UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities ---- Exchange Act of 1934 For the quarterly period ended September 30, 2001 or ____ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ____________ to ___________ Commission file number 1-9106 ------ Brandywine Realty Trust ----------------------- (Exact name of registrant as specified in its charter) Maryland 23-2413352 -------- ---------- State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization 14 Campus Boulevard, Newtown Square, Pennsylvania 19073 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) (610) 325-5600 -------------- Registrant's telephone number Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] A total of 35,468,649 Common Shares of Beneficial Interest were outstanding as of November 14, 2001.
BRANDYWINE REALTY TRUST TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2001 and September 30, 2000 Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2001 and September 30, 2000 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Signatures 2
PART I - FINANCIAL INFORMATION Item 1. - Financial Statements BRANDYWINE REALTY TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited and in thousands, except share and per share information) <TABLE> <CAPTION> September 30, December 31, 2001 2000 ----------- ----------- <S> <C> <C> ASSETS Real estate investments: Operating properties $ 1,883,725 $ 1,754,895 Accumulated depreciation (216,526) (179,558) ----------- ----------- 1,667,199 1,575,337 Construction-in-progress 89,799 59,979 Land held for development 39,172 39,025 ----------- ----------- 1,796,170 1,674,341 Cash and cash equivalents 10,536 16,040 Escrowed cash 16,579 14,788 Accounts receivable, net 10,648 7,322 Accrued rent receivable, net 24,450 21,221 Due from affiliates 3,933 5,781 Marketable securities 11,505 769 Investment in management company, at equity - 392 Investment in real estate ventures, at equity 21,065 33,566 Deferred costs, net 24,838 19,828 Other assets 35,381 31,392 ----------- ----------- Total assets $ 1,955,105 $ 1,825,440 =========== =========== LIABILITIES AND BENEFICIARIES' EQUITY Mortgage notes payable $ 612,415 $ 527,877 Borrowings under Credit Facility 393,325 338,325 Accounts payable and accrued expenses 35,223 20,099 Distributions payable 21,523 20,428 Tenant security deposits and deferred rents 15,753 17,232 Other liabilities 14,857 - ----------- ----------- Total liabilities 1,093,096 923,961 Minority interest 143,372 144,974 Commitments and contingencies Beneficiaries' equity: Preferred Shares (shares authorized-10,000,000): 7.25% Series A Preferred Shares, $0.01 par value; issued and outstanding-750,000 in 2001 and 2000 8 8 8.75% Series B Preferred Shares, $0.01 par value; issued and outstanding-4,375,000 in 2001 and 2000 44 44 Common Shares of beneficial interest, $0.01 par value; shares authorized-100,000,000; issued and outstanding- 35,534,149 in 2001 and 35,681,314 in 2000 355 357 Additional paid-in capital 848,920 851,875 Share warrants 908 908 Cumulative earnings 156,983 131,256 Accumulated other comprehensive loss (7,614) (1,731) Cumulative distributions (280,967) (226,212) ----------- ----------- Total beneficiaries' equity 718,637 756,505 ----------- ----------- Total liabilities and beneficiaries' equity $ 1,955,105 $ 1,825,440 =========== =========== </TABLE> The accompanying condensed notes are integral part of these consolidated financial statements. 3
BRANDYWINE REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited and in thousands, except per share information) <TABLE> <CAPTION> Three-Month Periods Nine-Month Periods Ended September 30, Ended September 30, --------------------- -------------------------- 2001 2000 2001 2000 ------- -------- --------- --------- <S> <C> <C> <C> <C> Revenue: Rents $67,152 $ 62,215 $ 197,386 $ 183,989 Tenant reimbursements 9,505 8,302 28,976 26,305 Other 2,654 2,559 7,087 6,379 ------- -------- --------- --------- Total revenue 79,311 73,076 233,449 216,673 Operating Expenses: Property operating expenses 20,202 16,071 60,533 48,205 Real estate taxes 7,169 6,756 20,865 19,445 Interest 17,346 16,168 50,269 48,483 Depreciation and amortization 19,781 16,772 59,087 49,892 Management fees - 3,222 - 10,109 Administrative expenses 3,445 1,612 11,717 3,987 ------- -------- --------- --------- Total operating expenses 67,943 60,601 202,471 180,121 Income before equity in income of real estate ventures, equity in income of management company, net gain on sales, minority interest and extraordinary item 11,368 12,475 30,978 36,552 Equity in income of management company - 107 - 37 Equity in income of real estate ventures 235 611 2,223 2,373 ------- -------- --------- --------- Income before net gain on sales, minority interest and extraordinary item 11,603 13,193 33,201 38,962 Net gain on sales of interest in real estate 929 9,496 1,297 9,564 Minority interest (2,261) (2,844) (6,553) (7,292) ------- -------- --------- --------- Income before extraordinary item 10,271 19,845 27,945 41,234 Extraordinary item - - (1,111) - ------- -------- --------- --------- Net income 10,271 19,845 26,834 41,234 Income allocated to Preferred Shares (2,977) (2,977) (8,931) (8,931) ------- -------- --------- --------- Income allocated to Common Shares $ 7,294 $ 16,868 $ 17,903 $ 32,303 ======= ======== ========= ========= Earnings per Common Share before extraordinary item: Basic $ 0.19 $ 0.47 $ 0.50 $ 0.90 ======= ======== ========= ========= Diluted $ 0.19 $ 0.47 $ 0.50 $ 0.88 ======= ======== ========= ========= Earnings per Common Share after extraordinary item: Basic $ 0.19 $ 0.47 $ 0.47 $ 0.90 ======= ======== ========= ========= Diluted $ 0.19 $ 0.47 $ 0.47 $ 0.88 ======= ======== ========= ========= </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4
