10-Q 1 0001.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities ---- Exchange Act of 1934 For the quarterly period ended June 30, 2000 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 36,133,825 Common Shares of Beneficial Interest were outstanding as of August 11, 2000. BRANDYWINE REALTY TRUST TABLE OF CONTENTS ----------------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2000 and June 30, 1999 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and June 30, 1999 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 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. 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)
June 30, December 31, 2000 1999 --------------- -------------- ASSETS Real estate investments: Operating properties $ 1,785,589 $ 1,792,228 Construction-in-progress 52,238 24,742 Land held for development 32,653 11,127 ------------ ------------ 1,870,480 1,828,097 Accumulated depreciation (157,278) (125,744) ------------ ------------ 1,713,202 1,702,353 Cash and cash equivalents 12,630 5,692 Escrowed cash 14,149 10,814 Accounts receivable, net 30,694 25,893 Due from affiliates 10,264 7,361 Investment in management company, at equity 158 228 Investment in real estate ventures, at equity 38,269 35,682 Deferred costs, net 17,857 17,960 Other assets 22,634 23,933 ------------ ------------ Total assets $ 1,859,857 $ 1,829,916 ============ ============ LIABILITIES AND BENEFICIARIES' EQUITY Mortgage notes payable $ 481,461 $ 462,809 Borrowings under Credit Facility 421,825 376,825 Accounts payable and accrued expenses 13,458 17,596 Distributions payable 20,060 18,982 Tenant security deposits and deferred rents 16,672 18,871 ------------ ----------- Total liabilities 953,476 895,083 Minority interest 145,129 145,941 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 2000 and 1999 8 8 8.75% Series B Preferred Shares, $0.01 par value; issued and outstanding-4,375,000 in 2000 and 1999 44 44 Common Shares of beneficial interest, $0.01 par value; shares authorized-100,000,000; issued and outstanding- 35,703,623 in 2000 and 36,372,590 in 1999 357 364 Additional paid-in capital 849,862 863,962 Share warrants 908 908 Cumulative earnings 95,226 76,643 Cumulative distributions (185,153) (153,037) ------------ ----------- Total beneficiaries' equity 761,252 788,892 ------------ ----------- Total liabilities and beneficiaries' equity $ 1,859,857 $ 1,829,916 ============ ============
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)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- --------------------------- 2000 1999 2000 1999 ----------- ------------ ---------- ------------ Revenue: Rents $ 61,243 $ 61,199 $ 121,774 $ 120,638 Tenant reimbursements 9,047 9,079 18,003 17,813 Other 1,863 1,394 3,820 4,004 --------- --------- ---------- ----------- Total revenue 72,153 71,672 143,597 142,455 Operating Expenses: Property operating expenses 15,771 16,675 32,134 32,662 Real estate taxes 6,405 6,029 12,689 12,228 Interest 16,361 18,138 32,315 36,901 Depreciation and amortization 16,557 17,538 33,120 34,602 Management fees 3,578 2,914 6,887 6,055 Administrative expenses 966 626 1,324 1,029 Amortization of deferred compensation costs 554 418 1,051 778 --------- --------- ---------- ----------- Total operating expenses 60,192 62,338 119,520 124,255 Income before equity in income of management company, equity in income of real estate ventures and minority interest 11,961 9,334 24,077 18,200 Equity in (loss) income of management company (83) 38 (70) 71 Equity in income of real estate ventures 1,119 280 1,762 429 Gain on sale of interests in real estate 68 - 68 - --------- --------- ---------- ----------- Income before minority interest 13,065 9,652 25,837 18,700 Minority interest (2,266) (1,819) (4,448) (3,669) --------- --------- ---------- ----------- Net income 10,799 7,833 21,389 15,031 Income allocated to Preferred Shares (2,977) (1,070) (5,954) (1,750) --------- --------- ---------- ----------- Income allocated to Common Shares $ 7,822 $ 6,763 $ 15,435 $ 13,281 ========= ========= ========== =========== Earnings per Common Share: Basic $ 0.22 $ 0.18 $ 0.43 $ 0.35 ========= ========= ========== =========== Diluted $ 0.22 $ 0.18 $ 0.43 $ 0.35 ========= ========= ========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 BRANDYWINE REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited and in thousands)
