Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
BDN > SEC Filings for BDN > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for BRANDYWINE REALTY TRUST

Form 10-Q for BRANDYWINE REALTY TRUST


1-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Quarterly Report on Form 10-Q and other materials filed by us with 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 losses;

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 the terms of their financing agreements to us;

earthquakes, floodings 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;

complex regulations relating to our status as a REIT and the adverse consequences of the Parent Company's 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 of our 2012 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.
The discussion that follows is based primarily on our consolidated financial statements as of September 30, 2013 and December 31, 2012 and for the three and nine-month periods ended September 30, 2013 and 2012 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 September 30, 2013, our 210 property portfolio consisted of 182 office properties (one of which is held-for-sale), 19 industrial facilities, five mixed-use properties (205 core properties), one development property, two redevelopment properties and one re-entitlement property that contain an aggregate of approximately 24.1 million net rentable square feet. As of September 30, 2013, we also held economic interests in 18 unconsolidated 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 6.2 million net rentable square feet.
As of September 30, 2013, we managed our portfolio within seven geographic segments: (1) Pennsylvania, (2) Philadelphia 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 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, and Carlsbad, California. We generate cash and revenue from leases of space at our properties, from investments in Real Estate Ventures and, to a lesser extent, from the management of properties owned by third parties. 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. Challenging economic conditions could result in a reduction of the availability of financing and potentially in higher borrowing costs. These factors, coupled with ongoing economic recovery, have reduced the volume of real estate transactions and created credit stresses on most businesses. Vacancy rates may increase through the remainder of 2013 and possibly beyond as the current economic climate continues to negatively impact tenants.


We expect that the impact of the current state of the economy, including continued high unemployment and the continued volatility in the financial and credit markets, could continue to have a dampening effect on the fundamentals of our business, including potential 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 September 30, 2013 was 88.3%.
The table below summarizes the key operating and leasing statistics of our wholly owned operating properties for the three and nine months ended September 30, 2013:

                                                  Three-month period       Nine-month period
                                                         ended                   ended
                                                     September 30,           September 30,
                                                         2013                    2013
Leasing Activity:
Core portfolio net rentable square feet owned
(1)                                                     23,334,037              23,334,037
Occupancy percentage (end of period)                          88.3 %                  88.3 %
Average occupancy percentage                                  88.1 %                  88.1 %
New leases and expansions commenced (square
feet)                                                      447,698               1,227,902
Leases renewed (square feet)                               384,691               1,191,804
Net absorption (square feet) (2)                            49,290                 (54,434 )
Percentage change in rental rates per square
feet (3):
New and expansion rental rates                                 9.3 %                  10.5 %
Renewal rental rates                                           9.5 %                   9.6 %
Combined rental rates                                          9.4 %                   9.9 %
Capital Costs Committed (4):
Leasing commissions (per square feet)            $            4.08       $            3.77
Tenant Improvements (per square feet)            $            9.04       $            8.85

(1) Includes all properties in the core portfolio (i.e. not under development or redevelopment or a re-entitlement property), including properties that were sold during these periods.

(2) Includes leasing related to completed developments and redevelopments, as well as properties sold during the nine-month period ended September 30, 2013.

(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 risk that tenant leases, upon expiration, will not be 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 1.1% of our aggregate final annualized base rents as of September 30, 2013 (representing approximately 1.3% of the net rentable square feet of the Properties) expire without penalty in the remainder of 2013. As of September 30, 2013, the annualized rent per square foot of these expiring leases amounted to $22.03, and although we can provide no assurance, we currently expect that the annualized market rent per square foot will increase by 6% to 8% through a combination of new leases and renewals throughout the year. We maintain an active dialogue with our tenants in an effort to maximize lease renewals. During the nine months ended September 30, 2013, we achieved a 63.1% retention rate in our core portfolio. 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.