BRANDYWINE REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited and in thousands) <TABLE> <CAPTION> Nine-Month Periods Ended September 30, -------------------------- 2001 2000 -------- -------- <S> <C> <C> Cash flows from operating activities: Net income $ 26,834 $ 41,234 Adjustments to reconcile net income to net cash from operating activities: Depreciation 55,528 47,782 Amortization: Deferred financing costs 2,139 2,841 Deferred leasing costs 3,559 2,110 Notes payable discount 35 63 Deferred compensation costs 2,728 1,830 Straight-line rent (4,708) (5,147) Provision for doubtful accounts 1,304 - Equity in income of management company - (37) Equity in income of real estate ventures, net of cash distributions received - (2,373) Net gain on sale of interests in real estate (1,297) (9,564) Minority interest 6,553 7,292 Distributions paid to minority partners (7,953) (7,890) Extraordinary item 1,111 - Changes in assets and liabilities: Accounts receivable (3,629) 208 Due from affiliates 658 (1,982) Other assets 13,939 (32,858) Accounts payable and accrued expenses 3,027 1,853 Tenant security deposits and deferred rents (1,479) (2,356) -------- -------- Net cash from operating activites 98,349 43,006 Cash flows from investing activities: Acquisitions of properties (40,159) (7,010) Sales of properties 21,225 99,925 Capital expenditures (71,188) (79,398) Investment in real estate ventures (2,501) (1,996) Increase in escrowed cash (1,791) (3,657) Cash distributions from real estate ventures in excess of income 3,500 - Leasing costs (6,980) (2,529) -------- -------- Net cash from investing activities (97,894) 5,335 Cash flows from financing activites: Proceeds from notes payable, Credit Facility 80,000 58,000 Repayments of notes payable, Credit Facility (25,000) (101,000) Proceeds from mortgage notes payable 119,227 106,454 Repayments of mortgage notes payable (114,398) (38,137) Debt financing costs (5,489) (1,292) Repurchases of Common Shares (6,576) (14,811) Distributions paid to shareholders (53,723) (51,223) -------- -------- Net cash from financing activities (5,959) (42,009) -------- -------- (Decrease) increase in cash and cash equivalents (5,504) 6,332 Cash and cash equivalents at beginning of period 16,040 5,692 -------- -------- Cash and cash equivalents at end of period $ 10,536 $ 12,024 ======== ======== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 5
BRANDYWINE REALTY TRUST ----------------------- NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------- SEPTEMBER 30, 2001 ------------------ 1. THE COMPANY ----------- Brandywine Realty Trust (collectively with its subsidiaries, the "Company") is a self-administered and self-managed real estate investment trust (a "REIT") active in acquiring, developing, redeveloping, leasing and managing office and industrial properties. As of September 30, 2001, the Company's portfolio included 223 office properties, 47 industrial facilities and one mixed-use property (collectively, the "Properties") that contain an aggregate of 17.3 million net rentable square feet. The Properties are located in the office and industrial markets surrounding Philadelphia, Pennsylvania, New Jersey and Long Island, New York and Richmond, Virginia. As of September 30, 2001, the Company also held economic interests in 13 real estate ventures (the "Real Estate Ventures") formed with third parties to develop commercial properties. The Company's interest in its assets is held through Brandywine Operating Partnership, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership and, as of September 30, 2001, was entitled to approximately 94.3% of the Operating Partnership's income after distributions to holders of Series B Preferred Units (defined below). The Operating Partnership owns a 95% interest in Brandywine Realty Services Corporation (the "Management Company"), a taxable REIT subsidiary that, as of September 30, 2001, was performing management and leasing services for properties owned by third-parties that contain approximately 3.3 million net rentable square feet. Minority interest relates to interests in the Operating Partnership that are not owned by the Company. Income allocated to the minority interest is based on the percentage ownership of the Operating Partnership held by third parties throughout the year. Minority interest is comprised of Class A Units of limited partnership interest ("Class A Units") and Series B Preferred Units of limited partnership interest ("Series B Preferred Units"). The Operating Partnership issued these interests to persons that contributed assets to the Operating Partnership. The Operating Partnership is obligated to redeem, at the request of a holder, each Class A Unit for cash or one Common Share, at the option of the Company. Each Series B Preferred Unit has a stated value of $50.00 and is convertible, at the option of the holder, into Class A Units at a conversion price of $28.00. The conversion price declines to $26.50, if the average trading price of the Common Shares during the 60-day period ending December 31, 2003 is $23.00 or less. The Series B Preferred Units bear a preferred distribution of 7.25% per annum ($3.625 per unit per annum), subject to an increase in the event quarterly distributions paid to holders of Common Shares exceed $0.51 per share. As of September 30, 2001, there were 2,151,658 Class A Units and 1,950,000 Series B Preferred Units outstanding held by third party investors. Minority interest also relates to interests in the Management Company that are not owned by the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Basis of Presentation - --------------------- The consolidated financial statements have been prepared by the Company without audit except as to the balance sheet as of December 31, 2000, which has been prepared from audited data, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the included disclosures are adequate to make the information presented not misleading. In the opinion of the Company, all adjustments (consisting solely of normal recurring matters) necessary to fairly present the financial position of the Company as of September 30, 2001, the results of its operations for the three- and nine-month periods ended September 30, 2001 and 2000, and its cash flows for the nine-month period ended September 30, 2001 and 2000 have been included. The results of operations for such interim periods are not necessarily indicative of the results for a full year. For further information, refer to the Company's consolidated financial statements and footnotes included in the Annual Report on Form 10-K for the year ended December 31, 2000. Certain prior year amounts have been reclassified to conform with the current year presentation. 6
