
Debt financing costs | (10,128 | ) | (4,249 | ) | (595 | ) | |||||
Refund of deferred financing costs related to forward commitment | — | — | 1,659 | ||||||||
Exercise of unit options | 976 | 350 | 37 | ||||||||
Distributions paid to preferred and common partnership unitholders | (97,503 | ) | (91,868 | ) | (89,029 | ) | |||||
Net cash from (used in) financing activities | (83,107 | ) | (147,239 | ) | 1,807 | ||||||
Increase (decrease) in cash and cash equivalents | 1,139 | (16,155 | ) | 14,998 | |||||||
Cash and cash equivalents at beginning of year | 410 | 16,565 | 1,567 | ||||||||
Cash and cash equivalents at end of year | $ | 1,549 | $ | 410 | $ | 16,565 | |||||
Supplemental disclosure: | |||||||||||
Cash paid for interest, net of capitalized interest during the years ended December 31, 2012, 2011 and 2010 of $2,560, $1,997 and $10,385, respectively | $ | 137,823 | $ | 135,210 | $ | 135,206 | |||||
Supplemental disclosure of non-cash activity: | |||||||||||
Settlement of note receivable through foreclosure of a parcel of land | — | — | (2,795 | ) | |||||||
Proceeds from mortgage notes payable retained by lender and included in other assets | — | — | 396 | ||||||||
Change in investments in joint venture related to a contribution of land at period end | (15,222 | ) | — | — | |||||||
Change in investments in joint venture related to a contribution of services | (711 | ) | — | — | |||||||
Change in capital expenditures financed through accounts payable at period end | 7,059 | (3,896 | ) | (5,126 | ) | ||||||
Change in capital expenditures financed through retention payable at period end | 566 | (6,213 | ) | (2,066 | ) | ||||||
Change in unfunded tenant allowance | (1,089 | ) | (1,717 | ) | — | ||||||
Change in real estate investments due to the deconsolidation of variable interest entities | — | — | (37,126 | ) | |||||||
Change in mortgage notes payable due to the deconsolidation of variable interest entities | — | — | (42,887 | ) | |||||||
Change in non-controlling interest from issuance of limited partnership units | — | — | 77,733 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011, AND 2010
1. ORGANIZATION OF THE PARENT COMPANY AND THE OPERATING PARTNERSHIP
The Parent Company is a self-administered and self-managed real estate investment trust (“REIT”) that provides leasing, property management, development, redevelopment, acquisition and other tenant-related services for a portfolio of office and industrial properties. The Parent Company owns its assets and conducts its operations through the Operating Partnership and subsidiaries of the Operating Partnership. The Parent Company is the sole general partner of the Operating Partnership and, as of December 31, 2012, owned a 98.7% interest in the Operating Partnership. The Parent Company’s common shares of beneficial interest are publicly traded on the New York Stock Exchange under the ticker symbol “BDN”.
As of December 31, 2012, the Company owned 221 properties, consisting of 193 office properties, 19 industrial facilities, five mixed-use properties, two redevelopment properties and two re-entitlement properties (collectively, the “Properties”) containing an aggregate of approximately 25.1 million net rentable square feet. In addition, as of December 31, 2012, the Company owned economic interests in 19 unconsolidated real estate ventures that contain approximately 7.0 million net rentable square feet (collectively, the “Real Estate Ventures”). As of December 31, 2012, the Company also owned 434 acres of undeveloped land, and held options to purchase approximately 52 additional acres of undeveloped land. The Properties and the properties owned by the Real Estate Ventures are located in or near Philadelphia, Pennsylvania; Metropolitan Washington, D.C.; Southern and Central New Jersey; Richmond, Virginia; Wilmington, Delaware; Austin, Texas and Oakland, Concord, Carlsbad and Rancho Bernardo, California. In addition to managing properties that the Company owns, as of December 31, 2012, the Company was managing approximately 7.4 million net rentable square feet of office and industrial properties for third parties and the Real Estate Ventures.
All references to building square footage, acres, occupancy percentage and the number of buildings are unaudited.
The Company conducts its third-party real estate management services business primarily through six management companies (collectively, the “Management Companies”): Brandywine Realty Services Corporation (“BRSCO”), BTRS, Inc. (“BTRS”), Brandywine Properties I Limited, Inc. (“BPI”), BDN Brokerage, LLC (“BBL”), Brandywine Properties Management, L.P. (“BPM”) and Brandywine Brokerage Services, LLC (“BBS”). Each of BRSCO, BTRS and BPI is a taxable REIT subsidiary. As of December 31, 2012, the Operating Partnership owns, directly and indirectly, 100% of each of BRSCO, BTRS, BPI, BBL and BPM. As of December 31, 2012, the management company subsidiaries were managing properties containing an aggregate of approximately 32.5 million net rentable square feet, of which approximately 25.1 million net rentable square feet related to Properties owned by the Company and approximately 7.4 million net rentable square feet related to properties owned by third parties and Real Estate Ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain amounts have been reclassified in prior years to conform to the current year presentation. The reclassifications are related to the treatment of sold properties as discontinued operations on the statement of operations for all periods presented.
Principles of Consolidation
When the Company obtains an economic interest in an entity, the Company evaluates the entity to determine if the entity is deemed a variable interest entity (“VIE”), and if the Company is deemed to be the primary beneficiary, in accordance with the accounting standard for the consolidation of variable interest entities. The accounting standard for the consolidation of VIEs requires the Company to qualitatively assess if the Company was the primary beneficiary of the VIEs based on whether the Company had both (i) the power to direct those matters that most significantly impacted the activities of the VIE and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. For entities that the Company has determined to be VIEs but for which it is not the primary beneficiary, its maximum exposure to loss is the carrying amount of its investments, as the Company has not provided any guarantees other than the guarantee described for PJP VII which was approximately $0.6 million at December 31, 2012 (see Note 4). Also, for all entities determined to be VIEs, the Company does not provide financial support to the real estate ventures through liquidity arrangements, guarantees or other similar commitments. When an entity is not deemed to be a VIE, the Company considers the provisions of the same accounting standard to determine whether a general partner or managing member, or the general partners as a group, controls a limited partnership or similar entity when the limited partners have certain rights. The Company consolidates (i) entities that are VIEs and of which the Company is deemed to be the primary beneficiary and (ii) entities that are non-VIEs and controlled by the Company and in which the limited
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partners neither have the ability to dissolve the entity or remove the Company without cause nor any substantive participating rights. Entities that the Company accounts for under the equity method (i.e., at cost, increased or decreased by the Company's share of earnings or losses, plus contributions, less distributions) include (i) entities that are VIEs and of which the Company is not deemed to be the primary beneficiary (ii) entities that are non-VIEs which the Company does not control, but over which the Company has the ability to exercise significant influence and (iii) entities that are non-VIEs for which the Company maintains an ownership interest through its general partner or managing member status, but the limited partners in the entity have the substantive ability to dissolve the entity or remove the Company without cause or have substantive participating rights. The Company continuously assesses its determination of whether an entity is a VIE and who the primary beneficiary is, and whether or not the limited partners in an entity have substantive rights, more particularly if certain events occur that are likely to cause a change in the original determinations. The Company's assessment includes a review of applicable documents such as, but not limited to, applicable partnership agreements, real estate venture agreements, LLC agreements, management and leasing agreements to determine whether the Company has control to direct the business activities of the entities. The portion of the entities that are consolidated but not owned by the Company is presented as non-controlling interest as of and during the periods consolidated. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue, valuation of real estate and related intangible assets and liabilities, useful lives of fixed assets, impairment of long-lived assets, equity method investments, allowance for doubtful accounts and deferred costs.
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment losses. The cost of operating properties reflects their purchase price or development cost. Acquisition related costs are expensed as incurred. Costs incurred for the renovation and betterment of an operating property are capitalized to the Company’s investment in that property. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives. Fully-depreciated assets are removed from the accounts.
Purchase Price Allocation
The Company allocates the purchase price of properties to net tangible and identified intangible assets acquired based on fair values. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) the Company’s estimate of the fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease (includes the below market fixed renewal period). Capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining non-cancelable terms of the respective leases, including any below market fixed-rate renewal periods.
Other intangible assets also include amounts representing the value of 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. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. This intangible asset is amortized to expense over the remaining term of the respective leases and any fixed-rate bargain renewal periods. Company estimates of value are made using methods similar to those used by independent appraisers or by using independent appraisals. Factors considered by the Company in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from three to twelve months. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. The Company also uses the information obtained as a result of its pre-acquisition due diligence as part of its consideration of the accounting standard governing asset retirement obligations and when necessary, will record a conditional asset retirement obligation as part of its purchase price.
Characteristics considered by the Company in allocating value to its tenant relationships include the nature and extent of the Company’s business relationship with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit
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quality and expectations of lease renewals, among other factors. The value of tenant relationship intangibles is amortized over the remaining initial lease term and expected renewals, but in no event longer than the remaining depreciable life of the building. The value of in-place leases is 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 in-place lease values and tenant relationship values, is charged to expense and market rate adjustments (above or below) are recorded to revenue.
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 55 years) and tenant improvements (the shorter of the lease term or the life of the asset).
The Company's 2011 consolidated statement of operations contained an out of period depreciation and amortization expense adjustment of $4.7 million relating to intangible assets representing tenant relationships and in-place leases that should have been written off in prior periods. This resulted in the overstatement of depreciation and amortization expense by $4.7 million in 2011. During the year ended December 31, 2010, depreciation and amortization expense was overstated by $1.7 million and was understated by $1.4 million, $1.8 million, $1.7 million and $1.5 million during the years ended December 31, 2009, 2008, 2007, and 2006, respectively. As management believes that this error was not material to prior years' consolidated financial statements and that the impact of recording the error during 2011 was not material to the Company's consolidated financial statements, the Company recorded the related adjustment during 2011.
Construction in Progress
Project costs directly associated with the development and construction of a real estate project are capitalized as construction in progress. Construction in progress also includes costs related to ongoing tenant improvement projects. In addition, interest, real estate taxes and other expenses that are directly associated with the Company’s development activities are capitalized until the property is placed in service. Internal direct construction costs totaling $4.7 million in 2012, $4.0 million in 2011, $3.9 million in 2010 and interest totaling $2.6 million in 2012, $2.0 million in 2011, and $10.4 million in 2010 were capitalized related to development of certain Properties and land holdings.
During the years ended December 31, 2012, 2011 and 2010, the Company's internal direct construction costs are comprised entirely of capitalized salaries. The following table shows the amount of compensation expense (including bonuses and benefits) capitalized for the years presented (in thousands):
December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Development | $ | 57 | $ | — | $ | 2,331 | |||||
Redevelopment | 353 | — | 127 | ||||||||
Tenant Improvements | 4,259 | 4,034 | 1,395 | ||||||||
Total | $ | 4,669 | $ | 4,034 | $ | 3,853 | |||||
Impairment or Disposal of Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair-value of the property. The Company is required to make subjective assessments as to whether there are impairments in the values of the investments in long-lived assets. These assessments have a direct impact on its net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Although the Company’s strategy is generally to hold its properties over the long-term, the Company will dispose of properties to meet its liquidity needs or for other strategic needs. If the Company’s strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair value less costs to sell, and such loss could be material. If the Company determines that impairment has occurred and the assets are classified as held and used, the affected assets must be reduced to their fair value.
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Where properties have been identified as having a potential for sale, additional judgments are required related to the determination as to the appropriate period over which the undiscounted cash flows should include the operating cash flows and the amount included as the estimated residual value. Management determines the amounts to be included based on a probability weighted cash flow. This requires significant judgment. In some cases, the results of whether an impairment is indicated are sensitive to changes in assumptions input into the estimates, including the hold period until expected sale.
During the Company’s impairment review for the years ended December 31, 2012, 2011 and 2010, the Company determined that no impairment charges were necessary.
The Company entered into development agreements related to two parcels of land under option for ground lease that required the Company to commence development by December 31, 2012. During the current year, the Company was granted an extension to commence development by December 31, 2015 related to these development agreements, and will incur a $3.5 million extension fee over the extension period. If the Company determines that it will not be able to start the construction by the date specified, or if the Company determines development is not in its best economic interest and an additional extension of the development period cannot be negotiated, the Company will have to write off all costs that it has incurred in preparing these parcels of land for development, amounting to $13.6 million as of December 31, 2012. The Company expects to commence development on one of the land parcels during 2013.
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, but believes this risk is mitigated by only investing in or through major financial institutions.
Restricted Cash
Restricted cash consists of cash held as collateral to provide credit enhancement for the Company’s mortgage debt, cash for property taxes, capital expenditures and tenant improvements. Restricted cash is included in other assets as discussed below.
Accounts Receivable and Accrued Rent Receivable
Leases with tenants are accounted for as operating leases. Minimum annual rentals under tenant leases are recognized on a straight-line basis over the term of the related lease. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payment terms is recorded as “accrued rent receivable, net” on the accompanying balance sheets. Included in current tenant receivables are tenant reimbursements which are comprised of amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred. As of December 31, 2012 and 2011, no tenant represented more than 10% of accounts receivable and accrued rent receivable.
Tenant receivables and accrued rent receivables are carried net of the allowances for doubtful accounts of $3.1 million and $13.5 million in 2012, respectively and $3.4 million and $12.1 million in 2011, respectively. The allowance is an estimate based on two calculations that are combined to determine the total amount reserved. First, the Company evaluates specific accounts where it has determined that a tenant may have an inability to meet its financial obligations. In these situations, the Company uses its judgment, based on the facts and circumstances, and records a specific reserve for that tenant against amounts due to reduce the receivable to the amount that the Company expects to collect. These reserves are reevaluated and adjusted as additional information becomes available. Second, a reserve is established for all tenants based on a range of percentages applied to receivable aging categories for tenant receivables. For accrued rent receivables, the Company considers the results of the evaluation of specific accounts and also considers other factors including assigning risk factors to different industries based on its tenants SIC classification. Considering various factors including assigning a risk factor to different industries, these percentages are based on historical collection and write-off experience adjusted for current market conditions, which requires management’s judgments.
Investments in Unconsolidated Real Estate Ventures
The Company accounts for its investments in unconsolidated Real Estate Ventures under the equity method of accounting as it is not the primary beneficiary (for VIE’s) and the Company exercises significant influence, but does not control these entities under the provisions of the entities’ governing agreements pursuant to the accounting standard for the consolidation of VIEs. Under the equity method, investments in unconsolidated Real Estate Ventures are recorded initially at cost, as Investments in Real Estate Ventures, and subsequently adjusted for equity in earnings, cash contributions, less distributions and impairments. On a periodic basis, management also assesses whether there are any indicators that the value of the Company’s investments in unconsolidated Real Estate Ventures may be other than temporarily impaired. An investment is impaired only if the value of the investment, as
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estimated by management, is less than the carrying value of the investment and the decline is other than temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the value of the investment, as estimated by management. The determination as to whether an impairment exists requires significant management judgment about the fair value of its ownership interest. Fair value is determined through various valuation techniques, including but not limited to, discounted cash flow models, quoted market values and third party appraisals.
To the extent that the Company acquires an interest in or contributes assets to a Real Estate Venture project, the difference between the Company’s cost basis in the investment and the value of the Real Estate Venture or asset contributed is amortized over the life of the related assets, intangibles and liabilities and such adjustment is included in the Company’s share of equity in income of unconsolidated Real Estate Ventures. For purposes of cash flow presentation, distributions from unconsolidated Real Estate Ventures are presented as part of operating activities when they are considered as return on investments. Distributions in excess of the Company’s share in the cumulative unconsolidated Real Estate Ventures’ earnings are considered as return of investments and are presented as part of investing activities in accordance with the accounting standard for cash flow presentation.
Deferred Costs
Costs incurred in connection with property leasing are capitalized as deferred leasing costs. Deferred leasing costs consist primarily of leasing commissions and internal leasing costs that are amortized using the straight-line method over the life of the respective lease which generally ranges from one to 15 years. Management re-evaluates the remaining useful lives of leasing costs as economic and market conditions change.
Costs incurred in connection with debt financing are capitalized as deferred financing costs and charged to interest expense over the terms of the related debt agreements. Deferred financing costs consist primarily of loan fees which are amortized over the related loan term on a basis that approximates the effective interest method. Deferred financing costs are accelerated, when debt is extinguished, as part of interest expense- amortization of deferred financing costs within the Company's consolidated statements of operations. Original issue discounts are recognized as part of the gain or loss on extinguishment of debt, as appropriate.
Other Assets
Other assets is comprised of the following (in thousands):
December 31, | |||||||
2012 | 2011 | ||||||
Prepaid Ground Rent | $ | 7,527 | $ | 7,615 | |||
Prepaid Real Estate Taxes | 8,116 | 7,983 | |||||
Rent inducements, net | 7,101 | 7,572 | |||||
Cash surrender value of life insurance | 11,515 | 9,261 | |||||
Restricted cash | 4,354 | 2,528 | |||||
Marketable securities | 2,366 | 2,366 | |||||
Prepaid insurance | 2,370 | 2,589 | |||||
Furniture, fixtures and equipment | 437 | 634 | |||||
Deposits on future settlements | 1,129 | 3,884 | |||||
Others | 8,410 | 8,726 | |||||
Total | $ | 53,325 | $ | 53,158 | |||
Notes Receivable
As of December 31, 2012, notes receivable included a $7.2 million purchase money mortgage with a 20 year amortization period that bears interest at 8.5% .
During 2012, the $23.5 million seven year purchase money mortgage note receivable (balance as of the payment date, including accrued but unpaid interest), which related to the 2009 sale of two Trenton properties, was paid in full prior to its scheduled maturity of October 2016. The Company also recognized a $12.9 million deferred gain and $1.0 million of interest income at the time of payment, in accordance with the accounting standard for installment sales.
During 2012, the $0.6 million loan (balance as of the payment date) bearing interest at 10% was also paid in full. This loan was previously due in 2015 before being paid in full.
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The Company periodically assesses the collectability of the notes receivable in accordance with the accounting standard for loan receivables. The Company's $7.2 million outstanding purchase money mortgage note mentioned above was extended to a buyer (the “Borrower”) of a parcel of land in Newtown, Pennsylvania in December 2006. During 2011, the Borrower, who is developing a residential community, defaulted on the note and as a result, a forbearance agreement was entered into between the Company and the Borrower. The Borrower also entered into another forbearance agreement with a third party senior creditor bank related to the senior creditor's loan. The forbearance agreement between the Company and the Borrower outlined the repayment terms of the outstanding debt and the payment of accrued interest by the Borrower and included, among other things, the metrics for selling and settling on home sales over an agreed period of time. With the inherent credit risk in collecting interest from the note, as provided in the forbearance agreement, the Company has provided a full allowance for any accrued interest receivable. The Company has determined that the loan modification as discussed above represents a troubled debt restructuring since the Borrower was considered to be in a financial difficulty when it defaulted on the two mortgage debts and that a concession was granted in the form of the forbearance agreements. Construction recommenced during the fourth quarter of 2011, with loan repayments being paid to the senior creditor beginning in the first quarter of 2012. Loan repayments to the Company are scheduled to begin during 2014. In December of 2011, the Borrower provided the Company and the third party senior creditor bank with expected future cash flows analysis showing its ability to meet its sales targets in 2012, with updates to the analysis being provided on a quarterly basis. The Company believes that, based on expected cash flows from the project and actual current year-to-date sales, the total note will be fully paid by 2015. The Company and the third party senior creditor bank have allowed the Borrower to operate under the cash flow assumptions without amending the forbearance agreements. Given the current circumstances, the Company performs, on an ongoing basis, a collectability assessment of its note using the expected cash flow information provided by the Borrower and obtained documentation to support the assumptions used by the Borrower. The key assumptions used in the cash flow analysis included the revenue per home built; the cost to construct; the general and administrative expenses incurred to operate the business and sell homes; and the absorption assumptions used to determine the rate of home sales. The Company has determined based on the results of its probability weighted cash flow analysis that, as of December 31, 2012, the present value of the expected cash flows of the note receivable exceeded the outstanding balance of the note and therefore the note is recoverable as of December 31, 2012. However, it is still possible that due to deterioration in the housing market, the Borrower will not meet its sales targets, and could cause a loan loss of the Company's note receivable which could be material to its consolidated results of operations.
As of December 31, 2011, notes receivable included a $7.2 million purchase money mortgage with a 20 year amortization period that bears interest at 8.5%, a $0.5 million loan (due in 2015) that bears interest at 10%, and a $23.4 million (including accrued but unpaid interest) seven year purchase money mortgage (due 2016) that bears interest at approximately 6% cash pay/7.64% accrual. The $23.4 million notes receivable is related to the sale of the two Trenton properties in 2009 and is presented net of the $12.9 million deferred gain in accordance with the accounting standard for installment sales (the “Trenton Note”). The Company received the remaining balance of the Trenton Note during 2012.
Revenue Recognition
Rental revenue is recognized on the straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. The straight-line rent adjustment increased revenue by approximately $21.1 million in 2012, $17.9 million in 2011and $10.9 million in 2010 Deferred rents on the balance sheet represent rental revenue received prior to their due dates and amounts paid by the tenant for certain improvements considered to be landlord assets that will remain as the Company’s property at the end of the tenant’s lease term. The amortization of the amounts paid by the tenant for such improvements is calculated on a straight-line basis over the term of the tenant’s lease and is a component of straight-line rental income and increased revenue by $2.4 million in 2012, $2.4 million in 2011, and $2.8 million in 2010. Lease incentives, which are included as reductions of rental revenue in the accompanying consolidated statements of operations, are recognized on a straight-line basis over the term of the lease. Lease incentives decreased revenue by $0.8 million in 2012, $1.6 million in 2011, and $1.5 million in 2010.
Leases also typically provide for tenant reimbursement of a portion of common area maintenance and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease or to the extent that the tenant has a lease on a triple net basis. For certain leases, significant assumptions and judgments are made by the Company in determining the lease term such as when termination options are provided to the tenant. The lease term impacts the period over which minimum rents are determined and recorded and also considers the period over which lease related costs are amortized. Termination fees received from tenants, bankruptcy settlement fees, third party management fees, labor reimbursement and leasing income are recorded when earned.
No tenant represented greater than 10% of the Company’s rental revenue in 2012, 2011 or 2010.
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Income Taxes
Parent Company
The Parent Company has elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). In order to continue to qualify as a REIT, the Parent Company is required to, among other things, distribute at least 90% of its annual REIT taxable income to its shareholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Parent Company is not subject to federal and state income taxes with respect to the portion of its income that meets certain criteria and is distributed annually to its shareholders. Accordingly, no provision for federal and state income taxes is included in the accompanying consolidated financial statements with respect to the operations of the Parent Company. The Parent Company intends to continue to operate in a manner that allows it to meet the requirements for taxation as a REIT. If the Parent Company fails to qualify as a REIT in any taxable year, it will be subject to federal and state income taxes and may not be able to qualify as a REIT for the four subsequent tax years. The Parent Company is subject to certain local income taxes. Provision for such taxes has been included in general and administrative expenses in the Parent Company’s Consolidated Statements of Operations and Comprehensive Income.
The tax basis of the Parent Company’s assets was $4.0 billion as of December 31, 2012 and $4.5 billion as of December 31, 2011.
The Parent Company is subject to a 4% federal excise tax if sufficient taxable income is not distributed within prescribed time limits. The excise tax equals 4% of the annual amount, if any, by which the sum of (a) 85% of the Parent Company’s ordinary income and (b) 95% of the Parent Company’s net capital gain exceeds cash distributions and certain taxes paid by the Parent Company. No excise tax was incurred in 2012, 2011, or 2010.
The Parent Company may elect to treat one or more of its subsidiaries as taxable REIT subsidiaries (each a “TRS”). A TRS is subject to federal, state and local income tax. In general, a TRS may perform non-customary services for tenants, hold assets that the Parent Company, as a REIT, cannot hold directly and generally may engage in any real estate or non-real estate related business. The Company’s taxable REIT subsidiaries did not have any tax provisions or deferred income tax items.
Operating Partnership
In general, the Operating Partnership is not subject to federal and state income taxes, and accordingly, no provision for income taxes has been made in the accompanying consolidated financial statements. The partners of the Operating Partnership are required to include their respective share of the Operating Partnership’s profits or losses in their respective tax returns. The Operating Partnership’s tax returns and the amount of allocable Partnership profits and losses are subject to examination by federal and state taxing authorities. If such examination results in changes to the Operating Partnership profits or losses, then the tax liability of the partners would be changed accordingly.
The tax basis of the Operating Partnership’s assets was $4.0 billion as of December 31, 2012 and $4.5 billion as of December 31, 2011.
The Operating Partnership is subject to a 4% federal excise tax if sufficient taxable income is not distributed within prescribed time limits. The excise tax equals 4% of the annual amount, if any, by which the sum of (a) 85% of the Operating Partnership’s ordinary income and (b) 95% of the Operating Partnership’s net capital gain exceeds cash distributions and certain taxes paid by the Operating Partnership. No excise tax was incurred in 2012, 2011, or 2010.
The Operating Partnership may elect to treat one or more of its subsidiaries as REITs under Sections 856 through 860 of the Code. Each subsidiary REIT has met or intends to meet the requirements for treatment as a REIT under Sections 856 through 860 of the Code, and, accordingly, no provision has been made for federal and state income taxes in the accompanying consolidated financial statements. If any subsidiary REIT fails to qualify as a REIT in any taxable year, that subsidiary REIT will be subject to federal and state income taxes and may not be able to qualify as a REIT for the four subsequent taxable years. Also, each subsidiary REIT may be subject to certain local income taxes.
The Operating Partnership has elected to treat several of its subsidiaries as taxable TRSs, which are subject to federal, state and local income tax.
Earnings Per Share
Basic earnings per share is calculated by dividing income allocated to common shares by the weighted-average number of shares outstanding during the period. Diluted earnings per share includes the effect of common share equivalents outstanding during the period.
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Earnings Per Unit
Basic earnings per unit is calculated by dividing income allocated to common units by the weighted-average number of units outstanding during the period. Diluted earnings per unit includes the effect of common unit equivalents outstanding during the period.
Treasury Shares
The Company accounts for its treasury share purchases using the cost method. Since repurchase, shares have been reissued at an amount less than their cost basis. The losses on reissuances are charged to the cumulative earnings of the Company using the FIFO basis. As of December 31, 2012 and 2011, none of the treasury shares remained outstanding.
Stock-Based Compensation Plans
The Parent Company maintains a shareholder-approved equity-incentive plan known as the Amended and Restated 1997 Long-Term Incentive Plan (the “1997 Plan”). The 1997 Plan is administered by the Compensation Committee of the Parent Company’s Board of Trustees. Under the 1997 Plan, the Compensation Committee is authorized to award equity and equity-based awards, including incentive stock options, non-qualified stock options, restricted shares and performance-based shares. On June 2, 2010, the Parent Company’s shareholders approved amendments to the 1997 Plan that, among other things, increased the number of common shares available for future awards under the 1997 Plan by 6,000,000 (of which 3,600,000 shares are available solely for options and share appreciation rights). As of December 31, 2012, 5,311,022 common shares remained available for future awards under the 1997 Plan (including 4,006,277 shares available solely for options and share appreciation rights). Through December 31, 2012 all options awarded under the 1997 Plan had a one to ten-year term.
The Company incurred stock-based compensation expense of $8.6 million during 2012, of which $2.6 million was capitalized as part of the Company’s review of employee salaries eligible for capitalization. The Company incurred stock-based compensation expense of $6.4 million and $6.1 million during 2011 and 2010, of which $1.5 million and $1.3 million, respectively, were also capitalized. The expensed amounts are included in general and administrative expense on the Company’s consolidated income statement in the respective periods.
The consolidated statement of operations for the fourth quarter of 2012 also contained an out of period deferred compensation expense adjustment of $0.6 million relating to the acceleration of deferred compensation for certain of our executive personnel who reached qualifying retirement conditions that should have been expensed in prior periods (please see Note 14 for further discussion regarding the qualifying retirement conditions). This resulted in an overstatement of expense by $0.6 million in the fourth quarter of 2012, and an understatement of expense by $0.2 million, $0.3 million, and a nominal amount in the third, second, and first quarters of 2012, respectively, and $0.1 million in the year-ended December 31, 2011. As management believes that this error was not material to prior years' consolidated financial statements and that the impact of recording the error in the current year is not material to the Company's consolidated financial statements, the Company recorded the related adjustment in the current year.
Comprehensive Income
Comprehensive income or loss is recorded in accordance with the provisions of the accounting standard for comprehensive income. The accounting standard establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income includes unrealized gains and losses on available-for-sale securities and the effective portions of changes in the fair value of derivatives.
Accounting for Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments and hedging activities in accordance with the accounting standard for derivative and hedging activities. The accounting standard requires the Company to measure every derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record them in the balance sheet as either an asset or liability. See disclosures below related to the accounting standard for fair value measurements and disclosures.
For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivative are reported in other comprehensive income while the ineffective portions are recognized in earnings.
The Company actively manages its ratio of fixed-to-floating rate debt. To manage its fixed and floating rate debt in a cost-effective manner, the Company, from time to time, enters into interest rate swap agreements as cash flow hedges, under which it agrees to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts.
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Fair Value Measurements
The Company estimates the fair value of its derivatives and available-for-sale securities in accordance with the accounting standard for fair value measurements and disclosures. The accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Financial assets and liabilities recorded on the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
• | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access; |
• | Level 2 inputs are inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals; and |
• | Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity or information. |
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2012 (in thousands):
Fair Value Measurements at Reporting Date Using: | |||||||||||||||
December 31, | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Unobservable Inputs | ||||||||||||
Description | 2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||||
Recurring | |||||||||||||||
Liabilities: | |||||||||||||||
Interest Rate Swaps | $ | 14,210 | $ | — | $ | 14,210 | $ | — | |||||||
The following table sets forth the Company’s financial liabilities that were accounted for at fair value on a recurring basis as of December 31, 2011 (in thousands):
Fair Value Measurements at Reporting Date Using: | |||||||||||||||
December 31, | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Unobservable Inputs | ||||||||||||
Description | 2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||
Recurring | |||||||||||||||
Liabilities: | |||||||||||||||
Interest Rate Swaps | $ | 3,886 | $ | — | $ | 3,886 | $ | — | |||||||
We classify our interest rate swaps, shown above, within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
Non-financial assets and liabilities recorded at fair value on a non-recurring basis to which the Company would apply the accounting standard where a measurement was required under fair value would include:
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• | Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination that are not remeasured at least quarterly at fair value, |
• | Long-lived assets measured at fair value due to an impairment or held-for-sale classification in accordance with the accounting standard for the impairment or disposal of long-lived assets, |
• | Equity method investments measured at fair value due to an impairment in accordance with the accounting standard for investments, |
• | Notes receivable adjusted for any impairment in its value in accordance with the accounting standard for loan receivables, and |
• | Asset retirement obligations initially measured at fair value under the accounting standard for asset retirement obligations. |
There were no items that were accounted for at fair value on a non-recurring basis as of December 31, 2012.
Available-for-sale securities
During 2012, the Company sold its entire remaining portfolio of available-for-sale securities, all purchased during 2012 and totaling $106.2 million, recognizing a $0.2 million loss associated with the sale. This transaction was completed after determining that a strategy of liquidation was in the Company's best interest.
The following table sets forth the details of the remaining available-for-sale securities sold during 2012 (in thousands):
Available-for-sale Securities Sold | ||||||||||||
Cash Received | Principal Amount | Gain (loss) | ||||||||||
Available-for-sale securities | $ | 106,009 | $ | 106,169 | $ | (160 | ) | |||||
The Company did not hold any available-for-sale securities as of December 31, 2012 or December 31, 2011.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued an amendment to the accounting standard for the presentation of comprehensive income. This amendment requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component, and represents the culmination of the FASB's redeliberation on the reporting of such reclassification adjustments. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update is effective for fiscal years and interim periods beginning after December 15, 2012. The Company’s adoption of the accounting standard did not have a material impact on its consolidated financial position or results of operations as the update relates only to changes in financial statement presentation.
In January 2012, the FASB issued an amendment to the accounting standard for the presentation of comprehensive income. The amendment requires entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, the amendment requires entities to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. This amendment is effective for fiscal years and interim periods beginning after December 15, 2011. The Company’s adoption of the new standard did not have a material impact on its consolidated financial position or results of operations as the amendment relates only to changes in financial statement presentation.
In January 2012, the FASB issued amendments to the accounting standard for fair value measurements and disclosures. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments are intended to create comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. These amendments are effective for fiscal years and interim periods beginning after December 15, 2011. The Company’s adoption of the new standard did not have a material impact on its consolidated financial position or results of operations.
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3. REAL ESTATE INVESTMENTS
As of December 31, 2012 and 2011 the gross carrying value of the Company’s Properties was as follows (in thousands):
2012 | 2011 | ||||||
Land | $ | 662,107 | $ | 677,891 | |||
Building and improvements | 3,576,065 | 3,631,388 | |||||
Tenant improvements | 487,997 | 483,801 | |||||
$ | 4,726,169 | $ | 4,793,080 | ||||
Acquisitions and Dispositions
2012
Brandywine/Toll Brothers Venture
On September 5, 2012, the Company formed a joint venture, TB-BDN Plymouth Apartments, L.P., (the "Venture"), with Toll Brothers, Inc. ("Toll Brothers"), a residential home builder. The Company and Toll Brothers each own a 50% interest in the Venture. The Venture owns a 20-acre parcel of land located in Plymouth Meeting, Pennsylvania, which the Company contributed to the Venture upon its formation. Concurrent with the Company's contribution of the aforementioned land parcel, Toll Brothers contributed $15.5 million of cash to the venture, equivalent to the fair value of the land parcel contributed by the Company. The Venture will use the cash contributed by Toll Brothers to fund predevelopment costs for construction of a 398 unit apartment complex.
Based on the facts and circumstances at the date of formation of the Venture, and in accordance with applicable accounting standards for the consolidation of variable interest entities, or VIEs, the Company determined that the Venture is not a VIE. Accordingly, the Company used the voting interest model under the accounting standards for consolidation to determine whether to consolidate the Venture. Under the joint venture agreement for the Venture, each of the Company and Toll Brothers has significant participating rights and the Company does not have exclusive control over the development or construction phases of the Venture's project. Because each partner has significant participating rights, the Company deconsolidated the land parcel that was contributed to the Venture, and the Company is accounting for the Venture under the equity method of accounting. As of December 31, 2012, the carrying amount of the Company's equity investment in the Venture equaled $15.2 million, with an associated $0.3 million permanent basis adjustment accounting for the difference between the fair value and carrying amount of the land parcel contributed by the Company. This basis adjustment will remain unamortized until the property is sold to a third party or until the Venture is dissolved, in accordance with the accounting standard for equity method investment.
Brandywine AI Venture - Station Square Acquisition
On July 10, 2012, the Company contributed $26.1 million to a joint venture, Brandywine AI Venture, that the Company formed in 2011 with an affiliate of Allstate Insurance. The Company's contribution funded its share of partner capital for the Venture's $120.6 million acquisition of three office properties containing 497,896 net rentable square feet in Silver Spring, Maryland. The properties were 93.2% occupied as of December 31, 2012.
Acquisitions
On December 31, 2012, the Company acquired a two-building office property totaling 136,075 of net rentable square feet in Austin, Texas known as 7000 West at Lantana for $32.1 million. This property was 100.0% occupied as of December 31, 2012. The Company funded the acquisition price with available corporate funds, while recognizing $0.1 million of acquisition related costs, which are included as part of general and administrative expenses in the Company's consolidated statements of operations. On the acquisition date of the office property, the total purchase price was allocated as follows: $20.9 million to building, $4.7 million to land, $8.4 million to intangible assets and $1.9 million to below market lease liabilities assumed.