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 $16.7 million or 10.5% of total receivables (including accrued rent receivables) as of September 30, 2013 compared to $16.6 million or 10.9% of total receivables (including accrued rent receivables) as of December 31, 2012.
If economic conditions deteriorate, 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 September 30, 2013, we owned approximately 423 acres of undeveloped land, and held options to purchase approximately 51 additional acres of undeveloped land. As market conditions warrant, we will seek to opportunistically dispose of those parcels that we do not anticipate developing. For parcels of land that we ultimately develop, we will be subject to risks and costs associated with land development, including building moratoriums and the 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. As of September 30, 2013, the total potential development that these land parcels could support amounted to 6.1 million square feet.
We are a party to a development agreement and related ground leases covering two adjacent parcels of land. As described below under "Recent Property Transactions
- evo at Cira Centre South Venture" and in Note 4 above, on January 25, 2013, we contributed our development rights in one of the land parcels to the evo at Cira Centre South Venture, and during the three months ended March 31, 2013 the evo at Cira Centre South Venture commenced construction of a student housing tower. As to the other parcel, we have the right, on terms and conditions in the development agreement and applicable ground lease, to commence development of such other parcel by December 31, 2015. On October 31, 2013 the Operating Partnership determined to proceed with development of the Cira Walnut Tower ("Cira Walnut"), which it contemplates as a 47-story office and residential tower at 30th and Walnut Streets in Philadelphia on a site ground leased from the University of Pennsylvania. The Operating Partnership expects Cira Walnut to be ready for initial occupancy during the second quarter of 2016. The Operating Partnership contemplates that Cira Walnut will include approximately 575,000 square feet of office space, 245,000 square feet of residential space consisting of 260 market rate finished and unfinished rental apartment units, and 10,000 square feet of retail space, with an additional floor containing a full range of amenities. The Operating Partnership has pre-leased an aggregate of 61% of the office square feet of Cira Walnut. The anchor tenant for approximately 253,000 square feet of office space is FMC Corporation, a diversified chemical company serving agricultural, consumer and industrial markets globally. The lease with FMC has an initial term of sixteen (16) years from initial occupancy. In addition, the Operating Partnership also leased approximately 100,000 square feet of office space to the University of Pennsylvania under a twenty-year lease. Cira Walnut will be known as The FMC Tower at Cira Centre South. The Operating Partnership anticipates the office component of the project will cost approximately $236.0 million with the residential component costing approximately $105.0 million for a total project cost of $341.0 million.

The Operating Partnership intends to fund the Cira Walnut development costs through a combination of existing cash balances, one or more joint venture formations, proceeds from additional asset sales or equity and debt financing including third party equity sources.
The Operating Partnership's current intention is to either joint venture or pre-sell the residential component of the FMC Tower at Cira Centre South. Pursuant to this objective, the Operating Partnership has executed a non-binding letter of intent with a residential development and operating company that contemplates either outcome.

The Operating Partnership's ground lease with the University of Pennsylvania has a term through July 2097, with a variable rent that would provide the University with a percentage of the cash flow or proceeds of specified capital events subject to receipt of a priority return on the Operating Partnership's investment.

Development projects are subject to a variety of risks, including construction delays, construction cost overruns, inability to obtain financing on favorable terms, inability to lease space at projected rates, inability to enter into construction, development and other


agreements on favorable terms, and unexpected environmental and other hazards. Reference is made to our Annual Report on Form 10-K for the year ended December 31, 2012 for additional risks associated with development projects.
RECENT PROPERTY TRANSACTIONS
Real Estate Acquisitions/Dispositions
On April 25, 2013, we exercised our purchase option under the long term ground lease agreement we held through our acquisition of Three Logan Square on August 5, 2010 and acquired the 1.8 acre land parcel underlying Three Logan Square in Philadelphia, Pennsylvania for $20.8 million. We have accounted for the transaction as an asset acquisition. A portion of the original purchase price of Three Logan Square was allocated to the below market ground lease intangible asset, as the sum of the purchase price of the land and the $4.3 million remaining balance for the intangible asset approximates the fair value of the land as unencumbered by the ground lease. The remaining intangible asset balance was reclassified to land upon exercise of the purchase option. We funded the cost of the acquisition with available corporate funds and capitalized $0.1 million of acquisition related costs as part of the basis in the operating land. On August 5, 2013, we sold an eight-acre parcel of land located in Richmond, Virginia known as Dabney Land East, for a sales price of $0.5 million. The land parcel was undeveloped as of the date of sale.
On June 28, 2013, we sold 16870 West Bernardo Drive, a 67,909 net rentable square feet office property located in San Diego, California, for a sales price of $18.0 million. The property was 98.8% occupied as of the date of sale. On June 28, 2013, we sold 100 Arrandale Boulevard, a 34,931 net rentable square feet office property located in Exton, Pennsylvania, for a sales price of $3.5 million. The property was vacant at the date of sale.
On June 19, 2013, we sold 1700 Paoli Pike, a 28,000 net rentable square feet office property located in Malvern, Pennsylvania, for a sales price of $2.7 million. The property was vacant at the date of sale.
On June 14, 2013, we sold Pacific View Plaza, a 51,695 net rentable square feet office property located in Carlsbad, California, for a sales price of $10.3 million. The property was 90.5% occupied as of the date of sale.
On February 25, 2013, we sold a portfolio of eight office properties containing 800,546 square feet in Lawrenceville, New Jersey for an aggregate sales price of $121.0 million. These properties, collectively known as "Princeton Pike Corporate Center," were 86.9% occupied as of the date of sale. 4040 Wilson Venture
On July 31, 2013, we formed 4040 Wilson LLC Venture ("4040 Wilson"), a joint venture between the Company and Ashton Park Associates LLC ("Ashton Park"), an unaffiliated third party. 4040 Wilson expects to construct a 20-story office building located in the Ballston submarket of Arlington, Virginia. We and Ashton Park each own a 50% interest in 4040 Wilson. 4040 Wilson would develop the project on a 1.3 acre land parcel contributed by Ashton Park at an agreed upon value of $36.0 million. The total estimated project costs are $194.3 million, which the Company expects would be financed through approximately $72.0 million of partner capital contributions (consisting of $36.0 million in cash from the Company and land with a value of $36.0 million from Ashton Park) and approximately $122.3 million of debt financing through a construction lender that has not yet been determined. Construction is scheduled to commence during the fourth quarter of 2013, with a targeted project completion in 2015. Based upon the facts and circumstances at formation of 4040 Wilson, we determined that 4040 Wilson is a VIE in accordance with the accounting standard for the consolidation of VIEs. As a result, we used the variable interest model under the accounting standard for consolidation in order to determine whether to consolidate 4040 Wilson. Based upon each member's shared power over the activities of 4040 Wilson under the operating and related agreements of 4040 Wilson, and our lack of control over the development and construction phases of the project, 4040 Wilson is not consolidated by us, and is accounted for under the equity method of accounting.
In addition, in connection with our development of 4040 Wilson we have agreed to guarantee 100% of any lender mandated recourse. As of September 30, 2013, we had no outstanding guarantees under the 4040 Wilson LLC Venture.


