-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MdZxeXQmhSy2By7IdXSBo8ndN93zu4I+B7plQitm4m0zxqC8PuwvFrBTPB9H5vO0 s0+GZdT2ZWu46gcTy9zPeg== 0000950116-98-001569.txt : 19980729 0000950116-98-001569.hdr.sgml : 19980729 ACCESSION NUMBER: 0000950116-98-001569 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980727 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRANDYWINE REALTY TRUST CENTRAL INDEX KEY: 0000790816 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 232413352 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-09106 FILM NUMBER: 98671440 BUSINESS ADDRESS: STREET 1: 16 CAMPUS BLVD STREET 2: STE 100 CITY: NEWTOWN SQUARE STATE: PA ZIP: 19073 BUSINESS PHONE: 6103255600 MAIL ADDRESS: STREET 1: TWO GREENTREE CENTRE STREET 2: SUITE 100 CITY: MARLTON STATE: NJ ZIP: 08053 FORMER COMPANY: FORMER CONFORMED NAME: LINPRO SPECIFIED PROPERTIES DATE OF NAME CHANGE: 19920703 10-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A No. 1 (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1997 ----------------- or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND 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 16 Campus Boulevard, Newtown Square, Pennsylvania 19073 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (610) 325-5600 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Shares of Beneficial Interest, (par value $0.01 per share) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: ________________________________________________________________________________ (Title of class) ________________________________________________________________________________ (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting shares held by non-affiliates of the registrant was approximately $864.0 million as of March 27, 1998. The aggregate market value has been computed by reference to the closing price at which the Common Shares of Beneficial Interest were sold on the New York Stock Exchange on such date. An aggregate of 37,426,000 Common Shares of Beneficial Interest were outstanding as of March 30, 1998. Documents Incorporated By Reference None -2- PART I Item 1. Business General Brandywine Realty Trust (collectively with its subsidiaries, the "Company") is a self-administered, self-managed and fully integrated real estate investment trust ("REIT") active in acquiring, developing, redeveloping, leasing and managing suburban office and industrial properties. As of December 31, 1997, the Company owned a portfolio of 95 office properties and 22 industrial facilities (the "Year-End Properties") that contained an aggregate of approximately 7.1 million net rentable square feet. As of December 31, 1997, the Year-End Properties (excluding two Year-End Properties under development or redevelopment) were approximately 91.2% leased to 688 tenants and had an average age of approximately 14 years. Between January 1, 1998 and March 15, 1998, the Company acquired 32 office properties and six industrial facilities and, as of March 15, 1998, the Company's portfolio contained 127 office properties and 28 industrial facilities (together with the Year-End Properties, the "Properties" ). As of March 15, 1998, the Properties were approximately 93.4% leased to 909 tenants and had an average age of approximately 15 years. As of March 15, 1998, 136 of the 155 Properties (approximately 81.4% of the Company's portfolio based on net rentable square feet) were located in the Suburban Philadelphia Office and Industrial Market. The term "Suburban Philadelphia Office and Industrial Market" or "Market" means the areas comprised of the following counties: Berks, Bucks, Chester, Delaware, Lehigh, Montgomery and Northampton in Pennsylvania and Burlington and Camden in New Jersey. The Properties consist primarily of Class A suburban office and industrial properties. The Company considers Class A suburban office and industrial properties to be those that have desirable locations, are well-maintained and professionally managed and have the potential of achieving rental and occupancy rates that are typically at or above those prevailing in their respective markets. Certain of the Properties serve as flex facilities, accommodating office use, warehouse space and research and development activities. As of December 31, 1997, 11 tenants individually represented more than 1.0% of the Company's aggregate Annualized Escalated Rent (as defined below) at the Year-End Properties. The Company's 10 largest tenants at December 31, 1997 accounted for approximately 21.1% of total Annualized Escalated Rent for the year ended December 31, 1997 and approximately 17.9% of the net rentable square feet at the Year-End Properties. As of March 15, 1998, the Company also owned, and held options to purchase, approximately 264.5 acres of undeveloped land directly, and owned or held options to purchase approximately 62 acres of undeveloped land through its economic interests in seven joint venture development entities (the "Development Entities"). The Company believes that this undeveloped land can accommodate development of at least 2.1 million net rentable square feet of office space and 340,000 net rentable square feet of industrial space. Two of the Development Entities are currently constructing two Class A suburban office properties which are scheduled for completion in 1998 and are expected to contain an aggregate of approximately 235,000 net rentable square feet. The Company's business objective is to increase cash available for distribution and to maximize shareholder value by: * maximizing cash flow through leasing strategies designed to capture potential rental growth as rental rates increase and as below-market leases are renewed; * ensuring a high tenant retention rate through an aggressive tenant services program responsive to the varying needs of the Company's diverse base of 909 tenants as of March 15, 1998; * broadening its geographic and economic diversification while maximizing economies of scale; * acquiring high-quality office and industrial properties and portfolios of such properties at attractive yields in selected submarkets within the Mid-Atlantic region (including Delaware, -3- Maryland, New Jersey, New York, Ohio, Pennsylvania, Virginia and the District of Columbia), which management expects will experience economic growth; * capitalizing on management's redevelopment expertise to selectively acquire, redevelop and reposition underperforming Properties in desirable locations; * acquiring land in anticipation of developing office or industrial properties on a build-to-suit basis, under circumstances where significant pre-leasing can be arranged or as otherwise warranted by market conditions; * enhancing the Company's investment strategy through the pursuit of joint venture opportunities with high quality partners having attractive real estate holdings or significant financial resources; and * optimizing the use of debt and equity financing to create a flexible and conservative capital structure that will enable the Company to continue its aggressive growth strategy. As a result of its business objective of increasing cash available for distribution and maximizing shareholder value, the Company has recently experienced rapid growth. Between January 1, 1997 and March 15, 1998, the Company has acquired 93 office properties containing approximately 6.7 million net rentable square feet and 25 industrial facilities containing approximately 1.7 million net rentable square feet and, together with the Development Entities, has acquired ownership of, or rights to acquire, approximately 326.5 acres of undeveloped land. The aggregate purchase price for the 118 Properties acquired by the Company since January 1, 1997 was approximately $738.8 million. The Company believes that, through the expertise and extensive relationships of its management and its flexible capital structure, it will continue to identify and capitalize on substantial opportunities for additional real estate investments from a variety of sources, including institutional and private holders of real estate seeking liquidity or reduction in their holdings or tax-deferred dispositions. The Company expects to continue to concentrate its real estate activities in submarkets within the Mid-Atlantic region where it believes that: (i) barriers