On December 11, 2012, the Company acquired an office property containing 456,922 net rentable square feet in Philadelphia, Pennsylvania known as 1900 Market Street for $34.8 million. This property was 76.3% occupied as of December 31, 2012, with redevelopment expected to commence in early 2013 in anticipation of the lead tenant's departure in late 2015. The Company funded the acquisition price with available corporate funds, while recognizing $0.1 million of acquisition related costs, which are included as part of general and administrative expenses in the Company's consolidated statements of operations. On the acquisition date of the office property, the total purchase price was allocated as follows: $17.3 million to building, $7.8 million to land, $13.5 million to intangible assets and $3.8 million to below market lease liabilities assumed.
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On November 20, 2012, the Company acquired a ten-acre parcel of land in Herndon, Virginia for $2.1 million. The Company funded the acquisition price with available corporate funds. The Company capitalized a nominal amount of acquisition related and other costs as part of land inventory on its consolidated balance sheet.
On January 6, 2012, the Company acquired a vacant office property containing 154,392 net rentable square feet in Plymouth Meeting, Pennsylvania known as 660 West Germantown Pike for $9.1 million. The Company is currently redeveloping this property. The Company funded the acquisition price with available corporate funds. The Company also recognized $0.1 million of acquisition related costs that have been capitalized on our consolidated balance sheet, in accordance with the accounting standard for asset acquisitions.
Dispositions
On July 18, 2012, the Company sold a portfolio of 11 flex/office properties, totaling 466,719 square feet, in Exton, Pennsylvania, for a sales price of $52.7 million. These properties, collectively known as the Oaklands Corporate Center, were 81.6% occupied as of the date of sale.
On June 22, 2012, the Company sold Pacific Ridge Corporate Center, a 121,381 net rentable square feet, two-building office property located in Carlsbad, California, for a sales price of $29.0 million. The property was 83.7% occupied as of the sale date.
On March 22, 2012, the Company sold South Lake at Dulles Corner, a 268,240 net rentable square feet office property located in Herndon, Virginia, for a sales price of $91.1 million. The property was 100.0% occupied as of the date of sale.
On January 17, 2012, the Company sold 304 Harper Drive, a 32,978 net rentable square feet office property located in Moorestown, New Jersey, for a sales price of $3.0 million. The property was 90.1% occupied as of the date of sale.
Each of these sales is included in discontinued operations (see Note 10).
2011
Brandywine-AI Venture
On December 20, 2011, the Company formed a joint venture, Brandywine - AI Venture LLC, (the "Venture"), with Current Creek Investments, LLC ("Current Creek"), a wholly-owned subsidiary of Allstate Insurance Company. The Company and Current Creek each own a 50% interest in the Venture. The Venture owns three office properties, which the Company contributed to the Venture upon its formation. The contributed office properties contain an aggregate of 587,317 net rentable square feet and consist of 3130 and 3141 Fairview Park Drive, both located in Falls Church, Virginia, and 7101 Wisconsin Avenue located in Bethesda, Maryland. Concurrent with the Company's contribution of the three properties to the Venture, Current Creek contributed approximately $32.2 million (net of closing costs and customary prorations) to the capital of the Venture and the Venture closed on non-recourse fixed rate mortgage loans in the aggregate amount of $90.0 million, secured by mortgages on each of the three properties. The mortgage loans have a weighted-average maturity of 7.4 years and bear interest at a weighted average rate of 4.4%. The Company transferred the properties to the Venture based on a $156.0 million valuation. Upon formation of the Venture, the Company received $120.1 million of aggregate proceeds from these transactions net of $2.9 million of transaction and venture formation costs. The Company used the net proceeds to reduce its outstanding indebtedness under its Prior Credit Facility and for general corporate purposes.
Based on facts and circumstances at Venture formation, the Company has determined that the Venture is not a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, the Company used the voting interest model under the accounting standard for consolidation to determine if it will consolidate the Venture. Based on the provisions within the joint venture agreement, the Company and Current Creek have shared control rights and the Company does not have exclusive control over the properties. Since control is shared, 3130 Fairview Park and 7101 Wisconsin Avenue were deconsolidated by the Company and are accounted for under the equity method of accounting. The Company recorded a net loss on partial sale of $0.1 million related to these two office properties which is included as part of the loss on venture formation in the Company's consolidated statements of operations together with the related $0.2 million basis adjustment on the Company's equity method investment in the Venture. As of December 31, 2011, the carrying amount of the Company's equity investment in this Venture amounted to $24.7 million.
The Company will continue to maintain a regional management and leasing office in 3141 Fairview Park. Consistent with the other two properties, financial control is shared, however, pursuant to the accounting standard for sales-leaseback transactions, the lease maintained by the Company at 3141 Fairview Park and its 50% ownership interest in the Venture results in the Company having continued involvement that will require the property and its related operations to be consolidated by the Company under the financing method. The Company recorded a mortgage debt of $22.0 million and a $7.5 million financing obligation as part
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of other liabilities in the Company's balance sheet representing the cash it received from the Venture related to this transaction. The Company recognized a nominal amount of interest expense related to the other partner's portion of the property's operation, from Venture formation through December 31, 2011. As of December 31, 2011, the balance of the financing obligation amounted to $7.5 million.
The Company's continuing involvement with the properties through its interest in the Venture and its management and leasing activities represents a significant continuing involvement in the properties. Accordingly, under the accounting standard for reporting discontinued operations, the Company has determined that the loss on partial sale and the operations of the properties should not be included as part of discontinued operations in its consolidated statements of operations.
Acquisitions
On August 12, 2011, the Company acquired an office property located in Philadelphia, Pennsylvania, together with related ground tenancy rights under a long-term ground lease, through the foreclosure of a note receivable amounting to $18.8 million under which the said property was encumbered. The Company obtained the note receivable from a third party on August 2, 2011 which was funded through an advance under its Prior Credit Facility and with available corporate funds. The office property contains 192,707 of net rentable square feet and was 57.4% leased as of December 31, 2011. The Company recognized $0.3 million of transaction costs to acquire the office property which is included as part of general and administrative expenses in the Company's consolidated statements of operations. On the acquisition date of the office property, the total purchase price was allocated as follows: $21.4 million to building, $12.0 million to intangible assets and $14.4 million to below market lease liabilities assumed. The Company also acquired other assets of $0.2 million and assumed certain liabilities of $0.4 million.
On March 28, 2011, the Company acquired two office properties totaling 126,496 of net rentable square feet in Glen Allen, Virginia known as Overlook I and II for $12.6 million. The acquired properties were 100% leased as of December 31, 2011. The Company funded the acquisition price through an advance under its Prior Credit Facility and with available corporate funds. The Company recognized a nominal amount of acquisition related costs, which are included as part of general and administrative expenses in the Company's consolidated statements of operations.
On January 20, 2011, the Company acquired a one acre parcel of land in Philadelphia, Pennsylvania for $9.3 million. The Company funded the cost of this acquisition with available corporate funds and a draw on its Prior Credit Facility. The Company capitalized $0.5 million of acquisition related and other costs as part of land inventory on its consolidated balance sheet. On December 29, 2011, the Company contributed the acquired property into a newly formed real estate venture known as Brandywine 1919 Market Ventures (the "1919 Ventures") in return for a 50% general partner interest in the venture. 1919 Ventures is expected to construct a mixed-use development property in the city of Philadelphia. The Company has determined that 1919 Ventures is a VIE due to insufficient equity at the date of formation. It was also determined that the Company will not consolidate 1919 Ventures as both partners have shared power in the venture. Prior to the formation of 1919 Ventures, the Company received $4.9 million from the other partner in anticipation of the real estate venture formation. The amount received was accounted for as a distribution from 1919 Ventures and accordingly reduced the Company's equity investment in the venture in the Company's consolidated balance sheet as of December 31, 2011.
Dispositions
On November 22, 2011, the Company sold 442 Creamery Way, a 104,500 net rentable square feet office property located in Exton, PA, for a sales price of $7.4 million. The property was 100.0% occupied as of the date of sale.
On October 28, 2011, the Company sold two office properties (Five Greentree and Lake Center II) containing a total of 206,243 net rentable square feet located in Marlton, NJ for an aggregate sales price of $22.8 million. Five Greentree and Lake Center II were 92.2% and 47.8% occupied, respectively, as of the date of sale.
On October 14, 2011, the Company sold an undeveloped parcel of land in Dallas, Texas containing six acres of land for $0.6 million.
On June 27, 2011, the Company sold Three Greentree Center, a 69,300 net rentable square feet office property located in Marlton, New Jersey, for a sales price of $5.9 million. The property was 13.9% occupied as of the date of sale.
During the first quarter of 2011, the Company recognized a $2.8 million net gain upon the sale of its remaining 11% ownership interest in three properties which it partially sold to one of its unconsolidated Real Estate Ventures in December 2007. The Company had retained an 11% equity interest in these properties subject to a put/call at fixed prices for a period of three years from the time of the sale. In January 2011, the Company exercised the put/call and transferred full ownership in the three properties to the Real Estate Venture. Accordingly, the Company's direct continuing involvement through its 11% interest in the properties ceased as a result of the transfer of the ownership interest. The Company has also presented the gain as part of its continuing operations in its
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consolidated statements of operations because of its prior significant continuing involvement with the properties through its interest in the unconsolidated Real Estate Venture and its management and leasing activities at the properties.
4. INVESTMENT IN UNCONSOLIDATED VENTURES
As of December 31, 2012, the Company had an aggregate investment of approximately $193.6 million in 19 unconsolidated Real Estate Ventures. The Company formed or acquired interests in these ventures with unaffiliated third parties to develop or manage office properties or to acquire land in anticipation of possible development of office or residential properties. As of December 31, 2012, 15 of the Real Estate Ventures owned 54 office buildings that contain an aggregate of approximately 7.0 million net rentable square feet; three Real Estate Ventures owned 24 acres of undeveloped parcels of land; and one Real Estate Venture developed a hotel property that contains 137 rooms in Conshohocken, PA.
The Company accounts for its unconsolidated interests in its Real Estate Ventures using the equity method. The Company’s unconsolidated interests range from 20% to 65%, subject to specified priority allocations of distributable cash in certain of the Real Estate Ventures.
The amounts reflected in the following tables (except for the Company’s share of equity and income) are based on the historical financial information of the individual Real Estate Ventures. One of the Real Estate Ventures, acquired in connection with the Prentiss Properties Trust merger in 2006, had a negative equity balance on a historical cost basis as a result of historical depreciation and distribution of excess financing proceeds. The Company reflected its acquisition of this Real Estate Venture interest at its relative fair value as of the date of the merger. The difference between allocated cost and the underlying equity in the net assets of the investee is accounted for as if the entity were consolidated (i.e., allocated to the Company’s relative share of assets and liabilities with an adjustment to recognize equity in earnings for the appropriate depreciation/amortization). The Company does not record operating losses of the Real Estate Ventures in excess of its investment balance unless the Company is liable for the obligations of the Real Estate Venture or is otherwise committed to provide financial support to the Real Estate Venture.
The Company’s investment in Real Estate Ventures as of December 31, 2012 and the Company’s share of the Real Estate Ventures’ income (loss) for the year ended December 31, 2012 was as follows (in thousands):
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Ownership Percentage (a) | Carrying Amount | Company’s Share of 2012 Real Estate Venture Income (Loss) | Real Estate Venture Debt at 100% | Current Interest Rate | Debt Maturity | ||||||||||||||
Broadmoor Austin Associates | 50 | % | $ | 65,919 | $ | (231 | ) | $ | 60,656 | 7.04 | % | Apr-23 | |||||||
Brandywine-AI Venture LLC (b) | 50 | % | 49,169 | (648 | ) | 134,500 | 3.87 | % | (b) | ||||||||||
BDN Beacon Venture LLC | 20 | % | 17,294 | 1,546 | — | N/A | N/A | ||||||||||||
TB-BDN Plymouth Apartments (c) | 50 | % | 15,222 | — | — | N/A | N/A | ||||||||||||
Six Tower Bridge (d) | 63 | % | 13,330 | (135 | ) | — | N/A | N/A | |||||||||||
One Commerce Square (e) | 25 | % | 13,056 | 657 | 126,869 | 5.67 | % | Dec-15 | |||||||||||
Two Commerce Square (e) | 25 | % | 9,171 | 455 | 106,612 | 6.30 | % | May-13 | |||||||||||
Brandywine 1919 Ventures | 50 | % | 5,632 | — | — | N/A | N/A | ||||||||||||
1000 Chesterbrook Blvd. | 50 | % | 1,981 | 455 | 25,444 | 4.75 | % | Dec-21 | |||||||||||
Four Tower Bridge | 65 | % | 1,297 | 400 | 10,707 | 5.20 | % | Feb-21 | |||||||||||
Residence Inn Tower Bridge | 50 | % | 716 | 434 | 13,990 | 5.63 | % | Feb-16 | |||||||||||
PJP VII | 25 | % | 593 | 221 | 6,678 | L+1.55% | Nov-13 | ||||||||||||
PJP II | 30 | % | 417 | 117 | 4,022 | 6.12 | % | Nov-23 | |||||||||||
G&I Interchange Office LLC (DRA — N. PA) (f) | 20 | % | 260 | (626 | ) | 179,671 | 5.78 | % | Jan-15 | ||||||||||
Seven Tower Bridge | 20 | % | 242 | — | 11,107 | (g) | (g) | ||||||||||||
PJP V | 25 | % | 192 | (81 | ) | 5,619 | 6.47 | % | Aug-19 | ||||||||||
Two Tower Bridge | 35 | % | 113 | (21 | ) | 13,213 | (h) | (h) | |||||||||||
PJP VI | 25 | % | 42 | 12 | 8,626 | 6.08 | % | Apr-23 | |||||||||||
Coppell Associates | 50 | % | (1,091 | ) | (84 | ) | 17,066 | (i) | (i) | ||||||||||
Eight Tower Bridge | — | 12 | — | ||||||||||||||||
Invesco, L.P. | — | 258 | — | ||||||||||||||||
$ | 193,555 | $ | 2,741 | $ | 724,780 | ||||||||||||||
(a) | Ownership percentage represents the Company's entitlement to residual distributions after payments of priority returns, where applicable. |
(b) | See Note 3 for related discussion about the Brandywine-AI Venture, LLC formation. |
(c) | On September 5, 2012, the Company contributed a 20-acre parcel of land into a newly formed real estate venture and retained a 50% ownership interest. The land parcel contributed to the Venture was deconsolidated by the Company from land inventory. |
(d) | On November 1, 2012, Six Tower Bridge Associates paid off its $12.2 million loan using funds contributed by the Company in the form of a $8.4 million partner loan which pays current interest expense at 9.0%, and a $4.9 million priority loan which accrues interest at 9.0%, compounding annually (the additional funds contributed from the partner and priority loans were used for operations of the venture). |
(e) | In accordance with the accounting guidance for joint ventures, the Company is currently recognizing its preferred return from the real estate ventures as income on its invested capital. After the other partner has recognized the losses equal to its invested capital, the Company will begin to recognize its share from the results of operations of the real estate ventures in proportion to its 25% ownership interests. |
(f) | Proceeds received by the Company from the sale of an 80% ownership stake in the properties exceeded the historical cost of those properties. No investment in the real estate venture was reflected on the balance sheet at formation, and the current balance reflects interim capital contributions. |
(g) | Comprised of two fixed rate mortgages totaling $8.0 million that mature in February 2015 and accrue interest at a current rate of 5% (increasing by 1% annually through maturity), a $1.1 million 3% fixed rate loan with interest only through its September 2025 maturity, and a $2.0 million 4% fixed rate loan with interest only through its February 2014 maturity. |
(h) | Consists of a $9.9 million fixed rate mortgage with a 5.72% interest rate and May 2013 maturity date and $3.3 million municipal and state borrowings with nominal interest rates (0 — 1%) and maturity dates from 1 to 5 years. |
(i) | Comprised of a senior fixed rate note of $16.2 million at 5.75% that matures in March 2016 and a junior fixed rate note of $0.9 million at 6.89% that matures in December 2013; 5.81% is the blended rate. |
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The following is a summary of the financial position of the Real Estate Ventures as of December 31, 2012 and December 31, 2011 (in thousands):
December 31, 2012 | December 31, 2011 | ||||||
Net property | $ | 923,536 | $ | 846,643 | |||
Other assets | 174,677 | 110,520 | |||||
Other liabilities | 53,645 | 48,798 | |||||
Debt | 724,780 | 745,830 | |||||
Equity | 319,788 | 162,535 | |||||
Company’s share of equity (Company’s basis) | 193,555 | 115,807 | |||||
The following is a summary of results of operations of the Real Estate Ventures in which the Company had interests as of December 31, 2012, 2011 and 2010 (in thousands):
Years ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Revenue | $ | 164,013 | $ | 145,867 | $ | 118,923 | |||||
Operating expenses | 70,775 | 63,715 | 44,942 | ||||||||
Interest expense, net | 41,633 | 42,032 | 37,505 | ||||||||
Depreciation and amortization | 50,241 | 39,172 | 32,703 | ||||||||
Net income | 1,364 | 948 | 3,773 | ||||||||
Company’s share of income (Company’s basis) | 2,741 | 3,775 | 5,305 | ||||||||
As of December 31, 2012, the aggregate principal payments of recourse and non-recourse debt payable to third-parties are as follows (in thousands):
2012 | $ | 134,400 | |
2013 | 13,651 | ||
2014 | 313,881 | ||
2015 | 37,033 | ||
2016 | 32,338 | ||
Thereafter | 193,477 | ||
$ | 724,780 | ||
As of December 31, 2012, the Company had guaranteed repayment of approximately $0.6 million of loans on behalf of a Real Estate Venture. The Company, from time to time, also provides customary environmental indemnities in connection with construction and permanent financing both for its own account and on behalf of its Real Estate Ventures.
On September 19, 2012, the Company settled and was released from a previous agreement with a third party service provider ("the provider") who provided services related to Brandywine AI Ventures ("the venture"). The agreement between the two parties required that the Company pay the provider certain commissions and fees related to real estate acquisitions to be executed by the venture in the future. The Company paid a one-time termination fee of $1.0 million to the provider in order to terminate and discharge any future obligations of commissions and fees associated with acquisitions by the venture. This fee is shown within the Company's consolidated statements of operations as "Loss on real estate venture formation" as the fee is associated with a contract entered into at the time of the formation of the venture. There were no comparable charges for the prior period.
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5. DEFERRED COSTS
As of December 31, 2012 and 2011, the Company’s deferred costs were comprised of the following (in thousands):
December 31, 2012 | |||||||||||
Total Cost | Accumulated Amortization | Deferred Costs, net | |||||||||
Leasing Costs | $ | 150,331 | $ | (58,343 | ) | $ | 91,988 | ||||
Financing Costs | 40,246 | (9,991 | ) | 30,255 | |||||||
Total | $ | 190,577 | $ | (68,334 | ) | $ | 122,243 | ||||
December 31, 2011 | |||||||||||
Total Cost | Accumulated Amortization | Deferred Costs, net | |||||||||
Leasing Costs | $ | 140,772 | $ | (50,990 | ) | $ | 89,782 | ||||
Financing Costs | 38,929 | (13,349 | ) | 25,580 | |||||||
Total | $ | 179,701 | $ | (64,339 | ) | $ | 115,362 | ||||
During years ended December 31, 2012, 2011 and 2010, the Company capitalized internal direct leasing costs of $7.5 million, $6.6 million, and $6.2 million, respectively, in accordance with the accounting standard for the capitalization of leasing costs.
6. INTANGIBLE ASSETS
As of December 31, 2012 and 2011, the Company’s intangible assets were comprised of the following (in thousands):
December 31, 2012 | |||||||||||
Total Cost | Accumulated Amortization | Intangible Assets, net | |||||||||
In-place lease value | $ | 87,909 | $ | (42,894 | ) | $ | 45,015 | ||||
Tenant relationship value | 56,137 | (37,389 | ) | 18,748 | |||||||
Above market leases acquired | 8,565 | (1,708 | ) | 6,857 | |||||||
Total | $ | 152,611 | $ | (81,991 | ) | $ | 70,620 | ||||
Below market leases acquired | $ | 77,083 | $ | (43,224 | ) | $ | 33,859 | ||||
December 31, 2011 | |||||||||||
Total Cost | Accumulated Amortization | Intangible Assets, net | |||||||||
In-place lease value | $ | 91,426 | $ | (55,498 | ) | $ | 35,928 | ||||
Tenant relationship value | 72,813 | (45,114 | ) | 27,699 | |||||||
Above market leases acquired | 12,744 | (5,856 | ) | 6,888 | |||||||
Total | $ | 176,983 | $ | (106,468 | ) | $ | 70,515 | ||||
Below market leases acquired | $ | 75,685 | $ | (40,579 | ) | $ | 35,106 | ||||
For the years ended December 31, 2012, 2011, and 2010, the Company wrote-off through the acceleration of amortization approximately $1.4 million, $7.4 million and $1.5 million, respectively, of intangible assets as a result of tenant move-outs prior to the end of the associated lease term. For the year ended December 31, 2012, the Company accelerated amortization of a nominal amount of intangible liabilities as a result of tenant move-outs. For the year ended December 31, 2011, the Company accelerated amortization of $0.2 million of intangible liabilities as a result of tenant move-outs. For the year ended December 31, 2010, the Company accelerated amortization of a nominal amount of intangible liabilities as a result of tenant move-outs.
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As of December 31, 2012, the Company’s annual amortization for its intangible assets/liabilities were as follows (in thousands, and assuming no early lease terminations):
Assets | Liabilities | ||||||
2013 | $ | 15,316 | $ | 7,639 | |||
2014 | 12,399 | 6,087 | |||||
2015 | 10,027 | 3,920 | |||||
2016 | 6,009 | 1,980 | |||||
2017 | 4,743 | 1,445 | |||||
Thereafter | 22,126 | 12,788 | |||||
Total | $ | 70,620 | $ | 33,859 | |||
7. DEBT OBLIGATIONS
The following table sets forth information regarding the Company’s consolidated debt obligations outstanding at December 31, 2012 and 2011 (in thousands):
Property / Location | December 31, 2012 | December 31, 2011 | Effective Interest Rate | Maturity Date | ||||||||||
MORTGAGE DEBT: | ||||||||||||||
Newtown Square/Berwyn Park/Libertyview | $ | — | $ | 56,538 | 7.25 | % | (a) | May-13 | ||||||
Southpoint III | — | 1,887 | 7.75 | % | (a) | Apr-14 | ||||||||
Tysons Corner | 93,188 | 94,882 | 5.36 | % | (b) | Aug-15 | ||||||||
Two Logan Square | 89,340 | 89,800 | 7.57 | % | Apr-16 | |||||||||
Fairview Eleven Tower | 22,000 | 22,000 | 4.25 | % | Jan-17 | |||||||||
IRS Philadelphia Campus | 197,111 | 202,905 | 7.00 | % | Sep-30 | |||||||||
Cira South Garage | 42,303 | 44,379 | 7.12 | % | Sep-30 | |||||||||
Principal balance outstanding | 443,942 | 512,391 | ||||||||||||
Plus: fair market value premiums (discounts), net | (968 | ) | (1,330 | ) | ||||||||||
Total mortgage indebtedness | $ | 442,974 | $ | 511,061 | ||||||||||
UNSECURED DEBT: | ||||||||||||||
Prior Term Loan | — | 37,500 | LIBOR + 0.80% | (c) | Feb-12 | |||||||||
Prior Revolving Credit Facility | — | 275,500 | LIBOR + 0.725% | (c) | Feb-12 | |||||||||
New Credit Facility | 69,000 | — | LIBOR + 1.50% | (c) | Feb-16 | |||||||||
Three-Year Term Loan - Swapped to fixed | 150,000 | — | 2.60 | % | (c) | Feb-15 | ||||||||
Four-Year Term Loan | 100,000 | — | LIBOR + 1.75% | (c) | Feb-16 | |||||||||
Seven-Year Term Loan - Swapped to fixed | 200,000 | — | 3.62 | % | (c) | Feb-19 | ||||||||
$300.0M 5.750% Guaranteed Notes due 2012 | — | 151,491 | 5.73 | % | (d) | Apr-12 | ||||||||
$250.0M 5.400% Guaranteed Notes due 2014 | 238,379 | 242,681 | 5.53 | % | Nov-14 | |||||||||
$250.0M 7.500% Guaranteed Notes due 2015 | 166,535 | 227,329 | 7.76 | % | (e) | May-15 | ||||||||
$250.0M 6.000% Guaranteed Notes due 2016 | 150,429 | 250,000 | 5.95 | % | (e) | Apr-16 | ||||||||
$300.0M 5.700% Guaranteed Notes due 2017 | 300,000 | 300,000 | 5.68 | % | May-17 | |||||||||
$325.0M 4.950% Guaranteed Notes due 2018 | 325,000 | 325,000 | 5.13 | % | Apr-18 | |||||||||
$250.0M 3.950% Guaranteed Notes due 2023 | 250,000 | — | 4.02 | % | (e) | Feb-23 | ||||||||
Indenture IA (Preferred Trust I) | 27,062 | 27,062 | 2.75 | % | Mar-35 | |||||||||
Indenture IB (Preferred Trust I) | 25,774 | 25,774 | 3.30 | % | Apr-35 | |||||||||
Indenture II (Preferred Trust II) | 25,774 | 25,774 | 3.09 | % | Jul-35 | |||||||||
Principal balance outstanding | 2,027,953 | 1,888,111 | ||||||||||||
plus: original issue premium (discount), net | (5,597 | ) | (5,177 | ) | ||||||||||
Total unsecured indebtedness | $ | 2,022,356 | $ | 1,882,934 | ||||||||||
Total Debt Obligations | $ | 2,465,330 | $ | 2,393,995 | ||||||||||
(a) | On December 28, 2012, the Company prepaid the remaining balances of the loans, incurring associated prepayment penalties of $0.1 million. |
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(b) | This loan was assumed upon acquisition of the related property. The interest rate reflects the market rate at the time of acquisition. |
(c) | On February 1, 2012, the Company closed on a new $600.0 million four-year unsecured credit facility and three unsecured term loans (the "New Term Loans") totaling $600.0 which consist of a $150.0 million three-year loan, a $250.0 million four-year loan (with $150.0 million swapped to fixed) and a $200.0 million seven-year loan. The Company used a portion of the net proceeds from the New Term Loans to repay all balances outstanding under its prior revolving credit facility and its prior $183.0 million bank term loan which were then retired prior to their scheduled June 29, 2012 maturity. On December 31, 2012, the Company repaid the entire portion of the four-year loan that was swapped to fixed (see related discussion below). |
(d) | Notes matured on April 1, 2012, and were repaid using a portion of the proceeds from the term loans. |
(e) | On December 18, 2012, the Company issued new 3.95% $250.0 million Guaranteed Notes due 2023. The Company used the net proceeds from this debt offering to redeem portions of its 7.500% Guaranteed Notes due May 15, 2015 and 6.000% Guaranteed Notes due April 1, 2016 (see related discussion below). |
During 2012, 2011, and 2010, the Company’s weighted-average effective interest rate on its mortgage notes payable was 6.65% , 6.72%, and 6.59%, respectively. As of December 31, 2012 and 2011, the net carrying value of the Company's Properties that are encumbered by mortgage indebtedness was $591.3 million and $678.0 million, respectively.
During the year-ended December 31, 2012, the Company repurchased $165.0 million of its outstanding unsecured Notes in a series of transactions that are summarized in the following table (in thousands):
Notes | Repurchase Amount | Principal | Loss | Deferred Financing Amortization | |||||||||||
2012 5.750% Notes | $ | 309 | $ | 301 | $ | 2 | $ | — | |||||||
2014 5.400% Notes | 4,630 | 4,302 | 264 | 8 | |||||||||||
2015 7.500% Notes | 69,549 | 60,794 | 8,712 | 183 | |||||||||||
2016 6.000% Notes | 113,942 | 99,571 | 12,961 | 260 | |||||||||||
$ | 188,430 | $ | 164,968 | $ | 21,939 | $ | 451 | ||||||||
The Parent Company unconditionally guarantees the unsecured debt obligations of the Operating Partnership (or is a co-borrower with the Operating Partnership) but does not by itself incur unsecured indebtedness.
The Company utilizes its unsecured new revolving credit facility (the "New Credit Facility") for potential borrowings and for general business purposes, including the acquisition, development and redevelopment of properties and the repayment of other debt. The maturity date of the New Credit Facility in place at December 31, 2012 is February 1, 2016. The per annum variable interest rate on the outstanding balances is LIBOR plus 1.50%. The interest rate and facility fee are subject to adjustment upon a change in the Company’s unsecured debt ratings. As of December 31, 2012, the Company had $69.0 million of borrowings, with $0.9 million in letters of credit outstanding, leaving $530.1 million of unused availability under the New Credit Facility. During the years ended December 31, 2012 and 2011, the weighted-average interest rate on the respective credit facility borrowings was 1.02% and 0.99%, respectively. As of December 31, 2012 and 2011, the weighted average interest rate on the respective credit facility was 2.83% and 1.01%, respectively.
The Company has the option to increase the amounts available to be advanced under the New Credit Facility, the $150.0 million three-year term loan, and the $100.0 million four-year term loan by an aggregate of $200.0 million, subject to customary conditions and limitations, by obtaining additional commitments from the current lenders and other financial institutions. The Company also has the option to extend the maturity dates of each of the New Credit Facility, the $150.0 million three-year term loan and the $100.0 million four-year term loan by one year, subject to payment of an extension fee and other customary conditions and limitations. The $150.0 million three-year term and the $100.0 million four-year term loans can be prepaid by the Company at any time without penalty. The $200.0 million seven-year term loan is subject to a declining prepayment penalty (3.00% commencing one year after closing, 2.00% after two years, 1.00% after three years and without penalty thereafter).
The spread to LIBOR for LIBOR-based loans under the New Credit Facility and New Term Loans will depend on the Company's unsecured senior debt credit rating. Based on the Company's current credit rating, the spread for such loans will be 150, 175, 175 and 190 basis points under the New Credit Facility, the $150.0 million three-year term loan, the $100.0 million four-year term loan and the $200.0 million seven-year term loan, respectively. At the Company's option, advances under the New Credit Facility and New Term Loans may also bear interest at a per annum floating rate equal to the higher of the prime rate or the federal funds rate plus 0.50% per annum. The New Credit Facility contains a competitive bid option that allows banks that are part of the lender
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consortium to bid to make loans to the Company at a reduced rate. The Company executed hedging transactions that fix the rate on the $200.0 million seven-year term loan at a 3.623% average rate for its full term, and the rate on the $150.0 million three-year term loan at a 2.596% average rate for periods of three to four years. All hedges commenced on February 1, 2012 and the rates are inclusive of the LIBOR spread based on our current investment grade rating. See Note 9 for details of the interest rate swaps entered into as of December 31, 2012.
The New Credit Facility and New Term Loans contain financial and operating covenants and restrictions. The Company was in compliance with all such restrictions and financial covenants as of December 31, 2012.
On December 18, 2012, the Company closed a registered offering of $250.0 million in aggregate principal amount of its 3.95% Guaranteed Notes due 2023. The notes were priced at 99.273% of their face amount with a yield to maturity of 4.037%, representing a spread at the time of pricing of 2.35%. The notes have been reflected net of discount of $1.8 million in the consolidated balance sheet as of December 31, 2012. The Company used a portion of the net proceeds from this offering, which amounted to $246.1 million after deducting underwriting discounts and offering expenses, to fund its repurchase, through a tender offer, of the Company's 7.50% Guaranteed Notes due May 15, 2015 and 6.00% Guaranteed Notes due April 1, 2016.
On December 27, 2012, in connection with the aforementioned offering, the Company funded tender offers for $50.3 million of its 7.50% Guaranteed Notes due 2015, and $99.6 million of its 6.00% Guaranteed Notes due 2016. The Company funded the total tender offer consideration of $171.5 million from net proceeds of the registered offering, as well as available cash balances, with the Company recognizing a $20.4 million loss on early extinguishment of debt related to the total repurchase.
On December 31, 2012, the Company repaid the entire $150.0 million remaining fixed portion of its four-year term loan due February 1, 2016. In connection with this repayment, the Company also incurred a $3.0 million charge on the termination of associated interest rate swap contracts, as reflected in the Company's consolidated statements of operations. Please refer to Footnote 9 for further information related to the termination of the interest rate swap contracts.
As of December 31, 2012, the Company’s aggregate scheduled principal payments of debt obligations, excluding amortization of discounts and premiums, were as follows (in thousands):
2013 | $ | 11,237 | |
2014 | 250,321 | ||
2015 | 416,568 | ||
2016 | 416,038 | ||
2017 | 330,323 | ||
Thereafter | 1,047,408 | ||
Total principal payments | 2,471,895 | ||
Net unamortized premiums/(discounts) | (6,565 | ) | |
Outstanding indebtedness | $ | 2,465,330 | |
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value disclosure was determined by the Company using available market information and discounted cash flow analyses as of December 31, 2012 and 2011, respectively. The discount rate used in calculating fair value is the sum of the current risk free rate and the risk premium on the date of measurement of the instruments or obligations. Considerable judgment is necessary to interpret market data and to develop the related estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize upon disposition. The use of different estimation methodologies may have a material effect on the estimated fair value amounts. The Company believes that the carrying amounts reflected in the consolidated balance sheets at December 31, 2012 and 2011 approximate the fair values for cash and cash equivalents, accounts receivable, other assets, accounts payable and accrued expenses.
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The following are financial instruments for which the Company’s estimates of fair value differ from the carrying amounts (in thousands):
December 31, 2012 | December 31, 2011 | ||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Mortgage notes payable | $ | 443,942 | $ | 486,412 | $ | 512,391 | $ | 545,784 | |||||||
Unsecured notes payable | $ | 1,430,343 | $ | 1,553,123 | $ | 1,496,501 | $ | 1,555,633 | |||||||
Variable rate debt | $ | 597,610 | $ | 595,693 | $ | 391,610 | $ | 380,786 | |||||||
Notes receivable | $ | 7,226 | $ | 7,783 | $ | 31,157 | (a) | $ | 32,756 | ||||||
(a) | For purposes of this disclosure, one of the notes is presented gross of the deferred gain of $12.9 million arising from the sale of two properties in 2009 accounted for under the accounting standard for installment sales. |
The fair value of the Company's unsecured notes payable is categorized at a Level 1 basis (as provided by the accounting standard for Fair Value Measurements and Disclosures). This is because the Company valued these instruments using quoted market prices as of December 31, 2012 and 2011.
The fair value of the Company's mortgage notes payable, variable rate debt and notes receivable are all categorized at a Level 3 basis (as provided by the accounting standard for Fair Value Measurements and Disclosures). The fair value of the variable rate debt was estimated using a discounted cash flow analysis valuation on the borrowing rates currently available to the Company for loans with similar terms and maturities, as applicable. The fair value of the mortgage debt was determined by discounting the future contractual interest and principal payments by a blended market rate. The fair value of the notes receivable was determined by using the expected cash flows of the notes receivable, and discounting those cash flows using the market rate of interest for mortgage notes with a comparable level of risk. These financial instruments have been categorized as Level 3 due to the fact that the Company considers the rates used in the valuation techniques to be unobservable inputs.
The only significant unobservable input in the discounted cash flow model is the discount rate. For the fair value of the Company's unsecured notes, the Company uses a discount rate based on the indicative new issue pricing provided by lenders. For the Company's mortgage loans, the Company uses an estimate based on its knowledge of the mortgage market. The weighted average discount rate for the combined variable rate debt and mortgage loans used as of December 31, 2012 was 3.214%. An increase in the discount rate used in the discounted cash flow model would result in a decrease to the fair value of the Company's long-term debt. Conversely, a decrease in the discount rate used in the discounted cash flow model would result in an increase to the fair value of the Company's long-term debt.
Disclosure about the fair value of financial instruments is based upon pertinent information available to management as of December 31, 2012 and 2011. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2012, and current estimates of fair value may differ from the amounts presented herein.
9. RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS
Risk Management
In the course of its ongoing business operations, the Company encounters economic risk. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk on its interest-bearing liabilities. Credit risk is primarily the risk of inability or unwillingness of tenants to make contractually required payments and counterparties on derivatives not fulfilling their obligations. Market risk is the risk of declines in the value of properties due to changes in rental rates, interest rates or other market factors affecting the valuation of properties held by the Company.