Two and Six Tower Bridge Exchange Transaction

On June 19, 2013, we acquired, from an unaffiliated third party, the third party's ownership interest in Six Tower Bridge real estate venture through a nonmonetary exchange for our ownership interest in the Two Tower Bridge real estate venture. Six Tower Bridge owns an unencumbered office property in Conshohocken, PA. We previously accounted for our noncontrolling interest in Six Tower Bridge using the equity method. As a result of the exchange transaction we obtained control of the Six Tower Bridge property and our existing equity interest was remeasured at fair value based on the fair value of the underlying property and the distribution provisions of the real estate venture agreement. Accordingly, during 2013, we recorded a gain of approximately $7.8 million, which is reflected in "Gain on remeasurement of investment in real estate venture" on the accompanying statements of operations. Following the acquisition, the Class A office property in Conshohocken, PA is wholly owned by us with an unencumbered fair value of $24.5 million. We accounted for this acquisition as a business combination and allocated the fair value as follows:
$14.8 million to building, $6.9 million to land, $3.3 million to intangible assets and $0.5 million to below market lease liabilities assumed.

As mentioned above, we exchanged our investment in Two Tower Bridge real estate venture in an nonmonetary transaction with an unaffiliated third party for the third party's interest in the Six Tower Bridge real estate venture. The investment in Two Tower Bridge had a fair value of $3.6 million on the date of the exchange transaction based on the fair value of the venture's equity and distribution provisions of the real estate venture agreement. Based on the fair value and the carrying value for our investment of $(0.1) million, during 2013 we recognized a gain on exchange of interests in real estate ventures of $3.7 million.
evo at Cira Centre South Venture (formerly the Grove Venture) On January 25, 2013, we formed the evo at Cira Centre South Venture, a joint venture among the Company and two unaffiliated third parties: Campus Crest Properties, LLC ("Campus Crest") and HSRE-Campus Crest IXA, LLC ("HSRE"). The evo at Cira Centre South Venture has commenced construction of a 33-story, 850-bed student housing tower located in the University City submarket of Philadelphia, Pennsylvania to be called "evo at Cira Centre South." We and Campus Crest each own a 30% interest in the evo at Cira Centre South Venture and HSRE owns a 40% interest. The evo at Cira Centre South Venture is developing the project on a one-acre land parcel held under a long-term ground lease with a third party lessor. We contributed to the evo at Cira Centre South Venture our tenancy rights under a long-term ground lease, together with associated development rights, at an agreed-upon value of $8.5 million. The total estimated project costs are $158.5 million, which will be financed through partner capital contributions totaling $60.7 million, with the remaining $97.8 million being financed through construction facilities provided by PNC Bank, Capital One, and First Niagara Bank. Construction has already commenced, with a targeted project completion in 2014.
In connection with the development of the evo at Cira Centre South project (as described in Note 4 to the consolidated financial statements), we and Campus Crest have provided, in addition to customary non-recourse carve-out guarantees, a completion and cost overrun guaranty, as well as a payment guaranty, on the construction financing (with our share of the payment guaranty being approximately $23.0 million).
BDN Beacon Venture
On March 26, 2013, we sold our entire 20% ownership interest in an unconsolidated real estate venture known as BDN Beacon Venture LLC (the "Beacon Venture"). The carrying amount of our investment in the Beacon Venture amounted to $17.0 million at the sale date, with our proceeds effectively matching the carrying amount.
From time to time, we provide guarantees and indemnities on behalf of Real Estate Ventures, including environmental indemnities and non-recourse carve-outs under mortgage loans, in connection with both construction and permanent financing. As of September 30, 2013, the Company had guaranteed repayment of approximately $0.6 million of loans on behalf of the PJP VII Real Estate Venture.
We continually assess our portfolio in light of our strategic and economic . . .

  Add BDN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for BDN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.