to entry (such as zoning restrictions, infrastructure limitations and limited developable land) are likely to create supply constraints on office and industrial space; (ii) current market rents do not justify new construction; (iii) it can maximize market penetration by accumulating a critical mass of properties and thereby enhance operating efficiencies; and (iv) there is potential for economic growth. On November 25, 1996, the Company combined its common shares of beneficial interest, par value $.01 per share ("Common Shares") by means of a one-for-three reverse share split and all information contained herein has been adjusted to give effect to the reverse share split. On October 21, 1997, the Company changed the listing of its Common Shares from the American Stock Exchange to the New York Stock Exchange (the "NYSE"). The Company's executive offices are located at 16 Campus Boulevard, Newtown Square, Pennsylvania 19073 and its telephone number is (610) 325-5600. Organization The Company was organized and commenced its operations in 1986 as a finite life Maryland real estate investment trust. In October 1994, the Company's shareholders approved amendments to the Company's Declaration of Trust that eliminated the Company's finite life status. The Company owns its assets and conducts its operations through Brandywine Operating Partnership, L.P. (the "Operating Partnership") and subsidiaries of the Operating Partnership. As of December 31, 1997 and March 15, 1998, the Company's ownership interest in the Operating Partnership was approximately 97.2% and 98.8%, respectively. The structure of the Company as an "UPREIT" is designed to permit persons -4- contributing properties (or interests in properties) to the Company to defer some or all of the tax liability they might otherwise incur. The Company conducts its real estate management services through a management company (the "Management Company"). The Company, through its indirect ownership of preferred and common stock of the Management Company, is entitled to receive 95% of amounts paid as dividends by the Management Company. See "-- Management Company." Recent Acquisitions At December 31, 1997, the Company's portfolio consisted of 117 properties totaling approximately 7.1 million net rentable square feet compared to 37 properties containing approximately 2.0 million net rentable square feet at December 31, 1996 and four Properties containing approximately 254,000 net rentable square feet at December 31, 1995. Between January 1, 1998 and March 15, 1998, the Company acquired 32 office properties containing approximately 2.8 million net rentable square feet and six industrial properties containing approximately 413,000 net rentable square feet, for an aggregate purchase price of approximately $335.1 million. The 1998 acquisitions (net of approximately $2.8 million of the aggregate purchase price allocated to undeveloped land) had a weighted average purchase price of approximately $103 per square foot (approximately $113 per square foot for the office property acquisitions and approximately $37 per square foot for the industrial property acquisitions). The following table sets forth certain information regarding Property acquisitions completed between January 1, 1998 and March 15, 1998:
Percent Net Leased Purchase Number Rentable as of Purchase Price of Square March 15, Price Per Square Property Location Properties Feet 1998 (in 000's) Foot - -------------------------------------------------------- ------------- -------------- ------------ -------------- ----------- OFFICE PROPERTIES Pennsylvania Blue Bell / Plymouth Meeting / Fort Washington 1 48,122 100.0% $ 4,100 $ 85 Southern Bucks County 2 128,659 93.9% 11,234 87 Main Line 1 61,102 100.0% 8,338 136 King of Prussia / Valley Forge 13 916,904 100.0% 99,598 106(1) Reading / Allentown 2 95,805 91.5% 7,580 79 New Jersey Bergen County 2 483,189 85.5% 69,614 144 Delaware 8 596,132 94.3% 70,941 119 Ohio 1 156,175 100.0% 14,696 94 Maryland 2 329,008 94.4% 33,571 102 -- --------- ----- -------- ---- TOTAL - OFFICE PROPERTIES 32 2,815,096 88.1% $319,672 $113(1) -- --------- ----- -------- ---- INDUSTRIAL PROPERTIES Pennsylvania Southern Bucks County 1 78,213 100.0% $ 2,800 $360 King of Prussia / Valley Forge 5 334,835 92.7% 12,644 38 -- --------- ----- -------- ---- TOTAL - INDUSTRIAL PROPERTIES 6 413,048 94.1% $ 15,444 $ 37 -- --------- ----- -------- ---- TOTAL / WEIGHTED AVERAGE 38 3,228,144 88.8% $335,116 $103(1) == ========= ===== ======== ====
(1) Purchase price per square foot excludes $2,800,000, which is the cost of an acquired parcel of undeveloped land. -5- Equity Financings Since January 1, 1997, the Company has consummated seven underwritten public offerings pursuant to which the Company issued an aggregate of 28,056,350 Common Shares and raised aggregate net proceeds of approximately $594.8 million. The net proceeds from these financings, which the Company contributed to the Operating Partnership, were used: (i) to repay debt; (ii) to fund property acquisitions (iii) to fund capital contributions to the Development Entities; and (iv) for working capital purposes. On March 4, 1997, the Company consummated an underwritten public offering of 2,200,000 Common Shares at a price to the public of $20.62 per share. On March 17, 1997, the Company issued an additional 175,500 Common Shares pursuant to exercise by the underwriters of their over-allotment option. Proceeds to the Company were used to fund the purchase of additional properties, to repay indebtedness and for working capital purposes. On July 28, 1997, the Company consummated an underwritten public offering of 10,000,000 Common Shares at a price to the public of $20.75 per share. On August 20, 1997, the Company issued an additional 1,500,000 Common Shares pursuant to exercise by the underwriters of their over-allotment option. Proceeds to the Company were used to fund the purchase of additional properties, to repay indebtedness and for working capital purposes. On September 16, 1997, the Company consummated an underwritten public offering of 786,840 Common Shares at a price to the public of $22.31 per share. Proceeds to the Company were used to fund the purchase of additional properties and for working capital purposes. On December 23, 1997, the Company consummated an underwritten public offering of 751,269 Common Shares at a price to the public of $24.62 per share. Proceeds to the Company were used to repay indebtedness. On February 4, 1998, the Company consummated an underwritten public offering of 10,000,000 Common Shares at a price to the public of $24.00 per share. On March 6, 1998, the Company issued an additional 1,000,000 Common Shares pursuant to exercise by the underwriters of their over-allotment option. Proceeds to the Company were used to repay indebtedness and for working capital purposes. On February 18, 1998, the Company consummated an underwritten public offering of 1,012,820 Common Shares at a price to the public of $24.06 per share. Proceeds to the Company were used to repay indebtedness. On February 27, 1998, the Company consummated an underwritten public offering of 629,921 Common Shares at a price to the public of $23.81 per share. Proceeds to the Company were used to repay indebtedness. In addition, on December 11, 1997, the Operating Partnership issued 389,976 units of limited partnership interest ("Units"), which are redeemable for an equal number of Common Shares, as part of the acquisition price for a portfolio of 14 office and industrial properties. Credit Facility On January 5, 1998, the Company replaced its $150 million secured revolving credit facility (the "1997 Credit Facility") with a $300 million unsecured revolving credit facility (the "Credit Facility"). On March 15, 1998, the maximum amount available to be borrowed under the Credit Facility was increased from $300 million to $330 million. The Credit Facility enables the Company to borrow funds at an interest rate equal to the one, two, three or six month LIBOR, plus, in each case, a range of 100 to 137.5 basis points, depending on the Company's then existing leverage and debt rating. Alternatively, the Company can borrow funds at a Base Rate equal to the higher of (i) the Prime Rate or (ii) the Fed Funds Rate plus 50 basis points. As of