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| BDN > SEC Filings for BDN > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
• our failure to re-lease occupied space upon expiration of leases;
• the bankruptcy of major tenants;
• changes in prevailing interest rates;
• the impact of unrealized hedging transactions;
• the unavailability of equity and debt financing;
• unanticipated costs associated with the acquisition, integration and operation of our acquisitions;
• unanticipated costs to complete, lease-up and operate our developments and redevelopments;
• impairment charges;
• increased costs for, or lack of availability of, adequate insurance, including for terrorist acts;
• risks associated with actual or threatened terrorist attacks;
• demand for tenant services beyond those traditionally provided by landlords;
• potential liability under environmental or other laws;
• earthquakes and other natural disasters;
• risks associated with state and local tax audits;
• complex regulations relating to our status as a REIT and the adverse consequences of our failure to qualify as a REIT;
• changes in local real estate conditions (including changes in rental rates and the number of competing properties);
• changes in the economic conditions affecting industries in which our principal tenants compete;
• changes in general economic conditions;
• the impact of newly adopted accounting principles on our accounting policies and on period-to-period comparisons of financial results and the other risks identified in the "Risk Factors" section and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2007.
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 except as required by law.
The discussion that follows is based primarily on our consolidated financial
statements as of June 30, 2008 and December 31, 2007 and for the three- and
six-months ended June 30, 2008 and 2007 and should be read along with the
consolidated financial statements and related notes appearing elsewhere in this
report. The ability to compare one period to another may be significantly
affected by acquisitions completed, development properties placed in service and
dispositions made during those periods.
OVERVIEW
As of June 30, 2008, our portfolio consisted of 211 office properties, 22
industrial facilities and one mixed-use property that contain an aggregate of
approximately 23.3 million net rentable square feet. In addition, we consolidate
three office properties owned by real estate ventures containing 0.4 million net
rentable square feet. These 237 properties make up our core portfolio. We also
had six properties under development and six properties under redevelopment
containing an aggregate 3.2 million net rentable square feet. As of June 30,
2008, the Company owned
three office properties, one property under redevelopment and one property under
development containing an aggregate of approximately 1.7 million net rentable
square feet designated as held for sale assets. Therefore, as of June 30, 2008,
we consolidated 254 properties with an aggregate of 28.6 million net rentable
square feet. As of June 30, 2008, we also held economic interests in 14
unconsolidated real estate ventures (the "Real Estate Ventures") that we formed
with third parties to develop or own commercial properties. The properties owned
by these Real Estate Ventures contain approximately 4.4 million net rentable
square feet.
As of June 30, 2008 we managed our portfolio within seven geographic segments:
(1) Pennsylvania, (2) New Jersey/Delaware, (3) Richmond, Virginia,
(4) California-North, (5) California-South, (6) Metropolitan Washington, D.C.
and (7) Southwest. The Pennsylvania segment includes properties in Chester,
Delaware, Bucks, Lehigh and Montgomery counties in the Philadelphia suburbs and
the City of Philadelphia in Pennsylvania. The New Jersey/Delaware segment
includes properties in counties in the southern and central part of New Jersey
including Burlington, Camden and Mercer counties and the state of Delaware. The
Richmond, Virginia segment includes properties primarily in Chesterfield and
Henrico counties, the City of Richmond and Durham, North Carolina. The
California-North segment includes properties in the City of Oakland and Concord.
The California-South segment includes properties in the City of Carlsbad and
Rancho Bernardo. The Metropolitan Washington, D.C. segment includes properties
in Northern Virginia and suburban Maryland. The Southwest segment includes
properties in Travis county of Texas.
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.
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.
We seek revenue growth at our portfolio through an increase in occupancy and
rental rates. Occupancy at our core portfolio at June 30, 2008 was 92.9%. Our
overall occupancy at June 30, 2008, including our 12 properties under
development or redevelopment, was 84.7%.