Six Months Ended June 30, ------------------------------------- 2000 1999 ------------------ ----------------- Cash flows from operating activities: Net income $ 21,389 $ 15,031 Adjustments to reconcile net income to net cash from operating activities: Minority interest 4,448 3,669 Depreciation and amortization 33,120 34,602 Straight-line rent (3,548) (4,322) Equity in loss (income) of management company 70 (71) Equity in income of real estate ventures (1,762) (429) Amortization of deferred compensation costs 1,051 778 Amortization of financing costs 1,733 1,516 Gain on sale of interests of real estate ventures (68) - Changes in assets and liabilities: Accounts receivable (1,253) (5,419) Due from affiliates (2,903) 317 Deferred costs and other assets 1,299 5,212 Accounts payable and accrued expenses (4,592) (518) Tenant security deposits and deferred rents (2,199) 3,332 ---------- ----------- Net cash from operating activites 46,785 53,698 Cash flows from investing activities: Acquisitions of properties (7,935) (12,426) Sales of properties 825 123,109 Capital expenditures (35,543) (19,773) Investment in real estate ventures (825) (7,966) Increase in escrowed cash (3,335) (3,993) Leasing costs (2,417) (3,101) ---------- ----------- Net cash from investing activities (49,230) 75,850 Cash flows from financing activites: Proceeds from notes payable, Credit Facility 55,000 - Repayments of notes payable, Credit Facility (10,000) (286,500) Proceeds from mortgage notes payable 25,900 195,808 Repayments of mortgage notes payable (7,289) (31,719) Debt financing costs (368) (3,278) Proceeds from issuance of Preferred Shares, net - 31,207 Repurchases of Common Shares (14,811) (286) Distributions paid to shareholders (33,789) (31,051) Distributions paid to minority partners (5,260) (4,397) ---------- ----------- Net cash from financing activities 9,383 (130,216) ---------- ----------- Increase (decrease) in cash and cash equivalents 6,938 (668) Cash and cash equivalents at beginning of period 5,692 13,075 ---------- ----------- Cash and cash equivalents at end of period $ 12,630 $ 12,407 ========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 BRANDYWINE REALTY TRUST NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 1. THE COMPANY ----------- Brandywine Realty Trust (collectively with its subsidiaries, the "Company") is a self-administered and self-managed real estate investment trust (a "REIT") active in acquiring, developing, redeveloping, leasing and managing office and industrial properties. As of June 30, 2000, the Company's portfolio included 198 office properties, 50 industrial facilities, one mixed-use property and five properties under redevelopment (collectively, the "Properties") that contain an aggregate of 16.7 million net rentable square feet. A majority of the Properties are located in the office and industrial markets surrounding Philadelphia (Northern and Western Suburbs and Wilmington, Delaware) and Southern/Central New Jersey. The balance of the Properties are primarily located in Northern New Jersey and Long Island, New York; and Northern and Richmond, Virginia. As of June 30, 2000, the Company also held economic interests in twelve office real estate ventures (the "Real Estate Ventures"). 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 June 30, 2000, held an approximate 87.7% interest in the Operating Partnership and was entitled to approximately 94.3% of the Operating Partnership's income after distributions to holders of Series B Preferred Units. The Operating Partnership holds 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. As of June 30, 2000, the Management Company was managing and leasing properties containing an aggregate of approximately 20.7 million net rentable square feet, of which 16.7 million net rentable square feet related to properties owned by the Company and approximately 4.0 million net rentable square feet related to properties owned by unaffiliated third parties or the Real Estate Ventures. 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, subject to an increase in the event quarterly distributions paid to holders of Common Shares exceed $0.51 per share. As of June 30, 2000, there were 2,156,150 Class A Units and 1,950,000 outstanding Series B Preferred Units held by third party investors. 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, 1999, 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 generally accepted accounting principles 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 June 30, 2000, the results of its operations for the three and six month periods ended June 30, 2000 and 1999, and its cash flows for the six months ended June 30, 2000 and 1999 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, 1999. Certain prior year amounts have been reclassified to conform with the current year presentation. 6 Real Estate Investments ----------------------- Real estate investments include capitalized direct internal development costs totaling $.6 million and $.9 million for the three and six months ended June 30, 2000 and $.4 million and $.6 million for the three and six months ended June 30, 1999. Deferred Costs -------------- Deferred costs include internal direct leasing costs totaling $.2 million and $1.0 million for the three and six months ended June 30, 2000 and $.3 million and $.6 million for the three and six months ended June 30, 1999. New Pronouncements ------------------ In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The FASB also issued SFAS No. 137 that delays the effective date for SFAS 133 until fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards for the recognition and measurement of derivative instruments and hedging activities. The Company has not quantified the impact of SFAS 133 on the Company's future financial position or result of operations. 3. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS -------------------------------------------------------- Second Quarter 2000 ------------------- 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. Second Quarter 1999 ------------------- During the second quarter of 1999, the Company sold 20 industrial properties and one office property containing 2.1 million net rentable square feet for $99.8 million and acquired four office properties containing 277,000 net rentable square feet for $14.4 million. The results of operations on a pro forma basis on the above acquisitions and dispositions are not significant. 4. INDEBTEDNESS ------------ The Company utilizes credit facility borrowings for general business purposes, including the acquisition of properties and the repayment of debt. At June 30, 2000, the Company had a $450.0 million unsecured credit facility (the "Credit Facility") that matures in September 2001, which can be extended through September 2002 upon payment of a fee. The Credit Facility bears interest at LIBOR (LIBOR was 6.70% at June 30, 2000) plus 1.5%, with the spread over LIBOR subject to reductions from .125% to .35% and a possible increase of .25% based on the Company's leverage. As of June 30, 2000, the Company had $421.8 million of borrowings and $16.5 million of letters-of credit outstanding under the Credit Facility. The weighted-average interest rate on the Credit Facility was 7.69% for the six months ended June 30, 2000. The Company is currently in compliance with all covenants in the Credit Facility. As of June 30, 2000, the Company had $481.5 million of mortgage notes payable secured by 97 of the Properties and a portion of its land holdings. Fixed rate mortgages, totaling $337.0 million, require payments of principal and/or interest (or imputed interest) at rates ranging from 5.0% to 9.88% and mature at various dates from August 2000 through July 2027. The weighted-average interest rate on the Company's mortgages was 7.87% in 2000. For the three months ended June 30, 2000 and 1999, the Company paid interest totaling $16.8 million and $16.2 million including capitalized interest of $2.0 million in 2000 and $.2 million in 1999. For the six months ended June 30, 2000 and 1999, the Company paid interest totaling $33.5 million and $35.0 million including capitalized interest of $3.4 in 2000 and $.2 million in 1999. 7 5. BENEFICIARIES' EQUITY --------------------- The Series A Preferred Shares, with a stated value of $50.00, are convertible into Common Shares, at the option of the holder, at a conversion price of $28.00. The conversion price declines to $26.50, if the trading price of the Common Shares during the 60-day period ending December 31, 2003 is $23.00 or less. The Series A Preferred Shares bear a preferred distribution of 7.25% per annum, subject to an increase if quarterly distributions paid to Common Share holders exceeds $0.51 per share. The Series A Preferred Shares are perpetual and may be redeemed, at the Company's option, at par beginning in January 2004 or earlier, if the market price of the Common Shares exceeds specified levels. The Series B Preferred Shares, convertible into Common Shares at a conversion price of $24.00 per share, are entitled to quarterly dividends equal to the greater of $0.525 per share or the quarterly dividend on the number of Common Shares into which a Series B Preferred Share is convertible. The Series B Preferred Shares are perpetual and may be redeemed, at the Company's option, at par, beginning in April 2007. In addition, the Company may require the conversion of the Series B Preferred Shares into Common Shares starting in April 2004, if certain conditions are met, including that the Common Shares are then trading in excess of 130% of the conversion price. Upon certain changes in control of the Company, the holder may require the Company to redeem its Series B Preferred Shares. However, the Company has the ability and intent to cause the Series B Preferred Shares to be converted into Common Shares rather than redeemed in such circumstances. On June 26, 2000, the Company declared a distribution of $0.40 per Common Share, totaling $14.5 million, which was paid on July 25, 2000 to shareholders of record as of July 7, 2000. The Operating Partnership simultaneously declared a $0.40 per unit cash distribution to holders of Class A Units totaling $.9 million. On June 26, 2000, 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 July 15, 2000 to holders of Series A Preferred Shares, Series B Preferred Shares and Series B Preferred Units totaled $.7 million, $2.3 million and $1.7 million, respectively. During the second quarter of 2000, the Company repurchased 14,733 Common Shares for an aggregate of $.3 million (an average price of $17.31 per share). 6. SEGMENT INFORMATION ------------------- The Company has four reportable segments: (1) Pennsylvania Suburbs (includes Berks, Bucks, Chester, Cumberland, Dauphin, Delaware, Lehigh, Montgomery, Northampton and Philadephia counties and Wilmington, Delaware), (2) Southern/Central New Jersey (includes Atlantic, Burlington, Camden and Mercer counties), (3) New York (includes Northern New Jersey and Long Island, New York) and (4) Virginia (includes Northern Virginia and Richmond, Virginia). Corporate is responsible for cash and investment management and certain other general support functions. 8 Segment information as of and for the three months ended June 30, 2000 and June 30, 1999 is as follows (in thousands):