In 2000, the Operating Partnership held a 95% economic interest in the Management Company through its ownership of 100% of the Management Company's non-voting preferred stock and 5% of its voting common stock. The Company's Annual Report on Form 10-K for the year ended December 31, 2000 disclosed the Company's purchase of the 5% minority ownership interest in the Management Company not historically owned by the Company. The Company, upon further consideration, determined not to purchase the minority interest, but instead, converted the Company's non-voting equity interest in the Management Company to a voting interest. Accordingly, the Company owns 95% of the equity of the Management Company and has voting control over the Management Company. Therefore, the 2001 financial results of the Management Company have been consolidated. Use of Estimates - ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Real Estate Investments - ----------------------- Real estate investments include capitalized direct internal development costs totaling $1.2 million and $2.4 million for the three- and nine-month periods ended September 30, 2001 and $0.3 million and $1.2 million for the three- and nine-month periods ended in 2000. Interest totaling $1.3 million and $3.9 million for the three- and nine-month periods ended September 30, 2001 and $2.8 million and $6.2 million for the three- and nine-month periods ended September 30, 2000 was capitalized related to the development of certain Properties and land holdings. Deferred Costs - -------------- Deferred costs include internal direct leasing costs totaling $0.7 million and $2.2 million for the three- and nine-month periods ended September 30, 2001 and $0.5 million and $1.4 million for the three- and nine-month periods ended September 30, 2000. Accounting for Derivative Instruments and Hedging Activities - ------------------------------------------------------------ Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its corresponding amendments under SFAS No. 138. SFAS 133 requires the Company to measure every derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record them in the balance sheet as either an asset or liability. For derivatives designated as fair value hedges, the changes in fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivative are reported in other comprehensive income. Changes in fair value of derivative instruments and ineffective portions of hedges are recognized in earnings in the current period. For the nine-month period ended September 30, 2001, the Company was not party to any derivative contract designated as a fair value hedge. Upon adoption of this new standard as of January 1, 2001, the Company recorded a charge of $1.3 million to comprehensive income for the cumulative effect of an accounting change to recognize at fair value all derivatives that are designed as cash flow hedging instruments. The Company recorded additional charges of $1.6 million and $4.7 million in other comprehensive income to recognize the change in value during the three- and nine-month periods ended September 30, 2001. Over time, the unrealized gains/losses and the transition adjustment held in accumulated other comprehensive income will be reclassified into earnings as the underlying hedged item affects earnings, such as when the forecasted interest payments occurs. It is expected that $6.0 million of net losses will be reclassified into earnings over the next twelve months. The Company formally assesses, both at inception of the hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in fair values of cash flows of the hedged item. If it is determined that a derivative is not highly-effective as a hedge or if a derivative ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively. 7
The Company manages its ratio of fixed-to-floating rate debt with the objective of achieving a mix that management believes is appropriate. To manage this mix in a cost-effective manner, the Company, from time to time, enters into interest rate swap agreements, in which it agrees to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts. As of September 30, 2001, the maximum length of time which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is through June 2004. There was no gain or loss reclassified from accumulated other comprehensive income into earnings during the three- and nine-month periods ended September 30, 2001 as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring. New Pronouncements - ------------------ In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations (effective July 1, 2001) and SFAS No. 142, Goodwill and Other Intangible Assets (effective for the Company on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized, but instead subject to periodic impairment testing. Neither of these statements will have a material impact on the Company's financial statements. 3. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS -------------------------------------------------------- 2001 - ---- During the third quarter of 2001, the Company sold six industrial properties containing 245,000 net rentable square feet and three parcels of land containing 13.7 acres for an aggregate of $15.5 million, realizing a net gain of $929,000. During the second quarter of 2001, the Company consumated an exchange of properties with Prentiss Properties Acquisition Partners, L.P. ("Prentiss"). The Company acquired from Prentiss 30 properties (29 office and 1 industrial) containing 1.6 million net rentable square feet and 6.9 acres of developable land for total consideration of $215.2 million. The Company conveyed to Prentiss four office properties located in Northern Virginia that contain an aggregate of 657,000 net rentable square feet, assumed $79.7 million of mortgage debt secured by certain of the Prentiss properties, issued a $7.8 million promissory note, paid $15.9 million at closing and agreed to make additional payments totaling $7.0 million (including $5.4 million of payments discounted at 7.5%) over a three year period subsequent to closing. The Company also contributed to Prentiss its interest in a real estate venture that owns two additional office properties that contain an aggregate of 452,000 net rentable square feet and received a combination of preferred and common units of limited partnership interest in Prentiss having a value of $10.7 million, as of the closing. In addition as part of the Prentiss transaction in June 2001, the Company purchased a 103,000 square foot building under construction and six acres of related developable land for $5.7 million, plus $4.2 million of additional costs related to development. In addition to the Prentiss transaction, the Company also sold one industrial property containing 25,000 net rentable square feet for $2.2 million, realizing a gain of $186,000. During the first quarter of 2001, the Company sold one office property containing 30,000 net rentable square feet, one industrial property containing 16,000 net rentable square feet and one parcel of land containing 2.1 acres for an aggregate of $3.5 million, realizing a net gain of $182,000. In addition, the Company purchased two office properties containing 146,000 net rentable square feet for $18.0 million and one parcel of land containing 20 acres for $7.6 million. 