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 risk that tenant leases, upon expiration, are not renewed,
that space may not be relet, or 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 5.1% of our aggregate
annualized base rents as of June 30, 2008 (representing approximately 4.7% of
the net rentable square feet of the Properties) expire without penalty through
the end of 2008. We maintain an active dialogue with our tenants in an effort to
achieve a high level of lease renewals. Our retention rate for leases that were
scheduled to expire in the six-month period ended June 30, 2008 was 75.4%. If we
were unable to renew leases for a substantial portion of the space under
expiring leases, or to promptly relet this space, at anticipated rental rates,
our cash flow would be adversely impacted.
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 allowance for accounts
receivable in light of our tenant base and general and local economic
conditions. Our accounts receivable allowances were $12.3 million or 10.7% of
total receivables (including accrued rent receivable) as of June 30, 2008
compared to $10.2 million or 9.2% of total receivables (including accrued rent
receivable) as of December 31, 2007.
Development Risk:
As of June 30, 2008, we had in development or redevelopment 12 sites aggregating
approximately 3.2 million square feet. We estimate the total cost of these
projects to be $637.3 million and we had incurred $367.1 million of these costs
as of June 30, 2008. We are actively marketing space at these projects to
prospective tenants but can provide no assurance as to the timing or terms of
any leases of space at these projects. As of June 30, 2008, we had entered into
leases covering 74.6% of the net rentable square feet at these projects. As of
June 30, 2008, we owned approximately 414 acres of undeveloped land. Risks
associated with development of this land include construction cost increases or
overruns and construction delays, insufficient occupancy rates, building
moratoriums and inability to obtain zoning, land-use, building, occupancy and
other required governmental approvals.
RECENT ACQUISITIONS AND DISPOSITIONS
During the six-month period ended June 30, 2008, we sold three properties,
containing an aggregate of 0.3 million net rentable square feet and one land
parcel containing 3.24 acres. Specifically:
- On January 14, 2008, we sold 7130 Ambassador Drive, an office property located
in Allentown, Pennsylvania containing 114,049 net rentable square feet, for a
sales price of $5.8 million.
- On February 14, 2008, we sold a parcel of land located in Henrico, Virginia
containing 3.24 acres, for a sales price of $0.4 million.
- On February 29, 2008, we sold 1400 Howard Boulevard, an office property
located in Mount Laurel, New Jersey containing 75,590 net rentable square feet,
for a sales price of $22.0 million.
- On April 25, 2008, we sold 100 Brandywine Boulevard, an office property
located in Newtown, Pennsylvania containing 102,000 net rentable square feet,
for a sales price of $28.0 million.
- On June 27, 2008, we entered into an agreement to sell five properties,
totaling approximately 1.7 million net rentable square feet in Oakland,
California for an aggregate sales price of $412.5 million (including debt
assumption). These five properties are designated as held for sale at June 30,
2008 and we expect to complete this sale in the third quarter. As noted in the
Results of Operations below we incurred an impairment charge of $6.85 million
upon entering into the agreement of sale.
We continually reassess our portfolio to determine properties that may be in our
best interest to sell depending on strategic or economic factors. From time to
time, the decision to sell properties in the short term could result in an
impairment or other loss being taken by the Company and such losses could be
material in the statement of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements 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 the disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. 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 accounting policies are reasonably likely to
occur from period to period. Management bases its estimates and assumptions on
historical experience and current economic conditions. On an on-going basis,
management evaluates its estimates and assumptions including those related to
revenue, impairment of long-lived assets and the allowance for doubtful
accounts. Actual results may differ from those estimates and assumptions.
Our Annual Report on Form 10-K for the year ended December 31, 2007 contains a
discussion of our critical accounting policies. There have been no significant
changes in our critical accounting policies since December 31, 2007. See also
Note 2 in our unaudited consolidated financial statements for the three-month
period ended June 30, 2008 set forth herein. Management discusses our critical
accounting policies and management's judgments and estimates with our Audit
Committee.