Southern/ Pennsylvania Central Suburbs New Jersey New York Virginia Corporate Total ------------- ------------- ------------- ------------- ------------- --------------- 2000: ----- Real estate investments, at cost $ 928,943 $ 465,094 $ 170,193 $ 306,250 $ - $ 1,870,480 Total revenue 36,343 18,615 6,710 10,301 184 72,153 Property operating expenses and real estate taxes 10,824 6,345 2,157 2,850 - 22,176 Interest 1,848 2,625 743 546 10,599 16,361 Depreciation & amortization 2,782 7,192 2,784 3,799 - 16,557 1999: ----- Real estate investments, at cost $ 890,586 $ 448,140 $ 167,293 $ 307,957 $ - $ 1,813,976 Total revenue 35,833 19,309 6,410 10,109 11 71,672 Property operating expenses and real estate taxes 11,048 6,675 1,837 3,144 - 22,704 Interest 1,956 2,403 769 688 12,322 18,138 Depreciation & amortization 8,872 4,564 1,759 2,343 - 17,538
Segment information for the six months ended June 30, 2000 and June 30, 1999 is as follows (in thousands):
Southern/ Pennsylvania Central Suburbs New Jersey New York Virginia Corporate Total ------------- ------------- ------------- ------------- ------------- --------------- 2000: ----- Total revenue $ 71,671 $ 38,177 $ 13,401 $ 19,995 $ 353 $ 143,597 Property operating expenses and real estate taxes 22,186 12,776 4,099 5,762 - 44,823 Interest 3,706 5,143 1,480 1,089 20,897 32,315 Depreciation & amortization 12,995 10,261 4,152 5,712 - 33,120 1999: ----- Total revenue $ 72,684 $ 37,847 $ 12,518 $ 19,080 $ 326 $ 142,455 Property operating expenses and real estate taxes 22,269 13,090 3,593 5,938 - 44,890 Interest 3,340 3,890 1,483 1,368 26,820 36,901 Depreciation & amortization 17,904 9,158 3,038 4,502 - 34,602
9 7. 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).
Three Months Ended June 30, ------------------------------------------------------------------- 2000 1999 --------------------------------- --------------------------------- Basic Diluted Basic Diluted --------------- ---------------- ---------------- ---------------- Net income $ 10,799 $ 10,799 $ 7,833 $ 7,833 Income allocated to Preferred Shares (2,977) (2,977) (1,070) (1,070) ------------ ------------ ------------ ------------ Net income available to common shareholders $ 7,822 $ 7,822 $ 6,763 $ 6,763 ============ ============ ============ ============ Weighted-average shares outstanding 35,701,256 35,701,256 37,573,381 37,573,381 Options and warrants - 15,391 - 17,077 ------------ ------------ ------------ ------------ Total weighted-average shares outstanding 35,701,256 35,716,647 37,573,381 37,590,458 ============ ============ ============ ============ Earnings per share $ 0.22 $ 0.22 $ 0.18 $ 0.18 ============ =========== ============ ===========
Six Months Ended June 30, ------------------------------------------------------------------- 2000 1999 --------------------------------- --------------------------------- Basic Diluted Basic Diluted --------------- ---------------- ---------------- ---------------- Net income $ 21,389 $ 21,389 $ 15,031 $ 15,031 Income allocated to Preferred Shares (5,954) (5,954) (1,750) (1,750) ------------ ------------ ------------ ------------ Net income available to common shareholders $ 15,435 $ 15,435 $ 13,281 $ 13,281 ============ ============ ============ ============ Weighted-average shares outstanding 35,918,980 35,918,980 37,573,381 37,573,381 Options and warrants - 13,814 - 15,627 ------------ ------------ ------------ ------------ Total weighted-average shares outstanding 35,918,980 35,932,794 37,573,381 37,589,008 ============ ============ ============ ============ Earnings per share $ 0.43 $ 0.43 $ 0.35 $ 0.35 ============ ============ ============ ============