Risks and Uncertainties
Challenging economic conditions have reduced the volume of real estate transactions and created credit stresses on many businesses. Vacancy rates may increase through 2013 and possibly beyond as the current economic climate negatively impacts tenants. The current financial markets also have an adverse effect on the Company’s other counter parties such as the counter parties in its derivative contracts.
The Company expects that the impact of the current state of the economy, including high unemployment and the continued volatility in the financial and credit markets, could continue to have a dampening effect on the fundamentals of its business, including
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potential increases in past due accounts, tenant defaults, lower occupancy and reduced effective rents. These conditions would negatively affect the Company’s future net income and cash flows and could have a material adverse effect on its financial condition.
The Company’s New Credit Facility, New Term Loans and the indenture governing its unsecured public debt securities (Note 7) contain restrictions, requirements and other limitations on the ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which it must maintain. The ability to borrow under the New Credit Facility is subject to compliance with such financial and other covenants. In the event that the Company fails to satisfy these covenants, it would be in default under the New Credit Facility, the New Term Loans and the indenture and may be required to repay such debt with capital from other sources. Under such circumstances, other sources of capital may not be available, or may be available only on unattractive terms.
Availability of borrowings under the New Credit Facility is subject to a traditional material adverse effect clause. Each time the Company borrows it must represent to the lenders that there have been no events of a nature which would have a material adverse effect on the business, assets, operations, condition (financial or otherwise) or prospects of the Company taken as a whole or which could negatively affect the ability of the Company to perform its obligations under the New Credit Facility. While the Company believes that there are currently no material adverse effect events, the Company is operating in unprecedented economic times and it is possible that such event could arise which would limit the Company’s borrowings under the New Credit Facility. If an event occurs which is considered to have a material adverse effect, the lenders could consider the Company in default under the terms of the New Credit Facility and any borrowings under the New Credit Facility would become unavailable. If the Company is unable to obtain a waiver, this would have a material adverse effect on the Company’s financial position and results of operations.
The Company was in compliance with all financial covenants as of December 31, 2012. Management continuously monitors the Company’s compliance with and anticipated compliance with the covenants. Certain of the covenants restrict management’s ability to obtain alternative sources of capital. While the Company currently believes it will remain in compliance with its covenants, in the event of a continued slow-down in the credit markets, the Company may not be able to remain in compliance with such covenants and if the lenders would not provide a waiver, an event of default could result.
Use of Derivative Financial Instruments
The Company’s use of derivative instruments is limited to the utilization of interest rate agreements or other instruments to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the 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 through derivative financial instruments.
The Company formally assesses, both at inception of a hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that a derivative is not highly-effective as a hedge or if a derivative ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively. The related ineffectiveness would be charged to the consolidated statement of operations.
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of the accounting standard for fair value measurements and disclosures, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
The following table summarizes the terms and fair values of the Company's derivative financial instruments as of December 31, 2012 and December 31, 2011. The notional amounts provide an indication of the extent of the Company's involvement in these instruments at that time, but do not represent exposure to credit, interest rate or market risks (amounts presented in thousands and included in other liabilities on the Company's consolidated balance sheets).
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Hedge Product | Hedge Type | Designation | Notional Amount | Strike | Trade Date | Maturity Date | Fair value | ||||||||||||||||||||
12/31/2012 | 12/31/2011 | 12/31/2012 | 12/31/2011 | ||||||||||||||||||||||||
Swap | Interest Rate | Cash Flow | (a) | $ | 200,000 | $ | 200,000 | 3.623 | % | December 6-13, 2011 | February 1, 2019 | $ | 8,859 | $ | 2,820 | ||||||||||||
Swap | Interest Rate | Cash Flow | (a), (b) | 77,000 | 127,000 | 2.703 | % | December 9-13, 2011 | February 1, 2016 | 1,343 | 340 | ||||||||||||||||
Swap | Interest Rate | Cash Flow | (a) | 50,000 | 50,000 | 2.470 | % | December 13, 2011 | February 1, 2015 | 458 | 65 | ||||||||||||||||
Swap | Interest Rate | Cash Flow | (a) | 23,000 | 23,000 | 2.513 | % | December 7-12, 2011 | May 1, 2015 | 245 | 27 | ||||||||||||||||
Swap | Interest Rate | Cash Flow | (a) | 27,062 | 27,062 | 2.750 | % | December 21, 2011 | September 30, 2017 | 914 | 244 | ||||||||||||||||
Swap | Interest Rate | Cash Flow | (a) | 25,774 | 25,774 | 3.300 | % | December 22, 2011 | January 30, 2021 | 1,262 | 390 | ||||||||||||||||
Swap | Interest Rate | Cash Flow | (a) | 25,774 | — | 3.090 | % | January 6, 2012 | October 30, 2019 | 1,129 | — | ||||||||||||||||
$ | 428,610 | $ | 452,836 | $ | 14,210 | $ | 3,886 | ||||||||||||||||||||
(a) Hedging unsecured variable rate debt.
(b) On December 31, 2012, the Company repaid the entire $150.0 million swapped to fixed portion of its previously mentioned four-year loan (please refer to Note 7), consisting of $50.0 million interest rate swaps maturing February 1, 2016 (shown above), and $100.0 million of interest rate swaps entered into on January 6, 2012. In connection with the repayment, the Company terminated associated hedging contracts, incurring a $3.0 million charge upon termination.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
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 10% or more of the Company’s rents during 2012, 2011 and 2010. Conditions in the general economy and the global credit markets have had a significant adverse effect on companies in numerous industries. The Company has tenants concentrated in various industries that may be experiencing adverse effects from the current economic conditions and the Company could be adversely affected if such tenants go into default under their leases.
10. DISCONTINUED OPERATIONS
For the years ended December 31, 2012, 2011 and 2010, income from discontinued operations relates to an aggregate of 26 properties containing approximately 1.8 million net rentable square feet that the Company has sold since January 1, 2010.
The following table summarizes revenue and expense information for the properties sold which qualify for discontinued operations reporting since January 1, 2010 (in thousands):
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Years ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
Revenue: | |||||||||||
Rents | $ | 6,384 | $ | 21,608 | $ | 26,979 | |||||
Tenant reimbursements | 800 | 3,326 | 5,540 | ||||||||
Termination fees | 11 | 75 | 250 | ||||||||
Other | 72 | 3 | 109 | ||||||||
Total revenue | 7,267 | 25,012 | 32,878 | ||||||||
Expenses: | |||||||||||
Property operating expenses | 1,857 | 6,631 | 9,258 | ||||||||
Real estate taxes | 753 | 2,618 | 3,453 | ||||||||
Depreciation and amortization | 2,750 | 8,777 | 11,432 | ||||||||
Total operating expenses | 5,360 | 18,026 | 24,143 | ||||||||
Other income (expense): | |||||||||||
Interest income | 2 | — | 4 | ||||||||
Income from discontinued operations before gain on sale of interests in real estate | 1,909 | 6,986 | 8,739 | ||||||||
Net gain on disposition of discontinued operations | 34,774 | 7,264 | 10,980 | ||||||||
Income from discontinued operations | $ | 36,683 | $ | 14,250 | $ | 19,719 | |||||
Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the consolidated statements of operations.
11. NON-CONTROLLING INTERESTS IN THE PARENT COMPANY'S FINANCIAL STATEMENTS
Non-controlling interests in the Parent Company’s financial statements relate to redeemable common limited partnership interests in the Operating Partnership held by parties other than the Parent Company.
Operating Partnership
As of December 31, 2012 and 2011, the aggregate book value of the non-controlling interests associated with the redeemable common limited partnership interests in the accompanying consolidated balance sheet of the Parent Company was $21.2 million and $33.1 million, respectively. The Parent Company believes that the aggregate settlement value of these interests (based on the number of units outstanding and the closing price of the common shares on the balance sheet date) was approximately $22.5 million and $25.6 million, respectively.
12. BENEFICIARIES’ EQUITY OF THE PARENT COMPANY
Earnings per Share (EPS)
The following tables detail the number of shares and net income used to calculate basic and diluted earnings per share (in thousands, except share and per share amounts; results may not add due to rounding):
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Year ended December 31, | |||||||||||||||||||||||
2012 | 2011 | 2010 | |||||||||||||||||||||
Basic | Diluted | Basic | Diluted | Basic | Diluted | ||||||||||||||||||
Numerator | |||||||||||||||||||||||
Loss from continuing operations | $ | (30,154 | ) | $ | (30,154 | ) | $ | (18,965 | ) | $ | (18,965 | ) | $ | (37,325 | ) | $ | (37,325 | ) | |||||
Net (income) loss from continuing operations attributable to non-controlling interests | 736 | 736 | 769 | 769 | 946 | 946 | |||||||||||||||||
Amount allocable to unvested restricted shareholders | (376 | ) | (376 | ) | (505 | ) | (505 | ) | (512 | ) | (512 | ) | |||||||||||
Preferred share dividends | (10,405 | ) | (10,405 | ) | (7,992 | ) | (7,992 | ) | (7,992 | ) | (7,992 | ) | |||||||||||
Preferred share redemption charge | (4,052 | ) | (4,052 | ) | — | — | — | — | |||||||||||||||
Loss from continuing operations available to common shareholders | (44,251 | ) | (44,251 | ) | (26,693 | ) | (26,693 | ) | (44,883 | ) | (44,883 | ) | |||||||||||
Income from discontinued operations | 36,683 | 36,683 | 14,250 | 14,250 | 19,719 | 19,719 | |||||||||||||||||
Discontinued operations attributable to non-controlling interests | (670 | ) | (670 | ) | (553 | ) | (553 | ) | (414 | ) | (414 | ) | |||||||||||
Discontinued operations attributable to common shareholders | 36,013 | 36,013 | 13,697 | 13,697 | 19,305 | 19,305 | |||||||||||||||||
Net loss attributable to common shareholders | $ | (8,238 | ) | $ | (8,238 | ) | $ | (12,996 | ) | $ | (12,996 | ) | $ | (25,578 | ) | $ | (25,578 | ) | |||||
Denominator | |||||||||||||||||||||||
Weighted-average shares outstanding | 143,257,097 | 143,257,097 | 135,444,424 | 135,444,424 | 131,743,275 | 131,743,275 | |||||||||||||||||
Earnings per Common Share: | |||||||||||||||||||||||
Loss from continuing operations attributable to common shareholders | $ | (0.31 | ) | $ | (0.31 | ) | $ | (0.20 | ) | $ | (0.20 | ) | $ | (0.34 | ) | $ | (0.34 | ) | |||||
Discontinued operations attributable to common shareholders | 0.25 | 0.25 | 0.10 | 0.10 | 0.15 | 0.15 | |||||||||||||||||
Net loss attributable to common shareholders | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.10 | ) | $ | (0.10 | ) | $ | (0.19 | ) | $ | (0.19 | ) | |||||
Redeemable common limited partnership units totaling 1,845,737 in 2012, 2,698,647 in 2011, and 9,902,752 in 2010 were excluded from the diluted earnings per share computations because their effect would have been anti-dilutive.
The contingent securities/share based compensation impact is calculated using the treasury stock method and relates to employee awards settled in shares of the Parent Company. The effect of these securities is anti-dilutive for periods that the Parent Company incurs a net loss from continuing operations available to common shareholders and therefore is excluded from the dilutive earnings per share calculation in such periods.
Unvested restricted shares are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share. For the years ended December 31, 2012, 2011 and 2010, earnings representing nonforfeitable dividends as noted in the table above were allocated to the unvested restricted shares issued to the Company’s executives and other employees under the 1997 Plan.
Common and Preferred Shares
On December 28, 2012 the Parent Company used available cash balances to redeem all 2,300,000 shares of its then outstanding 7.375% Series D Cumulative Redeemable Preferred Shares at an aggregate redemption price of $57.5 million plus $0.8 million of dividends accrued through the redemption date. The Company used the remaining proceeds from the aforementioned offering for corporate purposes.
On April 11, 2012, the Parent Company closed on a registered public offering of 4,000,000 shares of 6.90% Series E Cumulative Redeemable Preferred Shares, or Series E Preferred Shares, at a price to the public of $25.00 per share. Dividends on the Series E Preferred Shares are payable quarterly in arrears on or about the 15th day of each January, April, July, and October, commencing July 15, 2012, at a rate per annum of 6.90% of the liquidation value of $25.00 per share (equivalent to $1.725 per share per annum). Net proceeds from this offering totaled approximately $96.3 million, after deducting the underwriting discount and our related expenses. The Series E Preferred Shares are perpetual. On or after April 11, 2017, the
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Parent Company, at its option, may redeem the Series E Preferred Shares, in whole or in part, by paying $25.00 per share, which is equivalent to its liquidation preference, plus accrued but unpaid dividends. The Parent Company could not redeem Series E Preferred Shares before April 11, 2017 except to preserve its REIT status. See Note 13 for related discussion.
On May 3, 2012, the Parent Company used a portion of the net proceeds from the sale of Series E Preferred Shares to redeem all 2,000,000 shares of its then outstanding 7.50% Series C Cumulative Redeemable Preferred Shares at a redemption price of $50.0 million plus $0.2 million of dividends accrued through the redemption date. The Company used the remaining proceeds from the aforementioned offering for corporate purposes.
In accordance with GAAP, the Company also recognized $4.1 million of redemption costs ($2.1 million and $2.0 million related to the Series C and Series D redemptions, respectively) associated with the total aforementioned redemptions as a reduction in net earnings to arrive at net income applicable to common shares. These costs are listed above and shown within the Company's consolidated statements of operations as "Preferred share redemption charge". There were no comparable charges for the prior year.
On December 11, 2012, the Parent Company declared a distribution of $0.15 per common share, totaling $21.6 million, which was paid on January 18, 2013 to shareholders of record as of January 4, 2013. On December 11, 2012, the Parent Company declared distributions on its Series E Preferred Shares to holders of record as of December 30, 2012. These shares are entitled to a preferential return of 6.90%. Distributions paid on January 15, 2013 to holders of Series E Preferred Shares totaled $1.7 million.
In March 2010, the Parent Company commenced a continuous equity offering program (the “Offering Program”), under which the Parent Company may sell up to an aggregate amount of 15,000,000 common shares until March 10, 2013. The Company may sell common shares in amounts and at times to be determined by the Parent Company. Actual sales will depend on a variety of factors as determined by the Parent Company, including market conditions, the trading price of its common shares and determinations by the Parent Company of the appropriate sources of funding. In conjunction with the Offering Program, the Parent Company engages sales agents who receive compensation, in aggregate, of up to 2% of the gross sales price per share sold. During the year-ended December 31, 2012, the Parent Company did not sell any shares under the Offering Program. During the year-ended December 31, 2011, the Parent Company sold 679,285 shares under this program at an average sales price of $12.18 per share resulting in net proceeds of $8.0 million. The Parent Company contributed the net proceeds from the sale of its shares to the Operating Partnership in exchange for the issuance of 679,285 common partnership units to the Parent Company. The Operating Partnership used the net proceeds from the sales contributed by the Parent Company to repay balances on its Credit Facility and for general corporate purposes. From the inception of the Offering Program in March 2010 through December 31, 2012, the Parent Company had sold 6,421,553 shares under this program at an average sales price of $12.50 per share, resulting in 8,578,447 remaining shares available for sale. The Parent Company is currently evaluating an extension of the Offering Program subsequent to its scheduled expiration date.
Common Share Repurchases
The Parent Company maintains a share repurchase program pursuant to which the Parent Company is authorized to repurchase its common shares from time to time. The Parent Company’s Board of Trustees initially authorized this program in 1998 and has periodically replenished capacity under the program. On May 2, 2006 the Board of Trustees restored capacity to 3.5 million common shares.
The Parent Company did not repurchase any shares under the share repurchase program during the year-ended December 31, 2012. As of December 31, 2012, the Parent Company may purchase an additional 0.5 million shares under the program.
Repurchases may be made from time to time in the open market or in privately negotiated transactions, subject to market conditions and compliance with legal requirements. The share repurchase program does not contain any time limitation and does not obligate the Parent Company to repurchase any shares. The Parent Company may discontinue the program at any time.
13. PARTNERS’ EQUITY OF THE OPERATING PARTNERSHIP
Earnings per Common Partnership Unit
The following tables detail the number of units and net income used to calculate basic and diluted earnings per common partnership unit (in thousands, except unit and per unit amounts; results may not add due to rounding):
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Year ended December 31, | |||||||||||||||||||||||
2012 | 2011 | 2010 | |||||||||||||||||||||
Basic | Diluted | Basic | Diluted | Basic | Diluted | ||||||||||||||||||
Numerator | |||||||||||||||||||||||
Loss from continuing operations | $ | (30,154 | ) | $ | (30,154 | ) | $ | (18,965 | ) | $ | (18,965 | ) | $ | (37,325 | ) | $ | (37,325 | ) | |||||
Amount allocable to unvested restricted unitholders | (376 | ) | (376 | ) | (505 | ) | (505 | ) | (512 | ) | (512 | ) | |||||||||||
Preferred unit dividends | (10,405 | ) | (10,405 | ) | (7,992 | ) | (7,992 | ) | (7,992 | ) | (7,992 | ) | |||||||||||
Preferred unit redemption charge | (4,052 | ) | (4,052 | ) | — | — | — | — | |||||||||||||||
Loss from continuing operations available to common unitholders | (44,987 | ) | (44,987 | ) | (27,462 | ) | (27,462 | ) | (45,829 | ) | (45,829 | ) | |||||||||||
Discontinued operations attributable to common unitholders | 36,683 | 36,683 | 14,250 | 14,250 | 19,719 | 19,719 | |||||||||||||||||
Net loss attributable to common unitholders | $ | (8,304 | ) | $ | (8,304 | ) | $ | (13,212 | ) | $ | (13,212 | ) | $ | (26,110 | ) | $ | (26,110 | ) | |||||
Denominator | |||||||||||||||||||||||
Weighted-average units outstanding | 145,883,217 | 145,883,217 | 145,118,841 | 145,118,841 | 137,454,796 | 137,454,796 | |||||||||||||||||
Earnings per Common Partnership Unit: | |||||||||||||||||||||||
Loss from continuing operations attributable to common unitholders | $ | (0.31 | ) | $ | (0.31 | ) | $ | (0.19 | ) | $ | (0.19 | ) | $ | (0.33 | ) | $ | (0.33 | ) | |||||
Discontinued operations attributable to common unitholders | 0.25 | 0.25 | 0.10 | 0.10 | 0.14 | 0.14 | |||||||||||||||||
Net loss attributable to common unitholders | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.09 | ) | $ | (0.19 | ) | $ | (0.19 | ) | |||||
Unvested restricted units are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share. For the years ended December 31, 2012, 2011 and 2010, earnings representing nonforfeitable dividends as noted in the table above were allocated to the unvested restricted units.
Common Partnership Units and Preferred Mirror Units
The Operating Partnership issues partnership units to the Parent Company in exchange for the contribution of the net proceeds of any equity security issuance by the Parent Company. The number and terms of such partnership units correspond to the number and terms of the related equity securities issued by the Parent Company. In addition, the Operating Partnership may also issue separate classes of partnership units. Historically, the Operating Partnership has had the following types of partnership units outstanding (i) Preferred Partnership Units which have been issued to parties other than the Parent Company (ii) Preferred Mirror Partnership Units which have been issued to the Parent Company and (iii) Common Partnership Units which include both interests held by the Parent Company and those held by other limited partners. Each of these interests is described in more detail below.
Preferred Mirror Partnership Units
In exchange for the proceeds received in corresponding offerings by the Parent Company of preferred shares of beneficial interest, the Operating Partnership has issued to the Parent Company a corresponding amount of Preferred Mirror Partnership Units with terms consistent with that of the preferred securities issued by the Parent Company.
On December 28, 2012, the Operating Partnership redeemed all of its Series E Preferred Mirror Units as a result of the aforementioned redemption of Series D Preferred Shares.
On April 11, 2012, the Operating Partnership issued 6.90% Series E-Linked Preferred Mirror Units to the Parent Company, in connection with the previously mentioned Series E Preferred Share Offering. On May 3, 2012, the Operating Partnership also redeemed all of its Series D Preferred Mirror Units as a result of the aforementioned redemption of Series C Preferred Shares.
In accordance with GAAP, the Operating Partnership also recognized $4.1 million of redemption costs ($2.1 million and $2.0 million related to the Series D and Series E redemptions, respectively) associated with the total aforementioned redemptions as a reduction in net earnings to arrive at net income applicable to common units. These costs are listed above and shown within the Operating Partnership's consolidated statements of operations as "Preferred unit redemption charge". There were no comparable charges for the prior year.
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Common Partnership Units (Redeemable and General)
The Operating Partnership has two classes of Common Partnership Units: (i) Class A Limited Partnership Interest which are held by both the Parent Company and outside third parties and (ii) General Partnership Interests which are held by the Parent Company (collectively, the Class A Limited Partnership Interest, and General Partnership Interests are referred to as “Common Partnership Units”). The holders of the Common Partnership Units are entitled to share in cash distributions from, and in profits and losses of, the Operating Partnership, in proportion to their respective percentage interests, subject to preferential distributions on the preferred mirror units and the preferred units.
The Common Partnership Units held by the Parent Company (comprised of both General Partnership Units and Class A Limited Partnership Units) are presented as partner’s equity in the consolidated financial statements. Class A Limited Partnership Interest held by parties other than the Parent Company are redeemable at the option of the holder for a like number of common shares of the Parent Company, or cash, or a combination thereof, at the election of the Parent Company. Because the form of settlement of these redemption rights are not within the control of the Operating Partnership, these Common Partnership Units have been excluded from partner’s equity and are presented as redeemable limited partnership units measured at the potential cash redemption value as of the end of the periods presented based on the closing market price of the Parent Company’s common shares at December 31, 2012, 2011 and 2010, which was $12.19, $9.50, 11.65, respectively. As of December 31, 2012 and 2011, 1,845,737 and 2,698,647 of Class A Units, respectively, were outstanding and owned by outside limited partners of the Operating Partnership.
On December 17, 2012, the Operating Partnership redeemed 811,984 limited partnership units from the estate of a former unit holder for a total cash consideration of $9.7 million, based on a calculated price of $12.00 per unit on the date of redemption.
On December 11, 2012, the Operating Partnership declared a distribution of $0.15 per common partnership unit, totaling $21.6 million, which was paid on January 18, 2013 to unitholders of record as of January 4, 2013.
On December 11, 2012, the Operating Partnership declared distributions on its Series E-Linked Preferred Mirror Units to holders of record as of December 30, 2012. These units are entitled to a preferential return of 6.90%. Distributions paid on January 15, 2013 to holders of Series E-Linked Preferred Mirror Units totaled $1.8 million.
During the year-ended December 31, 2012, the Parent Company did not sell any shares related to the Offering Program, and accordingly, during the twelve-month period ended December 31, 2012, the Operating Partnership did not issue any common partnership units in connection with the Parent Company's Offering Program. From the inception of the Offering Program in March 2010 through December 31, 2012, the Parent Company had sold 6,421,553 shares under this program at an average sales price of $12.50 per share, resulting in 8,578,447 remaining shares available for sale. The Parent Company is currently evaluating an extension of the Offering Program subsequent to its scheduled expiration date.
Generally, the Operating Partnership uses the net proceeds from these sales to repay balances on its unsecured revolving credit facility and for general corporate purposes.
Common Unit Repurchases
The Parent Company did not repurchase any shares under its share repurchase program during the year-ended December 31, 2012 and accordingly, during the year-ended December 31, 2012, the Operating Partnership did not repurchase any units in connection with the Parent Company’s share repurchase program.
14. SHARE BASED COMPENSATION, 401(k) PLAN AND DEFERRED COMPENSATION
Stock Options
At December 31, 2012, the Parent Company had 3,337,549 options outstanding under its shareholder approved equity incentive plan. There were 645,463 options unvested as of December 31, 2012 and $0.7 million of unrecognized compensation expense associated with these options to be recognized over a weighted average of 0.8 years. During the years ended December 31, 2012, 2011 and 2010 the Company recognized $1.6 million, $1.4 million, and $1.0 million, respectively, of compensation expense included in general and administrative expense related to unvested options. During the years ended December 31, 2012 and 2011, the company has also capitalized $0.5 million and $0.4 million, respectively, of compensation expense as part of the Company’s review of employee salaries eligible for capitalization. During the year ended December 31, 2010, the Company had capitalized nominal amounts of compensation expense.
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Option activity as of December 31, 2012 and changes during the year-ended December 31, 2012 were as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||||||||
Outstanding at January 1, 2012 | 3,599,672 | $ | 14.50 | 7.20 | $ | — | |||||||
Granted | — | — | — | — | |||||||||
Exercised | (230,294 | ) | $ | 4.25 | — | — | |||||||
Forfeited/Expired | (31,829 | ) | $ | 14.33 | |||||||||
Outstanding at December 31, 2012 | 3,337,549 | $ | 14.85 | 5.95 | $ | — | |||||||
Vested/Exercisable at December 31, 2012 | 2,692,086 | $ | 16.06 | 5.78 | $ | — | |||||||
The fair value of share option awards is estimated on the date of the grant using the Black-Scholes option valuation model. The following weighted-average assumptions were utilized in calculating the fair value of options granted during the year-ended December 31, 2011. There is no comparable data during the year-ended December 31, 2012, as there were no share options granted during the current year.
Grant Date | March 2, 2011 | ||
Risk-free interest rate | 2.86% | ||
Dividend yield | 5.01% | ||
Volatility factor | 48.02% | ||
Weighted-average expected life | 7 | yrs | |
Years ended December 31, | |||||||||||||||||
2011 | 2010 | ||||||||||||||||
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in Years) | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in Years) | ||||||||||||
Outstanding at beginning of year | 3,116,611 | $ | 14.56 | 7.81 | 2,404,567 | $ | 15.48 | 8.38 | |||||||||
Granted | 603,241 | 11.89 | 9.18 | 724,805 | 11.31 | 9.18 | |||||||||||
Exercised | (120,180 | ) | 2.91 | (12,761 | ) | 2.91 | |||||||||||
Outstanding at end of year | 3,599,672 | $ | 14.50 | 7.20 | 3,116,611 | $ | 14.56 | 7.81 | |||||||||
Vested/Exercisable at end of year | 2,287,729 | $ | 17.01 | 6.59 | 1,384,728 | $ | 17.63 | 7.14 | |||||||||
401(k) Plan
The Company sponsors a 401(k) defined contribution plan for its employees. Each employee may contribute up to 100% of annual compensation, subject to specific limitations under the Internal Revenue Code. At its discretion, the Company can make matching contributions equal to a percentage of the employee’s elective contribution and profit sharing contributions. Effective October 1, 2011, employees automatically vest in employer contributions. The Company contributions were $0.4 million in 2012 and 2011, and $0.3 million in 2010.
Restricted Share Awards
As of December 31, 2012, 597,708 restricted shares were outstanding under the 1997 Plan and vest over three to seven years from the initial grant date. The remaining compensation expense to be recognized at December 31, 2012 was approximately $2.7 million, and is expected to be recognized over a weighted average remaining vesting period of 1.9 years. The Company recognized compensation expense related to outstanding restricted shares of $3.4 million, of which of which $0.9 million was capitalized as part of the Company’s review of employee salaries eligible for capitalization. For the years ended December 31, 2011 and 2010,
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the company recognized $3.2 million (of which $0.7 million was capitalized) and $4.0 million (of which $0.9 million was capitalized), respectively, of compensation expense included in general and administrative expense in the respective periods related to outstanding restricted shares.
The following table summarizes the Company’s restricted share activity during the year-ended December 31, 2012:
Shares | Weighted Average Grant Date Fair value | |||||
Non-vested at January 1, 2012 | 807,291 | $ | 9.46 | |||
Granted | 228,777 | 10.91 | ||||
Vested | (414,865 | ) | 6.18 | |||
Forfeited | (23,495 | ) | 14.29 | |||
Non-vested at December 31, 2012 | 597,708 | $ | 12.57 | |||
On March 1, 2012, the Compensation Committee of the Company’s Board of Trustees awarded 193,270 restricted shares to the Company’s executives. The restricted shares will cliff vest after three years from the grant date. The vesting of the restricted shares is also subject to acceleration upon a change in control or if the recipient of the award were to die, become disabled, be terminated without cause or retire in a qualifying retirement prior to the vesting date. Qualifying retirement for restricted shares granted on March 1, 2012 as provided in the Plan award agreements means the recipient’s voluntary termination of employment after reaching age 57 and accumulating at least 15 years of service with the Company. As of December 31, 2012, two of the Company’s executives had met conditions to elect a qualifying retirement, and upon the retirement of one of these executives, the Company issued 10,935 of the 2012 restricted shares.
Restricted Performance Share Units Plan
On March 1, 2012, March 2, 2011, and March 4, 2010, the Compensation Committee of the Parent Company’s Board of Trustees awarded an aggregate of 260,571, 122,119, and 111,703 share-based awards, respectively, to its executives. These awards are referred to as Restricted Performance Share Units, or RPSUs. The RPSUs represent the right to earn common shares. The number of common shares, if any, deliverable to award recipients depends on the Company’s performance based on its total return to shareholders during the three-year measurement period that commenced on January 1, 2012 (in the case of the March 1, 2012 awards), January 1, 2011 (in the case of the March 2, 2011 awards), and January 1, 2010 (in the case of the March 4, 2010 awards) and that ends on the earlier of December 31, 2014, December 31, 2013 or December 31, 2012 (as applicable) or the date of a change of control. In the case of the awards made on March 1, 2012, the Company's performance is compared to the shareholder return of REITs within an index over the measurement period for 50% of the RPSUs awarded on that date, with the remaining 50% being compared to the total shareholder return of REITs within the Company's proxy peer group over such period. In the case of the awards made on March 2, 2011 and March 4, 2010, the Company's performance is compared to the total shareholder return of REITs within an index over such respective periods. The awards are also contingent upon the continued employment of the participants through the performance periods (with exceptions for death, disability and qualifying retirement). Dividends are deemed credited to the performance units accounts and are applied to “acquire” more performance units for the account of the unit holder at the price per common share ending on the dividend payment date. If earned, awards will be settled in common shares in an amount that reflects both the number of performance units in the holder’s account at the end of the applicable measurement period and the Company’s total return to shareholders during the applicable three year measurement period relative to the total shareholder return of the REIT within the index or peer group, as applicable.
If the total shareholder return during the measurement period places the Company at or above a certain percentile as compared to the REITs within the index or peer group, as applicable, then at the end of the measurement period the number of shares that will be delivered shall equal a certain percentage (not to exceed 200%) of the participant's base units.
On the date of each grant, the awards were valued using a Monte Carlo simulation. The fair value of the 2012 award on the grant date was $4.2 million, while the fair values of the 2011 and 2010 awards were $2.0 million and $1.8 million, respectively. The fair values of each award are being amortized over the three-year cliff vesting period. In the case of the 2012 and 2011 awards, the vesting of the RPSUs is also subject to acceleration upon a change in control or if the recipient of the award were to die, become disabled, terminated without cause or retire in a qualifying retirement prior to the vesting date. Qualifying retirement for RPSUs granted on March 1, 2012 and March 1, 2011 as provided under the 1997 Plan means the recipient’s voluntary termination of employment after reaching age 57 and accumulating at least 15 years of service with the Company. As of December 31, 2012, two of the Company’s executives had met conditions to elect a qualifying retirement, and upon the retirement of one of these executives, the Company issued 30,610 and 5,943 of the 2012 and 2011 RPSUs, respectively.
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During the year-ended December 31, 2012, the Company recognized total compensation expense for the 2012, 2011, and 2010 awards of $3.5 million related to this plan, of which $1.2 million was capitalized as part of the Company’s review of employee salaries eligible for capitalization. During the year-ended December 31, 2011, the Company recognized total compensation expense for the 2011, 2010, and 2009 awards of $1.7 million related to this plan, of which $0.5 million was capitalized as part of the Company’s review of employee salaries eligible for capitalization. During the year-ended December 31, 2010, the Company recognized total compensation expense for both the 2010 and 2009 awards of $1.0 million related to this plan, of which nominal amounts were capitalized as part of the Company’s review of employee salaries eligible for capitalization.
In the case of the Company's previous April 1, 2009 award, a total of 372,102 shares were delivered to award recipients on March 1, 2012. These shares, which all vested on December 31, 2011 (the end of its three-year measurement period), were also paid cash dividends on February 3, 2012.
Employee Share Purchase Plan
On May 9, 2007, the Parent Company’s shareholders approved the 2007 Non-Qualified Employee Share Purchase Plan (the “ESPP”). The ESPP is intended to provide eligible employees with a convenient means to purchase common shares of the Parent Company through payroll deductions and voluntary cash purchases at an amount equal to 85% of the average closing price per share for a specified period. Under the plan document, the maximum participant contribution for the 2012 plan year is limited to the lesser of 20% of compensation or $50,000. The number of shares initially reserved for issuance under the ESPP is 1.25 million. During the year-ended December 31, 2012, employees made purchases under the ESPP of $0.4 million and the Company recognized $0.1 million of compensation expense related to the ESPP. During the year-ended December 31, 2011, employees made purchases of $0.4 million under the ESPP, and the Company recognized $0.1 million of compensation expense related to the ESPP. During the year ended December 31, 2010, employees made purchases of $0.5 million under the ESPP, and the Company recognized $0.2 million of compensation expense related to the ESPP. The Board of Trustees of the Parent Company may terminate the ESPP at its sole discretion at any time.
Deferred Compensation
In January 2005, the Parent Company adopted a Deferred Compensation Plan (the “Plan”) that allows trustees and certain key employees to voluntarily defer compensation. Compensation expense is recorded for the deferred compensation and a related liability is recognized. Participants may elect designated benchmark investment options for the notional investment of their deferred compensation. The deferred compensation obligation is adjusted for deemed income or loss related to the investments selected. At the time the participants defer compensation, the Company records a liability, which is included in the Company’s consolidated balance sheet. The liability is adjusted for changes in the market value of the participant-selected investments at the end of each accounting period, and the impact of adjusting the liability is recorded as an increase or decrease to compensation cost. For the year ended December 31, 2012, the Company recorded a net increase in compensation costs of $1.3 million in connection with the Plan due to the change in the market value of the participant investments in the Plan. For the years ended 2011 and 2010, the Company recorded a nominal net decrease, and a net increase of $1.0 million in compensation costs, respectively, in connection with the Plan plan due to the change in the market value of the participant investments in the Plan.
The deferred compensation obligations are unfunded, but the Company has purchased company-owned life insurance policies and mutual funds, which can be utilized as a funding source for the Company’s obligations under the Plan. Participants in the Plan have no interest in any assets set aside by the Company to meet its obligations under the Plan. For the year-ended December 31, 2012, the Company recorded a net decrease in compensation costs of $1.0 million. For the years ended December 31, 2011 and 2010, the Company recorded a net increase in compensation costs of $0.1 million and a net decrease in compensation costs of $1.0 million, respectively, in connection with the investments in the company-owned policies and mutual funds.
Participants in the Plan may elect to have all or a portion of their deferred compensation invested in the Company’s common shares. The Company holds these shares in a rabbi trust, which is subject to the claims of the Company’s creditors in the event of the Company’s bankruptcy or insolvency. The Plan does not permit diversification of a participant’s deferral allocated to the Company common share and deferrals allocated to Company common shares can only be settled with a fixed number of shares. In accordance with the accounting standard for deferred compensation arrangements where amounts earned are held in a rabbi trust and invested, the deferred compensation obligation associated with the Company’s common shares is classified as a component of shareholder’s equity and the related shares are treated as shares to be issued and are included in total shares outstanding. At December 31, 2012 and 2011, 0.3 million of such shares were included in total shares outstanding. Subsequent changes in the fair value of the common shares are not reflected in operations or shareholders’ equity of the Company.