March 15, 1998, approximately $158.3 million was outstanding under the Credit -6- Facility and such amounts bore interest at an average rate of 7.1% per annum. The Credit Facility matures on January 5, 2001 and is extendible to January 5, 2002 by the Company in the absence of default and upon payment of a fee. The Credit Facility requires the Company to maintain compliance with customary financial and other covenants, including leverage ratios based on gross implied asset value and debt service coverage ratios, limitations on additional indebtedness, liens and distributions and a minimum net worth requirement. A structuring fee equal to .15% of the maximum amount available under the Credit Facility and a commitment fee equal to .15% of the first $150,000,000 of availability under the Credit Facility plus .375% of the second $150,000,000 of availability under the Credit Facility were paid to the lender at the closing of the Credit Facility. In addition, an unused credit fee is payable at the end of each quarter with respect to the portion of the Credit Facility which is unutilized during such quarter. The fee is equal to .15% per annum if at least fifty percent of the available credit under the Credit Facility was utilized, based on daily averages, during such quarter and equal to .20% per annum if less than fifty percent of the available credit under the Credit Facility was utilized, based on daily averages, during such quarter. An annual fee in the amount of $25,000 is payable annually in advance to NationsBank, N.A. as compensation for administration of the Credit Facility. To facilitate certain 1998 property acquisitions, on January 5, 1998, the Company also obtained an additional unsecured credit facility (the "Additional Credit Facility") permitting advances of up to $100.0 million. The Additional Credit Facility bore interest at a per annum floating rate equal to the one month LIBOR plus 150 basis points and was scheduled to mature on May 5, 1998. The Company repaid all amounts outstanding under the Additional Credit Facility with proceeds of the February 4, 1998 offering of Common Shares. Management Company The Company conducts its real estate management services business through the Management Company. The Company manages, through the Management Company, certain of the Properties and additional properties on behalf of unaffiliated third parties. As of December 31, 1997, the Management Company was managing properties containing an aggregate of approximately 7.2 million net rentable square feet, of which approximately 7.1 million net rentable square feet related to Properties then owned by the Company or subject to purchase options held by the Company, and approximately 102,000 net rentable square feet related to properties owned by unaffiliated third parties. Through its ownership of 100% of the non-voting preferred stock and 5% of the voting common stock of the Management Company, the Operating Partnership is entitled to receive 95% of amounts paid as dividends by the Management Company. Because certain executive officers of the Company indirectly own 95% of the voting common stock of the Management Company, the Company does not control the timing or amount of distributions by, or the management and operation of, the Management Company. Industry Segments The Company operates in one industry segment. The Company does not have any foreign operations and its business is not seasonal. Competition The leasing of real estate is highly competitive. The Properties compete for tenants with similar properties located in its markets primarily on the basis of location, rent charged, services provided, and the design and condition of the improvements. The Company also faces competition when attempting to acquire real estate, including competition from domestic and foreign financial institutions, other REIT's, life insurance companies, pension trusts, trust funds, partnerships and individual investors. -7- Possible Environmental Liabilities Under various Federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or releases at such property and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with contamination. The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property. All of the Properties have been subject to a Phase I or similar environmental site assessment (which involves general inspections without soil sampling or groundwater analysis) completed by independent environmental consultants. Except as indicated below with respect to 110 Summit Drive at the Whitelands Business Park in Exton, Pennsylvania (the " Whitelands Property") and the Affected Properties at the Paint Works (as defined below), the Company is not aware of any environmental liability with respect to the Properties that the Company's management believes would have a material adverse effect on the Company. An environmental assessment has identified environmental contamination with respect to the Whitelands Property. Petroleum products, solvents and heavy metals were detected in the groundwater. These contaminants are believed to be associated with debris deposited by third parties in a quarry formerly located on the Whitelands Property. The Whitelands Property previously appeared on the Comprehensive Environmental Response Compensation and Liability Information System List, a list maintained by the United States Environmental Protection Agency (the "EPA") of abandoned, inactive or uncontrolled hazardous waste sites which may require cleanup. The EPA conducted a preliminary assessment of the Whitelands Property in 1984, and subsequently the Whitelands Property was removed from the list. Although the Company can offer no assurance, based on its review of prior test results and consultation with counsel, the Company does not believe it is likely that it will be required to undertake remedial action with respect to such contamination, nor does the Company believe that any remediation which might be requested would be material to the Company. If the Company were required to undertake remedial action on the Whitelands Property, it has been indemnified through August 2001 against the cost of such remediation by Safeguard Scientifics, Inc. ("SSI") subject to a limitation of approximately $2.0 million. Because the Company does not believe that any remediation at the Whitelands Property is probable, no amounts have been accrued for any such potential liability. The Company acquired the Whitelands Property from SSI in August 1996 as part of an acquisition of a portfolio of properties from SSI and its real estate affiliate. At the time of the acquisition, Warren V. Musser, Chairman and Chief Executive Officer of SSI, became a member of the Company's Board of Trustees. An environmental assessment has identified environmental contamination at land acquired by the Company as part of its acquisition of certain Properties that include 6 East Clementon and 1, 4, 5, 7 and 10 Foster Avenue and an adjacent parking lot. These Properties (the "Affected Properties") and certain non-affected Properties are commonly referred to as the Paint Works Corporate Center ("Paint Works"). Volatile organic compounds, semi-volatile organic compounds and metals were detected in the groundwater, surface soils and sub-surface soils, principally on land acquired by the Company that is adjacent to the buildings located on the Affected Properties. These contaminants are associated with the use by prior owners and operators of the properties and are believed to be associated with the historic use of the Affected Properties as a paint and varnish factory since the mid-nineteenth century. The Affected Properties have been the subject of investigation by the New Jersey Department of Environmental Protection ("NJDEP") since the mid-1970's. The NJDEP has issued two directives to the former owners and operators of the site, ordering them to investigate and remediate the contamination at the site. The NJDEP has also entered into two administrative consent orders (the "ACO's") with Sherwin-Williams, the former owner and operator primarily responsible for the environmental contamination at the site, pursuant to which Sherwin-Williams has agreed to investigate and commence certain remediation. The NJDEP has provided written assurances to the Company that the