2000 - ---- During the third quarter of 2000, the Company sold seven office properties containing 619,000 net rentable square feet for $99.1 million, realizing a net gain of $9.5 million. Four properties were sold for $71.3 million realizing an aggregate gain of $14.6 million and three properties were sold for $27.8 million realizing an aggregate loss of $5.1 million. During the second quarter of 2000, the Company purchased an aggregate of 19.6 acres of land for $2.7 million. In addition, the Company sold one building containing 10,000 square feet for $.8 million resulting in a gain of $.1 million. During the first quarter of 2000, the Company purchased a 21 acre parcel of land for $5.3 million. 8
Proforma - -------- The following unaudited pro forma financial information for the nine-month periods ended September 30, 2001 and September 30, 2000 gives effect to the exchange of properties with Prentiss as if the transaction occurred on January 1, 2000. The proforma financial information presented below is not necessarily indicative of the results which actually would have occurred if the transaction had been consummated on January 1, 2000, nor does the pro forma information purport to represent the results of operations for future periods. <TABLE> <CAPTION> Nine-Month Periods Ended September 30, ---------------------------------- 2001 2000 ---------------- ---------------- (in thousands, except per share data) <S> <C> <C> Pro forma total revenues $244,668 $230,836 Pro forma net income before extraordinary item $30,165 $42,031 Pro forma net income after extraordinary item $29,054 $42,031 Pro forma net income per Common Share before extraordinary item (diluted) $0.59 $0.91 Pro forma net income per Common Share after extraordinary item (diluted) $0.56 $0.91 </TABLE> 4. INDEBTEDNESS ------------ The Company utilizes credit facility borrowings for general business purposes, including the acquisition of properties and the repayment of debt. In June 2001, the Company amended its unsecured credit facility (the "Credit Facility") to increase borrowing capacity from $450 million to $500 million and to extend the maturity to June 2004. The Credit Facility bears interest at LIBOR (LIBOR was 2.637% at September 30, 2001) plus 1.5%, with the spread over LIBOR subject to reductions from .125% to .35% based on the Company's leverage. As of September 30, 2001, the Company had $393.3 million of borrowings and $14.9 million of letters of credit outstanding and $91.8 million of unused availability under the Credit Facility. The weighted-average interest rate on borrowings under the Credit Facility was 6.83% for the nine-month period ended September 30, 2001. As of September 30, 2001, the Company had $612.4 million of mortgage notes payable, secured by 111 of the Properties and certain land holdings. Fixed rate mortgages, totaling $539.6 million, require payments of principal and/or interest (or imputed interest) at rates ranging from 6.80% to 9.88% and mature on dates from January 2002 through July 2027. Variable rate mortgages, totaling $72.8 million, require payments of principal and/or interest at rates ranging from LIBOR plus .76% to 1.75% or prime minus .75% to prime plus .25% (the prime rate was 6.0% at September 30, 2001) and mature on dates from February 2003 through July 2027. The weighted-average interest rate on the Company's mortgages was 7.43% for the nine-month period ended September 30, 2001. The Company has entered into interest rate swap and rate cap agreements designed to reduce the impact of interest rate changes on its variable rate debt. At September 30, 2001, the Company had three interest rate swap agreements for notional principal amounts aggregating $175 million. The swap agreements effectively fix the interest rate on $100 million of Credit Facility borrowings at 6.383%, $50 million at 6.080% and $25 million at 5.215% until September 2002. The interest rate cap agreements effectively fix the interest rate on two variable rate mortgages. One rate cap fixes the interest rate on a mortgage with a notional value of $75 million at 6.25% until maturity in April 2002. The second interest rate cap fixes the interest rate on a mortgage with a notional value of $28 million at 8.7% until July 2004. The impact of the cap agreements is recorded as a component of interest expense. In October 2001, the Company entered into three additional interest rate swap agreements that effectively fix the interest rate on $100 million of Credit Facility borrowings at 4.230% and on $75 million at 4.215% from September 2002 to June 2004. For the three- and nine-month periods ended September 30, 2001 and 2000, the Company paid interest totaling $21.4 million and $56.9 million in 2001 and $17.6 million and $51.1 million in 2000. 9
5. BENEFICIARIES' EQUITY --------------------- On September 25, 2001, the Company declared a distribution of $0.44 per Common Share, totaling $15.8 million, which was paid on October 15, 2001 to shareholders of record as of October 5, 2001. The Operating Partnership simultaneously declared a $0.44 per unit cash distribution to holders of Class A Units totaling $0.9 million. On September 25, 2001, the Company and the Operating Partnership, respectively, also declared distributions to holders of Series A Preferred Shares, Series B Preferred Shares and Series B Preferred Units, which are each currently entitled to a preferential return of 7.25%, 8.75% and 7.25%, respectively. Distributions paid on October 15, 2001 to holders of Series A Preferred Shares, Series B Preferred Shares and Series B Preferred Units totaled $0.7 million, $2.3 million and $1.8 million, respectively. 6. COMPREHENSIVE INCOME -------------------- Comprehensive income represents net income, plus the results of certain non-shareholders' equity changes not reflected in the Consolidated Statements of Operations. The components of comprehensive income are as follows: <TABLE> <CAPTION> Three-Month Periods Nine-Month Periods Ended September 30, Ended September 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 ------- -------- -------- -------- <S> <C> <C> <C> <C> Net income $ 10,271 $ 19,845 $ 26,834 $ 41,234 Other comprehensive income: Cumulative effect of change in accounting principle (SFAS #133) on other comprehensive income - - (1,300) - Unrealized derivative losses on cash flow hedges (1,740) - (4,669) - Unrealized gain on available-for-sale securities 186 - 86 - ------- -------- -------- -------- Comprehensive income $ 8,717 $ 19,845 $ 20,951 $ 41,234 ======= ======== ======== ======== </TABLE> 7. SEGMENT INFORMATION ------------------- The Company currently manages its portfolio within three segments: (1) Pennsylvania, (2) New Jersey/New York, and (3) Virginia. Corporate is responsible for cash and investment management and certain other general support functions. 10