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15.DISTRIBUTIONS
Years ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
(in thousands, except per share amounts) | |||||||||||
Common Share Distributions: | |||||||||||
Ordinary income | $ | 0.39 | $ | 0.37 | $ | 0.60 | |||||
Capital gain | — | — | — | ||||||||
Non-taxable distributions | 0.21 | 0.23 | — | ||||||||
Distributions per share | $ | 0.60 | $ | 0.60 | $ | 0.60 | |||||
Percentage classified as ordinary income | 65.00 | % | 61.67 | % | 100.00 | % | |||||
Percentage classified as capital gain | — | % | — | % | — | % | |||||
Percentage classified as non-taxable distribution | 35.00 | % | 38.33 | % | — | % | |||||
Preferred Share Distributions: | |||||||||||
Total distributions declared | $ | 10,405 | $ | 7,992 | $ | 7,992 | |||||
Percentage classified as ordinary income | 100.00 | % | 100.00 | % | 100.00 | % | |||||
16. TAX CREDIT TRANSACTIONS
Historic Tax Credit Transaction
On November 17, 2008, the Company closed a transaction with US Bancorp (“USB”) related to the historic rehabilitation of the IRS Philadelphia Campus, a 862,692 square foot office building that is 100% leased to the IRS. On August 27, 2010, the Company completed the development of the IRS Philadelphia Campus and the IRS lease commenced. USB agreed to contribute approximately $64.1 million of project costs and advanced $10.2 million of that amount contemporaneously with the closing of the transaction. USB subsequently advanced an additional $27.4 million and $23.8 million in June 2010 and December 2009, respectively. On October 19, 2011, the Company received the remaining $2.7 million of the total contributions upon its completion of certain items and compliance with the federal rehabilitation regulations.
In exchange for its contributions into the development of the IRS Philadelphia Campus, USB is entitled to substantially all of the benefits derived from the tax rehabilitation credits available under section 47 of the Internal Revenue Code. USB does not have a material interest in the underlying economics of the property. This transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase USB’s interest in the IRS Philadelphia Campus. The Company believes the put will be exercised and the amount attributed to that puttable non-controlling interest obligation is included in other liabilities and is being accreted to the expected fixed put price.
Based on the contractual arrangements that obligate the Company to deliver tax benefits and provide other guarantees to USB and that entitle the Company through fee arrangements to receive substantially all available cash flow from the IRS Philadelphia Campus, the Company concluded that the IRS Philadelphia Campus should be consolidated. The Company also concluded that capital contributions received from USB, in substance, are consideration that the Company receives in exchange for its obligation to deliver tax credits and other tax benefits to USB. These receipts other than the amounts allocated to the put obligation will be recognized as revenue in the consolidated financial statements beginning when the obligation to USB is relieved which occurs upon delivery of the expected tax benefits net of any associated costs. The tax credit is subject to 20% recapture per year beginning one year after the completion of the IRS Philadelphia Campus. The total USB contributions presented within the Company’s consolidated balance sheet amounted to $39.1 million as of December 31, 2012 and $51.6 million as of December 31, 2011. The contributions were recorded net of the amount allocated to non-controlling interest as described above of $2.6 million and $2.4 million at the end of the periods ended December 31, 2012 and December 31, 2011, respectively, with the remaining balance being presented within deferred income. Beginning in September 2011 to September 2015, the Company recognized and will recognize the cash received as revenue net of allocated expenses over the five year credit recapture period as defined in the Internal Revenue Code within other income (expense) in its consolidated statements of operations. During the year-ended December 31, 2012, the Company recognized $11.8 million of the cash received as revenue, net of $0.5 million of allocated expenses within other income (expense) in its consolidated statements of operations. During the year ended December 31, 2011, the Company recognized $12.0 million of the cash received as revenue, net of $0.5 million of allocated expenses within other income (expense) in its consolidated statements of operations.
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Direct and incremental costs incurred in structuring the transaction are deferred and will be recognized as expense in the consolidated financial statements upon the recognition of the related revenue as discussed above. The deferred cost at December 31, 2012 and December 31, 2011 is $1.6 million and $2.1 million, respectively, and are included in other assets in the Company’s consolidated balance sheet. Amounts included in interest expense related to the accretion of the non-controlling interest liability and the 2% return expected to be paid to USB on its non-controlling interest aggregate to $1.3 million for each of the years ended December 31, 2012 and 2011, and $1.1 million for the year-ended December 31, 2010.
New Markets Tax Credit Transaction
On December 30, 2008, the Company entered into a transaction with USB related to the Cira South Garage in Philadelphia, Pennsylvania and expects to receive a net benefit of $7.8 million under a qualified New Markets Tax Credit Program (“NMTC”). The NMTC was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce investment capital in under-served and impoverished areas of the United States. The Act permits taxpayers (whether companies or individuals) to claim credits against their Federal income taxes for up to 39% of qualified investments in qualified, active low-income businesses or ventures.
USB contributed $13.3 million into the development of the Cira South Garage and as such it is entitled to substantially all of the benefits derived from the tax credit, but it does not have a material interest in the underlying economics of the Cira South Garage. This transaction also includes a put/call provision whereby the Company may be obligated or entitled to repurchase USB’s interest. The Company believes the put will be exercised and an amount attributed to that obligation is included in other liabilities and is being accreted to the expected fixed put price. The said put price is insignificant.
Based on the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees to USB, the Company concluded that the investment entities established to facilitate the NMTC transaction should be consolidated. The USB contribution of $13.3 million is included in deferred income on the Company’s consolidated balance sheets at each of the years ended December 31, 2012 and December 31, 2011. The USB contribution other than the amount allocated to the put obligation will be recognized as income in the consolidated financial statements when the tax benefits are delivered without risk of recapture to the tax credit investors and the Company’s obligation is relieved. The Company anticipates that it will recognize the net cash received as revenue within other income/expense in the year ended December 31, 2015. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. The Company expects that the put/call provision will be exercised in 2017.
Direct and incremental costs incurred in structuring the transaction are deferred and will be recognized as expense in the consolidated financial statements upon the recognition of the related revenue as discussed above. The deferred cost at each of the years ended December 31, 2012 and December 31, 2011 is $5.3 million, and is included in other assets in the Company’s consolidated balance sheet.
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17. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table details the components of accumulated other comprehensive income (loss) of the Parent Company and the Operating Partnership as of and for the three years ended December 31, 2012 (in thousands):
Parent Company | Unrealized Gains (Losses) on Securities | Cash Flow Hedges | Accumulated Other Comprehensive Loss | |||||||||
Balance at January 1, 2010 | $ | (9 | ) | $ | (9,129 | ) | $ | (9,138 | ) | |||
Change during year | — | 7,320 | 7,320 | |||||||||
Non-controlling interest — consolidated real estate venture partner’s share of unrealized (gains)/losses on derivative financial instruments | — | (155 | ) | (155 | ) | |||||||
Reclassification adjustments for (gains) losses reclassified into operations | — | 28 | 28 | |||||||||
Balance at December 31, 2010 | $ | (9 | ) | $ | (1,936 | ) | $ | (1,945 | ) | |||
Change during year | — | (4,499 | ) | (4,499 | ) | |||||||
Non-controlling interest — consolidated real estate venture partner’s share of unrealized (gains)/losses on derivative financial instruments | — | 212 | 212 | |||||||||
Reclassification adjustments for (gains) losses reclassified into operations | — | 153 | 153 | |||||||||
Balance at December 31, 2011 | $ | (9 | ) | $ | (6,070 | ) | $ | (6,079 | ) | |||
Change during year | — | (7,338 | ) | (7,338 | ) | |||||||
Non-controlling interest — consolidated real estate venture partner’s share of unrealized (gains)/losses on derivative financial instruments | — | 187 | 187 | |||||||||
Settlement of interest rate swaps | — | (2,985 | ) | (2,985 | ) | |||||||
Reclassification adjustments for (gains) losses reclassified into operations | — | 297 | 297 | |||||||||
Balance at December 31, 2012 | $ | (9 | ) | $ | (15,909 | ) | $ | (15,918 | ) | |||
Operating Partnership | Unrealized Gains (Losses) on Securities | Cash Flow Hedges | Accumulated Other Comprehensive Loss | |||||||||
Balance at January 1, 2010 | $ | (9 | ) | $ | (9,419 | ) | $ | (9,428 | ) | |||
Change during year | — | 7,320 | 7,320 | |||||||||
Reclassification adjustments for (gains) losses reclassified into operations | — | 28 | 28 | |||||||||
Balance at December 31, 2010 | $ | (9 | ) | $ | (2,071 | ) | $ | (2,080 | ) | |||
Change during year | — | (4,499 | ) | (4,499 | ) | |||||||
Reclassification adjustments for (gains) losses reclassified into operations | — | 153 | 153 | |||||||||
Balance at December 31, 2011 | $ | (9 | ) | $ | (6,417 | ) | $ | (6,426 | ) | |||
Change during year | — | (7,338 | ) | (7,338 | ) | |||||||
Settlement of interest rate swaps | — | (2,985 | ) | (2,985 | ) | |||||||
Reclassification adjustments for (gains) losses reclassified into operations | — | 297 | 297 | |||||||||
Balance at December 31, 2012 | $ | (9 | ) | $ | (16,443 | ) | $ | (16,452 | ) | |||
Over time, the unrealized gains and losses held in Accumulated Other Comprehensive Income (“AOCI”) will be reclassified to earnings when the related hedged items are recognized in earnings. The current balance held in AOCI is expected to be reclassified to earnings for realized losses on forecasted debt transactions over the related term of the debt obligation, as applicable.
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18. SEGMENT INFORMATION
As of December 31, 2012, the Company was managing its portfolio within seven segments: (1) Pennsylvania, (2) Philadelphia Central Business District (CBD), (3) Metropolitan Washington D.C., (4) New Jersey/Delaware, (5) Richmond, Virginia, (6) Austin, Texas and (7) California. The Pennsylvania segment includes properties in Chester, Delaware, and Montgomery counties in the Philadelphia suburbs. The Philadelphia CBD segment includes properties located in the City of Philadelphia in Pennsylvania. The Metropolitan Washington, D.C. segment includes properties in Northern Virginia and southern Maryland. The New Jersey/Delaware segment includes properties in Burlington, Camden and Mercer counties in New Jersey and in New Castle county in the state of Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle, Chesterfield, Goochland and Henrico counties and one property in Durham, North Carolina. The Austin, Texas segment includes properties in Austin. The California segment includes properties in Oakland, Concord, Carlsbad and Rancho Bernardo. The corporate group is responsible for cash and investment management, development of certain real estate properties during the construction period, and certain other general support functions. Land held for development and construction in progress are transferred to operating properties by region upon completion of the associated construction or project.
Segment information for the three years ended December 31, 2012, 2011 and 2010 are as follows (in thousands):
Pennsylvania Suburbs | Philadelphia CBD | Metropolitan, D.C. | New Jersey/Delaware | Richmond, Virginia | Austin, Texas | California | Corporate | Total | |||||||||||||||||||||||||||
2012: | |||||||||||||||||||||||||||||||||||
Real estate investments, at cost: | |||||||||||||||||||||||||||||||||||
Operating properties | $ | 1,178,730 | $ | 988,590 | $ | 1,193,200 | $ | 546,644 | $ | 309,923 | $ | 285,346 | $ | 223,736 | $ | — | $ | 4,726,169 | |||||||||||||||||
Construction-in-progress | 48,950 | 48,950 | |||||||||||||||||||||||||||||||||
Land inventory | 102,439 | 102,439 | |||||||||||||||||||||||||||||||||
Total revenue | $ | 151,784 | $ | 131,594 | $ | 107,656 | $ | 82,395 | $ | 35,701 | $ | 32,380 | $ | 20,005 | $ | (1,682 | ) | $ | 559,833 | ||||||||||||||||
Property operating expenses, real estate taxes and third party management expenses | 53,392 | 50,790 | 41,487 | 37,968 | 14,485 | 13,952 | 10,050 | (1,732 | ) | 220,392 | |||||||||||||||||||||||||
Net operating income | $ | 98,392 | $ | 80,804 | $ | 66,169 | $ | 44,427 | $ | 21,216 | $ | 18,428 | $ | 9,955 | $ | 50 | $ | 339,441 | |||||||||||||||||
2011: | |||||||||||||||||||||||||||||||||||
Real estate investments, at cost: | |||||||||||||||||||||||||||||||||||
Operating properties | $ | 1,218,071 | $ | 953,870 | $ | 1,255,803 | $ | 545,657 | $ | 307,698 | $ | 257,694 | $ | 254,287 | $ | — | $ | 4,793,080 | |||||||||||||||||
Construction-in-progress | 25,083 | 25,083 | |||||||||||||||||||||||||||||||||
Land inventory | 109,008 | 109,008 | |||||||||||||||||||||||||||||||||
Total revenue | $ | 150,611 | $ | 125,366 | $ | 119,255 | $ | 80,894 | $ | 36,789 | $ | 30,894 | $ | 19,192 | $ | (1,248 | ) | $ | 561,753 | ||||||||||||||||
Property operating expenses, real estate taxes and third party management expenses | 55,558 | 48,832 | 45,136 | 40,218 | 14,739 | 13,058 | 10,483 | (1,186 | ) | 226,838 | |||||||||||||||||||||||||
Net operating income | $ | 95,053 | $ | 76,534 | $ | 74,119 | $ | 40,676 | $ | 22,050 | $ | 17,836 | $ | 8,709 | $ | (62 | ) | $ | 334,915 | ||||||||||||||||
2010: | |||||||||||||||||||||||||||||||||||
Operating properties | $ | 1,199,957 | $ | 911,354 | $ | 1,359,776 | $ | 568,413 | $ | 294,406 | $ | 254,019 | $ | 246,186 | $ | — | $ | 4,834,111 | |||||||||||||||||
Construction-in-progress | 33,322 | 33,322 | |||||||||||||||||||||||||||||||||
Land inventory | 110,055 | 110,055 | |||||||||||||||||||||||||||||||||
Total revenue | $ | 144,792 | $ | 92,110 | $ | 128,823 | $ | 87,011 | $ | 36,032 | $ | 32,050 | $ | 20,414 | $ | (800 | ) | $ | 540,432 | ||||||||||||||||
Property operating expenses, real estate taxes and third party management expenses | 59,537 | 37,890 | 46,104 | 43,780 | 14,008 | 13,399 | 10,827 | (4,458 | ) | 221,087 | |||||||||||||||||||||||||
Net operating income | $ | 85,255 | $ | 54,220 | $ | 82,719 | $ | 43,231 | $ | 22,024 | $ | 18,651 | $ | 9,587 | $ | 3,658 | $ | 319,345 | |||||||||||||||||
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Net operating income (“NOI”) is defined as total revenue less property operating expenses, real estate taxes and third party management expenses. Segment NOI includes revenue, real estate taxes and property operating expenses directly related to operation and management of the properties owned and managed within the respective geographical region. Segment NOI excludes property level depreciation and amortization, revenue and expenses directly associated with third party real estate management services, expenses associated with corporate administrative support services, and inter-company eliminations. NOI also does not reflect general and administrative expenses, interest expenses, real estate impairment losses, depreciation and amortization costs, capital expenditures and leasing costs. Trends in development and construction activities that could materially impact the Company’s results from operations are also not reflected in NOI. All companies may not calculate NOI in the same manner. NOI is the measure that is used by the Company to evaluate the operating performance of its real estate assets by segment. The Company also believes that NOI provides useful information to investors regarding its financial condition and results of operations because it reflects only those income and expenses recorded at the property level. The Company believes that net income, as defined by GAAP, is the most appropriate earnings measure. The following is a reconciliation of consolidated NOI to consolidated net income (loss), as defined by GAAP:
Year Ended December 31, | |||||||||||
2012 | 2011 | 2010 | |||||||||
(amounts in thousands) | |||||||||||
Consolidated net operating income | $ | 339,441 | $ | 334,915 | $ | 319,345 | |||||
Less: | |||||||||||
Interest expense | (132,939 | ) | (131,405 | ) | (132,640 | ) | |||||
Deferred financing costs | (6,208 | ) | (4,991 | ) | (3,770 | ) | |||||
Depreciation and amortization | (195,841 | ) | (210,334 | ) | (203,345 | ) | |||||
Administrative expenses | (25,413 | ) | (24,602 | ) | (23,306 | ) | |||||
Plus: | |||||||||||
Interest income | 3,012 | 1,813 | 3,218 | ||||||||
Historic tax credit transaction income | 11,840 | 12,026 | — | ||||||||
Recognized hedge activity | (2,985 | ) | — | — | |||||||
Interest expense - financing obligation | (850 | ) | — | — | |||||||
Equity in income of real estate ventures | 2,741 | 3,775 | 5,305 | ||||||||
Net gain (loss) on sales of interests in real estate | — | 2,791 | (22 | ) | |||||||
Net gain on sale of undepreciated real estate | — | 45 | — | ||||||||
Loss on real estate venture formation | (950 | ) | (222 | ) | — | ||||||
Loss on early extinguishment of debt | (22,002 | ) | (2,776 | ) | (2,110 | ) | |||||
Income (loss) from continuing operations | (30,154 | ) | (18,965 | ) | (37,325 | ) | |||||
Income from discontinued operations | 36,683 | 14,250 | 19,719 | ||||||||
Net income (loss) | $ | 6,529 | $ | (4,715 | ) | $ | (17,606 | ) | |||
19. OPERATING LEASES
The Company leases properties to tenants under operating leases with various expiration dates extending to 2030. Minimum future rentals on non-cancelable leases at December 31, 2012 are as follows (in thousands):
Year | Minimum Rent | ||
2013 | $ | 459,966 | |
2014 | 436,239 | ||
2015 | 399,759 | ||
2016 | 347,574 | ||
2017 | 283,268 | ||
Thereafter | 1,099,690 | ||
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Total minimum future rentals presented above do not include amounts to be received as tenant reimbursements for operating costs
20. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved from time to time in litigation on various matters, including disputes with tenants and disputes arising out of agreements to purchase or sell properties. Given the nature of the Company’s business activities, these lawsuits are considered routine to the conduction of its business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. The Company does not expect that the liabilities, if any, that may ultimately result from such legal actions will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
Letters-of-Credit
Under certain mortgages, the Company has funded required leasing and capital reserve accounts for the benefit of the mortgage lenders with letters-of-credit. There were no associated letters-of-credit at December 31, 2012, with $1.9 million at December 31, 2011. Certain of the tenant rents at properties that secure these mortgage loans are deposited into the loan servicer’s depository accounts, which are used to fund debt service, operating expenses, capital expenditures and the escrow and reserve accounts, as necessary. Any excess cash is included in cash and cash equivalents.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state, and local governments. The Company’s compliance with existing laws has not had a material adverse effect on its financial condition and results of operations, and the Company does not believe it will have a material adverse effect in the future. However, the Company cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on its current Properties or on properties that the Company may acquire.
Ground Rent
Future minimum rental payments under the terms of all non-cancellable ground leases under which the Company is the lessee are expensed on a straight-line basis regardless of when payments are due. The Company’s ground leases have remaining lease terms ranging from 17 to 91 years. Minimum future rental payments on non-cancelable leases at December 31, 2012 are as follows (in thousands):
Year | Minimum Rent | ||
2013 | $ | 1,818 | |
2014 | 1,818 | ||
2015 | 1,818 | ||
2016 | 1,909 | ||
2017 | 1,909 | ||
Thereafter | 288,526 | ||
One of the land leases for a property provides for contingent rent participation by the lessor in certain capital transactions and net operating cash flows of the property after certain returns are achieved by the Company. Such amounts, if any, will be reflected as contingent rent when incurred. The leases also provide for payment by the Company of certain operating costs relating to the land, primarily real estate taxes. The above schedule of future minimum rental payments does not include any contingent rent amounts or any reimbursed expenses.
The Company acquired ground tenancy rights under a long term ground lease agreement related to its acquisition of an office building in Philadelphia, Pennsylvania on August 12, 2011. The annual rental payments under this ground lease is equal to a percentage of the NOI generated by the property. The Company has not included the amounts in the table above since such amounts are not fixed or determinable.
The Company also acquired ground tenancy rights under a long term ground lease agreement through its acquisition of Three Logan Square on August 5, 2010. The annual rental payment under this ground lease is ten dollars through August 2022 which is when the initial term of the ground lease is scheduled to end. After the initial term, the Company has the option to renew the lease
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until 2091. The Company also has the option to purchase the land at fair market value after providing a written notice to the owner. The annual rental payment after 2022 will be adjusted at the lower of $3.0 million or the prevailing market rent at that time until 2030. Subsequent to 2030, the annual rental payment will be adjusted at the lower of $4.0 million or the prevailing market rent at the time until 2042 and at fair market value until 2091. The Company believes that based on conditions as of the date the Company acquired its rights under the lease (August 5, 2010), the lease will reset to market after the initial term. Using the estimated fair market rent as of the date of the acquisition over the extended term of the ground lease (assuming the purchase option is not exercised), the future payments will aggregate to $27.4 million. The Company has not included the amounts in the table above since such amounts are not fixed or determinable.
Other Commitments or Contingencies
As part of the Company’s September 2004 acquisition of a portfolio of properties from The Rubenstein Company (which the Company refers to as the TRC acquisition), the Company acquired its interest in Two Logan Square, a 708,844 square foot office building in Philadelphia, primarily through its ownership of a second and third mortgage secured by this property. This property is consolidated, as the borrower is a variable interest entity and the Company, through its ownership of the second and third mortgages, is the primary beneficiary. The Company currently does not expect to take title to Two Logan Square until, at the earliest, September 2019. If the Company takes fee title to Two Logan Square upon a foreclosure of its mortgage, the Company has agreed to pay an unaffiliated third party that holds a residual interest in the fee owner of this property an amount equal to $2.9 million. On the TRC acquisition date, the Company recorded a liability of $0.7 million and this amount will accrete up to $2.9 million through September 2019. As of December 31, 2012, the Company had a balance of $1.5 million for this liability in its consolidated balance sheet.
The Company was audited by the Internal Revenue Service (the “IRS”) for its 2004 tax year. The audit concerned the tax treatment of the TRC acquisition in September 2004 in which the Company acquired a portfolio of properties through the acquisition of a limited partnership. On December 17, 2010, the Company received notice that the IRS proposed an adjustment to the allocation of recourse liabilities allocated to the contributor of the properties. The Company appealed the proposed adjustment and expects to enter into a settlement agreement with the IRS which will not result in a material tax liability for the Company. Assuming that the settlement agreement is finalized as expected, the contributor of partnership interests in the 2004 transaction has agreed not to assert a claim against the Company under the tax protection agreement entered into as part of the transaction.
As part of the Company’s 2006 merger with Prentiss Properties Trust, the 2004 TRC acquisition and several of our other transactions, the Company agreed not to sell certain of the properties it acquired in transactions that would trigger taxable income to the former owners. In the case of the TRC acquisition, the Company agreed not to sell acquired properties for periods up to 15 years from the date of the TRC acquisition as follows at December 31, 2012: One Rodney Square and 130/150/170 Radnor Financial Center (January, 2015); and One Logan Square, Two Logan Square and Radnor Corporate Center (January, 2020). In the Prentiss acquisition, the Company assumed the obligation of Prentiss not to sell Concord Airport Plaza before March, 2018. The Company’s agreements generally provide that it may dispose of the subject properties only in transactions that qualify as tax-free exchanges under Section 1031 of the Internal Revenue Code or in other tax deferred transactions. If the Company were to sell a restricted property before expiration of the restricted period in a non-exempt transaction, the Company may be required to make significant payments to the parties who sold the applicable property on account of tax liabilities attributed to them.
As part of the Company’s acquisition of properties from time to time in tax-deferred transactions, the Company has agreed to provide certain of the prior owners of the acquired properties with the right to guarantee the Company’s indebtedness. If the Company were to seek to repay the indebtedness guaranteed by the prior owner before the expiration of the applicable agreement, the Company will be required to provide the prior owner an opportunity to guaranty a qualifying replacement debt. These debt maintenance agreements may limit the Company’s ability to refinance indebtedness on terms that will be favorable to the Company.
The Company invests in its properties and regularly incurs capital expenditures in the ordinary course to maintain the properties. The Company believes that such expenditures enhance its competitiveness. The Company also enters into construction, utility and service contracts in the ordinary course of business which may extend beyond one year. These contracts typically provide for cancellation with insignificant or no cancellation penalties.
During 2008, in connection with the development of the IRS Philadelphia Campus and the Cira South Garage, the Company entered into a historic tax credit and a new market tax credit arrangement, respectively. The Company is required to be in compliance with various laws, regulations and contractual provisions that apply to its historic and new market tax credit arrangements. Non-compliance with applicable requirements could result in projected tax benefits not being realized and require a refund or reduction of investor capital contributions, which are reported as deferred income in the Company’s consolidated balance sheet, until such time as its obligation to deliver tax benefits is relieved. The remaining compliance periods for its tax credit arrangements runs through 2015. The Company does not anticipate that any material refunds or reductions of investor capital contributions will be required in connection with these arrangements.
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21. SUBSEQUENT EVENTS
On February 25, 2013, the Company sold a portfolio of eight office properties, totaling 800,556 square feet, in Lawrenceville, New Jersey, for a sales price of $121.0 million.
The Company has evaluated subsequent events through the date the financial statements were issued.
22. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following is a summary of quarterly financial information as of and for the years ended December 31, 2012 and 2011 (in thousands, except per share data):
1st Quarter (a) | 2nd Quarter (a) | 3rd Quarter (a) | 4th Quarter (a) | ||||||||||||
2012: | |||||||||||||||
Total revenue | $ | 139,411 | $ | 137,576 | $ | 140,383 | $ | 142,463 | |||||||
Net income (loss) | 9,336 | 6,802 | 17,089 | (26,698 | ) | ||||||||||
Net income (loss) allocated to Common Shares | 7,108 | 1,537 | 13,949 | (30,832 | ) | ||||||||||
Basic earnings (loss) per Common Share | $ | 0.05 | $ | 0.01 | $ | 0.10 | $ | (0.21 | ) | ||||||
Diluted earnings (loss) per Common Share | $ | 0.05 | $ | 0.01 | $ | 0.10 | $ | (0.21 | ) | ||||||
2011: | |||||||||||||||
Total revenue | $ | 141,617 | $ | 139,249 | $ | 139,401 | $ | 141,486 | |||||||
Net income (loss) | (490 | ) | (6,234 | ) | 6,611 | (4,602 | ) | ||||||||
Net income (loss) allocated to Common Shares | (2,579 | ) | (8,188 | ) | 4,130 | (6,359 | ) | ||||||||
Basic earnings (loss) per Common Share | $ | (0.02 | ) | $ | (0.06 | ) | $ | 0.03 | $ | (0.05 | ) | ||||
Diluted earnings (loss) per Common Share | $ | (0.02 | ) | $ | (0.06 | ) | $ | 0.03 | $ | (0.05 | ) | ||||
(a) The consolidated statement of operations for the fourth quarter of 2012 also contained an out of period deferred compensation expense adjustment of $0.6 million relating to the acceleration of deferred compensation for certain of our executive personnel who reached qualifying retirement conditions that should have been expensed in prior periods (please see Note 14 for further discussion regarding the qualifying retirement conditions). This resulted in an overstatement of expense by $0.6 million in the fourth quarter of 2012, and an understatement of expense by $0.2 million, $0.3 million, and a nominal amount in the third, second, and first quarters of 2012, respectively, and $0.1 million in the year-ended December 31, 2011. As management believes that this error was not material to prior years' consolidated financial statements and that the impact of recording the error in the current year is not material to the Company's consolidated financial statements, the Company recorded the related adjustment in the current year.
The summation of quarterly earnings per share amounts do not necessarily equal the full year amounts due to rounding. The above information was updated to reclassify amounts previously reported to reflect discontinued operations. See Note 2 and Note 10.
F-57
Brandywine Realty Trust and Brandywine Operating Partnership, L.P.
Schedule II
Valuation and Qualifying Accounts
(in thousands)
Description | Balance at Beginning of Year | Additions | Deductions (1) | Balance at End of Year | ||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||
Year ended December 31, 2012 | $ | 15,485 | $ | 1,891 | $ | 730 | $ | 16,646 | ||||||||
Year ended December 31, 2011 | $ | 15,222 | $ | 928 | $ | 665 | $ | 15,485 | ||||||||
Year ended December 31, 2010 | $ | 16,363 | $ | 763 | $ | 1,904 | $ | 15,222 | ||||||||
(1) | Deductions represent amounts that the Company had fully reserved for in prior years and pursuit of collection of such amounts was ceased during the year. |
F-58
BRANDYWINE REALTY TRUST AND BRANDYWINE OPERATING PARTNERSHIP, L.P.
Real Estate and Accumulated Depreciation — December 31, 2012
(in thousands)
Gross Amount at Which Carried | ||||||||||||||||||||||||||||||||||
Initial Cost | December 31, 2012 | |||||||||||||||||||||||||||||||||
Property Name | City | State | Encumberances at December 31, 2012 (a) | Land | Building and Improvements | Net Improvements (Retirements) Since Acquisition | Land | Building and Improvements | Total (b) | Accumulated Depreciation at December 31, 2012 (c) | Year of Construction | Year Acquired | Depreciable Life | |||||||||||||||||||||
PENNSYLVANIA SUBURBS | ||||||||||||||||||||||||||||||||||
400 Berwyn Park | Berwyn | PA | — | 2,657 | 4,462 | 13,975 | 2,657 | 18,438 | 21,094 | 5,183 | 1999 | 1999 | 40 | |||||||||||||||||||||
300 Berwyn Park | Berwyn | PA | — | 2,206 | 13,422 | 4,080 | 2,206 | 17,502 | 19,708 | 7,213 | 1989 | 1997 | 40 | |||||||||||||||||||||
1050 Westlakes Drive | Berwyn | PA | — | 2,611 | 10,445 | 5,046 | 2,611 | 15,491 | 18,102 | 6,542 | 1984 | 1999 | 40 | |||||||||||||||||||||
1200 Swedesford Road | Berwyn | PA | — | 2,595 | 11,809 | 3,472 | 2,595 | 15,281 | 17,876 | 4,483 | 1994 | 2001 | 40 | |||||||||||||||||||||
200 Berwyn Park | Berwyn | PA | — | 1,533 | 9,460 | 1,734 | 1,533 | 11,193 | 12,727 | 4,829 | 1987 | 1997 | 40 | |||||||||||||||||||||
1180 Swedesford Road | Berwyn | PA | — | 2,086 | 8,342 | 1,653 | 2,086 | 9,995 | 12,081 | 2,896 | 1987 | 2001 | 40 | |||||||||||||||||||||
100 Berwyn Park | Berwyn | PA | — | 1,180 | 7,290 | 2,019 | 1,180 | 9,309 | 10,489 | 3,977 | 1986 | 1997 | 40 | |||||||||||||||||||||
1160 Swedesford Road | Berwyn | PA | — | 1,781 | 7,124 | 1,006 | 1,781 | 8,130 | 9,911 | 2,922 | 1986 | 2001 | 40 | |||||||||||||||||||||
1100 Cassett Road | Berwyn | PA | — | 1,695 | 6,779 | 102 | 1,695 | 6,882 | 8,576 | 1,999 | 1997 | 2001 | 40 | |||||||||||||||||||||
980 Harvest Drive | Blue Bell | PA | — | 3,304 | 16,960 | (541 | ) | 3,304 | 16,420 | 19,723 | 5,838 | 1988 | 2002 | 40 | ||||||||||||||||||||
925 Harvest Drive | Blue Bell | PA | — | 1,671 | 6,606 | 771 | 1,671 | 7,377 | 9,048 | 3,071 | 1990 | 1998 | 40 | |||||||||||||||||||||
920 Harvest Drive | Blue Bell | PA | — | 1,209 | 6,595 | (310 | ) | 1,208 | 6,286 | 7,494 | 2,876 | 1990 | 1998 | 40 | ||||||||||||||||||||
426 Lancaster Avenue | Devon | PA | — | 1,689 | 6,756 | 396 | 1,689 | 7,152 | 8,841 | 3,067 | 1990 | 1998 | 40 | |||||||||||||||||||||
52 Swedesford Square | East Whiteland Twp. | PA | — | 4,241 | 16,579 | 1,676 | 4,241 | 18,255 | 22,496 | 6,912 | 1988 | 1998 | 40 | |||||||||||||||||||||
100 Arrandale Boulevard | Exton | PA | — | 970 | 3,878 | — | 970 | 3,878 | 4,848 | 1,139 | 1997 | 2001 | 40 | |||||||||||||||||||||
One Progress Drive | Horsham | PA | — | 1,399 | 5,629 | 5,107 | 1,399 | 10,736 | 12,135 | 3,301 | 1986 | 1996 | 40 | |||||||||||||||||||||
500 Enterprise Drive | Horsham | PA | — | 1,303 | 5,188 | 3,229 | 1,303 | 8,416 | 9,720 | 3,071 | 1990 | 1996 | 40 | |||||||||||||||||||||
640 Freedom Business Center | King Of Prussia | PA | — | 4,222 | 16,891 | 3,338 | 4,222 | 20,229 | 24,451 | 8,279 | 1991 | 1998 | 40 | |||||||||||||||||||||
555 Croton Road | King of Prussia | PA | — | 4,486 | 17,943 | 1,325 | 4,486 | 19,268 | 23,754 | 5,807 | 1999 | 2001 | 40 | |||||||||||||||||||||
630 Allendale Road | King of Prussia | PA | — | 2,836 | 4,028 | 12,025 | 2,636 | 16,253 | 18,889 | 4,769 | 2000 | 2000 | 40 | |||||||||||||||||||||
620 Freedom Business Center | King Of Prussia | PA | — | 2,770 | 11,014 | 3,415 | 2,770 | 14,430 | 17,199 | 6,750 | 1986 | 1998 | 40 | |||||||||||||||||||||
1000 First Avenue | King Of Prussia | PA | — | 2,772 | 10,936 | 3,230 | 2,772 | 14,166 | 16,938 | 6,046 | 1980 | 1998 | 40 | |||||||||||||||||||||
1060 First Avenue | King Of Prussia | PA | — | 2,712 | 10,953 | 2,459 | 2,712 | 13,412 | 16,124 | 5,510 | 1987 | 1998 | 40 | |||||||||||||||||||||
630 Freedom Business Center | King Of Prussia | PA | — | 2,773 | 11,144 | 1,787 | 2,773 | 12,931 | 15,704 | 5,365 | 1989 | 1998 | 40 | |||||||||||||||||||||
1040 First Avenue | King Of Prussia | PA | — | 2,860 | 11,282 | 839 | 2,860 | 12,121 | 14,981 | 4,608 | 1985 | 1998 | 40 | |||||||||||||||||||||
1020 First Avenue | King Of Prussia | PA | — | 2,168 | 8,576 | 3,885 | 2,168 | 12,461 | 14,629 | 5,426 | 1984 | 1998 | 40 | |||||||||||||||||||||
610 Freedom Business Center | King Of Prussia | PA | — | 2,017 | 8,070 | 1,730 | 2,017 | 9,800 | 11,817 | 3,911 | 1985 | 1998 | 40 | |||||||||||||||||||||
650 Park Avenue | King Of Prussia | PA | — | 1,916 | 4,378 | 2,192 | 1,916 | 6,570 | 8,486 | 3,122 | 1968 | 1998 | 40 | |||||||||||||||||||||
500 North Gulph Road | King Of Prussia | PA | — | 1,303 | 5,201 | 1,652 | 1,303 | 6,853 | 8,156 | 3,088 | 1979 | 1996 | 40 | |||||||||||||||||||||
741 First Avenue | King Of Prussia | PA | — | 1,287 | 5,151 | 12 | 1,287 | 5,162 | 6,450 | 2,117 | 1966 | 1998 | 40 | |||||||||||||||||||||
875 First Avenue | King Of Prussia | PA | — | 618 | 2,473 | 3,239 | 618 | 5,712 | 6,330 | 2,688 | 1966 | 1998 | 40 | |||||||||||||||||||||
751-761 Fifth Avenue | King Of Prussia | PA | — | 1,097 | 4,391 | 31 | 1,097 | 4,422 | 5,519 | 1,813 | 1967 | 1998 | 40 | |||||||||||||||||||||
600 Park Avenue | King Of Prussia | PA | — | 1,012 | 4,048 | 385 | 1,012 | 4,434 | 5,445 | 1,804 | 1964 | 1998 | 40 | |||||||||||||||||||||
620 Allendale Road | King Of Prussia | PA | — | 1,020 | 3,839 | 503 | 1,020 | 4,342 | 5,362 | 1,776 | 1961 | 1998 | 40 | |||||||||||||||||||||
F-59
BRANDYWINE REALTY TRUST AND BRANDYWINE OPERATING PARTNERSHIP, L.P.