NJDEP will not require the Company to investigate or -8- remediate the site so long as Sherwin-Williams continues to comply with the ACO's. In addition to the foregoing, the NJDEP has also issued a letter of non-applicability for the remainder of the Paint Works properties owned by the Company at the site. This letter means that, based on the facts known to the NJDEP, the remainder of the Paint Works properties is not within any state statutory program requiring investigation or cleanup of environmental conditions. The Company has also been indemnified against Sherwin-Williams' failure to comply with the ACO's and from any migration of the aforesaid compounds onto the adjacent Company-owned properties which are not part of the Affected Properties by PWCCW, a New Jersey general partnership, and Robert K. Scarborough (collectively, "Scarborough"). In the event that Sherwin-Williams ceases to comply with the ACO's and Scarborough is unable to fulfill its obligations under its agreement with the Company, the Company could potentially be responsible for costs associated with any remediation. Because the Company does not believe that the occurrence of both of these events is probable, no amounts have been accrued for any such potential liability. No assurance can be given that existing environmental studies with respect to the Properties reveal all environmental liabilities or that any prior owner of any such property did not create any material environmental condition not known to the Company. Moreover, no assurance can be given that: (i) future laws, ordinances or regulations will not impose any material environmental liability on the Company, or (ii) the current environmental condition of the Properties will not be affected by tenants and occupants of the Properties, by the condition of properties in the vicinity of the Properties (such as the presence of underground storage tanks) or by third parties unrelated to the Company. Employees As of December 31, 1997, the Company employed 97 persons, including executive officers. Legal Proceedings The Company is not currently involved (nor was it involved at December 31, 1997) in any material legal proceedings nor, to the Company's knowledge, is any material legal proceeding currently threatened against the Company, other than routine litigation arising in the ordinary course of business, substantially all of which is expected to be covered by existing liability insurance. Mortgage and Other Debt Mortgage Indebtedness. The following table sets forth the Company's mortgage indebtedness outstanding at December 31, 1997. In addition to mortgage indebtedness listed below, on December 31, 1997, approximately $115.2 million was outstanding under the 1997 Credit Facility, which amounts were secured by cross-collateralized mortgages and assignments of rents on certain of the Properties. The 1997 Credit Facility was replaced with the Credit Facility (which is unsecured) on January 5, 1998. -9- Properties--Indebtedness
Principal Balance as of Interest Annual December 31, Rate at Debt 1997 December 31, Service Maturity Prepayment Property / Location (in 000's) 1997 (in 000's)(1) Date Premiums - ----------------------------------------------- --------------- --------------- -------------- ---------- -------------- Exton, PA 486 Thomas Jones Way (2) $ 6,279 8.00% $ 633 2/1998 None 468 Creamery Way(2) Horsham, PA Lot 17 & 18 - 655 Business Center Drive 369 0.00% - 3/1998 None Newtown Square, PA Lots 7,8 and 9 7/1998 to Newtown Square Business Campus 1,638 9.00% 4 2/1999 None Allentown, PA 7310 Tilghman Street 2,504 9.25% 257 3/2000 (5) 6575 Snowdrift Road 2,294 8.00% 232 2/1998 None Reading, PA Green Hills Corporate Center 1,500 5.00% 25 8/1998 to 8/2000 None Marlton, NJ One Greentree Centre (3) 7,138 7.56% 682 1/2002 (6) Two Greentree Centre (3) Three Greentree Centre (3) Cherry Hill, NJ 457 Haddonfield Road (4) 8,294 8.00% 815 1/1999 (7) 805 9.25% 74 1/1999 None Mt. Laurel, NJ 1120 Executive Plaza 5,922 9.875% 777 3/2002 (8) 1000 Howard Boulevard 5,784 9.25% 749 11/2004 (9) Raleigh, NC 5910 - 6090 Six Forks(3) 2,658 7.56% 254 1/2002 (10) -------- ------- Total Mortgage Indebtedness $ 45,185 $ 4,428 ======== =======
(1) "Annual Debt Service" is calculated for the twelve-month period ending December 31, 1997 and represents normal principal and interest amortization. For loans that bear interest at a variable rate, the rates in effect at December 31, 1997 have been assumed to remain constant. (2) Both of these Properties secure a single loan. (3) All of these Properties secure a single loan. (4) Pursuant to the terms of this loan, the Company has the right to borrow up to approximately $1.3 million to fund tenant improvements and leasing commissions and has a current outstanding balance of $805,000. (5) Two percent through December 31, 1998, which prepayment penalty is reduced by 1% in 1999. (6) This loan may not be prepaid unless the Six Forks loan is also prepaid. The prepayment penalty equals the greater of 1% of the principal amount prepaid or a yield maintenance premium. (7) One percent of the portion of the loan prepaid. (8) No prepayment is permitted until November, 1999, at which time the loan can be prepaid in full (but not in part) along with a penalty equal to the greater of 1% of the outstanding principal balance being prepaid or a yield maintenance premium. (9) No prepayment is permitted until March, 1999, at which time the loan can be prepaid in full (but not in part) along with a penalty equal to the greater of 1% of the outstanding principal balance being prepaid or a yield maintenance premium. (10) This loan may be prepaid without prepayment of the loan secured by One Greentree Centre, Two Greentree Centre and Three Greentree Centre, provided certain loan-to-value ratios and coverage tests with regard to the Greentree Centre loan are satisfied and upon payment of a premium equal to the greater of 1% of the principal balance being prepaid or a yield maintenance premium. Other Indebtedness. The Company incurred unsecured debt in the principal amount of $3.8 million on November 14, 1996 in connection with its acquisition of a property portfolio. The debt does not bear interest and is payable in two installments: $2.5 million on June 30, 1998 and $1.3 million on December 31, 1999. The Company recorded a $548,000 adjustment to the purchase price and a corresponding reduction in debt to reflect the fair value of the note payable to the seller and will accrue -10- interest expense to the date of maturity. The Company also maintains the Credit Facility. See "-- Credit Facility." Guaranties. As of March 15, 1998, the Company has guaranteed: (i) repayment of a $16.8 million construction loan made to a Development Entity; (ii) repayment of a $14.5 million construction loan made to a Development Entity (and has provided a $1.5 million letter of credit for the benefit of the construction lender); and (iii) repayment of a $500,000 loan made to a Development Entity. Payment under these guaranties would constitute loan obligations of, or preferred equity positions in, the applicable Development Entity in favor of the Company. -11- Item 2. Properties Properties As of December 31, 1997, the Company owned a portfolio of 95 office properties and 22 industrial facilities that contained an aggregate of approximately 7.1 million net rentable square feet. One hundred and eleven of the Year-End Properties (approximately 95% of the Company's December 31, 1997 portfolio based on net rentable square feet) were located in the Suburban Philadelphia Office and Industrial Market. As of December 31, 1997, the Year-End Properties (excluding two Year-End Properties under development or redevelopment) were approximately 91.2% leased to 688 tenants. The office Year-End Properties are primarily one to three story suburban office buildings containing an average of 61,000 net rentable square feet. The Company carries comprehensive liability, fire, extended coverage and rental loss insurance covering all of the Properties, with policy specifications and insured limits which the Company believes are adequate and appropriate under the circumstances. The following table sets forth certain information with respect to the Year-End Properties at December 31, 1997: -12-