Segment information for the three-month periods ended September 30, 2001 and September 30, 2000 is as follows (in thousands): <TABLE> <CAPTION> New Jersey/ Pennsylvania New York Virginia Corporate Total ------------ ----------- -------- --------- ----- <S> <C> <C> <C> <C> <C> 2001: - ----- Real estate investments, at cost $ 1,169,449 $ 642,278 $ 200,112 $ 857 $ 2,012,696 Investments in real estate ventures, at equity - - - 21,065 21,065 Total revenue 44,945 26,841 5,680 1,845 79,311 Property operating expenses 11,663 6,876 1,663 - 20,202 Real estate taxes 3,627 3,074 468 - 7,169 Interest - - - 17,346 17,346 Depreciation & amortization 10,856 6,756 1,875 294 19,781 2000: - ----- Real estate investments, at cost $ 916,603 $ 599,904 $ 308,078 $ - $ 1,824,585 Investments in real estate ventures, at equity - - - 34,833 34,833 Total revenue 36,556 24,607 10,127 1,786 73,076 Property operating expenses 8,410 5,477 2,184 - 16,071 Real estate taxes 3,118 2,900 738 - 6,756 Interest - - - 16,168 16,168 Depreciation & amortization 8,206 5,498 2,876 192 16,772 </TABLE> Segment information for the nine-month periods ended September 30, 2001 and September 30, 2000 is as follows (in thousands): <TABLE> <CAPTION> New Jersey/ Pennsylvania New York Virginia Corporate Total ------------ ----------- -------- --------- ----- <S> <C> <C> <C> <C> <C> 2001: - ----- Real estate investments, at cost $ 1,169,449 $ 642,278 $ 200,112 $ 857 $ 2,012,696 Investments in real estate ventures, at equity - - - 21,065 21,065 Total revenue 127,385 79,372 21,376 5,316 233,449 Property operating expenses 33,525 21,026 5,982 - 60,533 Real estate taxes 10,070 9,192 1,603 - 20,865 Interest - - - 50,269 50,269 Depreciation & amortization 30,998 20,791 6,425 873 59,087 2000: - ----- Real estate investments, at cost $ 916,603 $ 599,904 $ 308,078 $ - $ 1,824,585 Investments in real estate ventures, at equity - - - 34,833 34,833 Total revenue 108,217 76,181 30,135 2,140 216,673 Property operating expenses 25,121 16,690 6,394 - 48,205 Real estate taxes 8,638 8,595 2,212 - 19,445 Interest - - - 48,483 48,483 Depreciation & amortization 19,476 21,058 8,849 509 49,892 </TABLE> 11
8. EARNINGS PER COMMON SHARE ------------------------- The following table details the number of shares and net income used to calculate basic and diluted earnings per share (in thousands, except per share amounts): <TABLE> <CAPTION> Three-Month Periods Ended September 30, --------------------------------------------------------------- 2001 2000 ----------------------------- ---------------------------- Basic Diluted Basic Diluted ----------- ----------- ----------- ---------- <S> <C> <C> <C> <C> Net income before extraordinary item $ 10,271 $ 10,271 $ 19,845 $ 19,845 Preferred Share discount amortization (369) (369) (115) (115) Income allocated to Preferred Shares (2,977) (2,977) (2,977) (2,977) ----------- ----------- ----------- ---------- Net income available to common shareholders $ 6,925 $ 6,925 $ 16,753 $ 16,753 =========== =========== =========== =========== Weighted-average shares outstanding 35,629,980 35,629,980 35,705,115 35,705,115 Options and warrants - 45,547 - 50,978 ----------- ----------- ----------- ---------- Total weighted-average shares outstanding 35,629,980 35,675,527 35,705,115 35,756,093 =========== =========== =========== =========== Earnings per share before extraordinary item $ 0.19 $ 0.19 $ 0.47 $ 0.47 =========== =========== =========== =========== Nine-Month Periods Ended September 30, --------------------------------------------------------------- 2001 2000 ----------------------------- ---------------------------- Basic Diluted Basic Diluted ----------- ----------- ----------- ---------- Net income before extraordinary item $ 27,945 $ 27,945 $ 41,234 $ 41,234 Preferred Share discount amortization (1,107) (1,107) (170) (170) Income allocated to Preferred Shares (8,931) (8,931) (8,931) (8,931) ----------- ----------- ----------- ---------- Net income available to common shareholders $ 17,907 $ 17,907 $ 32,133 $ 32,133 =========== =========== =========== =========== Weighted-average shares outstanding 35,679,941 35,679,941 35,847,171 35,847,171 Options and warrants - 31,415 - 588,078 ----------- ----------- ----------- ---------- Total weighted-average shares outstanding 35,679,941 35,711,356 35,847,171 36,435,249 =========== =========== =========== =========== Earnings per share before extraordinary item $ 0.50 $ 0.50 $ 0.90 $ 0.88 =========== =========== =========== =========== </TABLE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------------------- The following discussion and analysis should be read in conjunction with the financial statements and notes thereto appearing elsewhere herein. This Form 10-Q contains forward-looking statements for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934 and as such may involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, there can be no assurance that these expectations will be realized. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Factors that could cause actual results to differ materially from current expectations include, but are not limited to, changes in general economic conditions, changes in local real estate conditions (including rental rates and competing properties), changes in industries in which the Company's principal tenants compete, the failure to timely lease unoccupied space, the failure to timely re-lease occupied space upon expiration of leases, the inability to generate sufficient revenue to meet debt service payments and operating expenses, prevailing interest rates, the unavailability of equity and debt financing, the Company's ability to reduce various expenses as a percentage of revenues, unanticipated costs associated with the acquisition and integration of the Company's acquisitions, costs to complete and lease-up pending developments, potential liability under environmental or other laws and regulations, the failure of the Company to manage its growth effectively and the other risks identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. OVERVIEW The Company currently manages its portfolio within three segments: (1) Pennsylvania, (2) New Jersey/New York, and (3) Virginia. The Company believes it has established an effective platform in these office and industrial markets that provides a foundation for achieving its goals of maximizing market penetration and operating economies of scale. As of September 30, 2001, the Company's portfolio consisted of 223 office properties, 47 industrial facilities and one mixed-use property that contain an aggregate of 17.3 million net rentable square feet. As of September 30, 2001, the Company held economic interests in 13 Real Estate Ventures. The Company receives income primarily from rental revenue (including tenant reimbursements) from the Properties and, to a lesser extent, from the management of properties owned by third parties. The Company expects that revenue growth in the next two years will result primarily from property acquisitions, rent increases in its current portfolio and the development or redevelopment of office properties. As of September 30, 2001, the Company had six properties in development aggregating 655,000 square feet. RESULTS OF OPERATIONS In 2000, the Operating Partnership held a 95% economic interest in Brandywine Realty Services Corporation (the Management Company") through its ownership of 100% of the Management Company's non-voting preferred stock and 5% of its voting common stock. Effective January 1, 2001, the Company converted its non-voting equity interest in the Management Company to a voting interest. Accordingly, the Company owns 95% of the equity of Management Company and has voting control. Therefore, the 2001 financial results of the Management Company have been consolidated. For the purpose of Management's Discussion and Analysis of Financial Condition and Results of Operations, the 2000 results of operations presented below have been restated to reflect this presentation. 13
<TABLE> <CAPTION> Three-Month Periods Nine-Month Periods Ended September 30, Ended September 30, --------------------------- --------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Revenue: Rents $ 67,152 $ 62,215 $ 197,386 $ 183,989 Tenant reimbursements 9,505 8,302 28,976 26,305 Other 2,654 3,409 7,087 9,126 -------- -------- -------- -------- Total revenue 79,311 73,926 233,449 219,420 Operating Expenses: Property operating expenses 20,202 18,224 60,533 54,604 Real estate taxes 7,169 6,756 20,865 19,445 Interest 17,346 16,177 50,269 48,511 Depreciation and amortization 19,781 16,812 59,087 50,345 Administrative expenses 3,445 3,394 11,717 9,683 -------- -------- -------- -------- Total operating expenses 67,943 61,363 202,471 182,588 Income before equity in income of real estate ventures, net gain on sales, minority interest and extraordinary item 11,368 12,563 30,978 36,832 Equity in income of real estate ventures 235 591 2,223 2,100 -------- -------- -------- -------- Income before net gain on sales, minority interest and extraordinary item 11,603 13,154 33,201 38,932 Net gain on sales of interest in real estate 929 9,496 1,297 9,564 Minority interest (2,261) (2,805) (6,553) (7,262) -------- -------- -------- -------- Income before extraordinary item 10,271 19,845 27,945 41,234 Extraordinary item - - (1,111) - -------- -------- -------- -------- Net income $ 10,271 $ 19,845 $ 26,834 $ 41,234 ======== ======== ======== ======== </TABLE> The results of operations for the three- and nine-month periods ended September 30, 2001 and 2000 include the respective operations of the Properties. Of the 271 Properties owned by the Company as of September 30, 2001, a total of 230 of the Properties containing an aggregate of 15.2 million net rentable square feet ("Same Store Properties") were owned for the entire three-month periods ended September 30, 2001 and 2000. Comparison of the Three- and Nine-Month Periods Ended September 30, 2001 and September 30, 2000 Revenue (which includes rental income, recoveries from tenants and other income) increased to $79.3 million and $233.4 million for the three- and nine-month periods ended September 30, 2001 as compared to $73.9 million and $219.4 million for the comparable periods in 2000. The straight-line rent adjustment increased revenues by $1.6 million and $4.7 million for the three- and nine-month periods ended September 30, 2001 and $1.6 million and $5.1 million for the comparable periods in 2000. Rental income for the Same Store Properties increased to $56.7 million for the three-month period ended September 30, 2001 from $54.3 million for the comparable period in 2000. This increase was the result of increased rental rates offset by a slight decrease in occupancy in 2001 as compared to 2000. Average occupancy for the Same Store Properties for the three-month period ended September 30, 2001 decreased to 94.9% from 95.2% for the comparable period in 2000. Property operating expenses increased to $20.2 million and $60.5 million for the three- and nine-month periods ended September 30, 2001 as compared to $18.2 million and $54.6 million for the comparable periods in 2000 as a result of higher utility costs, increased snow removal expense and increased provision for doubtful accounts. Property operating expenses includes a provision for doubtful accounts of $543,000 and $1.3 million in the three- and nine-month periods ended September 30, 2001 to provide for increased credit risk related to certain tenants. Property operating expenses for the Same Store Properties increased to $25.9 million for the three-month period ended September 30, 2001 as compared to $23.5 million for the comparable period in 2000 as a result of higher utility rates, increased repairs and maintenance costs and increased property management charges. Real estate taxes increased to $7.2 million and $20.9 million for the three- and nine-month periods ended September 30, 2001 as compared to $6.8 million and $19.4 million for the comparable periods in 2000, primarily due to increased real estate tax assessments in 2001. Real estate taxes for the Same Store Properties increased to $6.3 million for the three-month period ended September 30, 2001 as compared to $6.2 million for the comparable period in 2000 as a result of higher tax rates and property assessments. 14