Real Estate and Accumulated Depreciation — December 31, 2012
(in thousands)
Gross Amount at Which Carried | ||||||||||||||||||||||||||||||||||
Initial Cost | December 31, 2012 | |||||||||||||||||||||||||||||||||
Property Name | City | State | Encumberances at December 31, 2012 (a) | Land | Building and Improvements | Net Improvements (Retirements) Since Acquisition | Land | Building and Improvements | Total (b) | Accumulated Depreciation at December 31, 2012 (c) | Year of Construction | Year Acquired | Depreciable Life | |||||||||||||||||||||
660 Allendale Road | King Of Prussia | PA | — | 396 | 948 | 2,898 | 1,085 | 3,156 | 4,242 | 327 | 2011 | 1998 | 40 | |||||||||||||||||||||
640 Allendale Road | King of Prussia | PA | — | 439 | 432 | 1,579 | 439 | 2,012 | 2,450 | 643 | 2000 | 2000 | 40 | |||||||||||||||||||||
101 Lindenwood Drive | Malvern | PA | — | 4,152 | 16,606 | 3,554 | 4,152 | 20,161 | 24,312 | 5,712 | 1988 | 2001 | 40 | |||||||||||||||||||||
301 Lindenwood Drive | Malvern | PA | — | 2,729 | 10,915 | 1,398 | 2,729 | 12,313 | 15,042 | 3,941 | 1984 | 2001 | 40 | |||||||||||||||||||||
300 Lindenwood Drive | Malvern | PA | — | 848 | 3,394 | 1,266 | 849 | 4,659 | 5,508 | 1,679 | 1991 | 2001 | 40 | |||||||||||||||||||||
1700 Paoli Pike | Malvern | PA | — | 458 | 559 | 3,018 | 488 | 3,547 | 4,035 | 1,091 | 2000 | 2000 | 40 | |||||||||||||||||||||
100 Lindenwood Drive | Malvern | PA | — | 473 | 1,892 | 188 | 473 | 2,080 | 2,553 | 650 | 1985 | 2001 | 40 | |||||||||||||||||||||
200 Lindenwood Drive | Malvern | PA | — | 324 | 1,295 | 339 | 324 | 1,634 | 1,958 | 468 | 1984 | 2001 | 40 | |||||||||||||||||||||
14 Campus Boulevard | Newtown Square | PA | — | 2,244 | 4,217 | 1,516 | 2,244 | 5,733 | 7,977 | 2,642 | 1998 | 1998 | 40 | |||||||||||||||||||||
11 Campus Boulevard | Newtown Square | PA | — | 1,112 | 4,067 | 740 | 1,112 | 4,807 | 5,919 | 1,760 | 1998 | 1999 | 40 | |||||||||||||||||||||
17 Campus Boulevard | Newtown Square | PA | — | 1,108 | 5,155 | (397 | ) | 1,108 | 4,758 | 5,866 | 1,311 | 2001 | N/A | 40 | ||||||||||||||||||||
15 Campus Boulevard | Newtown Square | PA | — | 1,164 | 3,896 | 229 | 1,164 | 4,125 | 5,289 | 1,142 | 2002 | N/A | 40 | |||||||||||||||||||||
18 Campus Boulevard | Newtown Square | PA | — | 787 | 3,312 | (183 | ) | 787 | 3,129 | 3,916 | 1,421 | 1990 | 1996 | 40 | ||||||||||||||||||||
401 Plymouth Road | Plymouth Meeting | PA | — | 6,198 | 16,131 | 16,100 | 6,199 | 32,230 | 38,429 | 9,259 | 2001 | N/A | 40 | |||||||||||||||||||||
4000 Chemical Road | Plymouth Meeting | PA | — | 4,373 | 24,546 | 4,370 | 4,373 | 28,916 | 33,289 | 5,424 | 2006 | N/A | 40 | |||||||||||||||||||||
610 West Germantown Pike | Plymouth Meeting | PA | — | 3,651 | 14,514 | 3,231 | 3,651 | 17,745 | 21,396 | 4,757 | 1987 | 2002 | 40 | |||||||||||||||||||||
600 West Germantown Pike | Plymouth Meeting | PA | — | 3,652 | 15,288 | 2,252 | 3,652 | 17,540 | 21,192 | 5,361 | 1986 | 2002 | 40 | |||||||||||||||||||||
630 West Germantown Pike | Plymouth Meeting | PA | — | 3,558 | 14,743 | 2,204 | 3,558 | 16,947 | 20,505 | 5,248 | 1988 | 2002 | 40 | |||||||||||||||||||||
620 West Germantown Pike | Plymouth Meeting | PA | — | 3,572 | 14,435 | 1,621 | 3,572 | 16,056 | 19,628 | 4,557 | 1990 | 2002 | 40 | |||||||||||||||||||||
660 West Germantown Pike(d) | Plymouth Meeting | PA | — | — | — | 11,097 | — | 11,097 | 11,097 | 112 | 1987 | 2012 | 30 | |||||||||||||||||||||
2240/2250 Butler Pike | Plymouth Meeting | PA | — | 1,104 | 4,627 | 1,216 | 1,104 | 5,843 | 6,947 | 3,075 | 1984 | 1996 | 40 | |||||||||||||||||||||
2260 Butler Pike | Plymouth Meeting | PA | — | 661 | 2,727 | 1,195 | 662 | 3,922 | 4,583 | 1,864 | 1984 | 1996 | 40 | |||||||||||||||||||||
120 West Germantown Pike | Plymouth Meeting | PA | — | 685 | 2,773 | 823 | 685 | 3,596 | 4,281 | 1,656 | 1984 | 1996 | 40 | |||||||||||||||||||||
140 West Germantown Pike | Plymouth Meeting | PA | — | 481 | 1,976 | 428 | 482 | 2,404 | 2,885 | 1,198 | 1984 | 1996 | 40 | |||||||||||||||||||||
351 Plymouth Road | Plymouth Meeting | PA | — | 1,043 | 555 | — | 1,043 | 555 | 1,598 | 108 | N/A | 2000 | 40 | |||||||||||||||||||||
150 Radnor Chester Road | Radnor | PA | — | 11,925 | 36,986 | 12,134 | 11,897 | 49,148 | 61,045 | 14,336 | 1983 | 2004 | 29 | |||||||||||||||||||||
One Radnor Corporate Center | Radnor | PA | — | 7,323 | 28,613 | 23,071 | 7,323 | 51,684 | 59,007 | 13,046 | 1998 | 2004 | 29 | |||||||||||||||||||||
201 King of Prussia Road | Radnor | PA | — | 8,956 | 29,811 | 4,762 | 8,949 | 34,579 | 43,529 | 12,390 | 2001 | 2004 | 25 | |||||||||||||||||||||
555 Lancaster Avenue | Radnor | PA | — | 8,014 | 16,508 | 18,744 | 8,609 | 34,657 | 43,266 | 11,048 | 1973 | 2004 | 24 | |||||||||||||||||||||
Four Radnor Corporate Center | Radnor | PA | — | 5,406 | 21,390 | 11,971 | 5,705 | 33,061 | 38,767 | 11,026 | 1995 | 2004 | 30 | |||||||||||||||||||||
Five Radnor Corporate Center | Radnor | PA | — | 6,506 | 25,525 | 1,906 | 6,578 | 27,359 | 33,937 | 6,368 | 1998 | 2004 | 38 | |||||||||||||||||||||
Three Radnor Corporate Center | Radnor | PA | — | 4,773 | 17,961 | 2,449 | 4,791 | 20,392 | 25,183 | 6,212 | 1998 | 2004 | 29 | |||||||||||||||||||||
Two Radnor Corporate Center | Radnor | PA | — | 3,937 | 15,484 | 2,816 | 3,942 | 18,295 | 22,237 | 5,111 | 1998 | 2004 | 29 | |||||||||||||||||||||
130 Radnor Chester Road | Radnor | PA | — | 2,573 | 8,338 | 3,531 | 2,567 | 11,875 | 14,442 | 3,322 | 1983 | 2004 | 25 | |||||||||||||||||||||
170 Radnor Chester Road | Radnor | PA | — | 2,514 | 8,147 | 3,285 | 2,509 | 11,437 | 13,946 | 3,758 | 1983 | 2004 | 25 | |||||||||||||||||||||
101 West Elm Street | W. Conshohocken | PA | — | 6,251 | 25,209 | 2,685 | 6,251 | 27,894 | 34,145 | 5,524 | 1999 | 2005 | 40 | |||||||||||||||||||||
F-60
BRANDYWINE REALTY TRUST AND BRANDYWINE OPERATING PARTNERSHIP, L.P.
Real Estate and Accumulated Depreciation — December 31, 2012
(in thousands)
Gross Amount at Which Carried | ||||||||||||||||||||||||||||||||||
Initial Cost | December 31, 2012 | |||||||||||||||||||||||||||||||||
Property Name | City | State | Encumberances at December 31, 2012 (a) | Land | Building and Improvements | Net Improvements (Retirements) Since Acquisition | Land | Building and Improvements | Total (b) | Accumulated Depreciation at December 31, 2012 (c) | Year of Construction | Year Acquired | Depreciable Life | |||||||||||||||||||||
1 West Elm Street | W. Conshohocken | PA | — | 3,557 | 14,249 | 1,128 | 3,557 | 15,377 | 18,934 | 3,068 | 1999 | 2005 | 40 | |||||||||||||||||||||
595 East Swedesford Road | Wayne | PA | — | 2,729 | 10,917 | 2,076 | 2,729 | 12,992 | 15,722 | 3,441 | 1998 | 2003 | 40 | |||||||||||||||||||||
575 East Swedesford Road | Wayne | PA | — | 2,178 | 8,712 | 1,888 | 2,178 | 10,600 | 12,778 | 3,017 | 1985 | 2003 | 40 | |||||||||||||||||||||
565 East Swedesford Road | Wayne | PA | — | 1,872 | 7,489 | 1,610 | 1,872 | 9,099 | 10,971 | 2,435 | 1984 | 2003 | 40 | |||||||||||||||||||||
585 East Swedesford Road | Wayne | PA | — | 1,350 | 5,401 | 358 | 1,350 | 5,758 | 7,109 | 1,536 | 1998 | 2003 | 40 | |||||||||||||||||||||
1336 Enterprise Drive | West Goshen | PA | — | 731 | 2,946 | 47 | 731 | 2,993 | 3,724 | 1,346 | 1989 | 1997 | 40 | |||||||||||||||||||||
PHILADELPHIA CBD | ||||||||||||||||||||||||||||||||||
2970 Market Street | Philadelphia | PA | 197,111 | 22,430 | 217,763 | 10,375 | 22,430 | 228,138 | 250,568 | 14,793 | 2010 | 2007 | 40 | |||||||||||||||||||||
2929 Arch Street | Philadelphia | PA | — | — | 208,570 | 17,566 | — | 226,136 | 226,136 | 65,488 | 2005 | N/A | 40 | |||||||||||||||||||||
130 North 18th Street | Philadelphia | PA | — | 14,496 | 107,736 | 9,692 | 14,473 | 117,451 | 131,924 | 32,765 | 1998 | 2004 | 23 | |||||||||||||||||||||
100 North 18th Street | Philadelphia | PA | 89,340 | 16,066 | 100,255 | 5,079 | 16,066 | 105,334 | 121,400 | 29,007 | 1988 | 2004 | 33 | |||||||||||||||||||||
1717 Arch Street | Philadelphia | PA | — | — | 98,188 | 14,286 | — | 112,474 | 112,474 | 7,266 | 1990 | 2010 | 40 | |||||||||||||||||||||
2930 Chestnut Street | Philadelphia | PA | 42,303 | — | 76,008 | 2,570 | — | 78,578 | 78,578 | 4,576 | 2010 | N/A | 40 | |||||||||||||||||||||
1900 Market Street | Philadelphia | PA | — | 7,768 | 17,263 | 1 | 7,768 | 17,264 | 25,032 | 52 | 1981 | 2012 | 30 | |||||||||||||||||||||
3020 Market Street | Philadelphia | PA | — | — | 21,417 | 310 | — | 21,727 | 21,727 | 1,177 | 1959 | 2011 | 26 | |||||||||||||||||||||
101 - 103 Juniper Street | Philadelphia | PA | — | — | 14,401 | 283 | — | 14,684 | 14,684 | 578 | 2010 | 2006 | 40 | |||||||||||||||||||||
Philadelphia Marine Center | Philadelphia | PA | — | 532 | 2,196 | 3,175 | 628 | 5,275 | 5,903 | 1,943 | Various | 1998 | 40 | |||||||||||||||||||||
METROPOLITAN WASHINGTON, D.C. | ||||||||||||||||||||||||||||||||||
11720 Beltsville Drive | Beltsville | MD | — | 3,831 | 16,661 | 3,916 | 3,904 | 20,504 | 24,408 | 4,991 | 1987 | 2006 | 46 | |||||||||||||||||||||
11700 Beltsville Drive | Beltsville | MD | — | 2,808 | 12,081 | 161 | 2,863 | 12,187 | 15,050 | 2,131 | 1981 | 2006 | 46 | |||||||||||||||||||||
11710 Beltsville Drive | Beltsville | MD | — | 2,278 | 11,100 | (814 | ) | 2,321 | 10,243 | 12,564 | 1,821 | 1987 | 2006 | 46 | ||||||||||||||||||||
6600 Rockledge Drive | Bethesda | MD | — | — | 37,421 | 11,158 | — | 48,579 | 48,579 | 10,486 | 1981 | 2006 | 50 | |||||||||||||||||||||
11740 Beltsville Drive | Bethesda | MD | — | 198 | 870 | 42 | 202 | 908 | 1,111 | 168 | 1987 | 2006 | 46 | |||||||||||||||||||||
12015 Lee Jackson Memorial Highway | Fairfax | VA | — | 3,770 | 22,895 | 3,042 | 3,842 | 25,866 | 29,707 | 4,930 | 1985 | 2006 | 42 | |||||||||||||||||||||
11781 Lee Jackson Memorial Highway | Fairfax | VA | — | 3,246 | 19,836 | (886 | ) | 3,307 | 18,889 | 22,196 | 3,580 | 1982 | 2006 | 40 | ||||||||||||||||||||
4401 Fair Lakes Court | Fairfax | VA | — | 1,569 | 11,982 | 224 | 1,599 | 12,177 | 13,776 | 1,925 | 1988 | 2006 | 52 | |||||||||||||||||||||
3141 Fairview Park Drive (e) | Falls Church | VA | 22,000 | 5,918 | 40,981 | 10,297 | 7,081 | 50,116 | 57,196 | 7,598 | 1988 | 2006 | 51 | |||||||||||||||||||||
2340 Dulles Corner Boulevard | Herndon | VA | — | 16,345 | 65,379 | 18,364 | 16,129 | 83,959 | 100,088 | 21,130 | 1987 | 2006 | 40 | |||||||||||||||||||||
2291 Wood Oak Drive | Herndon | VA | — | 8,243 | 52,413 | 13,489 | 8,782 | 65,364 | 74,145 | 9,097 | 1999 | 2006 | 55 | |||||||||||||||||||||
2355 Dulles Corner Boulevard | Herndon | VA | — | 10,365 | 43,876 | 4,585 | 10,365 | 48,462 | 58,826 | 9,474 | 1988 | 2006 | 40 | |||||||||||||||||||||
2251 Corporate Park Drive | Herndon | VA | — | 11,472 | 45,893 | 717 | 11,472 | 46,610 | 58,082 | 7,131 | 2000 | 2006 | 40 | |||||||||||||||||||||
196/198 Van Buren Street | Herndon | VA | — | 7,931 | 43,812 | 6,076 | 8,348 | 49,471 | 57,819 | 8,695 | 1991 | 2006 | 53 | |||||||||||||||||||||
2411 Dulles Corner Park | Herndon | VA | — | 7,279 | 46,340 | 3,712 | 7,417 | 49,915 | 57,331 | 9,208 | 1990 | 2006 | 50 | |||||||||||||||||||||
2121 Cooperative Way | Herndon | VA | — | 5,598 | 38,639 | 2,193 | 5,795 | 40,635 | 46,430 | 5,685 | 2000 | 2006 | 54 | |||||||||||||||||||||
13880 Dulles Corner Lane | Herndon | VA | — | 7,236 | 39,213 | (1,132 | ) | 7,373 | 37,944 | 45,317 | 5,598 | 1997 | 2006 | 55 | ||||||||||||||||||||
2201 Cooperative Way | Herndon | VA | — | 4,809 | 34,093 | 1,476 | 4,809 | 35,569 | 40,378 | 4,856 | 1990 | 2006 | 54 | |||||||||||||||||||||
F-61
BRANDYWINE REALTY TRUST AND BRANDYWINE OPERATING PARTNERSHIP, L.P.
Real Estate and Accumulated Depreciation — December 31, 2012
(in thousands)
Gross Amount at Which Carried | ||||||||||||||||||||||||||||||||||
Initial Cost | December 31, 2012 | |||||||||||||||||||||||||||||||||
Property Name | City | State | Encumberances at December 31, 2012(a) | Land | Building and Improvements | Net Improvements (Retirements) Since Acquisition | Land | Building and Improvements | Total (b) | Accumulated Depreciation at December 31, 2012 (c) | Year of Construction | Year Acquired | Depreciable Life | |||||||||||||||||||||
13825 Sunrise Valley Drive | Herndon | VA | — | 3,794 | 19,365 | 368 | 3,866 | 19,662 | 23,527 | 2,968 | 1989 | 2006 | 46 | |||||||||||||||||||||
1676 International Drive | Mclean | VA | 60,869 | 18,437 | 97,538 | 1,698 | 18,785 | 98,888 | 117,673 | 15,357 | 1999 | 2006 | 55 | |||||||||||||||||||||
8260 Greensboro Drive | Mclean | VA | 32,319 | 7,952 | 33,964 | 692 | 8,102 | 34,506 | 42,608 | 5,393 | 1980 | 2006 | 52 | |||||||||||||||||||||
1880 Campus Commons Drive | Reston | VA | — | 6,164 | 28,114 | 5,606 | 6,281 | 33,603 | 39,884 | 4,634 | 1985 | 2006 | 52 | |||||||||||||||||||||
2273 Research Boulevard | Rockville | MD | — | 5,167 | 31,110 | 3,334 | 5,237 | 34,374 | 39,611 | 7,419 | 1999 | 2006 | 45 | |||||||||||||||||||||
2275 Research Boulevard | Rockville | MD | — | 5,059 | 29,668 | 2,421 | 5,154 | 31,994 | 37,148 | 6,500 | 1990 | 2006 | 45 | |||||||||||||||||||||
2277 Research Boulevard | Rockville | MD | — | 4,649 | 26,952 | 1,659 | 4,733 | 28,526 | 33,260 | 5,330 | 1986 | 2006 | 45 | |||||||||||||||||||||
1900 Gallows Road | Vienna | VA | — | 7,797 | 47,817 | 6,537 | 7,944 | 54,207 | 62,151 | 7,639 | 1989 | 2006 | 52 | |||||||||||||||||||||
8521 Leesburg Pike | Vienna | VA | — | 4,316 | 30,885 | (713 | ) | 4,397 | 30,091 | 34,488 | 4,656 | 1984 | 2006 | 51 | ||||||||||||||||||||
NEW JERSEY/DELAWARE | ||||||||||||||||||||||||||||||||||
457 Haddonfield Road | Cherry Hill | NJ | — | 2,142 | 9,120 | 1,190 | 2,142 | 10,310 | 12,452 | 4,491 | 1990 | 1996 | 40 | |||||||||||||||||||||
220 Lake Drive East | Cherry Hill | NJ | — | 2,144 | 8,798 | 735 | 2,144 | 9,533 | 11,677 | 2,954 | 1988 | 2001 | 40 | |||||||||||||||||||||
200 Lake Drive East | Cherry Hill | NJ | — | 2,069 | 8,275 | 1,281 | 2,069 | 9,556 | 11,625 | 2,901 | 1989 | 2001 | 40 | |||||||||||||||||||||
210 Lake Drive East | Cherry Hill | NJ | — | 1,645 | 6,579 | 1,067 | 1,645 | 7,646 | 9,291 | 2,288 | 1986 | 2001 | 40 | |||||||||||||||||||||
6 East Clementon Road | Gibbsboro | NJ | — | 1,345 | 5,366 | 682 | 1,345 | 6,048 | 7,393 | 2,498 | 1980 | 1997 | 40 | |||||||||||||||||||||
20 East Clementon Road | Gibbsboro | NJ | — | 769 | 3,055 | 499 | 769 | 3,554 | 4,323 | 1,460 | 1986 | 1997 | 40 | |||||||||||||||||||||
10 Foster Avenue | Gibbsboro | NJ | — | 244 | 971 | 113 | 244 | 1,084 | 1,328 | 476 | 1983 | 1997 | 40 | |||||||||||||||||||||
7 Foster Avenue | Gibbsboro | NJ | — | 231 | 921 | 91 | 231 | 1,011 | 1,243 | 400 | 1983 | 1997 | 40 | |||||||||||||||||||||
50 East Clementon Road | Gibbsboro | NJ | — | 114 | 964 | 3 | 114 | 967 | 1,081 | 406 | 1986 | 1997 | 40 | |||||||||||||||||||||
2 Foster Avenue | Gibbsboro | NJ | — | 185 | 730 | 16 | 185 | 746 | 931 | 316 | 1974 | 1997 | 40 | |||||||||||||||||||||
4 Foster Avenue | Gibbsboro | NJ | — | 183 | 726 | 5 | 183 | 732 | 914 | 307 | 1974 | 1997 | 40 | |||||||||||||||||||||
1 Foster Avenue | Gibbsboro | NJ | — | 93 | 364 | 76 | 93 | 440 | 533 | 202 | 1972 | 1997 | 40 | |||||||||||||||||||||
5 U.S. Avenue | Gibbsboro | NJ | — | 21 | 81 | 3 | 21 | 84 | 105 | 35 | 1987 | 1997 | 40 | |||||||||||||||||||||
5 Foster Avenue | Gibbsboro | NJ | — | 9 | 32 | 26 | 9 | 58 | 67 | 25 | 1968 | 1997 | 40 | |||||||||||||||||||||
1009 Lenox Drive | Lawrenceville | NJ | — | 4,876 | 19,284 | 3,866 | 5,118 | 22,909 | 28,026 | 9,337 | 1989 | 1998 | 40 | |||||||||||||||||||||
989 Lenox Drive | Lawrenceville | NJ | — | 3,701 | 14,802 | 1,494 | 3,850 | 16,147 | 19,997 | 4,038 | 1984 | 2003 | 40 | |||||||||||||||||||||
2000 Lenox Drive | Lawrenceville | NJ | — | 2,291 | 12,221 | 2,384 | 2,684 | 14,212 | 16,896 | 4,097 | 2000 | 2000 | 40 | |||||||||||||||||||||
1200 Lenox Drive | Lawrenceville | NJ | — | 1,071 | 12,967 | 2,500 | 1,071 | 15,467 | 16,538 | 2,656 | 2007 | N/A | 40 | |||||||||||||||||||||
997 Lenox Drive | Lawrenceville | NJ | — | 2,410 | 9,700 | 4,323 | 2,540 | 13,893 | 16,433 | 5,267 | 1987 | 1998 | 40 | |||||||||||||||||||||
993 Lenox Drive | Lawrenceville | NJ | — | 2,811 | 17,996 | (4,571 | ) | 2,960 | 13,276 | 16,236 | 5,124 | 1985 | 1998 | 40 | ||||||||||||||||||||
100 Lenox Drive | Lawrenceville | NJ | — | — | — | 12,114 | 1,134 | 10,980 | 12,114 | 2,471 | 1977 | 1999 | 40 | |||||||||||||||||||||
1000 Lenox Drive | Lawrenceville | NJ | — | 1,174 | 4,696 | 2,180 | 1,244 | 6,806 | 8,050 | 2,999 | 1982 | 2002 | 40 | |||||||||||||||||||||
1120 Executive Boulevard | Marlton | NJ | — | 2,074 | 8,415 | 1,971 | 2,074 | 10,386 | 12,460 | 4,540 | 1987 | 1997 | 40 | |||||||||||||||||||||
Two Eves Drive | Marlton | NJ | — | 818 | 3,461 | 278 | 818 | 3,738 | 4,557 | 1,713 | 1987 | 1997 | 40 | |||||||||||||||||||||
Five Eves Drive | Marlton | NJ | — | 703 | 2,819 | 582 | 703 | 3,401 | 4,104 | 1,520 | 1986 | 1997 | 40 | |||||||||||||||||||||
Four B Eves Drive | Marlton | NJ | — | 588 | 2,369 | 348 | 588 | 2,717 | 3,305 | 1,224 | 1987 | 1997 | 40 | |||||||||||||||||||||
Four A Eves Drive | Marlton | NJ | — | 539 | 2,168 | 137 | 539 | 2,305 | 2,844 | 1,081 | 1987 | 1997 | 40 | |||||||||||||||||||||
F-62
Gross Amount at Which Carried | ||||||||||||||||||||||||||||||||||
Initial Cost | December 31, 2012 | |||||||||||||||||||||||||||||||||
Property Name | City | State | Encumberances at December 31, 2012 (a) | Land | Building and Improvements | Net Improvements (Retirements) Since Acquisition | Land | Building and Improvements | Total (b) | Accumulated Depreciation at December 31, 2012(c) | Year of Construction | Year Acquired | Depreciable Life | |||||||||||||||||||||
308 Harper Drive | Moorestown | NJ | — | 1,643 | 6,663 | 1,070 | 1,644 | 7,732 | 9,376 | 2,993 | 1976 | 1998 | 40 | |||||||||||||||||||||
700 East Gate Drive | Mt. Laurel | NJ | — | 3,569 | 14,436 | 2,094 | 3,569 | 16,530 | 20,099 | 6,720 | 1984 | 1998 | 40 | |||||||||||||||||||||
10000 Midlantic Drive | Mt. Laurel | NJ | — | 3,206 | 12,857 | 2,066 | 3,206 | 14,923 | 18,129 | 6,542 | 1990 | 1997 | 40 | |||||||||||||||||||||
15000 Midlantic Drive | Mt. Laurel | NJ | — | 3,061 | 12,254 | 1,403 | 3,061 | 13,657 | 16,718 | 5,770 | 1991 | 1997 | 40 | |||||||||||||||||||||
1000 Atrium Way | Mt. Laurel | NJ | — | 2,061 | 8,180 | 5,015 | 2,061 | 13,195 | 15,256 | 5,540 | 1989 | 1997 | 40 | |||||||||||||||||||||
1000 Howard Boulevard | Mt. Laurel | NJ | — | 2,297 | 9,288 | 3,015 | 2,297 | 12,303 | 14,600 | 4,712 | 1988 | 1997 | 40 | |||||||||||||||||||||
2000 Midlantic Drive | Mt. Laurel | NJ | — | 2,202 | 8,823 | 1,898 | 2,203 | 10,720 | 12,923 | 4,236 | 1989 | 1997 | 40 | |||||||||||||||||||||
701 East Gate Drive | Mt. Laurel | NJ | — | 1,736 | 6,877 | 1,480 | 1,736 | 8,358 | 10,093 | 3,094 | 1986 | 1998 | 40 | |||||||||||||||||||||
9000 Midlantic Drive | Mt. Laurel | NJ | — | 1,472 | 5,895 | 1,830 | 1,472 | 7,725 | 9,197 | 2,919 | 1989 | 1997 | 40 | |||||||||||||||||||||
307 Fellowship Drive | Mt. Laurel | NJ | — | 1,565 | 6,342 | 1,226 | 1,565 | 7,568 | 9,133 | 2,891 | 1981 | 1998 | 40 | |||||||||||||||||||||
309 Fellowship Drive | Mt. Laurel | NJ | — | 1,518 | 6,154 | 596 | 1,518 | 6,750 | 8,268 | 2,702 | 1982 | 1998 | 40 | |||||||||||||||||||||
303 Fellowship Drive | Mt. Laurel | NJ | — | 1,493 | 6,055 | 638 | 1,494 | 6,692 | 8,186 | 2,652 | 1979 | 1998 | 40 | |||||||||||||||||||||
305 Fellowship Drive | Mt. Laurel | NJ | — | 1,421 | 5,768 | 978 | 1,421 | 6,745 | 8,167 | 2,661 | 1980 | 1998 | 40 | |||||||||||||||||||||
1000 Bishops Gate | Mt. Laurel | NJ | — | 934 | 6,287 | 413 | 934 | 6,700 | 7,634 | 2,028 | 2005 | 2000 | 40 | |||||||||||||||||||||
161 Gaither Drive | Mt. Laurel | NJ | — | 1,016 | 4,064 | 654 | 1,016 | 4,718 | 5,734 | 1,602 | 1987 | 2001 | 40 | |||||||||||||||||||||
4000 Midlantic Drive | Mt. Laurel | NJ | — | 714 | 5,085 | (1,819 | ) | 714 | 3,265 | 3,980 | 1,528 | 1998 | 1997 | 40 | ||||||||||||||||||||
815 East Gate Drive | Mt. Laurel | NJ | — | 636 | 2,584 | 200 | 636 | 2,783 | 3,420 | 1,130 | 1986 | 1998 | 40 | |||||||||||||||||||||
817 East Gate Drive | Mt. Laurel | NJ | — | 611 | 2,426 | 360 | 611 | 2,785 | 3,397 | 1,200 | 1986 | 1998 | 40 | |||||||||||||||||||||
400 Commerce Drive | Newark | DE | — | 2,528 | 9,220 | 1,198 | 2,528 | 10,418 | 12,946 | 3,382 | 1997 | 2002 | 40 | |||||||||||||||||||||
100 Commerce Drive | Newark | DE | — | 1,160 | 4,633 | 716 | 1,160 | 5,350 | 6,509 | 2,209 | 1989 | 1997 | 40 | |||||||||||||||||||||
200 Commerce Drive | Newark | DE | — | 911 | 4,414 | 1,018 | 911 | 5,432 | 6,343 | 1,844 | 1998 | 2002 | 40 | |||||||||||||||||||||
Main Street - Plaza 1000 | Voorhees | NJ | — | 2,732 | 10,942 | 3,402 | 2,732 | 14,344 | 17,076 | 6,730 | 1988 | 1997 | 40 | |||||||||||||||||||||
Main Street - Piazza | Voorhees | NJ | — | 696 | 2,802 | 28 | 696 | 2,831 | 3,526 | 1,269 | 1990 | 1997 | 40 | |||||||||||||||||||||
Main Street - Promenade | Voorhees | NJ | — | 531 | 2,052 | 339 | 532 | 2,391 | 2,922 | 990 | 1988 | 1997 | 40 | |||||||||||||||||||||
920 North King Street | Wilmington | DE | — | 6,141 | 21,140 | 1,083 | 6,141 | 22,223 | 28,364 | 6,120 | 1989 | 2004 | 30 | |||||||||||||||||||||
300 Delaware Avenue | Wilmington | DE | — | 6,368 | 13,739 | 2,615 | 6,369 | 16,354 | 22,722 | 5,432 | 1989 | 2004 | 23 | |||||||||||||||||||||
Two Righter Parkway | Wilmington | DE | — | 2,802 | 11,217 | 6,190 | 2,802 | 17,407 | 20,209 | 3,253 | 1987 | 2001 | 40 | |||||||||||||||||||||
One Righter Parkway | Wilmington | DE | — | 2,545 | 10,195 | 4,478 | 2,545 | 14,673 | 17,218 | 7,235 | 1989 | 1996 | 40 | |||||||||||||||||||||
RICHMOND | ||||||||||||||||||||||||||||||||||
4364 South Alston Avenue | Durham | NC | — | 1,622 | 6,419 | 844 | 1,581 | 7,304 | 8,885 | 2,712 | 1985 | 1998 | 40 | |||||||||||||||||||||
4805 Lake Brooke Drive | Glen Allen | VA | — | 1,640 | 6,567 | 1,661 | 1,640 | 8,227 | 9,868 | 3,496 | 1996 | 1998 | 40 | |||||||||||||||||||||
Overlook II | Glen Allen | VA | — | 748 | 4,492 | 147 | 791 | 4,595 | 5,386 | 444 | 2000 | 2011 | 40 | |||||||||||||||||||||
Overlook I | Glen Allen | VA | — | 748 | 3,976 | 149 | 791 | 4,081 | 4,872 | 406 | 1998 | 2011 | 40 | |||||||||||||||||||||
2812 Emerywood Parkway | Henrico | VA | — | 1,069 | 4,281 | 1,048 | 1,069 | 5,329 | 6,398 | 2,342 | 1980 | 1998 | 40 | |||||||||||||||||||||
300 Arboretum Place | Richmond | VA | — | 5,450 | 21,892 | 3,707 | 5,450 | 25,599 | 31,049 | 10,276 | 1988 | 1998 | 40 | |||||||||||||||||||||
7501 Boulders View Drive | Richmond | VA | — | 4,669 | 19,699 | 2,057 | 4,925 | 21,500 | 26,425 | 3,285 | 1990 | 2007 | 40 | |||||||||||||||||||||
F-63
Gross Amount at Which Carried | ||||||||||||||||||||||||||||||||||
Initial Cost | December 31, 2012 | |||||||||||||||||||||||||||||||||
Property Name | City | State | Encumberances at December 31, 2012(a) | Land | Building and Improvements | Net Improvements (Retirements) Since Acquisition | Land | Building and Improvements | Total (b) | Accumulated Depreciation at December 31, 2012 (c) | Year of Construction | Year Acquired | Depreciable Life | |||||||||||||||||||||
7300 Beaufont Springs Drive | Richmond | VA | — | 4,672 | 19,689 | 1,517 | 4,922 | 20,956 | 25,878 | 2,858 | 2000 | 2007 | 40 | |||||||||||||||||||||
6800 Paragon Place | Richmond | VA | — | 4,552 | 18,414 | 1,918 | 4,552 | 20,332 | 24,884 | 3,705 | 1986 | 2006 | 40 | |||||||||||||||||||||
6802 Paragon Place | Richmond | VA | — | 2,917 | 11,454 | 2,644 | 2,917 | 14,098 | 17,015 | 4,032 | 1989 | 2002 | 40 | |||||||||||||||||||||
1025 Boulders Parkway | Richmond | VA | — | 2,574 | 11,297 | 1,390 | 2,824 | 12,437 | 15,261 | 1,770 | 1994 | 2007 | 40 | |||||||||||||||||||||
2100-2116 West Laburnam Avenue | Richmond | VA | — | 2,482 | 8,846 | 3,046 | 2,482 | 11,892 | 14,374 | 4,783 | 1976 | 1998 | 40 | |||||||||||||||||||||
7401 Beaufont Springs Drive | Richmond | VA | — | 2,349 | 10,396 | 921 | 2,599 | 11,067 | 13,666 | 1,545 | 1998 | 2007 | 40 | |||||||||||||||||||||
7325 Beaufont Springs Drive | Richmond | VA | — | 2,344 | 10,377 | 503 | 2,594 | 10,630 | 13,224 | 1,470 | 1999 | 2007 | 40 | |||||||||||||||||||||
9011 Arboretum Parkway | Richmond | VA | — | 1,857 | 7,702 | 871 | 1,857 | 8,573 | 10,430 | 3,324 | 1991 | 1998 | 40 | |||||||||||||||||||||
6806 Paragon Place | Richmond | VA | — | — | 10,288 | 106 | 403 | 9,992 | 10,394 | 2,185 | 2007 | 2005 | 40 | |||||||||||||||||||||
9100 Arboretum Parkway | Richmond | VA | — | 1,362 | 5,489 | 669 | 1,362 | 6,158 | 7,520 | 2,359 | 1988 | 1998 | 40 | |||||||||||||||||||||
2511 Brittons Hill Road | Richmond | VA | — | 1,202 | 4,820 | 1,472 | 1,202 | 6,292 | 7,494 | 2,698 | 1987 | 1998 | 40 | |||||||||||||||||||||
100 Gateway Centre Parkway | Richmond | VA | — | 391 | 5,410 | 511 | 391 | 5,921 | 6,312 | 1,595 | 2001 | 1998 | 40 | |||||||||||||||||||||
9200 Arboretum Parkway | Richmond | VA | — | 985 | 3,973 | 1,242 | 985 | 5,216 | 6,200 | 1,931 | 1988 | 1998 | 40 | |||||||||||||||||||||
9210 Arboretum Parkway | Richmond | VA | — | 1,110 | 4,474 | 527 | 1,110 | 5,001 | 6,111 | 1,997 | 1988 | 1998 | 40 | |||||||||||||||||||||
2201-2245 Tomlynn Street | Richmond | VA | — | 1,020 | 4,067 | 685 | 1,020 | 4,752 | 5,772 | 1,780 | 1989 | 1998 | 40 | |||||||||||||||||||||
9211 Arboretum Parkway | Richmond | VA | — | 582 | 2,433 | 827 | 582 | 3,261 | 3,842 | 1,053 | 1991 | 1998 | 40 | |||||||||||||||||||||
2212-2224 Tomlynn Street | Richmond | VA | — | 502 | 2,014 | 364 | 502 | 2,378 | 2,880 | 857 | 1985 | 1998 | 40 | |||||||||||||||||||||
2244 Dabney Road | Richmond | VA | — | 550 | 2,203 | 37 | 550 | 2,240 | 2,790 | 892 | 1993 | 1998 | 40 | |||||||||||||||||||||
2221-2245 Dabney Road | Richmond | VA | — | 530 | 2,123 | 73 | 530 | 2,196 | 2,726 | 857 | 1994 | 1998 | 40 | |||||||||||||||||||||
2248 Dabney Road | Richmond | VA | — | 512 | 2,049 | 132 | 512 | 2,181 | 2,693 | 835 | 1989 | 1998 | 40 | |||||||||||||||||||||
2277 Dabney Road | Richmond | VA | — | 507 | 2,034 | 61 | 507 | 2,095 | 2,602 | 811 | 1986 | 1998 | 40 | |||||||||||||||||||||
2246 Dabney Road | Richmond | VA | — | 455 | 1,822 | 18 | 455 | 1,840 | 2,295 | 726 | 1987 | 1998 | 40 | |||||||||||||||||||||
2161-2179 Tomlynn Street | Richmond | VA | — | 423 | 1,695 | 100 | 423 | 1,795 | 2,218 | 697 | 1985 | 1998 | 40 | |||||||||||||||||||||
2130-2146 Tomlynn Street | Richmond | VA | — | 353 | 1,416 | 354 | 353 | 1,769 | 2,123 | 750 | 1988 | 1998 | 40 | |||||||||||||||||||||
2251 Dabney Road | Richmond | VA | — | 387 | 1,552 | 153 | 387 | 1,705 | 2,092 | 703 | 1983 | 1998 | 40 | |||||||||||||||||||||
2256 Dabney Road | Richmond | VA | — | 356 | 1,427 | 218 | 356 | 1,645 | 2,001 | 684 | 1982 | 1998 | 40 | |||||||||||||||||||||
2120 Tomlynn Street | Richmond | VA | — | 281 | 1,125 | 196 | 281 | 1,321 | 1,602 | 525 | 1986 | 1998 | 40 | |||||||||||||||||||||
2240 Dabney Road | Richmond | VA | — | 264 | 1,059 | 11 | 264 | 1,069 | 1,333 | 422 | 1984 | 1998 | 40 | |||||||||||||||||||||
Boulders Land | Richmond | VA | — | 1,256 | — | 28 | 1,259 | 25 | 1,284 | — | N/A | 2007 | N/A | |||||||||||||||||||||
F-64
Gross Amount at Which Carried | ||||||||||||||||||||||||||||||||||||||||||
Initial Cost | December 31, 2012 | |||||||||||||||||||||||||||||||||||||||||
Property Name | City | State | Encumberances at December 31, 2012 (a) | Land | Building and Improvements | Net Improvements (Retirements) Since Acquisition | Land | Building and Improvements | Total (b) | Accumulated Depreciation at December 31, 2012 (c) | Year of Construction | Year Acquired | Depreciable Life | |||||||||||||||||||||||||||||
CALIFORNIA | ||||||||||||||||||||||||||||||||||||||||||
5900 & 5950 La Place Court | Carlsbad | CA | — | 3,706 | 11,185 | 3,123 | 3,954 | 14,059 | 18,014 | 2,451 | 1988 | 2006 | 48 | |||||||||||||||||||||||||||||
5963 La Place Court | Carlsbad | CA | — | 2,824 | 9,413 | 2,069 | 2,998 | 11,307 | 14,306 | 1,840 | 1987 | 2006 | 55 | |||||||||||||||||||||||||||||
5973 Avenida Encinas | Carlsbad | CA | — | 2,121 | 8,361 | 1,433 | 2,255 | 9,659 | 11,915 | 1,942 | 1986 | 2006 | 45 | |||||||||||||||||||||||||||||
2035 Corte Del Nogal | Carlsbad | CA | — | 3,261 | 6,077 | 1,140 | 3,498 | 6,980 | 10,478 | 1,656 | 1991 | 2006 | 39 | |||||||||||||||||||||||||||||
1200 Concord Avenue | Concord | CA | — | 6,395 | 24,664 | 708 | 6,514 | 25,251 | 31,766 | 5,438 | 1984 | 2006 | 34 | |||||||||||||||||||||||||||||
1220 Concord Avenue | Concord | CA | — | 6,476 | 24,966 | 156 | 6,475 | 25,122 | 31,597 | 5,130 | 1984 | 2006 | 34 | |||||||||||||||||||||||||||||
155 Grand Avenue | Oakland | CA | — | 13,556 | 54,266 | 5,016 | 13,555 | 59,284 | 72,839 | 9,841 | 1990 | 2007 | 40 | |||||||||||||||||||||||||||||
Two Kaiser Plaza | Oakland | CA | — | 7,841 | — | — | 7,840 | — | 7,841 | — | N/A | 2006 | N/A | |||||||||||||||||||||||||||||
Oakland Lot B | Oakland | CA | — | 4,342 | — | — | 4,341 | — | 4,342 | — | N/A | 2006 | N/A | |||||||||||||||||||||||||||||
16870 W Bernardo Drive | San Diego | CA | — | 2,979 | 15,896 | 1,762 | 3,153 | 17,484 | 20,638 | 2,871 | 2002 | 2006 | 56 | |||||||||||||||||||||||||||||
AUSTIN | ||||||||||||||||||||||||||||||||||||||||||
1250 Capital of Texas Hwy South | Austin | TX | — | 5,152 | 37,928 | 6,240 | 5,249 | 44,072 | 49,321 | 8,644 | 1984 | 2006 | 52 | |||||||||||||||||||||||||||||
1301 Mopac Expressway | Austin | TX | — | 4,188 | 41,229 | (761 | ) | 4,249 | 40,407 | 44,657 | 5,765 | 2001 | 2006 | 55 | ||||||||||||||||||||||||||||
1601 Mopac Expressway | Austin | TX | — | 3,538 | 34,346 | 871 | 3,604 | 35,149 | 38,754 | 5,512 | 2000 | 2006 | 54 | |||||||||||||||||||||||||||||
7000 West at Lantana | Austin | TX | — | 4,651 | 20,897 | 1 | 4,650 | 20,898 | 25,549 | — | N/A | 2012 | 40 | |||||||||||||||||||||||||||||
3711 South Mopac Expressway - II | Austin | TX | — | 1,688 | 19,229 | 4,317 | 1,687 | 23,546 | 25,233 | 4,807 | 2007 | 2006 | 40 | |||||||||||||||||||||||||||||
3711 South Mopac Expressway - I | Austin | TX | — | 1,688 | 21,011 | 2,464 | 1,687 | 23,477 | 25,163 | 3,395 | 2007 | 2006 | 40 | |||||||||||||||||||||||||||||
1501 South Mopac Expressway | Austin | TX | — | 3,698 | 34,912 | (2,190 | ) | 3,767 | 32,653 | 36,419 | 4,556 | 1999 | 2006 | 53 | ||||||||||||||||||||||||||||
1221 Mopac Expressway | Austin | TX | — | 3,291 | 31,548 | 5,411 | 3,368 | 36,882 | 40,249 | 5,169 | 2001 | 2006 | 55 | |||||||||||||||||||||||||||||
Total: | $ | 443,942 | $ | 651,264 | $ | 3,533,200 | $ | 541,708 | $ | 662,107 | $ | 4,064,062 | $ | 4,726,169 | $ | 954,665 | ||||||||||||||||||||||||||
(a) | Excludes the effect of any net interest premium/(discount). |
(b) | Reconciliation of Real Estate: |
The following table reconciles the real estate investments from January 1, 2010 to December 31, 2012 (in thousands):
F-65
2012 | 2011 | 2010 | |||||||||
Balance at beginning of year | $ | 4,793,080 | $ | 4,834,111 | $ | 4,512,618 | |||||
Additions: | |||||||||||
Acquisitions | 50,579 | 31,454 | 102,475 | ||||||||
Capital expenditures and assets placed into service | 90,619 | 133,550 | 336,281 | ||||||||
Less: | |||||||||||
Dispositions | (208,109 | ) | (206,035 | ) | (117,263 | ) | |||||
Balance at end of year | $ | 4,726,169 | $ | 4,793,080 | $ | 4,834,111 | |||||
The aggregate cost for federal income tax purposes is $4.0 billion as of December 31, 2012.