10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the financial statements 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. 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 revenues to meet debt service payments and operating expenses, the unavailability of equity and debt financing, unanticipated costs associated with the acquisition and integration of the Company's acquisitions, 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, 1999. OVERVIEW The Company operates in four geographic segments: (1) Pennsylvania Suburbs (includes Berks, Bucks, Chester, Cumberland, Dauphin, Delaware, Lehigh, Montgomery, Northampton and Philadelphia counties and Wilmington, Delaware), (2) Southern/Central New Jersey (includes Atlantic, Burlington, Camden and Mercer counties), (3) New York (includes Northern New Jersey and Long Island, New York), and (4) Virginia (includes Northern Virginia and Richmond, 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 June 30, 2000, the Company's portfolio consisted of 198 office properties, 50 industrial facilities, one mixed-use property and five properties under redevelopment that contain an aggregate of 16.7 million net rentable square feet. The Company receives income primarily from rental revenue (including tenant reimbursements) from the Properties and, to a lesser extent, from the management of certain properties owned by third parties. The Company expects that revenue growth in the next two years will result primarily from rent increases in its current portfolio. RESULTS OF OPERATIONS The results of operations for the three and six months ended June 30, 2000 and 1999 include the respective operations of the Properties. For comparative purposes, the Company had a total of 243 of the Properties ("Same Store Properties") for the entire three months ended June 30, 2000 and 1999 as compared to 249 properties as of June 30, 2000. Comparison of the Three and Six Months Ended June 30, 2000 and June 30, 1999 Revenue (which includes rental income, recoveries from tenants and other income) increased to $72.2 million and $143.6 for the three and six months ended June 30, 2000 as compared to $71.7 million and $142.5 for the comparable periods in 1999. The straight-line rent adjustment increased revenues by $1.7 million and $3.5 million for the three and six months ended June 30, 2000 and $2.1 million and $4.3 million for the three and six months ended June 30, 1999. Rental income for the Same Store Properties increased to $57.4 million for the three months ended June 30, 2000 from $55.0 million for the comparable period in 1999 due to increased rental rates and occupancy. Property operating expenses and real estate taxes decreased to $22.2 million and $44.8 million for the three and six months ended June 30, 2000 as compared to $22.7 million and $44.9 million for the comparable periods in 1999. Property operating expenses and real estate taxes for the Same Store Properties decreased to $20.7 million for the three months ended June 30, 2000 from $21.0 million for the comparable period in 1999. This decrease was primarily attributable to expense savings from the Company's "Preferred Vendor Program," designed to take advantage of economies of scale. 11 Interest expense decreased to $16.4 million and $32.3 million for the three and six months ended June 30, 2000 from $18.1 million and $36.9 million for the comparable periods in 1999 as a result of decreased average borrowings on the Company's Credit Facility and mortgage notes payable and increased capitalized interest, offset by increased interest rates during 2000. Average debt balances outstanding for the three and six months ended June 30, 2000 were $892.8 million and $875.1 million as compared to $957.5 and $971.9 million for the comparable periods in 1999. For the six months ended June 30, 2000, the weighted-average interest rate on the Credit Facility and mortgage notes payable were 7.69% and 7.87% as compared to 6.95% and 6.75% for the comparable periods in 1999. For the three months ended June 30, 2000 and 1999, the Company paid interest totaling $16.8 million and $16.2 million including capitalized interest of $2.0 million in 2000 and $.2 million in 1999. For the six months ended June 30, 2000 and 1999, the Company paid interest totaling $33.5 million and $35.0 million including capitalized interest of $3.4 in 2000 and $.2 million in 1999. Depreciation and amortization expense decreased to $16.6 million and $33.1 million for the three and six months ended June 30, 2000 from $17.5 million and $34.6 million for the comparable periods in 1999 as a result of property dispositions during the second half of 1999. Amortization of deferred compensation costs increased to $.6 million and $1.1 million for the three and six months ended June 30, 2000 as compared to $.4 million and $.8 million for the comparable periods in 1999 due to the issuance of additional restricted Common Shares to Company executives in the latter part of 1999. Management fees increased to $3.6 million and $6.9 million for the three and six months ended June 30, 2000 from $2.9 million and $6.1 million for the comparable periods in 1999. This increase was attributable to increased management fee rates in 2000 offset by properties sold during the second half of 1999. Administrative expenses increased to $1.0 million and $1.3 million for the three and six months ended June 30, 2000 from $.6 million and $1.0 million for the comparable periods in 1999 as a result of the start-up of e-Tenants in May 2000. e-Tenants is a web-based service provider featuring