Interest expense was $17.3 million and $50.3 million for the three- and nine-month periods ended September 30, 2001 and $16.2 million and $48.5 million for the comparable periods in 2000. Average outstanding debt balances for the nine-month period ended September 30, 2001 was $934.6 million as compared to $872.6 million for the comparable periods in 2000. The Company's weighted-average interest rate on the unsecured Credit Facility was 6.83% for the nine-month period ended September 30, 2001 and 7.78% for the comparable period in 2000. The weighted-average interest rate on mortgage notes payable was 7.43% for the nine-month period ended September 30, 2001 and 7.92% for the comparable period in 2000. For the three-month periods ended September 30, 2001 and 2000, the Company paid interest totaling $21.4 million and $17.6 million, including capitalized interest of $1.3 million in 2001 and $2.8 million in 2000. For the nine-month periods ended September 30, 2001 and 2000, the Company paid interest totaling $56.9 million and $51.1 million, including capitalized interest of $3.9 million in 2001 and $6.2 million in 2000. Depreciation increased to $18.5 million and $55.5 million for the three- and nine-month periods ended September 30, 2001 as compared to $15.9 million and $47.8 million for the comparable periods in 2000, primarily due to the acquisitions of the Prentiss Properties and the write-off of capital and tenant improvements. Amortization, related to deferred leasing costs, increased to $1.3 million and $3.6 million for the three- and nine-month periods ended September 30, 2001 from $0.9 million and $2.1 million for the comparable periods in 2000, primarily due to increased leasing activity and the write-off of leasing commissions related to terminated leases. Administrative expenses increased to $3.4 million and $11.7 million for the three- and nine-month periods ended September 30, 2001 from $3.4 million and $9.7 million for the comparable periods in 2000, primarily due to amortization of deferred compensation costs related to additional restricted Common Shares awarded in late 2000, a compensation accrual for loans made to executives to purchase Common Shares which is subject to forgiveness over a three year period, and increased compensation, benefit costs and professional fees. During the nine-month period ended September 30, 2001, the Company sold one office property containing 30,000 net rentable square feet, eight industrial properties containing an aggregate of 286,000 net rentable square feet and four parcels of land containing an aggregate of 15.8 acres that were sold for an aggregate of $21.2 million, realizing a net gain of $1.3 million. The nine-month amounts include six industrial properties containing an aggregate of 245,000 net rentable square feet and three parcels of land containing an aggregate of 13.7 acres that were sold for $15.5 million, realizing a gain of $.9 million, during the three-month period ended September 30, 2001. Equity in income in Real Estate Ventures was $0.2 million and $2.2 million for the three- and nine-month periods ended September 30, 2001 as compared to $.6 million and $2.1 million for the comparable periods in 2000. The increase is primarily attributable to the gain of $.8 million realized on the sale of one Real Estate Venture offset by the disposition of the Company's interest in another Real Estate Venture as part of the Prentiss transaction. Minority interest represents equity in income attributable to the portion of the Operating Partnership and the Management Company not owned by the Company. Minority interest decreased for the three- and nine-month periods ended September 30, 2001 from the comparable periods in 2000 primarily due to the decrease in net income. LIQUIDITY AND CAPITAL RESOURCES Cash Flows During the nine-month period ended September 30, 2001, the Company generated $98.3 million in cash flow from operating activities. Other sources of cash flow consisted of: (i) $119.2 million of additional mortgage notes payable, (ii) $80.0 million of proceeds from draws on the Credit Facility, (iii) $21.2 million of proceeds from sales of properties and (iv) $3.5 million of cash distributions from Real Estate Ventures. During the nine-month period ended September 30, 2001, cash out-flows consisted of: (i) $114.4 million of mortgage note repayments, (ii) $71.2 million to fund development and capital expenditures, (iii) $53.7 million of distributions to shareholders, (iv) $40.2 million of property acquisitions, (v) $25.0 million of Credit Facility repayments, (vi) $12.5 million in deferred leasing and financing costs, (vii) $6.6 million to repurchase Common Shares, (viii) $2.5 million of investment in unconsolidated Real Estate Ventures, and (ix) $1.8 million of escrowed cash. 15
Development The Company is in the process of developing six sites aggregating 655,000 square feet that are scheduled to be completed between December 2001 and July 2002. These projects are in various stages of development and there can be no assurance that any of these projects will be completed or opened on schedule. The total costs of these projects is estimated to be $115.5 million of which $62.6 million has been incurred. As of September 30, 2001, these developments were approximately 51% leased. Capitalization In June 2001, the Company amended its unsecured Credit Facility to increase borrowing capacity from $450 million to $500 million and to extend the maturity to June 2004. The Credit Facility bears interest at LIBOR plus 1.5%, with the spread over LIBOR subject to reductions from .125% to .35% based on the Company's leverage. As of September 30, 2001, the Company had approximately $1.0 billion of debt outstanding, consisting of $393.3 million of borrowings under the Credit Facility and $612.4 million of mortgage notes payable. The mortgage notes payable consist of $539.6 million of fixed rate loans and $72.8 million of variable rate loans. The Company has entered