Net Percentage Rentable Leased as of Net Year Square December Effective Property Name Built Feet 31, 1997 (1) Rent (2) - -------------------------- -------------- ---------- ------------ --------- OFFICE PROPERTIES NORTHERN PHILADELPHIA SUBURBS Horsham/Willow Grove/ Jenkingtown, PA 700 Business Center Drive (5) 1986 82,009 99.2% $1,064 800 Business Center Drive (5) 1986 One Progress Avenue 1986 79,204 100.0% 733 500 Enterprise Road 1990 67,800 98.5% 718 300 Welsh Road 1985 57,793 100.0% 138 1155 Business Center Drive 1990 51,388 99.4% 658 650 Dresher Road 1984 30,138 100.0% 354 655 Business Center Drive 1997 30,000 72.1% 70 ------- ----- ------ 398,332 97.4% 3,735 ------- ----- ------ Blue Bell/Plymouth Meeting/ Fort Washington 501 Office Center Drive 1974 110,514 85.2% 333 500 Office Center Drive 1974 100,447 98.9% 371 323 Norristown Road 1988 79,083 100.0% 786 321 Norristown Road 1972 60,384 99.4% 634 2240/50 Butler Pike 1984 52,183 99.4% 653 220 Commerce Drive 1985 46,366 100.0% 114 2260 Butler Pike 1984 31,892 100.0% 420 120 West Germantown Pike 1984 30,546 100.0% 380
Average Tenants Leasing 10% Total Base Rent Annualized or More of Rentable for the Twelve Rental Rate Square Footage per Months Ended as of Property as of December 31, December December 31, 1997 and Property Name 1997 (3) (000's) 31, 1997 (4) Lease Expiration Date - -------------------------- ---------------- ------------ ----------------------- OFFICE PROPERTIES NORTHERN PHILADELPHIA SUBURBS Horsham/Willow Grove/ Jenkingtown, PA 700 Business Center Drive (5) $ 1,178 $ 14.83 Metpath (35%) -1/12 800 Business Center Drive (5) Macro (18%) - 4/01 Sprint (19%) - 4/01 Kelly Waldron (17%)-4/02 Advanta (10%) - 6/99 One Progress Avenue 782 9.80 Reed Technology (100%) - 6/11 500 Enterprise Road 718 14.44 Conti Mortgage (80%) - 4/01 Pioneer Technologies (19%) - 10/00 300 Welsh Road 138 16.78 American Meter Corporation (30%) - 9/99 Digital Cable Radio (18%) - 9/98 A.G. Edwards & Sons (14%) - 12/03 National Computer Systems (13%) - 8/00 Abington OB/GYN (11%) - 10/01 1155 Business Center Drive 669 20.24 IMS (79%) - 3/06 Motorola (16%) - 1/98 &2/99 650 Dresher Road 369 16.19 GMAC (100%) - 5/03 655 Business Center Drive 74 17.78 LD&B (50%) - 8/07 ----- ----- Paccar Financial (22%) - 6/02 3,928 15.01 ----- ----- Blue Bell/Plymouth Meeting/ Fort Washington 501 Office Center Drive 346 16.96 Aetna Life Insurance (18%) - 12/97 500 Office Center Drive 371 17.42 Advanta (43%) - 9/98 Main Line Financial (15%) - 8/98 Flannigan, O'Hara & Gentry (11%) - 3/00 323 Norristown Road 943 16.45 Bisys (58%) - 7/02 Siemans Energy (20%) - 1/01 321 Norristown Road 646 17.38 Ecta Corporation (24%) - 12/97 Bisys (20%) - 7/02 Bradford White Corporation (19%) - 12/01 2240/50 Butler Pike 669 18.01 PNB/Corestates (58%) - 4/06 TWA Marketing (33%) - 10/99 220 Commerce Drive 115 16.12 U.S. Physicians, Inc. (29%) - 6/02 Temple University (25%) - 4/01 2260 Butler Pike 420 18.59 Information Resources (66%) - 12/00 Ostroff, Fair & Company (25%) - 7/04 120 West Germantown Pike 391 17.59 Clair Odell Insurance (82%) - 7/01 Kleinert's, Inc. (13%) - 10/01
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Net Percentage Rentable Leased as of Net Year Square December Effective Property Name Built Feet 31, 1997 (1) Rent (2) - -------------------------- -------------- ---------- ------------ --------- 140 West Germantown Pike 1984 25,947 98.7% 315 -------- ----- ------ 537,362 96.6% 4,006 -------- ----- ------ Southern Bucks County 3329 Street Road - Greenwood Square (5) 1985 165,929 76.4% 2,162 3331 Street Road - Greenwood Square (5) 1986 3333 Street Road - Greenwood Square (5) 1988 2010 Cabot Boulevard 1985 53,421 85.7% 198 2000 Cabot Boulevard 1985 39,969 81.4% 186 3000 Cabot Boulevard 1986 34,640 90.3% 529 2260/70 Cabot Boulevard 1984 29,638 95.4% 248 2005 Cabot Boulevard 1985 22,000 100.0% 131 --------- ----- ------ 345,597 82.9% 3,454 --------- ----- ------ TOTAL NORTHERN PHILADELPHIA SUBURBS 1,281,291 93.1% 11,195 --------- ----- ------
Average Tenants Leasing 10% Total Base Rent Annualized or More of Rentable for the Twelve Rental Rate Square Footage per Months Ended as of Property as of December 31, December December 31, 1997 and Property Name 1997 (3) (000's) 31, 1997 (4) Lease Expiration Date - -------------------------- ---------------- ------------ ----------------------- 140 West Germantown Pike 317 17.73 Healthcare Inc. (46%) ---- ------ - 9/99 Henkel (29%) - 6/98 National Health Equity (20%) - 5/99 4,218 17.22 ---- ------ Southern Bucks County 3329 Street Road - Greenwood Square (5) 2,273 0.02 Nextel Communications (12%) - 7/02 3331 Street Road - Greenwood Square (5) 3333 Street Road - Greenwood Square (5) 2010 Cabot Boulevard 198 9.80 Computer Hardware Maintenance (42%) - 1/98 DiMark, Inc. (32%) - 9/99 Digital Descriptive Systems (11%) - 6/00 2000 Cabot Boulevard 187 10.48 Ecogen, Inc. (37%) - 3/00 Rom-Tec, Inc. (28%) - 9/02 Agietron Corporation (13%) - 1/98 3000 Cabot Boulevard 530 17.04 Geraghty & Miller (31%) - 4/98 Prudential Insurance (21%) - 7/98 Luigi Bormioli Company (11%) - 6/98 2260/70 Cabot Boulevard 255 12.60 Sager Electrical (14%) - 10/98 Manufacturers Survey (13%) - 12/01 Terminix International (13%) - 10/02 2005 Cabot Boulevard 131 10.84 Ecogen, Inc. (100%) ---- ------ - 3/00 3,574 6.70 ---- ------ TOTAL NORTHERN PHILADELPHIA SUBURBS 11,720 13.98 ---- ------
Net Percentage Rentable Leased as of Net Year Square December Effective Property Name Built Feet 31, 1997 (1) Rent (2) - -------------------------- -------------- ---------- ------------ --------- WESTERN PHILADELPHIA SUBURBS Southern Route 202 Corridor, PA 486 Thomas Jones Way 1990 51,500 80.5% 417 855 Springdale Drive 1986 50,750 100.0% 428 456 Creamery Way 1987 47,604 100.0% 345 110 Summit Drive 1985 43,660 100.0% 292 1336 Enterprise Drive 1989 38,470 100.0% 374 468 Creamery Way 1990 28,934 100.0% 292 Average Tenants Leasing 10% Total Base Rent Annualized or More of Rentable for the Twelve Rental Rate Square Footage per Months Ended as of Property as of December 31, December December 31, 1997 and Property Name 1997 (2) (000's) 31, 1997 (3) Lease Expiration Date - -------------------------- ---------------- ------------ ----------------------- WESTERN PHILADELPHIA SUBURBS Southern Route 202 Corridor, PA 486 Thomas Jones Way 424 16.59 First American Real Estate (20%) - 12/99 Toshiba American Medical Systems (12%) - 6/02 Cape Environmental (12%) - 7/02 ICI America's Inc. (12%) - 11/00 855 Springdale Drive 444 14.75 Environmental Resources (100%) - 7/01 456 Creamery Way 355 7.36 Neutronics (100%) - 1/03 110 Summit Drive 298 11.13 Maris Equipment (49%) - 4/99 Pall Trincor (30 %) - 3/02 DGH Technology (12%) - 9/99 1336 Enterprise Drive 371 13.66 CFM Technologies Inc. (100%) - 11/00 468 Creamery Way 292 14.76 Franciscan Health Systems (82%) - 6/99 American Day Treatment (18%) - 6/00
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Net Percentage Rentable Leased as of Net Year Square December Effective Property Name Built Feet 31, 1997 (1) Rent (2) - -------------------------- -------------- ---------- ------------ --------- 748 Springdale Drive 1986 13,844 100.0% 120 --------- ------- ------ 274,762 96.3% 2,268 --------- ------- ------ Main Line, PA 300 Berwyn Park 1989 107,919 100.0% 824 200 Berwyn Park 1987 76,065 100.0% 647 16 Campus Boulevard 1990 65,463 100.0% 636 1974 Sproul Road 1972 62,934 89.3% 424 100 Berwyn Park 1986 58,612 96.4% 421 18 Campus Boulevard 1990 37,700 83.0% 637 --------- ------- ------ 408,693 96.3% 3,589 --------- ------- ------ King of Prussia / Valley Forge 7000 Geerdes Boulevard 1988 112,905 100.0% 834 1111 Old Eagle School Road 1962 107,000 100.0% 102 500 North Gulph Road 1979 92,851 99.9% 1,394 --------- ------- ------ 312,756 100.0% 2,330 --------- ------- ------ Bala Cynwyd 111 Presidential Boulevard 1974 173,079 98.4% 284 --------- ------- ------ TOTAL WESTERN PHILADELPHIA SUBURBS 1,169,290 97.6% 8,471 --------- ------- ------ READING / ALLENTOWN, PA 100-300 Gundy Drive 1970 443,165 80.5% 2,247 100 Katchel Blvd 1970 131,076 97.5% 1,053