comprehensive business-to-business, business-to-consumer and on-line work order placement capabilities. Equity in income in Real Estate Ventures increased to $1.1 million and $1.8 million for the three and six months ended June 30, 2000 from $.3 million and $.4 million for the comparable periods of 1999. The increase is primarily attributable to an increase in the number of ventures commencing operations. LIQUIDITY AND CAPITAL RESOURCES Cash Flows During the six months ended June 30, 2000, the Company generated $46.8 million in cash flow from operating activities. Other sources of cash flow consisted of: (i) $55.0 million of proceeds from draws on the Credit Facility, (ii) $25.9 million in additional mortgage notes payable and (iii) $.8 million of proceeds from sales of properties. During the six months ended June 30, 2000, cash out-flows consisted of: (i) $39.0 million of distributions to shareholders and minority partners in the Operating Partnership, (ii) $35.5 million to fund development and capital expenditures, (iii) $14.8 million to repurchase Common Shares, (iv) $10.0 million of Credit Facility repayments, (v) $7.9 million of property acquisitions, (vi) $7.3 million of mortgage note repayments, (vii) $3.3 million of escrowed cash, (viii) $2.8 million in deferred leasing and financing costs and (ix) $.8 million of investment in unconsolidated real estate ventures. 12 Development The Company is in the process of developing three sites and redeveloping five properties. 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 projected costs of these developments and redevelopments are $76.3 million. Capitalization At June 30, 2000, the Company maintained a $450.0 million Credit Facility. As of June 30, 2000, the Company had approximately $903.3 million of debt outstanding, consisting of $421.8 million of borrowings under the Credit Facility and $481.5 million of mortgage notes payable. The mortgage notes payable consists of $337.0 million of fixed rate loans and $144.5 million of variable rate loans. The mortgage loans mature between August 2000 and July 2027. As of June 30, 2000, the Company had $16.5 million of letters of credit outstanding and $11.7 million of availability remaining under the Credit Facility. For the six months ended June 30, 2000, the weighted-average interest rate under the Credit Facility was 7.69%, and the weighted-average interest rate for borrowings under mortgage notes payable was 7.87%. As of June 30, 2000, the Company's debt-to-market capitalization ratio was 48.3%. As a general policy, the Company intends to maintain a long-term average debt-to-market capitalization ratio of no more than 50%. The Company's Board of Trustees previously approved a program authorizing the Company to repurchase up to 3,000,000 of its outstanding Common Shares. The Board imposed no time limit on the share repurchase program. During the second quarter of 2000, the Company repurchased 14,733 Common Shares for an aggregate of $.3 million (an average price of $17.31 per share). Under the share repurchase program, the Company has authority to repurchase an additional 652,130 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 the provision of services to third parties. The Company intends to use these funds to meet short-term liquidity needs, which are to fund operating expenses, debt service requirements, recurring capital expenditures, tenant allowances, leasing commissions and the minimum distributions required to maintain the Company's REIT qualification under the Internal Revenue Code. On June 26, 2000, the Company declared a distribution of $0.40 per Common Share, totaling $14.5 million, which was paid on July 25, 2000 to shareholders of record as of July 7, 2000. The Operating Partnership simultaneously declared a $0.40 per unit cash distribution to holders of Class A Units totaling $.9 million. On June 26, 2000, 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 July 15, 2000 to holders of Series A Preferred Shares, Series B Preferred Shares and Series B Preferred Units totaled $.7 million, $2.3 million and $1.7 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. 13 Funds from Operations Management generally 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, gains on sales of real estate investments and 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 June 30, 2000 and 1999 is summarized in the following table (in thousands, except share data):
Three Months Ended June 30, Six Months Ended June 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 --------------- -------------- --------------- -------------- Income before gains on sales and minority interest $ 12,997 $ 9,652 $ 25,769 $ 18,700 Add: Depreciation: Real property 15,925 16,931 31,872 33,271 Real estate ventures 587 230 1,124 471 Amortization of leasing costs 632 605 1,248 1,331 ------------ ----------- ------------ ----------- Funds from operations before minority interest $ 30,141 $ 27,418 $ 60,013 $ 53,773 ============ =========== ============ =========== Weighted-average Common Shares (including Common Share equivalents) and Operating Partnership units 47,342,146 45,082,040 47,558,293 44,586,540 ============ =========== ============ ===========