(c) | Reconciliation of Accumulated Depreciation: |
The following table reconciles the accumulated depreciation on real estate investments from January 1, 2010 to December 31, 2012 (in thousands):
2012 | 2011 | 2010 | |||||||||
Balance at beginning of year | $ | 865,710 | $ | 776,078 | $ | 716,957 | |||||
Additions: | |||||||||||
Depreciation expense — continuing operations | 154,095 | 157,691 | 133,740 | ||||||||
Depreciation expense — discontinued operations | 2,143 | 1,185 | 1,554 | ||||||||
Less: | |||||||||||
Dispositions | (67,283 | ) | (69,244 | ) | (76,173 | ) | |||||
Balance at end of year | $ | 954,665 | $ | 865,710 | $ | 776,078 | |||||
(d) Total net improvements since acquisition for this redevelopment property do not include amounts allocated to construction-in-progress, as shown within the Company's consolidated balance sheet as of December 31, 2012.
(e) This property was contributed to an unconsolidated real estate venture, however, the Company will continue to consolidate this property due to its continuing involvement in this property resulting from its ongoing lease at this property and its 50% ownership interest in the venture. Please see Note 3 to the consolidated financial financial statements for additional information.
F-66
EXHIBIT 3.1.29
ADMITTED PARTNERS OF
BRANDYWINE OPERATING PARTNERSHIP, L.P.
AS OF DECEMBER 31, 2012
Jack R. Loew
Brandywine Holdings I, Inc.
Brandywine Realty Trust
R. Randle Scarborough
M. Sean Scarborough
Steven L. Shapiro
Robert K. Scarborough
Brookstone Investors, LLC
Brookstone Holdings of Delaware 4, LLC
Brookstone Holdings of Delaware 5, LLC
Brookstone Holdings of Delaware 6, LLC
Estate of Calvin Axinn
Hirshman Family Trust
Trust UTW of Theodore Geffner
Gloria Kantor
Helen Geffner
Howard Kantor
Leo Guthart
Leonard Axinn
Estate of Donald E. Axinn
William H. Goodwin, Jr.
TRC Associates Limited Partnership
Steven A. Stattner
The F.M. (Bruce) Brusseau Trust
Newport National Corporation
Scott R. Brusseau
Jeffrey A. Brusseau
D. Kent Dahlke
Kenneth L. Hatfield
Michael G. Tombari
James J. Gorman
Christopher J. Knauer
The Jon Q. Reynolds and Ann S. Reynolds Family Trust
The David A. Brown Family Trust
The Revocable Trust Declaration of Thomas K. Terrill and Susan Jean Terrill
The Redford Family Trust
The Judith B. Brown 1992 Trust
The Peter M. Reynolds and Christina A. Reynolds Family Trust
C. Thomas Martz
Karen Leigh Brown
Tara Lynne Brown
Kristen Ann Brown
The Reynolds Family Partners
GENERAL PARTNER
Brandywine Realty Trust
Exhibit 12.1
Brandywine Realty Trust | |||||||||||||||||||||
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Distributions | |||||||||||||||||||||
(in thousands) | |||||||||||||||||||||
For the years ended December 31, | |||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||
Earnings before fixed charges: | |||||||||||||||||||||
Add: | |||||||||||||||||||||
Income (loss) from continuing operations before non-controlling interest and equity in earnings from unconsolidated real estate ventures | $ | (32,895 | ) | $ | (22,740 | ) | $ | (42,630 | ) | $ | (1,640 | ) | (a) | $ | (12,439 | ) | (a) | ||||
Distributed income of equity investees | 1,224 | 2,600 | 657 | 1,557 | 7,639 | ||||||||||||||||
Amortization of capitalized interest | 3,538 | 3,564 | 3,527 | 3,166 | 2,801 | ||||||||||||||||
Fixed charges - per below | 147,077 | 140,356 | 148,500 | 153,042 | 170,589 | ||||||||||||||||
Less: | |||||||||||||||||||||
Capitalized interest | (2,560 | ) | (1,997 | ) | (10,385 | ) | (8,893 | ) | (16,746 | ) | |||||||||||
Earnings before fixed charges | $ | 116,384 | $ | 121,783 | $ | 99,669 | $ | 147,232 | $ | 151,844 | |||||||||||
Fixed charges and Preferred Distributions: | |||||||||||||||||||||
Interest expense from continuing operations (including amortization) | $ | 142,982 | $ | 136,396 | $ | 136,410 | $ | 142,520 | $ | 152,096 | |||||||||||
Capitalized interest | 2,560 | 1,997 | 10,385 | 8,893 | 16,746 | ||||||||||||||||
Ground leases and other | 1,535 | 1,963 | 1,705 | 1,629 | 1,747 | ||||||||||||||||
Total Fixed Charges | 147,077 | 140,356 | 148,500 | 153,042 | 170,589 | ||||||||||||||||
Income allocated to preferred shareholders | 10,405 | 7,992 | 7,992 | 7,992 | 7,992 | ||||||||||||||||
Total Preferred Distributions | 10,405 | 7,992 | 7,992 | 7,992 | 7,992 | ||||||||||||||||
Total combined fixed charges and preferred distributions | $ | 157,482 | $ | 148,348 | $ | 156,492 | $ | 161,034 | $ | 178,581 | |||||||||||
Ratio of earnings to combined fixed charges and preferred distributions | (b) | (b) | (b) | (b) | (b) | ||||||||||||||||
(a) Amounts for the years ended December 31, 2009 and 2008 have been reclassified to present properties sold. As a result, operations have been reclassified to discontinued operations from continuing operations for all periods presented. | |||||||||||||||||||||
(b) Due to the registrant's loss in the period, the coverage ratio was less than 1:1. The registrant must generate additional earnings of $41,098 for the year ended December 31, 2012, $26,565 for the year ended December 31, 2011, $56,823 for the year ended December 31, 2010, $13,802 for the year ended December 31, 2009, and $26,737 for the year ended December 31, 2008 to achieve a coverage ratio of 1:1. | |||||||||||||||||||||
Exhibit 12.2
Brandywine Operating Partnership, L.P. | |||||||||||||||||||||
Computation of Ratio of Earnings to Combined Fixed Charges | |||||||||||||||||||||
(in thousands) | |||||||||||||||||||||
For the years ended December 31, | |||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||
Earnings before fixed charges: | |||||||||||||||||||||
Add: | |||||||||||||||||||||
Income (loss) from continuing operations before non-controlling interest and equity in earnings from unconsolidated real estate ventures | $ | (32,895 | ) | $ | (22,740 | ) | $ | (42,630 | ) | $ | (1,640 | ) | (a) | $ | (12,439 | ) | (a) | ||||
Distributed income of equity investees | 1,224 | 2,600 | 657 | 1,557 | 7,639 | ||||||||||||||||
Amortization of capitalized interest | 3,538 | 3,564 | 3,527 | 3,166 | 2,801 | ||||||||||||||||
Fixed charges - per below | 147,077 | 140,356 | 148,500 | 153,042 | 170,589 | ||||||||||||||||
Less: | |||||||||||||||||||||
Capitalized interest | (2,560 | ) | (1,997 | ) | (10,385 | ) | (8,893 | ) | (16,746 | ) | |||||||||||
Earnings before fixed charges | $ | 116,384 | $ | 121,783 | $ | 99,669 | $ | 147,232 | $ | 151,844 | |||||||||||
Fixed charges: | |||||||||||||||||||||
Interest expense from continuing operations (including amortization) | $ | 142,982 | $ | 136,396 | $ | 136,410 | $ | 142,520 | $ | 152,096 | |||||||||||
Ground leases and other | 1,535 | 1,963 | 1,705 | 1,629 | 1,747 | ||||||||||||||||
Capitalized interest | 2,560 | 1,997 | 10,385 | 8,893 | 16,746 | ||||||||||||||||
Total Fixed Charges | $ | 147,077 | $ | 140,356 | $ | 148,500 | $ | 153,042 | $ | 170,589 | |||||||||||
Ratio of earnings to combined fixed charges | (b) | (b) | (b) | (b) | (b) | ||||||||||||||||
(a) Amounts for the years ended December 31, 2009 and 2008 have been reclassified to present properties sold. As a result, operations have been reclassified to discontinued operations from continuing operations for all periods presented. | |||||||||||||||||||||
(b) Due to the registrant's loss in the period, the coverage ratio was less than 1:1. The registrant must generate additional earnings of $30,693 for the year ended December 31, 2012, $18,573 for the year ended December 31, 2011, $48,831 for the year ended December 31, 2010, $5,810 for the year ended December 31, 2009, and $18,745 for the year ended December 31, 2008 to achieve a coverage ratio of 1:1. | |||||||||||||||||||||
Exhibit 21
List of Subsidiaries
AAPOP 2, L.P., a Delaware limited partnership
B Chestnut LP, a Delaware limited partnership
BDN Real Estate Fund I LP, a Delaware limited partnership
Brandywine Ambassador, L.P., a Pennsylvania limited partnership
Brandywine Acquisition Partners LP, a Delaware limited partnership
Brandywine Austin Properties I LP, a Texas limited partnership
Brandywine Byberry LP, a Delaware limited partnership
Brandywine Central, L.P., a Pennsylvania limited partnership
Brandywine Cira Chestnut I LP. a Delaware limited partnership
Brandywine Cira Garage I LP, a Delaware limited partnership
Brandywine Cira, L.P., a Pennsylvania limited partnership
Brandywine Cira PO LP, a Delaware limited partnership
Brandywine Cira Post Office LP, a Delaware limited partnership
Brandywine Cira South LP, a Delaware limited partnership
Brandywine Cira Walnut I LP, a Delaware limited partnership
Brandywine Commerce I LP, a Delaware limited partnership
Brandywine Commerce II LP, a Delaware limited partnership
Brandywine Croton, L.P., a Pennsylvania limited partnership
Brandywine Dominion, L.P., a Pennsylvania limited partnership
Brandywine F.C., L.P., a Pennsylvania limited partnership
Brandywine Grande B, L.P., a Delaware limited partnership
Brandywine Grande C, L.P., a Delaware limited partnership
Brandywine Greensboro Drive LP, a Delaware limited partnership
Brandywine International Drive LP, a Delaware limited partnership
Brandywine Industrial Partnership, L.P., a Delaware limited partnership
Brandywine Metroplex, L.P., a Pennsylvania limited partnership
Brandywine Midatlantic, LP, a Delaware limited partnership
Brandywine Office Investors LP, a Delaware limited partnership
Brandywine Operating Partnership, L.P., a Delaware limited partnership
Brandywine P.M., L.P., a Pennsylvania limited partnership
Brandywine Properties Management LP, a Texas limited partnership
Brandywine TB Florig, L.P., a Pennsylvania limited partnership
Brandywine TB Inn, L.P., a Pennsylvania limited partnership
Brandywine TB I, L.P., a Pennsylvania limited partnership
Brandywine TB II, L.P., a Pennsylvania limited partnership
Brandywine TB V, L.P., a Pennsylvania limited partnership
Brandywine TB VI, L.P., a Pennsylvania limited partnership
Brandywine TB VII, L.P., a Pennsylvania limited partnership
Brandywine TB VIII, L.P., a Pennsylvania limited partnership
Brandywine 1177 Beltline Associates, L.P., a Texas limited partnership
BT Plymouth LP, a Delaware limited partnership
C/N Leedom Limited Partnership II, a Pennsylvania limited partnership
C/N Oaklands Limited Partnership I, a Pennsylvania limited partnership
C/N Oaklands Limited Partnership III, a Pennsylvania limited partnership
Concord Airport Plaza Associates, LP, a California limited partnership
Eight/Oliver Brandywine Partner, L.P., a Pennsylvania limited partnership
e-Tenants.com Holding, L.P., a Pennsylvania limited partnership
Fifteen Horsham, L.P., a Pennsylvania limited partnership
Five/Oliver Brandywine Partner, L.P., a Pennsylvania limited partnership
Five Tower Bridge Associates, a Pennsylvania limited partnership
Four Tower Bridge Associates, a Pennsylvania limited partnership
LC/N Horsham Limited Partnership, a Pennsylvania limited partnership
LC/N Keith Valley Limited Partnership I, a Pennsylvania limited partnership
Newtech IV Limited Partnership, a Pennsylvania limited partnership
New Two Logan, LP, a Pennsylvania limited partnership
Nichols Lansdale Limited Partnership III, a Pennsylvania limited partnership
OLS Office Partners, L.P., a Delaware limited partnership
One Rockledge Associates Limited Partnership, a Massachusetts limited partnership
Radnor Center Associates, a Pennsylvania limited partnership
Radnor Properties Associates-II, L.P., a Pennsylvania limited partnership
Radnor Properties-SDC, L.P., a Delaware limited partnership
Radnor Properties-200 RC Holdings, L.P., a Delaware limited partnership
Radnor Properties-200 RC, L.P., a Delaware limited partnership
Radnor Properties-201 KOP, L.P., a Delaware limited partnership
Radnor Properties-555 LA, L.P., a Delaware limited partnership
Two Logan Holdings LP, a Pennsylvania limited partnership
Two Logan Square Associates, a Pennsylvania limited partnership
Six Tower Bridge Associates, a Pennsylvania limited partnership
Tower Bridge Inn Associates, a Pennsylvania limited partnership
Two Tower Bridge Associates, a Pennsylvania limited partnership
Witmer Operating Partnership I, L.P., a Delaware limited partnership
100 Arrandale Associates, L.P., a Pennsylvania limited partnership
111 Arrandale Associates, L.P., a Pennsylvania limited partnership
440 Creamery Way Associates, L.P., a Pennsylvania limited partnership
442 Creamery Way Associates, L.P., a Pennsylvania limited partnership
481 John Young Way Associates, L.P., a Pennsylvania limited partnership
1919 Market Street LP, a Delaware limited partnership
3020 Market Holding LP, a Delaware limited partnership
3020 Market Operating LP, a Delaware limited partnership
Interstate Center Associates, a Virginia general partnership
Plymouth TFC, General Partnership, a Pennsylvania general partnership
Brandywine 1919 Ventures, a Delaware general partnership
BDN Management Inc, a Delaware corporation
Brandywine Holdings, I, Inc., a Pennsylvania corporation
Brandywine Properties I Limited Inc., a Delaware corporation
Brandywine Realty Services Corporation, a Pennsylvania corporation
Brandywine Resources I Inc., a Delaware corporation
BTRS, Inc., a Delaware corporation
BTRS Sub One Inc., a Delaware corporation
Southpoint Land Holdings, Inc., a Pennsylvania corporation
Valleybrooke Land Holdings, Inc., a Pennsylvania corporation
B Chestnut GP LLC, a Delaware limited liability company
BDN Beacon Venture LLC, a Delaware limited liability company
BDN Brokerage LLC, a Pennsylvania limited liability company
BDN GC Services LLC, a Delaware limited liability company
BDN GP Real Estate Fund I LLC, a Delaware limited liability company
BDN Properties I LLC, a Delaware limited liability company
BDN Venture LLC, a Delaware limited liability company
BOI Carlsbad LLC, a Delaware limited liability company
BOI Pacific Ridge LLC, a Delaware limited liability company
BRE/Logan I, L.L.C., a Delaware limited liability company
BRE/Logan II, L.L.C., a Delaware limited liability company
Brandywine Ambassador, L.L.C., a Pennsylvania limited liability company
Brandywine Austin I LLC, a Delaware limited liability company
Brandywine Boulders, LLC, a Delaware limited liability company
Brandywine Brokerage Services, LLC, A New Jersey limited liability company
Brandywine Byberry LLC, a Delaware limited liability company
Brandywine Calverton LLC, a Delaware limited liability company
Brandywine Charlottesville LLC, a Virginia limited liability company
Brandywine Christina LLC, a Delaware limited liability company
Brandywine Cira Brokerage LLC, d Delaware limited liability company
Brandywine Cira Chestnut LLC, a Delaware limited liability company
Brandywine Cira Garage LLC, a Delaware limited liability company
Brandywine Cira Garage Holding LLC, a Delaware limited liability company
Brandywine Cira Garage Holding MM LLC, a Delaware limited liability company
Brandywine Cira, LLC, a Pennsylvania limited liability company
Brandywine Cira PO LLC, a Delaware limited liability company
Brandywine Cira PO Developer LLC, a Delaware limited liability company
Brandywine Cira PO Master Tenant LLC, a Delaware limited liability company
Brandywine Cira Post Office LLC, a Delaware limited liability company
Brandywine Cira South GP LLC, a Delaware limited liability company
Brandywine Cira Walnut LLC, a Delaware limited liability company
Brandywine Commerce I GP LLC, a Delaware limited liability company
Brandywine Commerce II GP LLC, a Delaware limited liability company
Brandywine Continental LLC, a Delaware limited liability company
Brandywine Croton, LLC, a Pennsylvania limited liability company
Brandywine Dabney, L.L.C., a Delaware limited liability company
Brandywine Dominion, L.L.C., a Pennsylvania limited liability company
Brandywine F.C., L.L.C., a Pennsylvania limited liability company
Brandywine Grande B, L.L.C., a Delaware limited liability company
Brandywine Grande C LLC, a Delaware limited liability company
Brandywine Greentree V, LLC, a Delaware limited liability company
Brandywine Interstate 50, L.L.C., a Delaware limited liability company
Brandywine Lake Merritt LLC, a Delaware limited liability company
Brandywine - Main Street, LLC, a Delaware limited liability company
Brandywine Metroplex LLC., a Pennsylvania limited liability company
Brandywine Midatlantic, LLC, a Delaware limited liability company
Brandywine One Logan LLC, a Pennsylvania limited liability company
Brandywine One Rodney Square, L.L.C., a Delaware limited liability company
Brandywine P.M., L.L.C., a Pennsylvania limited liability company
Brandywine Piazza, L.L.C., a New Jersey limited liability company
Brandywine Plaza Ridge I, LLC, a Delaware limited liability company
Brandywine Plaza 1000, L.L.C., a New Jersey limited liability company
Brandywine Promenade, L.L.C., a New Jersey limited liability company
Brandywine Properties II LLC, a Delaware limited liability company
Brandywine Radnor 200 Holdings LLC, a Delaware limited liability company
Brandywine Radnor Center LLC, a Pennsylvania limited liability company
Brandywine Research LLC, a Delaware limited liability company
Brandywine TB Florig, LLC, a Pennsylvania limited liability company
Brandywine TB Inn, L.L.C., a Pennsylvania limited liability company
Brandywine TB I, L.L.C., a Pennsylvania limited liability company
Brandywine TB II, L.L.C., a Pennsylvania limited liability company
Brandywine TB V, L.L.C., a Pennsylvania limited liability company
Brandywine TB VI, L.L.C., a Pennsylvania limited liability company
Brandywine TB VII, L.L.C., a Pennsylvania limited liability company
Brandywine TB VIII, L.L.C., a Pennsylvania limited liability company
Brandywine Tysons LLC, a Delaware limited liability company
Brandywine Wisconsin Avenue Financing LLC, a Delaware limited liability company
Brandywine Witmer, L.L.C., a Pennsylvania limited liability company
Brandywine 55 US Avenue LLC, a New Jersey limited liability company
Brandywine 300 Delaware, LLC, a Delaware limited liability company
Brandywine 1177 Beltline Associates GP, LLC, a Delaware limited liability company
Brandywine 2201 Co-Way LLC a Delaware limited liability company
Brandywine 2201 Co-Way II LLC, a Delaware limited liability company
BT Plymouth GP, LLC, a Delaware limited liability company
Christiana Center Operating Company I LLC, a Delaware limited liability company
Christiana Center Operating Company II LLC, a Delaware limited liability company
Christiana Center Operating Company III LLC, a Delaware limited liability company
e-Tenants LLC, a Delaware limited liability company
G&I VI Interchange Office LLC, a Delaware limited liability company
HSRE-Campus Crest IX, LLC, a Delaware limited liability company
Macquarie BDN Christina I, LLC, a Delaware limited liability company
Macquarie BDN Christina III, LLC, a Delaware limited liability company
New Two Logan GP, LLC, a Pennsylvania limited liability company
PP Lake Merritt, L.L.C., a Delaware limited liability company
Radnor GP, L.L.C., a Delaware limited liability company
Radnor GP-SDC, L.L.C., a Delaware limited liability company
Radnor GP-200 RC, L.L.C., a Delaware limited liability company
Radnor GP-201 KOP, L.L.C., a Delaware limited liability company
Radnor GP-555 LA, L.L.C., a Delaware limited liability company
PJP Building Two, L.C., a Virginia limited liability company
PJP Building Three, L.C., a Virginia limited liability company
PJP Building Five, L.C., a Virginia limited liability company
PJP Building Six, L.C., a Virginia limited liability company
PJP Building Seven, L.C., a Virginia limited liability company
TB-BDN Plymouth Apartments Holdings GP, LLC, a Delaware limited liability company
3 Logan LLC, a Delaware limited liability company
1919 Market Holdco General LLC, a Delaware limited liability company
3020 Market Holding GP LLC, a Delaware limited liability company
1000 Chesterbrook Boulevard Partnership, a Pennsylvania general partnership
Atlantic American Properties Trust, a Maryland real estate investment trust
BDN Investment Trust, a Maryland real estate investment trust
BOI Herndon Trust, a Maryland real estate investment trust
BOI President's Plaza Trust, a Maryland real estate investment trust
BOI Rancho Bernardo Bluffs Trust, a Maryland real estate investment trust
Brandywine Capital Trust I, a Delaware statutory trust
Brandywine Capital Trust II, a Delaware statutory trust
Broadmoor Austin Associates, a Texas joint venture
Coppel Associates, a Texas joint venture
Seven Tower Bridge Associates, a Pennsylvania limited partnership
Seven Oliver/Brandywine Partner, L.P., a Pennsylvania limited partnership
Seven Tower Bridge Real Estate Investment Trust, a Maryland real estate investment trust
Brandywine - AI Venture LLC, a Delaware limited liability company
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-20999, 333-46647, 333-52952, 333-53359, 333-69653, 333-109010, 333-123444, 333-158590, 333-174700, and 333-174701) and on Form S-8 (Nos. 333-14243, 333-28427, 333-52957, 333-123446, 333-125311, 333-131171, 333-141906, 333-142752, 333-142754 and 333-167266) of Brandywine Realty Trust of our report dated February 22, 2013 relating to the financial statements, financial statement schedules, and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 2013
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-174700-01) of Brandywine Operating Partnership, L.P. of our report dated February 22, 2013 relating to the financial statements, financial statement schedules, and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 2013
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
I, Gerard H. Sweeney, certify that:
1. | I have reviewed this annual report on Form 10-K of Brandywine Realty Trust; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: February 25, 2013 /s/ Gerard H. Sweeney
Gerard H. Sweeney
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
I, Howard M. Sipzner, certify that:
1. | I have reviewed this annual report on Form 10-K of Brandywine Realty Trust; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: February 25, 2013 /s/ Howard M. Sipzner
Howard M. Sipzner
Executive Vice President and Chief Financial Officer
Exhibit 31.3
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
I, Gerard H. Sweeney, certify that:
1. | I have reviewed this annual report on Form 10-K of Brandywine Operating Partnership, L.P.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: February 25, 2013 /s/ Gerard H. Sweeney
Gerard H. Sweeney
President and Chief Executive Officer
Exhibit 31.4
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
I, Howard M. Sipzner, certify that:
1. | I have reviewed this annual report on Form 10-K of Brandywine Operating Partnership, L.P.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: February 25, 2013 /s/ Howard M. Sipzner
Howard M. Sipzner
Executive Vice President and Chief Financial Officer
Exhibit 32.1
RULE 13(a)-14(b) CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*
In connection with the Annual Report of Brandywine Realty Trust (the “Company”) on Form 10-K for the fiscal year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gerard H. Sweeney, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Gerard H. Sweeney
Gerard H. Sweeney
President and Chief Executive Officer
Date: February 25, 2013
* A signed original of this written statement required by Section 906 has been provided to Brandywine Realty Trust and will be retained by Brandywine Realty Trust and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
RULE 13(a)-14(b) CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*
In connection with the Annual Report of Brandywine Realty Trust (the “Company”) on Form 10-K for the fiscal year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Howard M. Sipzner, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Howard M. Sipzner
Howard M. Sipzner
Executive Vice President and Chief Financial Officer
Date: February 25, 2013
* A signed original of this written statement required by Section 906 has been provided to Brandywine Realty Trust and will be retained by Brandywine Realty Trust and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.3
RULE 13(a)-14(b) CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*
In connection with the Annual Report of Brandywine Operating Partnership, L.P. (the “Partnership”) on Form 10-K for the fiscal year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gerard H. Sweeney, President and Chief Executive Officer of Brandywine Realty Trust, the Partnership's sole general partner, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Gerard H. Sweeney
Gerard H. Sweeney
President and Chief Executive Officer
Date: February 25, 2013
* A signed original of this written statement required by Section 906 has been provided to Brandywine Realty Trust and will be retained by Brandywine Realty Trust and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.4
RULE 13(a)-14(b) CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*
In connection with the Annual Report of Brandywine Operating Partnership, L.P. (the “Partnership”) on Form 10-K for the fiscal year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Howard M. Sipzner, Executive Vice President and Chief Financial Officer of Brandywine Realty Trust, the Partnership's sole general partner, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Howard M. Sipzner
Howard M. Sipzner
Executive Vice President and Chief Financial Officer
Date: February 25, 2013
* A signed original of this written statement required by Section 906 has been provided to Brandywine Realty Trust and will be retained by Brandywine Realty Trust and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.1
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material U.S. federal income tax considerations relating to the purchase, ownership and disposition of Brandywine's common shares, preferred shares and debt securities and debt securities of Brandywine Operating Partnership, and the qualification and taxation of Brandywine Realty Trust as a REIT.