Average Tenants Leasing 10% Total Base Rent Annualized or More of Rentable for the Twelve Rental Rate Square Footage per Months Ended as of Property as of December 31, December December 31, 1997 and Property Name 1997 (3) (000's) 31, 1997 (4) Lease Expiration Date - -------------------------- -- ---------------- ------------ ----------------------- 748 Springdale Drive 122 15.90 Automated Financial Systems (68%) - 10/98 ------ ----- Chester County District Court (32%) - 1/99 2,306 13.01 ------ ----- Main Line, PA 300 Berwyn Park 841 20.73 Delaware Valley Financial (53%) - 3/04 Vertex Inc. (13%) - 12/98 C.G.I. Systems, Inc. (11%) - 8/99 and 4/04 200 Berwyn Park 632 22.96 Devon Direct Mktg & Advert. (52%) - 12/01 VHA East Corporation (14%) - 11/99 Bucks Consultants (12%) - 8/01 16 Campus Boulevard 691 14.76 Creative Financial (49%) - 5/06 Atlantic E'ees Credit Union (35%) - 1/06 Brandywine Realty Trust (12%) - 3/01 1974 Sproul Road 428 14.53 Franklin Mint Credit Union (30%) - 5/02 Main Line Book Company (21%) - 12/98 TMR Inc. (11%) - 10/02 Allan Collautt Assoc. (10%) - 2/00 100 Berwyn Park 436 21.42 Shared Medical Systems (50%) - 3/98 and 3/02 Funds Associates, Ltd. (28%) - 10/02 18 Campus Boulevard 637 19.36 Devco Mutual (35%) - 1/98 ------ ----- EMAX Solution Partners (25%) - 6/01 Marshall Dennehey (17%) - 10/01 3,665 19.27 ------ ----- King of Prussia / Valley Forge 7000 Geerdes Boulevard 859 12.55 Lockheed Martin Corp. (100%) - 12/98 1111 Old Eagle School Road 102 14.25 PECO (100%) -6/00 500 North Gulph Road 1,444 17.81 Transition Software (16%) ------ ----- - 9/00 Nason Cullen Group (15%) - 8/01 Strohl Systems (12%) - 10/99 2,405 14.69 ------ ----- Bala Cynwyd 111 Presidential Boulevard 294 23.04 American Business Financial (22%) - 1/03 ------ ----- TOTAL WESTERN PHILADELPHIA SUBURBS 8,670 17.13 ------ ----- READING / ALLENTOWN, PA 100-300 Gundy Drive 2,464 14.93 Parsons Corporation (45%) - 3/05 Penske Truck Leasing (25%) - 12/05 100 Katchel Blvd 1,139 19.82 Penske Truck Leasing (55%) - 12/05 UGI Utilities, Inc. (34%) - 3/03
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Net Percentage Rentable Leased as of Net Year Square December Effective Property Name Built Feet 31, 1997 (1) Rent (2) - -------------------------- -------------- ---------- ------------ --------- 6575 Snowdrift Road 1988 46,250 100.0% 331 7248 Tilghman Street 1987 42,863 93.8% 439 7310 Tilghman Street 1985 40,000 78.0% 356 ------------ ------- ------ 703,354 85.6% 4,426 ------------ ------- ------ SOUTHERN NEW JERSEY Burlington County 10000 Midlantic Drive 1990 175,573 88.6% 1,275 2000 Midlantic Drive 1989 121,658 84.9% 778 1000 Howard Boulevard 1988 105,312 99.6% 1,931 1000 Atrium Way 1989 96,660 84.0% 317 1120 Executive Boulevard 1987 95,124 94.4% 1,146 15000 Midlantic Drive 1991 84,056 100.0% 619 Three Greentree Centre 1984 69,101 88.2% 1,003 9000 Midlantic Drive 1989 67,299 100.0% 396 4000/5000 West Lincoln Drive 1982 60,010 89.9% 489 1000/2000 West Lincoln Drive 1982 60,001 92.6% 511 Two Greentree Centre 1983 56,075 88.0% 852 One Greentree Centre 1982 55,838 92.2% 817 8000 Lincoln Drive 1983 54,923 100.0% 790
Average Tenants Leasing 10% Total Base Rent Annualized or More of Rentable for the Twelve Rental Rate Square Footage per Months Ended as of Property as of December 31, December December 31, 1997 and Property Name 1997 (3) (000's) 31, 1997 (4) Lease Expiration Date - -------------------------- ---------------- ------------ ----------------------- 6575 Snowdrift Road 331 9.78 Corning Packaging (100%) - 2/99 7248 Tilghman Street 439 15.43 Ohio Casualty (46%) - 7/01 IDS Financial (29%) - 7/01 Meridian Mortgage (12%) - 2/98 7310 Tilghman Street 356 11.96 AT & T Communications (60%) - 1/98 and 8/98 ------- ------ Donnelley Directory (10%) - 7/99 4,729 15.46 ------- ------ SOUTHERN NEW JERSEY Burlington County 10000 Midlantic Drive 1,303 20.58 QAD, Inc. (35%) - 8/01 Deutsche Financial Services (13%) - 1/00 2000 Midlantic Drive 814 16.78 Lockheed Martin (47%) - 6/98, 5/99 and 10/04 Computer Associates Intl. (26%) - 12/02 Moore Business Forms (12%) - 4/00 1000 Howard Boulevard 1,952 21.01 Conrail (66%) - 6/00 Lincoln Technical (25%) - 5/07 1000 Atrium Way 317 17.53 IBM (18%) - 3/01 Navistar Financial (17%) - 12/99 Corporate Dynamics (14%) - 2/04 Janney, Montgomery, Scott (12%) - 9/02 Tri-Star Finance (10%) - 10/01 1120 Executive Boulevard 1,153 23.18 Computer Sciences (50%) - 5/02 Fleercorp (32%) - 4/00 15000 Midlantic Drive 722 17.86 New Jersey Bell (89%) - 7/06 Gallagher Bassett Services, Inc. (11%) - 11/02 Three Greentree Centre 1,009 16.55 Parker McCay (37%) - 5/01 Surety Title Company (15%) - 12/03 Eastern Mortgage Services (12%) - 7/00 Olde Discount (12%) - 3/00 9000 Midlantic Drive 405 17.65 Automotive Rentals (100%) - 8/00 4000/5000 West Lincoln Drive 489 13.47 Vitro Corporation (18%) - 5/01 1000/2000 West Lincoln Drive 513 13.42 Occupational Training (10%) - 7/02 Two Greentree Centre 834 18.31 Merrill Lynch (26%) - 12/98 and 11/05 Chubb Institute (10%) - 12/00 Medical Imaging Center (10 %) - 3/98 One Greentree Centre 838 17.52 American Executive Center (30%) - 1/06 Temple University (18%) - 12/97 West Jersey Health (15%) - 4/01 8000 Lincoln Drive 859 17.30 Computer Sciences (67%) - 11/01 Blue Cross (33%) - 5/07
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Net Percentage Rentable Leased as of Net Year Square December Effective Property Name Built Feet 31, 1997 (1) Rent (2) - -------------------------- -------------- ---------- ------------ --------- 4000 Midlantic Drive 1981 46,945 0.0% -- Five Eves Drive 1986 45,889 65.1% 278 9000 West Lincoln Drive 1983 43,719 88.7% 309 Two Eves Drive 1987 37,517 95.0% 401 3000 West Lincoln Drive 1982 36,070 86.1% 304 Four B Eves Drive 1987 27,038 99.9% 265 Four A Eves Drive 1987 24,631 80.8% 193 --------- ------- ------- 1,363,439 87.6% 12,674 --------- ------- ------- Camden County Main Street - Plaza 1000 1988 162,364 97.6% 2,184 457 Haddonfield Road 1990 121,737 82.9% 1,658 One South Union Place(5) 1982 105,972 0.0% -- 1007 Laurel Oak Road 1996 78,205 100.0% 35 6 East Clementon Road 1980 66,043 86.4% 52 King & Harvard(5) 1974 65,223 13.6% 14 Main Street - Piazza 1990 41,400 100.0% 472 20 East Clementon Road 1986 40,755 75.7% 31 Main Street - Promenade 1988 31,445 100.0% 317
Average Tenants Leasing 10% Total Base Rent Annualized or More of Rentable for the Twelve Rental Rate Square Footage per Months Ended as of Property as of December 31, December December 31, 1997 and Property Name 1997 (3) (000's) 31, 1997 (4) Lease Expiration Date - -------------------------- ---------------- ------------ ----------------------- 4000 Midlantic Drive - Five Eves Drive 278 13.26 ADP Financial Information (36%) - 8/98 McCay Corporation (18%) - 10/00 9000 West Lincoln Drive 312 14.13 Counseeling Program (18%) - 1/00 Two Eves Drive 402 17.10 Basco Association (24%) - 2/01 Acceptance Risk Mgmt. (18%) - 4/00 3000 West Lincoln Drive 304 13.73 Abo, Uris & Allenburger (20%) - 1/99 Four B Eves Drive 268 15.14 ISO Commercial Risk (66%) - 6/00 Global Industries, Inc. (17%) - 8/00 Banc One Financial (16%) - 4/01 Four A Eves Drive 193 14.86 Advanced Systems (23%) ------- ---- - 4/99 Eastern American (18%) - 9/02 Benefit Resources (17%) - 2/99 HIP Health Plan of NJ (13%) - 6/99 Columbia Investment Builders (10%) - 1/01 12,965 17.79 ------- ----- Camden County Main Street - Plaza 1000 2,249 18.07 Credit Lenders (16%) - 4/98 Dean Witter (11%) - 9/01 AMC (10%) - 12/99 457 Haddonfield Road 1,777 20.01 PHP Healthcare Corp. (31%) - 12/07 Dilworth Paxson (10%) - 5/04 One South Union Place(6) - 0.00 1007 Laurel Oak Road 35 7.94 R.F. Power (100%) - 10/06 6 East Clementon Road 52 16.74 West Jersey Health Systems (35%) - 6/98 and 3/01 Equifax Credit Info. Services (15%) - 12/99 Camden County Educational Serv. (13%) - 6/98 Premium Bank (12%) - 9/00 King & Harvard(6) 14 17.15 General Services Administration (14%) - 7/01 Main Street - Piazza 472 13.82 Cooper Hospital (41%) - 2/01 and 7/01 Lincoln Investments (20%) - 8/03 Chamber of Commerce (10%) - 8/01 South NJ Medical (10%) - 3/00 20 East Clementon Road 31 17.96 Serco, Inc. (15%) - 6/00 The State of NJ (GSA) (13%) - 8/07 MedQuist, Inc. (12%) - 4/98 Main Street - Promenade 317 12.70 West Jersey Hospital (25%) - 3/00 Morgenstern (14%) - 5/99 First Union (10%) - 2/99