RESULTS OF OPERATIONS
Comparison of the Three-Month Periods Ended June 30, 2008 and 2007
The table below shows selected operating information for the "Same Store
Property Portfolio" and the "Total Portfolio." The Same Store Property Portfolio
consists of 225 properties containing an aggregate of approximately 21.9 million
net rentable square feet that we owned for the entire three-month periods ended
June 30, 2008 and 2007. 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 three-month periods ended June 30, 2008 and 2007) 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 three-month periods ended
June 30, 2008 and 2007 (in thousands).
We have a significant continuing involvement in the G&I Interchange Office LLC
joint venture through our 20% ownership interest and the management and leasing
services we provide for the venture. Accordingly, under EITF 03-13, "Applying
the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether
to Report Discontinued Operations", we have determined that the operations of
the properties owned by the joint venture (the "G&I properties") should not be
included in discontinued operations. This determination is reflected in the
income statement comparisons below as we recognized revenue and expenses during
the second quarter of 2007 for our 100% ownership interest and such information
related to the G&I properties is included in the Other (Eliminations) column.
The Total Portfolio net income presented in the table is equal to the net income
of Brandywine Realty Trust. The only difference between the reported net income
of Brandywine Realty Trust and Brandywine Operating Partnership is the
allocation of the minority interest attributable to continuing and discontinued
operations for limited partnership units that is on the statement of operations
for Brandywine Realty Trust.
Comparison of three-months ended June 30, 2008 to the three-months ended
June 30, 2007
Acquired/Completed Development/Redevelopment Other
Same Store Property Portfolio Properties Properties (a) (Eliminations) (b) Total Portfolio
Increase/ Increase/
(dollars in thousands) 2008 2007 (Decrease) 2008 2007 2008 2007 2008 2007 2008 2007 (Decrease)
Revenue:
Cash rents $ 107,304 $ 105,767 $ 1,537 $ 9,612 $ 4,911 $ 3,273 $ 1,990 $ (550 ) $ 5,207 $ 119,639 $ 117,875 $ 1,764
Straight-line rents 3,264 4,242 (978 ) 1,034 1,087 82 45 - 348 4,380 5,722 (1,342 )
Rents - FAS 141 1,637 2,109 (472 ) (31 ) (113 ) 426 67 - - 2,032 2,063 (31 )
Total rents 112,205 112,118 87 10,615 5,885 3,781 2,102 (550 ) 5,555 126,051 125,660 391
Tenant reimbursements 18,919 17,454 1,465 927 645 939 440 74 880 20,859 19,419 1,440
Termination fees 792 1,123 (331 ) 100 - - - - (625 ) 892 498 394
Third party management
fees, labor
reimbursement and
leasing - - - - - - - 5,170 5,369 5,170 5,369 (199 )
Other 347 652 (305 ) 43 9 12 (6 ) 413 619 815 1,274 (459 )
Total revenue 132,263 131,347 916 11,685 6,539 4,732 2,536 5,107 11,798 153,787 152,220 1,567
Property operating
expenses 38,135 36,745 1,390 3,188 2,181 1,607 1,331 (1,648 ) 1,023 41,282 41,280 2
Real estate taxes 13,382 13,089 293 1,295 800 761 390 143 935 15,581 15,214 367
Management expenses - - - - - - - 2,381 2,496 2,381 2,496 (115 )
Subtotal 80,746 81,513 (767 ) 7,202 3,558 2,364 815 4,231 7,344 94,543 93,230 1,313
General & administrative
expenses - - - - - - - 6,127 7,007 6,127 7,007 (880 )
Depreciation and
amortization 44,766 45,885 (1,119 ) 5,104 2,907 1,661 1,237 941 3,513 52,472 53,542 (1,070 )
Operating Income (loss) $ 35,980 $ 35,628 $ 352 $ 2,098 $ 651 $ 703 $ (422 ) $ (2,837 ) $ (3,176 ) $ 35,944 $ 32,681 $ 3,263
Number of properties 225 12 12 249
Square feet 21,917 1,762 3,207 26,886
Other Income (Expense):
Interest income 179 1,597 (1,418 )
Interest expense (35,709 ) (39,423 ) 3,714
Interest expense -
Deferred financing costs (1,198 ) (1,065 ) (133 )
Equity in income of real
estate ventures 1,664 4,504 (2,840 )
Gain on early
extinguishment of debt 986 - 986
Income (loss) before
minority interest 1,866 (1,706 ) 3,572
Minority interest -
partners' share of
consolidated real
estate ventures (38 ) 8 (46 )
Minority interest
attributable to
continuing operations -
LP units 16 158 (142 )
Income (loss) from
continuing operations 1,844 (1,540 ) 3,384
Income from discontinued
operations 7,524 2,729 4,795
Net Income $ 9,368 $ 1,189 $ 8,179
Earnings per common
share $ 0.08 $ (0.01 ) $ 0.09
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EXPLANATORY NOTES
(a) - Results include: six developments and six redevelopment properties.