Because this is a summary that is intended to address only material U.S. federal income tax considerations relating to the ownership and disposition of Brandywine's common shares, preferred shares or debt securities that will apply to all holders, this summary may not contain all the information that may be important to you. As you review this discussion, you should keep in mind that:
• | the tax consequences to you may vary depending on your particular tax situation; |
• | special rules that are not discussed below may apply to you if, for example, you are a tax-exempt organization, a broker-dealer, a non-U.S. person, a trust, an estate, a regulated investment company, a REIT, a financial institution, an insurance company, a holder of debt securities or shares through a partnership or other pass-through entity, or otherwise subject to special tax treatment under the Code; |
• | this summary does not address state, local or non-U.S. tax considerations; |
• | this summary deals only with our shareholders and debt holders that hold common shares, preferred shares or debt securities as “capital assets” within the meaning of Section 1221 of the Code; and |
• | this discussion is not intended to be, and should not be construed as, tax advice. |
You are urged both to review the following discussion and to consult with your own tax advisor to determine the effect of ownership and disposition of our common shares, preferred shares or debt securities on your individual tax situation, including any state, local or non-U.S. tax consequences.
The information in this summary is based on the Code, current, temporary and proposed Treasury regulations, the legislative history of the Code, current administrative interpretations and practices of the Internal Revenue Service, including its practices and policies as endorsed in private letter rulings, which are not binding on the Internal Revenue Service, and existing court decisions. Future legislation, regulations, administrative interpretations and court decisions could change current law or adversely affect existing interpretations of current law. Any change could apply retroactively. We have not obtained any rulings from the Internal Revenue Service concerning the tax treatment of the matters discussed in this summary. Therefore, it is possible that the Internal Revenue Service could challenge the statements in this summary, which do not bind the Internal Revenue Service or the courts, and that a court could agree with the Internal Revenue Service.
Taxation of the Company
Qualification of Brandywine as a REIT
Brandywine first elected to be taxed as a REIT for the taxable year ended December 31, 1986. A REIT generally is not subject to federal income tax on the income that it distributes to its shareholders if it meets the applicable REIT distribution requirements and other requirements for qualification.
We believe that we are organized and have operated in such a manner so as to qualify as a REIT, but there can be no assurance that we have qualified or will remain quailed as a REIT.
Qualification and taxation as a REIT depends on our ability to meet, on a continuing basis, through actual operating results, distribution levels, and diversity of stock ownership, various qualification requirements imposed upon REITs by the Code. Our ability to qualify as a REIT also requires that we satisfy certain asset tests, some of which depend upon the fair market values of assets directly or indirectly owned by us. Such values may not be susceptible to a precise determination. While we intend to continue to operate in a manner that will allow us to qualify as a REIT, no assurance can be given that the actual results of our operations for any taxable year will satisfy such requirements for qualification and taxation as a REIT.
Taxation of Brandywine as a REIT
If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our shareholders, because the REIT provisions of the Code generally allow a REIT a deduction for distributions paid to its shareholders. This deduction substantially eliminates the
Exhibit 99.1
“double taxation” on earnings (taxation at both the corporate level and shareholder level) that generally results from investment in a corporation. However, even if we qualify for taxation as a REIT, we will be subject to federal income tax as follows:
• | We will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains; |
• | Under certain circumstances, we may be subject to the “alternative minimum tax” on our items of tax preference, if any; |
• | If we have net income from prohibited transactions (which are, in general, certain sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business) such income will be subject to a 100% tax. See “-Sale of Partnership Property;” |
• | If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or leasehold as “foreclosure property,” we may thereby avoid the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the sale or operation of the property (and any other non-qualifying income from foreclosure property) may be subject to corporate income tax at the highest applicable rate (currently 35%); |
• | If we should fail to satisfy the 75% gross income test or the 95% gross income test (as discussed below), and nonetheless have maintained our qualification as a REIT because certain other requirements have been met, we will be subject to a 100% tax on the net income attributable to the greater of the amount by which we fail the 75% or 95% test, multiplied by a fraction intended to reflect our profitability; |
• | If we fail to satisfy any of the REIT asset tests, as described below, by larger than a de minimis amount, but our failure is due to reasonable cause and not due to willful negligence and we nonetheless maintain our REIT qualification because of specified cure provisions, we will be required to pay a tax equal to the greater of $50,000 or 35% of the net income generated by the non-qualifying assets during the period in which we failed to satisfy the asset tests; |
• | If we fail to satisfy any provision of the Code that would result in our failure to qualify as a REIT (other than a gross income or asset test requirement) and that violation is due to reasonable cause and not due to willful negligence, we may retain our REIT qualification, but we will be required to pay a penalty of $50,000 for each such failure; |
• | We may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to meet record-keeping requirements intended to monitor our compliance with rules relating to the composition of our shareholders, as described below in “Requirements for Qualification as a REIT;” |
• | If we should fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior years, we would be subject to a 4% excise tax on the excess of such required distribution over the sum of (i) the amounts actually distributed plus (ii) retained amounts on which corporate level tax is paid by us; |
• | We may elect to retain and pay income tax on our net long-term capital gain. In that case, a shareholder would include its proportionate share of our undistributed long-term capital gain in its income and would be allowed a credit for its proportionate share of the tax we paid; |
• | A 100% excise tax may be imposed on some items of income and expense that are directly or constructively paid between us, our tenants and/or our taxable REIT subsidiaries if and to the extent that the IRS successfully adjusts the reported amounts of these items; |
• | If we acquire appreciated assets from a C corporation (a corporation generally subject to corporate level tax) in a transaction in which the adjusted tax basis of the assets in our hands is determined by reference to the adjusted tax basis of the assets in the hands of the C corporation, we may be subject to tax on such appreciation at the highest corporate income tax rate then applicable if we subsequently recognize gain on a disposition of such assets during the ten-year period following their acquisition from the C corporation, unless the C corporation elects to treat the assets as if they were sold for their fair market value at the time of our acquisition; and |
• | Income earned by any of our taxable REIT subsidiaries will be subject to tax at regular corporate rates. |
Exhibit 99.1
Requirements for Qualification as a REIT
We elected to be taxable as a REIT for U.S. federal income tax purposes for our taxable year ended December 31, 1986. In order to have so qualified, we must have met and continue to meet the requirements discussed below, relating to our organization, sources of income, nature of assets and distributions of income to shareholders.
The Code defines a REIT as a corporation, trust or association:
1.that is managed by one or more trustees or directors;
2.the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;
3.that would be taxable as a domestic corporation but for the special Code provisions applicable to REITs;
4.that is neither a financial institution nor an insurance company subject to certain provisions of the Code;
5.the beneficial ownership of which is held by 100 or more persons;
6.in which, during the last half of each taxable year, not more than 50% in value of the outstanding shares is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include specified entities), after applying certain attribution rules;
7.that makes an election to be taxable as a REIT, or has made this election for a previous taxable year which has not been revoked or terminated, and satisfies all relevant filing and other administrative requirements established by the Internal Revenue Service that must be met to elect and maintain REIT status;
8.that uses a calendar year for federal income tax purposes and complies with the record keeping requirements of the Code and the Treasury Regulations; and
9.that meets other applicable tests, described below, regarding the nature of its income and assets and the amount of its distributions.
Conditions (1) through (4) must be satisfied during the entire taxable year, and condition (5) must be satisfied during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.
We have previously issued common shares in sufficient proportions to allow us to satisfy requirements (5) and (6) (the “100 Shareholder” and “five-or-fewer” requirements). In addition, our Declaration of Trust provides restrictions regarding the transfer of our shares that are intended to assist us in continuing to satisfy the requirements described in conditions (5) and (6) above. However, these restrictions may not ensure that we will, in all cases, be able to satisfy the requirements described in conditions (5) and (6) above. In addition, we have not obtained a ruling from the Internal Revenue Service as to whether the provisions of our Declaration of Trust concerning restrictions on transfer and conversion of common shares to “Excess Shares” will allow us to satisfy conditions (5) and (6). If we fail to satisfy such share ownership requirements, our status as a REIT will terminate. However, for taxable years beginning on or after January 1, 2005, if the failure to meet the share ownership requirements is due to reasonable cause and not due to willful neglect, we may avoid termination of our REIT status by paying a penalty of $50,000.
To monitor compliance with the share ownership requirements, we are required to maintain records regarding the actual ownership of our shares. To do so, we must demand written statements each year from the record holders of certain percentages of our shares in which the record holders are to disclose the actual owners of the shares (the persons required to include in gross income the dividends paid by us). A list of those persons failing or refusing to comply with this demand must be maintained as part of our records. Failure by us to comply with these record-keeping requirements could subject us to monetary penalties. If we satisfy these requirements and have no reason to know that condition (6) is not satisfied, we will be deemed to have satisfied such condition. A shareholder that fails or refuses to comply with the demand is required by Treasury Regulations to submit a statement with its tax return disclosing the actual ownership of the shares and other information.
Exhibit 99.1
Qualified REIT Subsidiaries
The Code provides that a corporation that is a “qualified REIT subsidiary” shall not be treated as a separate corporation, and all assets, liabilities and items of income, deduction and credit of a “qualified REIT subsidiary” shall be treated as assets, liabilities and items of income, deduction and credit of the REIT. A “qualified REIT subsidiary” is a corporation, all of the capital stock of which is owned by the REIT, that has not elected to be a “taxable REIT subsidiary” (discussed below). In applying the requirements described herein, all of our “qualified REIT subsidiaries” will be ignored, and all assets, liabilities and items of income, deduction and credit of such subsidiaries will be treated as our assets, liabilities and items of income, deduction and credit. These subsidiaries, therefore, will not be subject to federal corporate income taxation, although they may be subject to state and local taxation.
Taxable REIT Subsidiaries
A REIT may generally jointly elect with a subsidiary corporation, whether or not wholly owned, to treat the subsidiary as a “taxable REIT subsidiary.” In addition, if a taxable REIT subsidiary owns, directly or indirectly, securities representing 35% or more of the vote or value of a subsidiary corporation, that subsidiary will also be treated as a taxable REIT subsidiary. A taxable REIT subsidiary is a corporation subject to U.S. federal income tax, and state and local income tax where applicable, as a regular “C” corporation.
Generally, a taxable REIT subsidiary of ours can perform some impermissible tenant services without causing us to receive impermissible tenant services income under the REIT income tests. However, several provisions regarding the arrangements between a REIT and its taxable REIT subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of United States federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct interest payments in excess of a certain amount made to us. In addition, we will be obligated to pay a 100% penalty tax on some payments that we receive or on certain expenses deducted by the taxable REIT subsidiary if the economic arrangements among us, our tenants, and/or the taxable REIT subsidiary are not comparable to similar arrangements among unrelated parties. A taxable REIT subsidiary may also engage in other activities that, if conducted by us other than through a taxable REIT subsidiary, could result in the receipt of non-qualified income or the ownership of non-qualified assets.
Ownership of Partnership Interests by a REIT
A REIT that is a partner in a partnership is deemed to own its proportionate share of the assets of the partnership and is deemed to receive the income of the partnership attributable to such share. In addition, the character of the assets and gross income of the partnership retains the same character in the hands of the REIT. Accordingly, our proportionate share of the assets, liabilities and items of income of the Operating Partnership are treated as assets, liabilities and items of income of ours for purposes of applying the requirements described herein. Brandywine has control over the Operating Partnership and most of the partnership and limited liability company subsidiaries of the Operating Partnership and intends to operate them in a manner that is consistent with the requirements for qualification of Brandywine as a REIT.
Income Tests
In order to qualify as a REIT, Brandywine must generally satisfy two gross income requirements on an annual basis. First, at least 75% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property, including “rents from real property,” dividends received from other REITs, interest income derived from mortgage loans secured by real property (including certain types of mortgage-backed securities), and gains from the sale of real estate assets, as well as income from certain kinds of temporary investments. Second, at least 95% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from the same items which qualify under the 75% gross income test, and from dividends, interest and gain from the sale or disposition of securities, which need not have any relation to real property.
Rents received by a REIT will qualify as “rents from real property” in satisfying the gross income requirements described above only if several conditions are met.
• | The amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term “rents from real property” solely by reason of being based on a fixed percentage or percentages of gross receipts or sales. |
• | Rents received from a tenant will not qualify as “rents from real property” in satisfying the gross income tests if the REIT, or a direct or indirect owner of 10% or more of the REIT, directly or |
Exhibit 99.1
constructively, owns 10% or more of such tenant (a “Related Party Tenant”). However, rental payments from a taxable REIT subsidiary will qualify as rents from real property even if we own more than 10% of the total value or combined voting power of the taxable REIT subsidiary if at least 90% of the property is leased to unrelated tenants and the rent paid by the taxable REIT subsidiary is substantially comparable to the rent paid by the unrelated tenants for comparable space.
• | Rent attributable to personal property leased in connection with a lease of real property will not qualify as “rents from real property” if such rent exceeds 15% of the total rent received under the lease. |
• | the REIT generally must not operate or manage the property or furnish or render services to tenants, except through an “independent contractor” who is adequately compensated and from whom the REIT derives no income, or through a taxable REIT subsidiary. The “independent contractor” requirement, however, does not apply to the extent the services provided by the REIT are “usually or customarily rendered” in connection with the rental of space for occupancy only, and are not otherwise considered “rendered to the occupant.” In addition, a de minimis rule applies with respect to non-customary services. Specifically, if the value of the non-customary service income with respect to a property (valued at no less than 150% of the direct costs of performing such services) is 1% or less of the total income derived from the property, then all rental income except the non-customary service income will qualify as “rents from real property.” A taxable REIT subsidiary may provide services (including non-customary services) to a REIT's tenants without “tainting” any of the rental income received by the REIT, and will be able to manage or operate properties for third parties and generally engage in other activities unrelated to real estate. |
We do not anticipate receiving rent that is based in whole or in part on the income or profits of any person (except by reason of being based on a fixed percentage or percentages of gross receipts or sales consistent with the rules described above). We also do not anticipate receiving more than a de minimis amount of rents from any Related Party Tenant or rents attributable to personal property leased in connection with real property that will exceed 15% of the total rents received with respect to such real property.
We provide services to our properties that we own through the Operating Partnership, and we believe that all of such services will be considered “usually or customarily rendered” in connection with the rental of space for occupancy only so that the provision of such services will not jeopardize the qualification of rent from the properties as “rents from real property.” In the case of any services that are not “usual and customary” under the foregoing rules, we intend to employ an “independent contractor” or a taxable REIT subsidiary to provide such services.
The Operating Partnership may receive certain types of income that will not qualify under the 75% or 95% gross income tests. In particular, dividends received from a taxable REIT subsidiary will not qualify under the 75% test. We believe, however, that the aggregate amount of such items and other non-qualifying income in any taxable year will not cause Brandywine to exceed the limits on non-qualifying income under either the 75% or 95% gross income tests.
If Brandywine fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, Brandywine may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will be generally available if (1) the failure to meet such tests was due to reasonable cause and not due to willful neglect, (2) we have attached a schedule of the sources of our income to our return, and (3) any incorrect information on the schedule was not due to fraud with intent to evade tax. In addition, for taxable years beginning on or after January 1, 2005, we must also file a disclosure schedule with the IRS after we determine that we have not satisfied one of the gross income tests. It is not possible, however, to state whether in all circumstances Brandywine would be entitled to the benefit of these relief provisions. As discussed above in “Taxation of Brandywine as a REIT,” even if these relief provisions apply, a tax would be imposed based on the non-qualifying income.
Asset Tests
At the close of each quarter of each taxable year, Brandywine must satisfy the following four tests relating to the nature of our assets:
First, at least 75% of the value of our total assets must be represented by some combination of “real estate assets,” cash or cash items, U.S. government securities, and, under some circumstances, stock or debt instruments purchased with new capital. For this purpose, “real estate assets” include interests in real property, such as land, buildings, leasehold interests in real property, stock of other REITs, and certain kinds of mortgage-backed securities and mortgage loans. Assets that do not qualify for purposes of the 75% test are subject to the additional asset tests described below, while securities that do qualify for purposes of the 75% test are generally not subject to the additional asset tests.
Exhibit 99.1
Second, the value of any one issuer's securities we own may not exceed 5% of the value of our total assets.
Third, we may not own more than 10% of the vote or value of any one issuer's outstanding securities. The 5% and 10% tests do not apply to our interests in the Operating Partnership, non-corporate subsidiaries, taxable REIT subsidiaries and any qualified REIT subsidiaries, and the 10% value test does not apply with respect to certain “straight debt” securities.
Effective for taxable years beginning after December 31, 2000, the safe harbor under which certain types of securities are disregarded for purposes of the 10% value limitation includes (1) straight debt securities (including straight debt securities that provides for certain contingent payments); (2) any loan to an individual or an estate; (3) any rental agreement described in Section 467 of the Code, other than with a “related person”; (4) any obligation to pay rents from real property; (5) certain securities issued by a State or any political subdivision thereof, or the Commonwealth of Puerto Rico; (6) any security issued by a REIT; and (7) any other arrangement that, as determined by the Secretary of the Treasury, is excepted from the definition of a security. In addition, for purposes of applying the 10% value limitation, (a) a REIT's interest as a partner in a partnership is not considered a security; (b) any debt instrument issued by a partnership is not treated as a security if at least 75% of the partnership's gross income is from sources that would qualify for the 75% REIT gross income test, and (c) any debt instrument issued by a partnership is not treated as a security to the extent of the REIT's interest as a partner in the partnership.
Fourth, not more than 25% (20% for taxable years ending on or before December 31, 2008) of the value of our assets may be represented by securities of one or more taxable REIT subsidiaries.
We may own, directly or indirectly, common shares of certain entities that have elected or will elect to be treated as a real estate investment trusts (“Captive REITs”). Provided that each of the Captive REITs continues to qualify as a REIT (including satisfaction of the ownership, income, asset and distribution tests discussed herein) the common shares of the Captive REITs will qualify as real estate assets under the 75% test. However, if any Captive REIT fails to qualify as a REIT in any year, then the common shares of such Captive REIT will not qualify as real estate assets under the 75% test. In addition, if we own, directly or indirectly, more than 10% of the common shares of each Captive REIT, Brandywine would not satisfy the 10% test if any Captive REIT were to fail to qualify as a REIT. Accordingly, Brandywine's qualification as a REIT depends upon the ability of any more than 10% owned Captive REIT to continue to qualify as a REIT.
After initially meeting the asset tests at the close of any quarter, Brandywine will not lose its status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If the failure to satisfy the asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient non-qualifying assets within 30 days after the close of that quarter. We intend to maintain adequate records of the value of our assets to ensure compliance with the asset tests, and to take such other action within 30 days after the close of any quarter as may be required to cure any noncompliance. However, there can be no assurance that such other action will always be successful. If we fail to cure any noncompliance with the asset tests within such time period, our status as a REIT would be lost.
For taxable years beginning on or after January 1, 2005, the Code provides relief from certain failures to satisfy the REIT asset tests. If the failure relates to the 5% test or 10% test, and if the failure is de minimis (does not exceed the lesser of $10 million or 1% of our assets as of the end of the quarter), we may avoid the loss of our REIT status by disposing of sufficient assets to cure the failure within 6 months after the end of the quarter in which the failure was identified. For failures to meet the asset tests that are more than a de minimis amount, we may avoid the loss of our REIT status if: the failure was due to reasonable cause, we file a disclosure schedule at the end of the quarter in which the failure was identified, we dispose of sufficient assets to cure the failure within 6 months after the end of the quarter, and we pay a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the non-qualifying assets.
Annual Distribution Requirements
In order to qualify as a REIT, Brandywine is required to distribute dividends (other than capital gain dividends) to our shareholders in an amount at least equal to (1) the sum of (a) 90% of its “REIT taxable income” (computed without regard to the dividends paid deduction and the REIT's net capital gain or loss) and (b) 90% of the net income (after tax), if any, from foreclosure property, minus (2) certain “excess” non-cash income as defined in the Code. These distributions must be paid in the taxable year to which they relate, or in the following taxable year if such distributions are declared in October, November or December of the taxable year, are payable to shareholders of record on a specified date in any such month, and are actually paid before the end of January of the following year. Such distributions are treated as both paid by us and received by our shareholders on December 31 of the year in which they are declared.
Exhibit 99.1
In addition, at our election, a distribution for a taxable year may be declared before we timely file our tax return for the year provided we pay such distribution with or before our first regular dividend payment after such declaration, and such payment is made during the 12-month period following the close of such taxable year. Such distributions are taxable to our shareholders in the year in which paid, even though the distributions relate to our prior taxable year for purposes of the 90% distribution requirement.
In order for distributions to be counted towards our distribution requirement, and to provide a tax deduction to us, they must not be “preferential dividends.” A dividend is not a preferential dividend if it is pro rata among all outstanding shares within a particular class and is in accordance with the preferences among our different classes of shares as set forth in our organizational documents.
To the extent that we distribute at least 90%, but less than 100%, of our net taxable income, we will be subject to tax at ordinary corporate tax rates on the retained portion. In addition, we may elect to retain, rather than distribute our net long-term capital gains and pay tax on such gains. In this case, we would elect to have our shareholders include their proportionate share of such undistributed long-term capital gains in their income and receive a corresponding credit for their proportionate share of the tax paid by us. Our shareholders would then increase their adjusted basis in our shares by the difference between the amount included in their long-term capital gains and the tax deemed paid with respect to their shares.
If we should fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of January following such calendar year) at least the sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT net capital gain income for such year and (3) any undistributed taxable income from prior periods, we would be subject to a 4% excise tax on the excess of such required distribution over the sum of (a) the amounts actually distributed plus (b) retained amounts on which corporate level tax is paid by us.
Brandywine intends to make timely distributions sufficient to satisfy the annual distribution requirements. In this regard, the limited partnership agreement of the Operating Partnership authorizes Brandywine, as general partner, to operate the partnership in a manner that will enable it to satisfy the REIT requirements and avoid the imposition of any federal income or excise tax liability. It is possible that we, from time to time, may not have sufficient cash or other liquid assets to meet the 90% distribution requirement. This could arise, for example, when there is an expenditure of cash for nondeductible items such as principal amortization or capital expenditures. In addition, because we may deduct capital losses only to the extent of our capital gains, our REIT taxable income may exceed our economic income. In order to meet the 90% distribution requirement, we may borrow or may cause the Operating Partnership to arrange for short-term or possibly long-term borrowing to permit the payment of required distributions, or we may pay dividends in the form of taxable in-kind distributions of property, including potentially, our shares.
Under certain circumstances, Brandywine may be able to rectify a failure to meet the distribution requirement for a given year by paying “deficiency dividends” to shareholders in a later year that may be included in Brandywine's deduction for distributions paid for the earlier year. Thus, Brandywine may be able to avoid losing our REIT qualification or being taxed on amounts distributed as deficiency dividends. However, Brandywine will be required to pay to the Internal Revenue Service interest and a penalty based upon the amount of any deduction taken for deficiency dividends.
Failure to Qualify
For taxable years beginning on or after January 1, 2005, the Code provides relief for many failures to satisfy the REIT requirements. In addition to the relief provisions for failures to satisfy the income and asset tests (discussed above), the Code provides additional relief for other failures to satisfy REIT requirements. If the failure is due to reasonable cause and not due to willful neglect, and we elect to pay a penalty of $50,000 for each failure, we can avoid the loss of our REIT status.
If Brandywine fails to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, it will be subject to tax (including any applicable corporate alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders in any year in which Brandywine fails to qualify will not be deductible to us. In such event, to the extent of Brandywine's current and accumulated earnings and profits, all distributions to shareholders will be taxable to them as dividends, and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Under current law, such dividends will generally be taxable to individual shareholders at the 20% rate for qualified dividends provided that applicable holding period requirements are met. Unless entitled to relief under specific statutory provisions, Brandywine also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances Brandywine would be entitled to such statutory relief.
Exhibit 99.1
Prohibited Transactions
Net income derived from a prohibited transaction is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of property (other than foreclosure property) that is held primarily for sale to customers in the ordinary course of a trade or business. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances of a particular transaction. We intend to hold properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning and operating properties, and to make occasional sales of properties as are consistent with our investment objectives. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent the imposition of the 100% tax. The 100% tax does not apply to gains from the sale of property that is held through a taxable REIT subsidiary or other taxable corporation, although such income will be subject to tax in the hands of that corporation at regular corporate tax rates.
Foreclosure Property
Foreclosure property is real property (including interests in real property) and any personal property incident to such real property (1) that is acquired by a REIT as a result of the REIT having bid on the property at foreclosure, or having otherwise reduced the property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of the property or a mortgage loan held by the REIT and secured by the property, (2) for which the related loan or lease was made, entered into or acquired by the REIT at a time when default was not imminent or anticipated and (3) for which such REIT makes an election to treat the property as foreclosure property. REITs generally are subject to tax at the maximum corporate rate (currently 35%) on any net income from foreclosure property, including any gain from the disposition of the foreclosure property, other than income that would otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale of property for which a foreclosure property election has been made will not be subject to the 100% tax on gains from prohibited transactions described above, even if the property is held primarily for sale to customers in the ordinary course of a trade or business.
Hedging
We may enter into hedging transactions with respect to one or more of our assets or liabilities. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements or similar financial instruments. Except to the extent provided by Treasury Regulations, any income from a hedging transaction (i) made in the normal course of our business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred by us to acquire or own real estate assets or (ii) entered into after July 30, 2008 primarily to manage the risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% income tests (or any property which generates such income or gain), which is clearly identified as such before the close of the day on which it was acquired, originated or entered into, including gain from the disposition of such a transaction, will not constitute gross income for purposes of the 95% gross income test and, in respect of hedges entered into after July 30, 2008, the 75% gross income test. To the extent we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both the 75% and 95% gross income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our ability to qualify as a REIT.
Tax Aspect of Investments in the Operating Partnership and Subsidiary Partnerships
The following discussion summarizes certain Federal income tax considerations applicable to Brandywine's investment in the Operating Partnership and the Operating Partnership's subsidiary partnerships and limited liability companies (referred to as the “Subsidiary Partnerships”).
General
We may hold investments through entities that are classified as partnerships for U.S. federal income tax purposes, including our interest in the Operating Partnership and the equity interests in Subsidiary Partnerships. In general, partnerships are “pass-through” entities that are not subject to U.S. federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are subject to tax on these items without regard to whether the partners receive a distribution from the partnership. We will include in our income our proportionate share of these partnership items for purposes of the various REIT income tests and in the computation of our REIT taxable income. Moreover, for purposes of the REIT asset tests, we will include our proportionate share of assets held by subsidiary
Exhibit 99.1
partnerships. Consequently, to the extent that we hold an equity interest in a partnership, the partnership's assets and operations may affect our ability to qualify as a REIT.
Classification of the Operating Partnership and Subsidiary Partnerships as Partnerships
The investment by us in partnerships involves special tax considerations, including the possibility of a challenge by the Internal Revenue Service to the status of the Operating Partnership or any if our Subsidiary Partnerships as a partnership, as opposed to an association taxable as a corporation, for U.S. federal income tax purposes. If any of these entities were treated as an association for U.S. federal income tax purposes, it would be taxable as a corporation and, therefore, could be subject to an entity-level tax on its income. In such a situation, the character of our assets and items of our gross income would change and could preclude us from satisfying the REIT asset tests or the REIT income tests as discussed in “-- Taxation of the Company -- Asset Tests” and “-- Income Tests” above, and in turn could prevent us from qualifying as a REIT. See “-- Taxation of the Company -- Failure to Qualify,” above, for a discussion of the effect of our failure to meet these tests for a taxable year. In addition, any change in the status of any of our subsidiary partnerships for tax purposes might be treated as a taxable event, in which case we could have taxable income that is subject to the REIT distribution requirements without receiving any cash.
Treasury Regulations that apply for tax periods beginning on or after January 1, 1997 provide that a domestic business entity not otherwise organized as a corporation (an “Eligible Entity”) may elect to be treated as a partnership or disregarded entity for federal income tax purposes. Unless it elects otherwise, an Eligible Entity in existence prior to January 1, 1997, will have the same classification for federal income tax purposes that it claimed under the entity classification Treasury Regulations in effect prior to this date. In addition, an Eligible Entity that did not exist or did not claim a classification prior to January 1, 1997 will be classified as a partnership or disregarded entity for federal income tax purposes unless it elects otherwise. The Operating Partnership and the Subsidiary Partnerships (other than those Subsidiary Partnerships that have elected to be treated as taxable REIT subsidiaries) intend to claim classification as partnerships or disregarded entities under these Treasury Regulations. As a result, we believe that the Operating Partnership and such Subsidiary Partnerships (other than those Subsidiary Partnerships that have elected to be treated as taxable REIT subsidiaries) will be classified as partnerships or disregarded entities for federal income tax purposes. We have not requested and do not intend to request a ruling from the Internal Revenue Service that the Operating Partnership or Subsidiary Partnerships will be classified as partnerships for federal income tax purposes.
Partnership Allocations
Although a partnership agreement will generally determine the allocation of income and losses among partners, such allocations will be disregarded for tax purposes if they do not comply with the provisions of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder, which require that partnership allocations respect the economic arrangement of the partners. If an allocation is not recognized for Federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners' interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. The Operating Partnership's allocations of taxable income and loss are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties
Pursuant to Section 704(c) of the Code, items of income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership must be allocated for federal income tax purposes in a manner such that the contributor is charged with or benefits from the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution. Such allocations are solely for federal income tax purposes and do not affect other economic or legal arrangements among the partners.
Our Operating Partnership has entered into transactions involving the contribution to the Operating Partnership of appreciated property, and the Operating Partnership may enter into such transactions in the future. The partnership agreement of the Operating Partnership requires allocations of income, gain, loss and deduction attributable to contributed property to be made in a manner that is consistent with Section 704(c) of the Code. Treasury Regulations issued under Section 704(c) give partnerships a choice of several methods of allocating taxable income with respect to contributed properties. Depending upon the method chosen, (1) our tax depreciation deductions attributable to those properties may be lower than they would have been if our Operating Partnership had acquired those properties for cash and (2) in the event of a sale of such properties, we could be allocated gain in excess of our corresponding economic or book gain. These allocations may cause us to recognize taxable
Exhibit 99.1
income in excess of cash proceeds received by us, which might adversely affect our ability to comply with the REIT distribution requirements or result in our shareholders recognizing additional dividend income without an increase in distributions.
Depreciation
The Operating Partnership's assets include a substantial amount of appreciated property contributed by its partners. Assets contributed to a partnership in a tax-free transaction generally retain the same depreciation method and recovery period as they had in the hands of the partner who contributed them to the partnership. Accordingly, a substantial amount of the Operating Partnership's depreciation deductions for its real property are based on the historic tax depreciation schedules for the properties prior to their contribution to the Operating Partnership. The properties are being depreciated over a range of 15 to 40 years using various methods of depreciation which were determined at the time that each item of depreciable property was placed in service. Any depreciable real property purchased by the Partnerships is currently depreciated over 40 years. In certain instances where a partnership interest rather than real property is contributed to the Partnership, the real property may not carry over its recovery period but rather may, similarly, be subject to the lengthier recovery period.
Basis in Operating Partnership Interest
Our adjusted tax basis in each of the partnerships in which we have an interest generally (1) will be equal to the amount of cash and the basis of any other property contributed to such partnership by us, (2) will be increased by (a) our allocable share of such partnership's income and (b) our allocable share of any indebtedness of such partnership, and (3) will be reduced, but not below zero, by our allocable share of (a) such partnership's loss and (b) the amount of cash and the tax basis of any property distributed to us and by constructive distributions resulting from a reduction in our share of indebtedness of such partnership.
If our allocable share of the loss (or portion thereof) of any partnership in which we have an interest would reduce the adjusted tax basis of our partnership interest in such partnership below zero, the recognition of such loss will be deferred until such time as the recognition of such loss (or portion thereof) would not reduce our adjusted tax basis below zero. To the extent that distributions to us from a partnership, or any decrease in our share of the nonrecourse indebtedness of a partnership (each such decrease being considered a constructive cash distribution to the partners), would reduce our adjusted tax basis below zero, such distributions (including such constructive distributions) would constitute taxable income to us. Such distributions and constructive distributions normally would be characterized as long-term capital gain if our interest in such partnership has been held for longer than the long-term capital gain holding period (currently 12 months).
Sale of Partnership Property
Generally, any gain realized by a partnership on the sale of property held by the partnership for more than 12 months will be long-term capital gain, except for any portion of such gain that is treated as depreciation or cost recovery recapture. However, under requirements applicable to REITs under the Code, our share as a partner of any gain realized by the Operating Partnership on the sale of any property held as inventory or other property held primarily for sale to customers in the ordinary course of a trade or business will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. See “-Taxation of the Company - Prohibited Transactions.”
Taxation of Shareholders
As used herein, a “U.S. Shareholder” means a beneficial owner of our common shares or preferred shares, who is, for U.S. federal income tax purposes:
• | a citizen or resident of the U.S. as defined in section 7701(b) of the Code, |
• | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S. or any state thereof or the District of Columbia, |
• | an estate the income of which is subject to U.S. federal income taxation regardless of its source or |
• | a trust if it (a) is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
As used herein, a “non-U.S. Shareholder” means a beneficial owner of our common shares or preferred shares that is not a “U.S. Shareholder” and that is not a partnership (or other entity treated as a partnership for U.S. federal income tax purposes).
Exhibit 99.1
If a partnership holds common shares or preferred shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding common shares or preferred shares, you should consult your tax advisors.
Taxation of Taxable U.S. Shareholders
Taxation of Ordinary Dividends on Shares
As long as Brandywine qualifies as a REIT, distributions made to Brandywine's taxable U.S. Shareholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) (“Ordinary Dividends”) will be dividends taxable to such U.S. Shareholders as ordinary income and will not be eligible for the dividends received deduction for corporations. Dividends received from REITs are generally not eligible for taxation at the preferential rates for qualified dividends received by individual shareholders. We may designate a distribution as qualified dividend income to the extent of (1) qualified dividend income we receive during the current year (for example, dividends received from our taxable REIT subsidiaries), plus (2) income on which we have been subject to corporate level tax during the prior year (for example, undistributed REIT taxable income), plus (3) any income attributable to the sale of a built in gain asset that was acquired from a C corporation in a carry-over basis transaction less the tax paid on that income. To the extent that we designate a dividend as qualified dividend income, an individual will be taxable at preferential rates (20% maximum federal rate) on such qualified dividend income provided certain holding period requirements are met. However, we expect that ordinary dividends paid by Brandywine generally will not be eligible for treatment as qualified dividend income to any significant extent.
Capital Gain Distributions
Distributions that are designated as long-term capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed our actual net capital gain for the taxable year) without regard to the period for which the U.S. Shareholder has held its shares of beneficial interest. In general, U.S. Shareholders will be taxable on long term capital gains at a maximum rate of 20%, except that the portion of such gain that is attributable to depreciation recapture will be taxable at the maximum rate of 25%. However, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income.
We may elect under the applicable provisions of the Code to retain and pay tax on our net capital gains. In such event U.S. Shareholders will be taxable on their proportionate share of such undistributed capital gains. Each U.S. Shareholder would then receive a credit, for use on their return, in the amount of their proportionate share of the capital gains tax paid by us. If the credit results in an amount owed to a U.S. Shareholder, such U.S. Shareholder would receive a refund. A U.S. Shareholder's basis in our shares will be increased by the amount of the shareholder's allocable share of any retained capital gains less the shareholder's allocable share of the tax paid by us on such capital gains.
Non-Dividend Distributions
Distributions in excess of current and accumulated earnings and profits (“Non-Dividend Distributions”) will not be taxable to a U.S. Shareholder to the extent that they do not exceed the adjusted basis of the shareholder's shares, but rather will reduce the adjusted basis of such shares. To the extent that Non-Dividend Distributions exceed the adjusted basis of a U.S. Shareholder's shares, such distributions will be included in income as long-term capital gain (or short-term capital gain if the shares have been held for 12 months or less) assuming the shares are a capital asset in the hands of the shareholder. In determining the extent to which a distribution on our shares constitutes a dividend for tax purposes, the earnings and profits of Brandywine will be allocated first to distributions with respect to the preferred shares and second to distributions with respect to common shares. Therefore, depending on our earnings and profits, distributions with respect to the preferred shares (as compared to distributions with respect to our common shares) are more likely to be treated as dividends than as a return of capital or a distribution in excess of basis.