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Net Percentage Rentable Leased as of Net Year Square December Effective Property Name Built Feet 31, 1997 (1) Rent (2) - -------------------------- -------------- ---------- ------------ --------- 7 Foster Avenue 1983 21,843 90.2% 17 10 Foster Avenue 1983 18,941 98.5% 14 50 East Clementon Road 1986 3,080 100.0% 7 5 Foster Avenue 1968 2,000 100.0% -- --------- ----- ------- 759,008 93.7% 4,801 --------- ----- ------- TOTAL SOUTHERN NEW JERSEY 2,122,447 89.0% 17,475 --------- ----- ------- DELAWARE Northern Suburban Wimington One Righter Parkway(7) 1989 104,828 97.5% 2,002 100 Commerce Drive 1989 63,898 98.3% 242 ------- ----- ------- TOTAL DELAWARE PROPERTIES 168,726 97.8% 2,244 --------- ----- ------- OTHER MARKETS Twin Forks Office Park, Raleigh, NC 5910 -6090 Six Forks 1982 73,340 91.6% 954 Lawrenceville, NJ 168 Franklin Corner Drive 1976 32,000 55.8% 227 Atlantic County 500 Scarborough Drive 1987 44,750 66.4% 33 501 Scarborough Drive 1987 44,750 66.5% 51 --------- ----- ------- TOTAL - OFFICE PROPERTIES 5,639,948 91.1% 45,076 ========= ===== =======
Average Tenants Leasing 10% Total Base Rent Annualized or More of Rentable for the Twelve Rental Rate Square Footage per Months Ended as of Property as of December 31, December December 31, 1997 and Property Name 1997 (3) (000's) 31, 1997 (4) Lease Expiration Date - -------------------------- ---------------- ------------ ----------------------- 7 Foster Avenue 17 15.41 West Jersey Health Systems (45%) - 8/98 Equifax Services, Inc. (35%) - 4/01 10 Foster Avenue 14 13.53 Dolphin, Inc. (35%) - 6/99 Ruttland Homes of New Jersey (29%) - 5/99 50 East Clementon Road 7 44.69 Corestates Financial Corp. (100%) - 10/02 5 Foster Avenue - 0.00 Police Station (100%) ----- ------ 4,985 16.03 ----- ------ TOTAL SOUTHERN NEW JERSEY 17,950 17.24 ----- ------ DELAWARE Northern Suburban Wimington One Righter Parkway(7) 2,315 19.43 Kimberly Clark (89%) - 12/05 100 Commerce Drive 252 13.71 The Travelers Bank (69%) - 12/01 ------ ------ Blaze Systems Corporation (12%) - 9/00 KCI Technologies (10%) - 6/00 TOTAL DELAWARE PROPERTIES 2,567 17.25 ----- ------ OTHER MARKETS Twin Forks Office Park, Raleigh, NC 5910 -6090 Six Forks 954 15.19 Lawrenceville, NJ 168 Franklin Corner Drive 227 14.36 Pennsbury Family Medical (16%) - 7/98 Crawford & Company (14%) - 11/99 Atlantic County Dr. Belden (12%) - 5/01 500 Scarborough Drive 33 19.84 Raytheon Services Co. (16%) - 9/98 The Mitre Corporation (16%) - 12/00 NYMA, Inc. (13%) - 10/98 501 Scarborough Drive 51 16.74 Computer Sciences (34%) ----- ----- Lockheed Martin Corp. (33%) - 1/01 TOTAL - OFFICE PROPERTIES 46,901 16.19 ====== =====
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Net Percentage Rentable Leased as of Net Year Square December Effective Property Name Built Feet 31, 1997 (1) Rent (2) - -------------------------- -------------- ---------- ------------ --------- INDUSTRIAL PROPERTIES NORTHERN PHILADELPHIA SUBURBS Southern Bucks County, PA 4667 Somerton Road (5) 1974 118,000 83.1% 503 2595 Metropolitan Drive (5) 1981 80,000 100.0% 2575 Metropolitan Drive (5) 1981 60,000 64.6% 2560 Metropolitan Drive (5) 1983 70,000 81.7% 2535 Metropolitan Drive (5) 1974 42,000 100.0% 2520 Metropolitan Drive (5) 1981 37,000 100.0% 2510 Metropolitan Drive (5) 1981 40,000 100.0% 2250 Cabot Boulevard 1982 40,000 100.0% 140 2200 Cabot Boulevard 1979 55,081 98.2% 235 ------- ---- ----- TOTAL NORTHERN PHILADELPHIA SUBURBS 542,081 89.8% 878 ------- ---- ----- WESTERN PHILADELPHIA SUBURBS Lansdale, PA 1510 Gehman Road 1990 152,625 100.0% 711 King of Prussia, PA 201/221 King Manor Drive 1964 124,960 100.0% 344 ------- ---- ----- TOTAL WESTERN PHILADELPHIA SUBURBS 277,585 100.0% 1,055 ------- ---- ------
Average Tenants Leasing 10% Total Base Rent Annualized or More of Rentable for the Twelve Rental Rate Square Footage per Months Ended as of Property as of December 31, December December 31, 1997 and Property Name 1997 (3) (000's) 31, 1997 (4) Lease Expiration Date - -------------------------- ------------------- ------------ ----------------------- INDUSTRIAL PROPERTIES NORTHERN PHILADELPHIA SUBURBS Southern Bucks County, PA 4667 Somerton Road (5) 522 5.16 American HomePatient Inc. (17%) - 10/99 BVI Industries, Inc. (17%) - 12/00 Brownell Electro, Inc. (14%) - 6/99 Carpet Transport, Inc. (14%) - 9/99 A.P. Green Refractories Co. (13%) - 12/01 2595 Metropolitan Drive (5) 7.35 Northtec LLC (100%) 6/06 2575 Metropolitan Drive (5) 3.99 Northtec LLC ( 65%) - 6/06 2560 Metropolitan Drive (5) 7.86 Picker International (48%) - 9/02 Delta Lighting Products, Inc. (19%) - 5/01 Precicontact, Inc. (15%) - 12/99 2535 Metropolitan Drive (5) 5.08 General Services Administration (100%) - 12/97 2520 Metropolitan Drive (5) 6.29 Bucks County Midweek, Inc. (40%) - 6/98 William Adams II, Inc. (30%) - 5/99 Philadelphia Newspapers, Inc. 17%) - 10/00 Stolarik Donohue Assoc. Inc. 14%) - 3/00 2510 Metropolitan Drive (5) 5.21 ACS Enterprises, Inc. (100%) - 6/99 2250 Cabot Boulevard 140 5.78 Bucks County Nut (100%) - 7/99 2200 Cabot Boulevard 240 6.84 Hussman Corporation (38%) --- ---- - 3/99 Nobel Printing Inks (36%) - 12/97 McCaffey Management (24%) - 8/00 TOTAL NORTHERN PHILADELPHIA SUBURBS 902 6.06 --- ---- WESTERN PHILADELPHIA SUBURBS Lansdale, PA 1510 Gehman Road 719 6.92 Accupac, Inc. (65%) 1/01 Ford Electronics (35%) - 6/98 King of Prussia, PA 201/221 King Manor Drive 362 4.29 Reber - Friel Company (28%) - 6/01 --- ---- Country Fresh Batter (20%) - 9/03 Central Sprinkler (16%) - 4/99 Dillon Moving, Inc. (13%) - 6/99 TOTAL WESTERN PHILADELPHIA SUBURBS 1,081 5.74 ----- ----
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Net Percentage Rentable Leased as of Net Year Square December Effective Property Name Built Feet 31, 1997 (1) Rent (2) - -------------------------- -------------- ---------- ------------ --------- SOUTHERN NEW JERSEY Burlington County, NJ 500 Highland Drive 1990 127,340 100.0% 295 300 Highland Drive 1990 126,905 100.0% 313 400 Highland Drive 1990 68,660 100.0% 126 600 Highland Drive 1990 65,862 82.5% 222 1000 East Lincoln Drive 1981 40,600 100.0% 7 ------- ---- ----- 429,367 97.3% 963 ------- ---- ----- Camden County, NJ 55 U.S. Avenue 1982 138,700 59.1% 32 2 Foster Avenue 1974 50,761 94.6% 9 1 Foster Avenue 1972 24,255 100.0% 6 4 Foster Avenue 1974 23,372 100.0% 10 5 U.S. Avenue 1987 5,000 100.0% 1 ------- ---- ----- 242,088 75.4% 58 ------- ---- ----- TOTAL SOUTHERN NEW JERSEY 671,455 89.4% 1,021 ------- ---- ----- TOTAL - INDUSTRIAL PROPERTIES 1,491,121 91.5% 2,954 --------- ---- ----- TOTAL ALL PROPERTIES / WEIGHTED AVG. 7,131,069 91.2% 48,030 ========= ===== ======
Average Tenants Leasing 10% Total Base Rent Annualized or More of Rentable for the Twelve Rental Rate Square Footage per Months Ended as of Property as of December 31, December December 31, 1997 and Property Name 1997 (3) (000's) 31, 1997 (4) Lease Expiration Date - -------------------------- ------------------ ------------ ----------------------- SOUTHERN NEW JERSEY Burlington County, NJ 500 Highland Drive 295 4.83 PFS - Pepsico (100%) - 12/99 300 Highland Drive 323 4.44 Walpole (40%) - 10/02 U.S. Postal Service (32%) - 4/09 Griffis Trucking , Inc. (16%) - 9/99 Faultless Casters Div., FKI (12%) - 5/00 400 Highland Drive 134 3.00 MBO Binder & Company (100%) - 1/02 600 Highland Drive 226 7.46 Excel Corporation (40%) - 7/01 Key Food Beverage (14%) - 9/02 Philadelphia Newspapers (12%) - 10/98 1000 East Lincoln Drive 7 3.45 Packquisition Corp. (75%) ----- ---- - 2/01 Allison Andrews Corporation (25%) - 10/99 985 4.62 --- ---- Camden County, NJ 55 U.S. Avenue 32 7.63 Micro Warehouse, Inc. (59%) - 8/02 2 Foster Avenue 9 3.68 Harbor Laundry, Inc. (95%) - 8/00 1 Foster Avenue 6 4.32 West Jersey Health Systems (100%) - 3/98 4 Foster Avenue 10 7.56 Harbor Laundry, Inc. (62%) - 8/00 Medical Data Exchange (27%) - 8/98 Mr. William Feinberg (11%) - 2/00 5 U.S. Avenue 1 0.00 ----- ---- 58 5.93 ----- ---- TOTAL SOUTHERN NEW JERSEY 1,043 5.02 ----- ---- TOTAL - INDUSTRIAL PROPERTIES 3,026 5.54 ----- ---- TOTAL ALL PROPERTIES / WEIGHTED AVG. $49,927 $13.90 ======= ======