(b) - 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. Also included are revenues and expenses from the29 DRA properties.
Total Revenue
Cash rents from the Total Portfolio increased by $1.8 million from second
quarter 2007 to second quarter 2008, primarily reflecting:
1) An additional $1.5 million at the Same Store Portfolio from increased
occupancy, increased rents received on lease renewals and free rent periods
converting to cash rent subsequent to the second quarter of 2007. This free
rent conversion is the primary reason for the decrease in Total Portfolio
straight-line rental income.
2) An additional $4.7 million from six properties that we acquired and six development/redevelopment properties that we completed and placed in service subsequent to the second quarter of 2007.
3) An additional $1.3 million of rental income due to increased occupancy at 12 development/redevelopment properties in the second quarter of 2008 in comparison to 2007.
4) The increase was offset by the decrease of $5.7 million of rental income earned from our G&I properties in the second quarter of 2007.
Tenant reimbursements at the Same Store Portfolio increased by $1.4 million as a
result of increased operating expenses of $1.8 million in the second quarter of
2008 in comparison to 2007.
Property Operating Expenses
Property operating expenses, including real estate taxes and management fees, at
the Total Portfolio increased by $0.3 million from second quarter 2007 to second
quarter 2008, primarily due to $2.9 million of such expenses for G&I properties
in the second quarter of 2007. The decrease was offset by an increase of
$1.6 million in our Same Store Portfolio and $1.4 million from six properties we
acquired and six development/redevelopment properties that we completed and
placed in service subsequent to the second quarter of 2007.
Depreciation and Amortization Expense
Depreciation and amortization decreased by $1.1 million from second quarter 2007
to second quarter 2008, primarily due to $2.7 million of depreciation and
amortization expense recorded on the G&I properties during the second quarter of
2007. The decrease was offset by an increase in depreciation and amortization
from six properties that we acquired and six development/redevelopment
properties that we completed and placed in service subsequent to the second
quarter of 2007.
General & Administrative Expenses
General & administrative expenses decreased by approximately $0.9 million from
second quarter 2007 to second quarter 2008, primarily as a result of a reduction
in overhead costs from a Company re-organization that occurred subsequent to the
second quarter of 2007.
Interest Income/ Expense
The decrease in interest income by approximately $1.4 million is due to lower
cash balances during the second quarter of 2008.
Interest expense decreased by $3.7 million primarily due to lower mortgage notes
payable outstanding at June 30, 2008 in comparison to June 30, 2007 as a result
of certain mortgage notes payable being paid off subsequent to the second
quarter of 2007. The decrease is also the result of a lower weighted average
interest rate on Credit Facility borrowings in the second quarter of 2008.
Gain on early extinguishment of debt
During the second quarter of 2008, we repurchased $7.0 million of our
. . .
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