Year 2000 Compliance The Company has not experienced any problems relating to the Year 2000 issue on or after January 1, 2000. The Company implemented its Year 2000 compliance program and intends to maintain its contingency plans until satisfied that Company operations will not be adversely impacted by the possibility of a Year 2000 issue. Inflation A majority of the Company's leases provide for separate escalations of real estate taxes and operating expenses either on a triple net basis or over a base amount. In addition, many of the office leases provide for fixed base rent increases 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 2000. Reference is made to Item 7 included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Part II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- The Company is a defendant in a case in which the plaintiffs allege that the Company breached its obligation to purchase a portfolio of properties for approximately $83.0 million. In July 1999, the complaint against the Company was dismissed with prejudice. The plaintiffs then appealed the dismissal and filed a motion for reconsideration. The case is currently on appeal before the Appellate Division of the Superior Court of New Jersey. Briefing on the appeal has been completed and the parties are awaiting a decision. 14 In November 1999, a third-party complaint was filed in the Superior Court of New Jersey, Burlington County, by BRI OP Limited Partnership ("BRI OP") against the Company as well as several persons and entities, including several former affiliates of the Company, relative to Greentree Shopping Center located in Marlton, New Jersey ("Subject Property"). The Subject Property was owned and managed by a subsidiary of the Company between 1986 and 1988. BRI OP, also a former owner of the Subject Property, has been sued by the present owner and manager of the Subject Property, seeking indemnification and contribution for costs related to the remediation of environmental contamination allegedly caused by a dry cleaning business, which was a tenant of the Subject Property. BRI OP, in turn, brought a third-party action against the Company and others seeking indemnification for environmental remediation and clean up costs for which it may be held liable. The plaintiff has since filed a direct action against the Company, raising the same claims as BRI OP derivatively. The litigation is presently in the early stages of discovery; however, plaintiff's response to the Company's interrogatories indicates that the estimated cost of soil remediation and/or clean-up is approximately $.2 million. As of this date, the Company's investigation of ground water impact is on-going, NJDEP has been advised and the Company is unable to determine its ultimate responsibility for such costs. Item 2. Changes in Securities --------------------- None. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Company held its annual meeting of shareholders on May 16, 2000. At the meeting, each of the seven individuals nominated for election to the Company's Board of Trustees were elected to the Board. These individuals will serve on the Board, together with an eighth Trustee (D. Pike Aloian), separately elected by the holder of a class of the Company's preferred securities. The number of shares cast for, against or withheld for each nominee is set forth below: For Against Withheld ---------- ------- -------- Anthony A. Nichols, Sr. 36,420,039 0 79,316 Gerard H. Sweeney 36,420,055 0 79,300 Donald E. Axinn 36,410,827 0 88,528 Walter D'Alessio 36,425,846 0 73,509 Robert Larson 36,412,635 0 86,720 Warren V. Musser 36,409,161 0 90,194 Charles P. Pizzi 36,432,210 0 67,145 Item 5. Other Information ----------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: --------- 27.1 Financial Data Schedule (electronic filers) (b) Reports on Form 8-K: -------------------- During the three months ended June 30, 2000, and through August 11, 2000, the Company did not file any Reports on Form 8-K. 15 BRANDYWINE REALTY TRUST SIGNATURES OF REGISTRANT Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRANDYWINE REALTY TRUST (Registrant)
Date: August 11, 2000 By: /s/ Gerard H. Sweeney --------------- ------------------------------------------------ Gerard H. Sweeney, President and Chief Executive Officer (Principal Executive Officer) Date: August 11, 2000 By: /s/ Jeffrey F. Rogatz --------------- --------------------------------------------------------- Jeffrey F. Rogatz, Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: August 11, 2000 By: /s/ Bradley W. Harris --------------- ------------------------------------------------ Bradley W. Harris, Vice President and Chief Accounting Officer (Principal Accounting Officer)
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