Dividends Paid in Common Shares
A recent Internal Revenue Service revenue procedure allows us to satisfy the REIT distribution requirements with respect to certain taxable years by distributing up to 90% of our dividends in the form of common shares rather than cash. In the event that we pay a portion of a dividend in common shares, taxable U.S. Shareholders would be required to pay tax on the full amount of the dividend (including the fair market value of any common shares received) and the amount of the tax may exceed the amount of cash received.
Exhibit 99.1
Timing of Distributions
Any distribution declared by us in October, November or December of any year payable to a shareholder of record on a specified date in any such month shall be treated as both paid by Brandywine and received by the shareholder on December 31 of such year, provided that the distribution is actually paid by Brandywine not later than the end of January of the following calendar year. Shareholders may not include in their individual income tax returns any of Brandywine's losses.
Sale or Exchange of Common and Preferred Shares
In general, a U.S. Shareholder will recognize capital gain or loss on the disposition of common or preferred shares equal to the difference between the sales price for such shares and the adjusted tax basis for such shares. In general, a U.S. Shareholder's adjusted tax basis will equal the U.S. Shareholder's acquisition cost, increased by the U.S. Shareholder's allocable share of any retained capital gains, less the U.S. Shareholder's allocable share of the tax paid by us on such retained capital gains, and reduced by Non-Dividend Distributions.
In general, capital gains recognized by individuals and other non-corporate U.S. Shareholders upon the sale or disposition of shares of our shares will be subject to a maximum U.S. federal income tax rate of 20%, if our shares are held for more than 12 months, and will be taxed at ordinary income rates (of up to 39.6% ) if our shares are held for 12 months or less. Gains recognized by U.S. Shareholders that are corporations are subject to U.S. federal income tax at a maximum rate of 35%, whether or not classified as long-term capital gains.
Capital losses recognized by a U.S. Shareholder upon the disposition of our shares held for more than one year at the time of disposition will be considered long-term capital losses, and are generally available only to offset capital gain income of the U.S. Shareholder but not ordinary income (except in the case of individuals, who may offset up to $3,000 of ordinary income each year). However, any loss upon a sale or exchange of shares by a U.S. Shareholder who has held such shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent such shareholder has received distributions from us required to be treated as long-term capital gain.
If a U.S. Shareholder recognizes a loss upon a subsequent disposition of our shares in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury Regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss generating transactions to the IRS. While these regulations are directed towards “tax shelters,” they are written broadly, and apply to transactions that would not typically be considered tax shelters. Significant penalties apply for failure to comply with these requirements. You should consult your tax advisors concerning any possible disclosure obligation with respect to the receipt or disposition of our shares, or transactions that might be undertaken directly or indirectly by us. Moreover, you should be aware that we and other participants in transactions involving us (including our advisors) might be subject to disclosure or other requirements pursuant to these regulations.
Passive Activity Losses and Investment Interest Limitations
Distributions from us and gain from the disposition of shares will not be treated as passive activity income and, therefore, U.S. Shareholders will not be able to apply any “passive losses” against such income. Distributions from us (to the extent they do not constitute a return of capital or capital gain dividends) will generally be treated as investment income for purposes of the investment income limitation. A shareholder may elect to treat capital gain dividends and capital gains from the disposition of shares as investment income for purposes of the investment income limitation, but in such event a shareholder will be taxed at ordinary income rates on such amounts.
Redemption of Preferred Shares
Our preferred shares are redeemable by us under certain circumstances. A redemption of preferred shares will be treated under Section 302 of the Internal Revenue Code as a distribution taxable as a dividend (to the extent of our current and accumulated earnings and profits) at ordinary income rates, unless the redemption satisfies one of the tests set forth in Section 302(b) of the Internal Revenue Code and is therefore treated as a sale or exchange of the redeemed shares. The redemption will be treated as a sale or exchange if it (i) is “substantially disproportionate” with respect to the holder, (ii) results in a “complete termination” of the holder's share interest in our company, or (iii) is “not essentially equivalent to a dividend with respect to the holder, all within the meaning of Section 302(b) of the Internal Revenue Code.
In determining whether any of these tests has been met, there must be taken into account not only any preferred shares owned by the holder, but also such holder's ownership of our common shares, other series of preferred shares and any options to acquire any of the foregoing. The holder also must take into account any such securities (including options) which are
Exhibit 99.1
considered to be owned by such holder by reason of the constructive ownership rules set forth in Sections 318 and 302(c) of the Internal Revenue Code. If a particular holder owns (actually or constructively) no common shares or an insubstantial percentage of common shares or preferred shares, based upon current law, it is probable that the redemption of the preferred shares from such holder would be considered “not essentially equivalent to a dividend.” However, because the determination as to whether any of the alternative tests of Section 302(b) of the Internal Revenue Code will be satisfied with respect to any particular holder of preferred shares depends upon the facts and circumstances at the time the determination must be made, prospective holders of preferred shares are advised to consult their own tax advisors to determine such tax treatment.
If a redemption of preferred shares is not treated as a distribution taxable as a dividend to a particular holder, it will be treated as a taxable sale or exchange by that holder. As a result, the holder will recognize gain or loss for federal income tax purposes in an amount equal to the difference between (i) the amount of cash and the fair market value of any property received (less any portion thereof attributable to accumulated and declared but unpaid dividends, which will be taxable as a dividend to the extent of our current and accumulated earnings and profits) and (ii) the holder's adjusted tax basis in the shares. Such gain or loss will be capital gain or loss if the shares were held as a capital asset, and will be long-term gain or loss if such shares were held for more than one year.
If the redemption is treated as a distribution taxable as a dividend, the amount of the distribution will be measured by the amount of cash and the fair market value of any property received by the holder. The holder's adjusted tax basis in the preferred shares redeemed will be transferred to any other shareholdings of the holder in Brandywine. If the holder of the preferred shares owns no other shares, under certain circumstances, such basis may be transferred to a related person, or it may be lost entirely.
Information Reporting and Backup Withholding Applicable to U.S. Shareholders
In general, Brandywine will report to its U.S. Shareholders and the Internal Revenue Service the amount of distributions paid (unless the U.S. Shareholder is an exempt recipient) during each calendar year, and the amount of tax withheld, if any. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 28% with respect to distributions paid unless such shareholder (a) comes within certain exempt categories and, when required, demonstrates this fact, or (b) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A shareholder that does not provide us with his correct taxpayer identification number may also be subject to penalties imposed by the Internal Revenue Service. In addition, we may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status to Brandywine. See “-Taxation of non-U.S. Shareholders.” Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against the shareholder's income tax liability, provided the required information is furnished to the Internal Revenue Service.
Taxation of Tax-Exempt Shareholders
U.S. tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, generally are exempt from U.S. federal income taxation. However, they are subject to taxation on their unrelated business taxable income or UBTI. Distributions by us to a shareholder that is a tax-exempt entity should generally not constitute UBTI, as defined in Section 512(a) of the Code provided that the tax-exempt entity has not financed the acquisition of its shares with “acquisition indebtedness” within the meaning of the Code and the shares are not otherwise used in an unrelated trade or business of the tax-exempt entity. Tax-exempt U.S. Shareholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from U.S. federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, are subject to different UBTI rules, which generally will require them to characterize distributions from us as UBTI.
In certain circumstances, a pension trust (1) that is described in Section 401(a) of the Code, (2) is tax exempt under section 501(a) of the Code, and (3) that owns more than 10% of our shares could be required to treat a percentage of the dividends from us as UBTI if we are a “pension-held REIT.” We will not be a pension-held REIT unless (1) either (A) one pension trust owns more than 25% of the value of our shares, or (B) a group of pension trusts, each individually holding more than 10% of the value of our shares, collectively owns more than 50% of such shares and (2) we would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides that shares owned by such trusts shall be treated, for purposes of the requirement that not more than 50% of the value of the outstanding shares of a REIT is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Code to include certain entities). Certain restrictions on ownership and transfer of our shares should generally prevent a tax-exempt entity from owning more than 10% of the value of our shares, or us from becoming a pension-held REIT.
Exhibit 99.1
Tax-exempt U.S. Shareholders are urged to consult their tax advisor regarding the U.S. federal, state, local and foreign tax consequences of the acquisition, ownership and disposition of our shares.
Taxation of Non-U.S. Shareholders
The rules governing United States federal income taxation of non-U.S. Shareholders are complex and no attempt will be made herein to provide more than a summary of such rules. Prospective non-U.S. Shareholders should consult with their own tax advisors to determine the impact of federal, state and local income and estate tax laws with regard to an investment in our shares, including any reporting requirements.
Ordinary Dividends
The portion of Ordinary Dividends received by non-U.S. Shareholders that are not attributable to gain from sales or exchanges by us of United States real property interests and which are not effectively connected with a U.S. trade or business of the non-U.S. Shareholder will generally be subject to a withholding tax equal to 30% of the gross amount of the distribution unless an applicable tax treaty reduces or eliminates that tax. Under some treaties, however, the lower rates generally applicable to dividends do not apply to dividends from REITs. We intend to withhold United States income tax at the rate of 30% on the gross amount of any such Ordinary Dividends paid to a non-U.S. Shareholder unless (1) a lower treaty rate applies and the non-U.S. Shareholder files a W-8 BEN (or applicable substitute form) claiming the benefits of the lower treaty rate or (2) the non-U.S. Shareholder files an IRS Form W-8 ECI with us claiming that the distribution is effectively connected with a U.S. trade or business.
In general, non-U.S. Shareholders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of our shares. If income from the investment in our shares is treated as effectively connected with the non-U.S. Shareholder's conduct of a United States trade or business, the non-U.S. Shareholder generally will be subject to a tax at graduated rates, in the same manner as U.S. Shareholders are taxed with respect to such distributions (and may also be subject to the 30% branch profits tax in the case of a shareholder that is a foreign corporation).
Non-Dividend Distributions
Unless our shares constitute a U.S. real property interest (“USRPI”), any Non-Dividend Distributions will not be taxable to a shareholder to the extent that such distributions do not exceed the adjusted basis of the shareholder's shares, but rather will reduce the adjusted basis of the shareholder in such shares. To the extent that Non-Dividend Distributions exceed the adjusted basis of a non-U.S. Shareholder's shares, such distributions will give rise to tax liability if the non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale or disposition of its shares, as described below (See -- Taxation of Non-U.S. Shareholders -- Dispositions of our Shares). If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the distributions will be subject to withholding at the same rate as Ordinary Dividends. Because we generally cannot determine at the time we make a distribution whether or not the distribution will exceed our current and accumulated earnings and profits, we normally will withhold tax on the entire amount of any distribution at the same rate as we would withhold on Ordinary Dividends. However, amounts thus withheld are refundable to the non-U.S. Shareholder if it is subsequently determined that such distribution was, in fact, in excess of our current and accumulated earnings and profits.
If our shares constitute a USRPI, as described below (See -- Taxation of Non-U.S. Shareholders -- Dispositions of our Shares), Non-Dividend Distributions by us in excess of the non-U.S. Shareholder's adjusted tax basis in our shares will be taxed under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) at the rate of tax, including any applicable capital gains rates, that would apply to a U.S. Shareholder of the same type (e.g., an individual or a corporation, as the case may be), and the collection of the tax will be enforced by a refundable withholding at a rate of 10% of the Non-Dividend Distribution.
Capital Gain Distributions
Except as discussed below with respect to 5% or less holders of regularly traded classes of shares, distributions that are attributable to gain from sales or exchanges by us of United States real property interests will be taxed to a non-U.S. Shareholder under the provisions of FIRPTA Under FIRPTA, distributions attributable to gain from sales of United States real property interests are taxed to a non-U.S. Shareholder as if such gain were effectively connected with a United States business. Individuals who are non-U.S. Shareholders will be required to report such gain on a U.S. federal income tax return and such gain will be taxed at the normal capital gain rates applicable to U.S. individual shareholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Also, distributions subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign corporate shareholder not entitled to treaty relief.
Exhibit 99.1
Brandywine is required by applicable Treasury Regulations to withhold 35% of any distribution that could be designated by us as a capital gains dividend. The amount is creditable against the non-U.S. Shareholder's U.S. tax liability.
However, distributions attributable to gain from sales or exchanges by us of United States real property interests are treated as ordinary dividends (not subject to the 35% withholding tax under FIRPTA) if the distribution is made to a non-U.S. Shareholder with respect to any class of shares which is “regularly traded” on an established securities market located in the United States and if the non-U.S. Shareholder did not own more than 5% of such class of shares at any time during the taxable year. Such distributions will generally be subject to a 30% U.S. withholding tax (subject to reduction under applicable treaty) and a non-U.S. Shareholder will not be required to report the distribution on a U.S. tax return. In addition, the branch profits tax will not apply to such distributions. See “Taxation of Non-U.S. Shareholders - Ordinary Dividends.”
Dividends Paid in Common Shares
A recent Internal Revenue Service revenue procedure allows us to satisfy the REIT distribution requirements with respect to certain taxable years by distributing up to 90% of our dividends in the form of common shares rather than cash. In the event that we pay a portion of a dividend in common shares, we may be required to withhold U.S. tax with respect to such dividend, including in respect of all or a portion of such dividend that is payable in common shares.
Dispositions of our Shares
Unless our shares constitutes a USRPI, gain recognized by a non-U.S. Shareholder upon a sale of shares generally will not be taxed under FIRPTA. Our shares will not be treated as a USRPI if Brandywine is a “domestically controlled REIT,” defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the shares of beneficial interest was held directly or indirectly by foreign persons. It is currently anticipated that we will be a “domestically controlled REIT,” and therefore the sale of shares by a non-U.S. Shareholder will not be subject to taxation under FIRPTA. However, because the shares may be traded, we cannot be sure that we will continue to be a “domestically controlled REIT.” Further, even if we are a domestically controlled REIT, pursuant to “wash sale” rules under FIRPTA, a non-U.S. Shareholder may incur tax under FIRPTA to the extent such non-U.S. Shareholder disposes of our shares within a certain period prior to a capital gain distribution and directly or indirectly (including through certain affiliates) reacquires our shares within certain prescribed periods.
However, a non-U.S. shareholder will not incur tax under FIRPTA on a sale of common or preferred shares if (1) our preferred shares or common shares is “regularly traded” on an established securities market within the meaning of applicable Treasury regulations and (2) the non-U.S. Shareholder did not actually, or constructively under specified attribution rules under the Code, own more than 5% of our preferred shares or common shares at any time during the shorter of the five-year period preceding the disposition or the holder's holding period.
Even if our common or preferred shares were not regularly traded on an established securities market, a non-U.S. Shareholder would not be subject to taxation under FIRPTA as a sale of a U.S. real property interest if such non-U.S. Shareholder's common or preferred shares had a fair market value on the date of acquisition that was equal to or less than 5% of our regularly traded class of shares with the lowest fair market value. For purposes of this test, if a non-U.S. Shareholder acquired shares of common or preferred shares and subsequently acquired additional shares at a later date, then all such shares would be aggregated and valued as of the date of the subsequent acquisition.
If gain on the sale of our shares is subject to taxation under FIRPTA, the non-U.S. Shareholder will be subject to the same treatment as a U.S. Shareholder with respect to such gain, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals, and the purchaser of the shares could be required to withhold 10% of the purchase price and remit such amount to the Internal Revenue Service. Gain not subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S. Shareholder if (1) investment in the shares is effectively connected with the non-U.S. Shareholder's United States trade or business, in which case the non-U.S. Shareholder will be subject to the same treatment as U.S. Shareholders with respect to such gain or (2) the non-U.S. Shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains.
Information Reporting and Backup Withholding Applicable to non-U.S. Shareholders
We must report annually to the IRS and to each non-U.S. Shareholder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information
Exhibit 99.1
returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. Shareholder resides under the provisions of an applicable income tax treaty.
Payments of dividends or of proceeds from the disposition of stock made to a non-U.S. Shareholder may be subject to information reporting and backup withholding unless such holder establishes an exemption, for example, by properly certifying its non-United States status on an IRS Form W-8 BEN or another appropriate version of IRS Form W-8. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that a non-U.S. Shareholder is a United States person.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against the shareholder's income tax liability, provided the required information is furnished to the Internal Revenue Service.
State, Local and Foreign Tax Consequences
Brandywine, the Operating Partnership, the Subsidiary Partnerships and Brandywine's shareholders may be subject to state, local and foreign taxation in various jurisdictions, including those in which it or they transact business or reside. The state, local and foreign tax treatment of Brandywine, the Operating Partnership, the Subsidiary Partnerships and Brandywine's shareholders may not conform to the federal income tax consequences discussed above. Any foreign taxes incurred by us would not pass through to shareholders as a credit against their U.S. federal income tax liability. Prospective shareholders should consult their own tax advisors regarding the effect of state, local and foreign tax laws on an investment in our shares.
Legislative or Other Actions Affecting REITs
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. No assurance can be given as to whether, when, or in what form, the U.S. federal income tax laws applicable to us and our shareholders may be enacted. Changes to the U.S. federal tax laws and interpretations of U.S. federal tax laws could adversely affect an investment in our shares.
Taxation of Holders of Debt Securities
This section describes the material United States federal income tax consequences of owning the debt securities that Brandywine Realty Trust or Brandywine Operating Partnership may offer. This summary is for general information only and is not tax advice. The tax consequences of owning any particular issue of debt securities will be discussed in the applicable prospectus.
As used herein, a “U.S. Holder” means a beneficial owner of our debt securities, who is, for U.S. federal income tax purposes:
• | a citizen or resident of the U.S. as defined in section 7701(b) of the Code, |
• | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S. or any state thereof or the District of Columbia, |
• | an estate the income of which is subject to U.S. federal income taxation regardless of its source or |
• | a trust if it (a) is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
As used herein, a “non-U.S. Holder” means a beneficial owner of our debt securities that is not a “U.S. Holder,” and that is not a partnership (or other entity treated as a partnership for U.S. federal income tax purposes).
If a partnership holds debt securities, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding debt securities, you should consult your tax advisors.
Taxation of U.S. Holders
Interest
The stated interest on debt securities generally will be taxable to a U.S. Holder as ordinary income at the time that it is paid or accrued, in accordance with the U.S. Holder's method of accounting for United States federal income tax purposes.
Exhibit 99.1
Original Issue Discount
If you own debt securities issued with original issue discount (“OID”), you will be subject to special tax accounting rules, as described in greater detail below. In that case, you should be aware that you generally must include OID in gross income in advance of the receipt of cash attributable to that income. However, you generally will not be required to include separately in income cash payments received on the debt securities, even if denominated as interest, to the extent those payments do not constitute “qualified stated interest,” as defined below. If we determine that a particular debt security will be an OID debt security, we will disclose that determination in the prospectus relating to those debt securities.
A debt security with an “issue price” that is less than the “stated redemption price at maturity” (the sum of all payments to be made on the debt security other than “qualified stated interest”) generally will be issued with OID if that difference is at least 0.25% of the stated redemption price at maturity multiplied by the number of complete years to maturity. The “issue price” of each debt security in a particular offering will be the first price at which a substantial amount of that particular offering is sold to the public. The term “qualified stated interest” means stated interest that is unconditionally payable in cash or in property, other than debt instruments of the issuer, and the interest to be paid meets all of the following conditions:
• | it is payable at least once per year; |
• | it is payable over the entire term of the debt security; and |
• | it is payable at a single fixed rate or, subject to certain conditions, based on one or more interest indices. |
If we determine that particular debt securities of a series will bear interest that is not qualified stated interest, we will disclose that determination in the prospectus relating to those debt securities.
If you own a debt security issued with “de minimis” OID, which is discount that is not OID because it is less than 0.25% of the stated redemption price at maturity multiplied by the number of complete years to maturity, you generally must include the de minimis OID in income at the time principal payments on the debt securities are made in proportion to the amount paid. Any amount of de minimis OID that you have included in income will be treated as capital gain.
Certain of the debt securities may contain provisions permitting them to be redeemed prior to their stated maturity at our option and/or at your option. OID debt securities containing those features may be subject to rules that differ from the general rules discussed herein. If you are considering the purchase of OID debt securities with those features, you should carefully examine the applicable prospectus and should consult your own tax advisors with respect to those features since the tax consequences to you with respect to OID will depend, in part, on the particular terms and features of the debt securities.
If you own OID debt securities with a maturity upon issuance of more than one year you generally must include OID in income in advance of the receipt of some or all of the related cash payments using the “constant yield method” described in the following paragraphs. This method takes into account the compounding of interest.
The amount of OID that you must include in income if you are the initial United States holder of an OID debt security is the sum of the “daily portions” of OID with respect to the debt security for each day during the taxable year or portion of the taxable year in which you held that debt security (“accrued OID”). The daily portion is determined by allocating to each day in any “accrual period” a pro rata portion of the OID allocable to that accrual period. The “accrual period” for an OID debt security may be of any length and may vary in length over the term of the debt security, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs on the first day or the final day of an accrual period. The amount of OID allocable to any accrual period is an amount equal to the excess, if any, of:
• | the debt security's “adjusted issue price” at the beginning of the accrual period multiplied by its yield to maturity, determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period, over |
• | the aggregate of all qualified stated interest allocable to the accrual period. |
OID allocable to a final accrual period is the difference between the amount payable at maturity, other than a payment of qualified stated interest, and the adjusted issue price at the beginning of the final accrual period. Special rules will apply for calculating OID for an initial short accrual period. The “adjusted issue price” of a debt security at the beginning of any accrual period is equal to its issue price increased by the accrued OID for each prior accrual period, determined without regard to the amortization of any acquisition or bond premium, as described below, and reduced by any payments made on the debt security (other than qualified stated interest) on or before the first day of the accrual period. Under these rules, you will generally have to include in income increasingly greater amounts of OID in successive accrual periods. We are required to provide information returns stating the amount of OID accrued on debt securities held of record by persons other than corporations and other exempt holders.
Exhibit 99.1
Floating rate debt securities are subject to special OID rules. In the case of an OID debt security that is a floating rate debt security, both the “yield to maturity” and “qualified stated interest” will be determined solely for purposes of calculating the accrual of OID as though the debt security will bear interest in all periods at a fixed rate generally equal to the rate that would be applicable to interest payments on the debt security on its date of issue or, in the case of certain floating rate debt securities, the rate that reflects the yield to maturity that is reasonably expected for the debt security. Additional rules may apply if either:
• | the interest on a floating rate debt security is based on more than one interest index; or |
• | the principal amount of the debt security is indexed in any manner. |
This discussion does not address the tax rules applicable to debt securities with an indexed principal amount. If you are considering the purchase of floating rate OID debt securities or securities with indexed principal amounts, you should carefully examine the prospectus relating to those debt securities, and should consult your own tax advisors regarding the United States federal income tax consequences to you of holding and disposing of those debt securities.
You may elect to treat all interest on any debt securities as OID and calculate the amount includible in gross income under the constant yield method described above. For purposes of this election, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. You must make this election for the taxable year in which you acquired the debt security, and you may not revoke the election without the consent of the Internal Revenue Service (the “IRS”). You should consult with your own tax advisors about this election.
Market Discount
If you purchase debt securities, other than OID debt securities, for an amount that is less than their stated redemption price at maturity, or, in the case of OID debt securities, their adjusted issue price, the amount of the difference will be treated as “market discount” for United States federal income tax purposes, unless that difference is less than a specified de minimis amount. Under the market discount rules, you will be required to treat any principal payment on, or any gain on the sale, exchange, retirement or other disposition of, the debt securities as ordinary income to the extent of the market discount that you have not previously included in income and are treated as having accrued on the debt securities at the time of their payment or disposition. In addition, you may be required to defer, until the maturity of the debt securities or their earlier disposition in a taxable transaction, the deduction of all or a portion of the interest expense on any indebtedness attributable to the debt securities. You may elect, on a debt security-by-debt security basis, to deduct the deferred interest expense in a tax year prior to the year of disposition. You should consult your own tax advisors before making this election.
Any market discount will be considered to accrue ratably during the period from the date of acquisition to the maturity date of the debt securities, unless you elect to accrue on a constant interest method. You may elect to include market discount in income currently as it accrues, on either a ratable or constant interest method, in which case the rule described above regarding deferral of interest deductions will not apply. Your election to include market discount in income currently, once made, applies to all market discount obligations acquired by you on or after the first taxable year to which your election applies and may not be revoked without the consent of the IRS. You should consult your own tax advisor before making this election.
Acquisition Premium and Amortizable Bond Premium
If you purchase OID debt securities for an amount that is greater than their adjusted issue price but equal to or less than the sum of all amounts payable on the debt securities after the purchase date other than payments of qualified stated interest, you will be considered to have purchased those debt securities at an “acquisition premium.” Under the acquisition premium rules, the amount of OID that you must include in gross income with respect to those debt securities for any taxable year will be reduced by the portion of the acquisition premium properly allocable to that year.
If you purchase debt securities (including OID debt securities) for an amount in excess of the sum of all amounts payable on those debt securities after the purchase date other than qualified stated interest, you will be considered to have purchased those debt securities at a “premium” and, if they are OID debt securities, you will not be required to include any OID in income. You generally may elect to amortize the premium over the remaining term of those debt securities on a constant yield method as an offset to interest when includible in income under your regular accounting method. In the case of debt securities that provide for alternative payment schedules, bond premium is calculated by assuming that (a) you will exercise or not exercise options in a manner that maximizes your yield, and (b) we will exercise or not exercise options in a manner that minimizes your yield (except that we will be assumed to exercise call options in a manner that maximizes your yield). If you do not elect to amortize bond premium, that premium will decrease the gain or increase the loss you would otherwise recognize on disposition of the debt security. Your election to amortize premium on a constant yield method will also apply to all debt
Exhibit 99.1
obligations held or subsequently acquired by you on or after the first day of the first taxable year to which the election applies. You may not revoke the election without the consent of the IRS. You should consult your own tax advisor before making this election.
Sale, Exchange and Retirement of Debt Securities
A U.S. Holder of debt securities will recognize gain or loss upon the sale, exchange, retirement, redemption or other taxable disposition of such debt securities in an amount equal to the difference between:
• | the amount of cash and the fair market value of other property received in exchange for such debt securities, other than amounts attributable to accrued but unpaid stated interest, which will be subject to tax as ordinary income to the extent not previously included in income; and |
• | the U.S. Holder's adjusted tax basis in such debt securities. |
A U.S. Holder's adjusted tax basis in a debt security generally will equal the cost of the debt security to such holder (A) increased by the amount of OID or accrued market discount (if any) previously included in income by such holder and (B) decreased by the amount of any payments other than qualified stated interest payments and any amortizable bond premium taken by the holder.
Any gain or loss recognized will generally be capital gain or loss, and such capital gain or loss will generally be long-term capital gain or loss if the debt security has been held by the U.S. Holder for more than one year. Long-term capital gain for non-corporate taxpayers is subject to reduced rates of United States federal income taxation (20% maximum federal rate). The deductibility of capital losses is subject to certain limitations.
If a U.S. Holder recognizes a loss upon a subsequent disposition of our debt securities in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury Regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss generating transactions to the IRS. While these regulations are directed towards “tax shelters,” they are written broadly, and apply to transactions that would not typically be considered tax shelters. Significant penalties apply for failure to comply with these requirements. You should consult your tax advisors concerning any possible disclosure obligation with respect to the receipt or disposition of our debt securities, or transactions that might be undertaken directly or indirectly by us. Moreover, you should be aware that we and other participants in transactions involving us (including our advisors) might be subject to disclosure or other requirements pursuant to these regulations.
Taxation of Tax-Exempt Holders of Debt Securities
Assuming the debt security is debt for tax purposes, interest income accrued on the debt security should not constitute unrelated business taxable income to a tax-exempt holder. As a result, a tax-exempt holder generally should not be subject to U.S. federal income tax on the interest income accruing on our debt securities. Similarly, any gain recognized by the tax-exempt holder in connection with a sale of the debt security generally should not be unrelated business taxable income. However, if a tax-exempt holder were to finance its acquisition of the debt security with debt, a portion of the interest income and gain attributable to the debt security would constitute unrelated business taxable income pursuant to the “debt-financed property” rules. Tax-exempt holders should consult their own counsel to determine the potential tax consequences of an investment in our debt securities.
Taxation of Non-U.S. Holders of Debt Securities
The rules governing the U.S. federal income taxation of a Non-U.S. Holder are complex and no attempt will be made herein to provide more than a summary of such rules. Non-U.S. Holders should consult their tax advisors to determine the effect of U.S. federal, state, local and foreign tax laws, as well as tax treaties, with regard to an investment in the debt securities.
Interest
Interest (including OID) paid to a non-U.S. Holder of debt securities will not be subject to United States federal withholding tax under the “portfolio interest exception,” provided that:
• | interest paid on debt securities is not effectively connected with a non-U.S. Holder's conduct of a trade or business in the United States; |
Exhibit 99.1
• | the non-U.S. Holder does not actually or constructively own 10% or more of the capital or profits interest in the Operating Partnership (in the case of debt issued by the Operating Partnership), or 10% or more of the shares of Brandywine (in the case of debt issued by Brandywine); |
• | the non-U.S. Holder is not |
◦ | a controlled foreign corporation that is related to the Operating Partnership or Brandywine, as applicable, or |
◦ | a bank that receives such interest on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business; and |
• | the beneficial owner of debt securities provides a certification, which is generally made on an IRS Form W-8BEN or a suitable substitute form and signed under penalties of perjury, that it is not a United States person. |
A payment of interest (including OID) to a non-U.S. Holder that does not qualify for the portfolio interest exception and that is not effectively connected to a United States trade or business will be subject to United States federal withholding tax at a rate of 30%, unless a United States income tax treaty applies to reduce or eliminate withholding.
A non-U.S. Holder will generally be subject to tax in the same manner as a U.S. Holder with respect to payments of interest (including OID) if such payments are effectively connected with the conduct of a trade or business by the non-U.S. Holder in the United States and, if an applicable tax treaty provides, such gain is attributable to a United States permanent establishment maintained by the non-U.S. Holder. In some circumstances, such effectively connected income received by a non-U.S. Holder which is a corporation may be subject to an additional “branch profits tax” at a 30% base rate or, if applicable, a lower treaty rate.
To claim the benefit of a lower treaty rate or to claim exemption from withholding because the income is effectively connected with a United States trade or business, the non-U.S. Holder must provide a properly executed IRS Form W-8BEN or IRS Form W-8ECI, or a suitable substitute form, as applicable, prior to the payment of interest. Such certificate must contain, among other information, the name and address of the non-U.S. Holder.
Non-U.S. Holders are urged to consult their own tax advisors regarding applicable income tax treaties, which may provide different rules.
Sale or Retirement of Debt Securities
A non-U.S. Holder generally will not be subject to United States federal income tax or withholding tax on gain realized on the sale, exchange or redemption of debt securities unless:
• | the non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange or redemption, and certain other conditions are met; or |
• | the gain is effectively connected with the conduct of a trade or business of the non-U.S. Holder in the United States and, if an applicable tax treaty so provides, such gain is attributable to a United States permanent establishment maintained by such holder. |
Except to the extent that an applicable tax treaty provides otherwise, a non-U.S. Holder will generally be subject to tax in the same manner as a U.S. Holder with respect to gain realized on the sale, exchange or redemption of debt securities if such gain is effectively connected with the conduct of a trade or business by the non-U.S. Holder in the United States and, if an applicable tax treaty provides, such gain is attributable to a United States permanent establishment maintained by the non-U.S. Holder. In certain circumstances, a non-U.S. Holder that is a corporation will be subject to an additional “branch profits tax” at a 30% rate or, if applicable, a lower treaty rate on such income.
U.S. Federal Estate Tax
Your estate will not be subject to U.S. federal estate tax on the debt securities beneficially owned by you at the time of your death, provided that any payment to you on the debt securities, including OID, would be eligible for exemption from the 30% U.S. federal withholding tax under the “portfolio interest” rule described above, without regard to the certification requirement.
Exhibit 99.1
Information Reporting and Backup Withholding Applicable to Holders of Debt Securities
U.S. Holders
Certain U.S. Holders may be subject to information reporting requirements on payments of principal and interest (including OID) on debt securities and payments of the proceeds of the sale, exchange, or redemption of debt securities, and backup withholding, currently imposed at a rate of 28%, may apply to such payment if the U.S. Holder:
• | fails to furnish an accurate taxpayer identification number, or TIN, to the payor in the manner required; |
• | is notified by the IRS that it has failed to properly report payments of interest or dividends; or |
• | under certain circumstances, fails to certify, under penalties of perjury, that it has furnished a correct TIN and that it has not been notified by the IRS that it is subject to backup withholding. |
Non-U.S. Holders
A non-U.S. Holder is generally not subject to backup withholding with respect to payments of interest (including OID) on debt securities if it certifies as to its status as a non-U.S. Holder under penalties of perjury or if it otherwise establishes an exemption, provided that neither we nor our paying agent has actual knowledge or reason to know that the non-U.S. Holder is a United States person or that the conditions of any other exemptions are not, in fact, satisfied. Information reporting requirements, however, will apply to payments of interest (including OID) to non-U.S. Holders where such interest is subject to withholding or exempt from United States withholding tax pursuant to a tax treaty. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the non-U.S. Holder resides.
The payment of the proceeds from the disposition of debt securities to or through the United States office of any broker, United States or foreign, will be subject to information reporting and possible backup withholding unless the owner certifies as to its non-United States status under penalties of perjury or otherwise establishes an exemption, provided that the broker does not have actual knowledge or reason to know that the non-U.S. Holder is a United States person or that the conditions of any other exemption are not, in fact, satisfied.
The payment of the proceeds from the disposition of debt securities to or through a non-United States office of a non-United States broker that is not a “United States related person” generally will not be subject to information reporting or backup withholding. For this purpose, a “United States related person” is:
a controlled foreign corporation for United States federal income tax purposes;
a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment, or for such part of the period that the broker has been in existence, is derived from activities that are effectively connected with the conduct of a United States trade or business; or
a foreign partnership that at any time during the partnership's taxable year is either engaged in the conduct of a trade or business in the United States or of which 50% or more of its income or capital interests are held by United States persons.
In the case of the payment of proceeds from the disposition of debt securities to or through a non-United States office of a broker that is either a United States person or a United States related person, the payment may be subject to information reporting unless the broker has documentary evidence in its files that the owner is a non-U.S. Holder and the broker has no knowledge or reason to know to the contrary. Backup withholding will not apply to payments made through foreign offices of a broker that is a United States person or a United States related person, absent actual knowledge that the payee is a United States person.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Holder will be allowed as a refund or a credit against such Holder's United States federal income tax liability, provided that the requisite procedures are followed.
Exhibit 99.1
Holders of debt securities are urged to consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption, if applicable.
FATCA Withholding
U.S. tax legislation ("FATCA") enacted in 2010 and subsequent guidance provides that a 30% withholding tax will be imposed on payments of dividends on shares and interest on debt securities made after December 31, 2013 and payments of gross proceeds from the sale, exchange or other disposition of shares or debt securities made after December 31, 2016 to a foreign entity if such entity fails to satisfy certain new disclosure and reporting rules. In general, these new disclosure and reporting rules require that (i) in the case of a foreign financial entity, the entity identify and provide information in respect of financial accounts with such entity held (directly or indirectly) by U.S. persons and U.S.-owned foreign entities, and (ii) in the case of a non-financial foreign entity, the entity identify and provide information in respect of substantial U.S. owners of such entity. Additionally, various requirements and exceptions are provided under FATCA and additional or different requirements and exceptions may be provided in subsequent guidance. Prospective investors should consult their tax advisors regarding the possible implications of this legislation on their investment in common shares or preferred shares of Brandywine or debt securities of the Operating Partnership.
Medicare Tax on Investment Income
On March 30, 2010, the President signed into law the Health Care and Reconciliation Act of 2010 (the “Reconciliation Act”). The Reconciliation Act will require certain U.S. Shareholders and U.S. Holders who are individuals, estates or trusts and whose income exceeds certain thresholds to pay a 3.8% Medicare tax on “net investment income” which includes, among other things, dividends on shares, interest on debentures and capital gains from the sale or other disposition of shares or debentures, subject to certain exceptions. This tax will applies for taxable years beginning after December 31, 2012. Prosepective investors should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of our common shares, preferred shares or debentures.