into interest rate swap and cap agreements that effectively fix the interest rate on $278 million of its variable rate debt. The mortgage loans mature between January 2002 and July 2027. As of September 30, 2001, the Company had $14.9 million of letters-of-credit outstanding and $91.8 million of unused availability under the Credit Facility. For the nine-month period ended September 30, 2001, the weighted-average interest rate under the Credit Facility was 6.83%, and the weighted-average interest rate for borrowings under mortgage notes payable was 7.43%. As of September 30, 2001, the Company's debt-to-market capitalization ratio was 50.0%. As a general policy, the Company intends to maintain a long-term average debt-to-market capitalization ratio of no more than 50%. During the third quarter of 2001, the Board of Trustees authorized an additional 1 million share increase to the Company's share repurchase program from three million shares to four million shares. Through September 30, 2001, the Company has repurchased 2.7 million of its Common Shares at an average price of $16.82 per share. Under the share repurchase program, the Company has authority to repurchase an additional 1.3 million shares. Short- and Long-Term Liquidity The Company believes that cash flow from operations is adequate to fund short-term liquidity requirements for the foreseeable future. Cash flow from operations is generated primarily from rental revenues and operating expense reimbursements from tenants and management services income from providing services to third parties. The Company intends to use these funds to meet short-term liquidity needs, which are to fund operating expenses, debt service requirements, recurring capital expenditures, tenant allowances, leasing commissions and the minimum distributions required to maintain the Company's REIT qualification under the Internal Revenue Code. On September 25, 2001, the Company declared a distribution of $0.44 per Common Share, totaling $15.8 million, which was paid on October 15, 2001 to shareholders of record as of October 5, 2001. The Operating Partnership simultaneously declared a $0.44 per unit cash distribution to holders of Class A Units totaling $0.9 million. On September 25, 2001, the Company and the Operating Partnership, respectively, also declared distributions to holders of Series A Preferred Shares, Series B Preferred Shares and Series B Preferred Units, which are each currently entitled to a preferential return of 7.25%, 8.75% and 7.25%, respectively. Distributions paid on October 15, 2001 to holders of Series A Preferred Shares, Series B Preferred Shares and Series B Preferred Units totaled $680,000, $2.3 million and $1.8 million, respectively. The Company expects to meet long-term liquidity requirements, such as for property acquisitions, development, investments in unconsolidated real estate ventures, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements, through asset dispositions, long-term secured and unsecured indebtedness and the issuance of equity securities. 16
Funds from Operations Management considers Funds from Operations ("FFO") as one measure of REIT performance. FFO is calculated as net income (loss) adjusted for depreciation expense attributable to real property, amortization expense attributable to capitalized leasing costs, net gain (loss) on sales of real estate investments, extraordinary items and comparable adjustments for real estate ventures accounted for using the equity method. Management believes that FFO is a useful disclosure in the real estate industry; however, the Company's disclosure may not be comparable to other REITs. FFO should not be considered an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity. FFO for the three- and six-month periods ended September 30, 2001 and 2000 is summarized in the following table (in thousands, except share data): <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, --------------------------------- ------------------------------------ 2001 2000 2001 2000 ----------- ----------- ----------- ------------ <S> <C> <C> <C> <C> Income before net gain on sales, minority interest and extraordinary item $ 11,603 $ 13,154 $ 33,201 $ 38,932 Add: Depreciation: Real property 18,526 15,910 55,528 47,782 Real estate ventures 816 601 2,280 1,725 Amortization of leasing costs 1,255 862 3,559 2,110 Gain on sale of land interests 840 - 881 - Less: Gain included in equity in income of real estate ventures - - (785) - ----------- ----------- ----------- ----------- Funds from operations before minority interest $ 33,040 $ 30,527 $ 94,664 $ 90,549 =========== =========== =========== =========== Weighted-average Common Shares (including Common Share equivalents) and Operating Partnership units 47,296,710 47,381,592 47,334,935 48,060,748 =========== =========== =========== =========== </TABLE> Inflation A majority of the Company's leases provide for separate escalations of real estate taxes and operating expenses either on a triple net basis or over a base amount. In addition, many of the leases provide for fixed base rent increases or indexed escalations (based on the CPI or other measure). The Company believes that inflationary increases in expenses will be significantly offset by expense reimbursement and contractual rent increases. Item 3. Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- There have been no material changes in Quantitative and Qualitative disclosures in 2001. Reference is made to Item 7 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: --------- None (b) Reports on Form 8-K: -------------------- During the three-month period ended September 30, 2001, and through November 14, 2001, the Company filed one Current Report on Form 8-K on July 13, 2001 (reporting under Item 5 and 7). This Current Report disclosed the amendment to the Company's revolving credit facility. 17
BRANDYWINE REALTY TRUST ----------------------- SIGNATURES OF REGISTRANT ------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRANDYWINE REALTY TRUST (Registrant) Date: November 14, 2001 By: /s/ Gerard H. Sweeney ----------------- -------------------------------- Gerard H. Sweeney, President and Chief Executive Officer (Principal Executive Officer) Date: November 14, 2001 By: /s/ Bradley W. Harris ----------------- -------------------------------- Bradley W. Harris, Vice President and Chief Accounting Officer (Principal Accounting Officer) 18