(1) Calculated by dividing net rentable square feet included in leases signed on or before December 31, 1997 at the Property by the aggregate net rentable square feet of the Property. (2) "Net Effective Rent" for the twelve months ended December 31, 1997 represents base rents received during such period, excluding straight line rent and tenant reimbursements. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges. (3) "Total Base Rent" for the twelve months ended December 31, 1997 represents base rents received during such period, excluding tenant reimbursements, calculated in accordance with generally accepted accounting principles determined on a straight-line basis. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges. (4) "Average Annualized Rental Rate" is calculated as follows:(i) for office leases written on a triple net basis, the sum of the annualized contracted base rental rates payable for all space leased as of December 31, 1997 (without giving effect to free rent or scheduled rent increases that would be taken into account under generally accepted accountin principles) plus the 1997 budgeted operating expenses excluding tenant electricity; and (ii) for office leases written on a full service basis, the annualized contracted base rent payable for all space leased as of December 31, 1997. In both cases the annualized rental rate is divided by the total square footage leased as of December 31, 1997 without giving effect to free rent or scheduled rent increases that would be taken into account under generally accepted accounting principles. (5) The data reflected for these properties are presented on a consolidated basis. (6) These Properties are under redevelopment and are excluded from the percentages for weighted average Percentage Leased and Average Annualized Rental Rate information. (7) This Property is subject to a ground lease. -20- The table set forth below shows certain information regarding rental rates and lease expirations for the Year-End Properties in the Company's portfolio at December 31, 1997, assuming none of the tenants exercise renewal options or termination rights, if any, at or prior to scheduled expirations:
Final Percentage Rentable Final Annualized of Total Final Number of Square Annualized Base Rent Annualized Year of Leases Footage Base Rent Per Square Base Rent Lease Expiring Subject to Under Foot Under Under Expiration Within the Expiring Expiring Expiring Expiring Cumulative December 31, Year Leases Leases (1) Leases Leases Total - ------------------ --------------- --------------- ------------------ --------------- --------------- ------------ 1998 243 1,009,854 $ 12,774,453 $ 12.65 15.2% 15.2% 1999 156 996,945 9,542,978 9.57 11.4% 26.6% 2000 134 937,831 11,990,195 12.79 14.3% 40.9% 2001 108 1,080,532 14,894,432 13.78 17.8% 58.7% 2002 86 761,409 10,355,737 13.60 12.4% 71.1% 2003 36 260,066 4,321,969 16.62 5.2% 76.2% 2004 14 127,386 2,172,514 17.05 2.6% 78.8% 2005 16 494,286 9,984,512 20.20 11.9% 90.7% 2006 12 422,107 4,345,711 10.30 5.2% 95.9% 2007 7 106,494 1,835,273 17.23 2.2% 98.1% 2008 and after 5 152,059 1,605,899 10.56 1.9% 100.0% ---- --- --------- ------------ ------- ---- 817 6,348,969 $ 83,823,673 $ 13.20 100.0% ==== ========== ============ ======= =====
(1) "Final Annualized Base Rent" for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges. The table set forth below shows certain information regarding rental rates and lease expirations for the Properties in the Company's portfolio at March 15, 1998, assuming none of the tenants exercise renewal options or termination rights, if any, at or prior to scheduled expirations: -21-
Final Percentage Rentable Final Annualized of Total Final Number of Square Annualized Base Rent Annualized Year of Leases Footage Base Rent Per Square Base Rent Lease Expiring Subject to Under Foot Under Under Expiration Within the Expiring Expiring Expiring Expiring Cumulative December 31, Year Leases Leases (1) Leases Leases Total - ------------------ --------------- --------------- ------------------ --------------- --------------- ------------ 1998 294 1,207,425 $15,510,213 $12.85 12.2% 12.2% 1999 204 1,228,666 13,454,854 10.95 10.6% 22.8% 2000 167 1,284,319 15,422,419 12.01 12.2% 35.0% 2001 152 1,489,063 21,247,940 14.27 16.7% 51.7% 2002 134 1,472,445 19,258,186 13.08 15.2% 66.9% 2003 61 492,646 8,176,324 16.60 6.4% 73.4% 2004 21 230,273 3,864,043 16.78 3.0% 76.4% 2005 24 809,851 14,538,912 17.95 11.5% 87.9% 2006 12 422,107 4,317,557 10.23 3.4% 91.3% 2007 8 118,880 2,135,510 17.96 1.7% 93.0% 2008 and after 32 568,058 8,933,001 15.73 7.0% 100.0% -------- ----------- ----------- ------ ----- 1,109 9,323,733 $126,858,959 $13.61 100.0% ======== =========== ============ ====== ======
(1) "Final Annualized Base Rent" for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges. The Properties owned by the Company at December 31, 1997 were leased to 688 tenants that are engaged in a variety of businesses. The following table sets forth information regarding leases at the Year-End Properties with the 20 largest tenants based upon Annualized Escalated Rent from the Year-End Properties as of December 31, 1997:
Percentage of Remaining Aggregate Percentage Annualized Aggregate Number Lease Square of Aggregate Escalated Annualized of Term in Feet Leased Rent (in Escalated Tenant Name (a) Leases Months Leased Square Feet thousands) (b) Rent - -------------------------------------------- -------- ------------- ------------- -------------- ---------------- ------------- Parsons Corporation 4 87 200,000 3.1% $ 3,583 3.5% Penske Truck Leasing 8 96 182,064 2.9% 3,333 3.2% Lockheed Martin Corporation 5 (c) 184,389 2.9% 2,928 2.8% Computer Sciences Corporation 3 (d) 99,006 1.6% 2,266 2.2% Kimberly Clark Corporation 1 96 93,014 1.5% 2,000 1.9% Consolidated Rail Corporation ("Conrail") 1 30 69,511 1.1% 1,746 1.7% PECO 1 30 107,000 1.7% 1,739 1.7% New Jersey Bell Telephone Company 1 103 74,728 1.2% 1,482 1.4% QAD, Inc. 1 44 61,900 1.0% 1,377 1.3% Automotive Rentals, Inc. 1 32 67,299 1.1% 1,322 1.3% Delaware Valley Financial Services, Inc. 7 (e) 57,057 0.9% 1,293 1.3% West Jersey Health Systems 6 (f) 73,612 1.2% 1,034 1.0% Bisys Plan Services 5 55 58,586 0.9% 1,025 1.0% UGI Utilities, Inc. 4 63 44,665 0.7% 1,022 1.0% Advanta Corporation 3 (g) 51,547 0.8% 994 1.0% Northtec LLC 2 102 118,775 1.9% 980 1.0% Devon Direct Marketing & Advertising 2 (h) 39,330 0.6% 976 0.9% American Business Financial 15 61 38,149 0.6% 970 0.9% Reed Technology 1 162 79,204 1.2% 935 0.9% Conti Mortgage 1 40 53,906 0.8% 907 0.9% -- --- --------- ---- ------- ---- Consolidated Total/Weighted Average 72 65 1,753,742 27.6% $31,912 30.9% == === ========= ==== ======= ====
-22- (a) The identified tenant includes affiliates in certain circumstances. (b) Annualized Escalated Rent represents the monthly Escalated Rent for each lease in effect at December 31, 1997 multiplied by 12. Escalated Rent represents fixed base rental amounts plus pass-throughs of operating expenses, including electricity costs. The Company estimates operating expense pass-throughs based on historical amounts and comparable market data. (c) Consists of five leases: a lease representing 112,905 net rentable square feet that expires in December 1998, a lease representing 30,280 net rentable square feet that expires in May 1999, a lease representing 14,750 net rentable square feet that expires in January 2001, a lease representing 13,956 net rentable square feet that expires in October 2004 and a lease representing 12,498 net rentable square feet that expires in June 1998. (d) Consists of three leases: a lease representing 41,176 net rentable square feet that expires in May 2002, a lease representing 36,830 net rentable square feet that expires in November 2001 and a lease representing 15,000 net rentable square feet that expires in October 2000. (e) Consists of seven leases: six leases representing 55,857 net rentable square feet in the aggregate that expire in March 2004 and a lease representing 1,200 net rentable square feet (storage) that is leased on a month-to-month basis. (f) Consists of six leases: a lease representing 24,255 net rentable square feet that expires in March 1998, a lease representing 20,000 net rentable square feet that expires in March 2001, a lease representing 9,875 net rentable square feet that expires in August 1998, a lease representing 8,387 net rentable square feet that expires in April 2001, a lease representing 7,976 net rentable square feet that expires in March 2000 and a lease representing 3,119 net rentable square feet that expires in June 1998. (g) Consists of three leases: a lease representing 43,130 net rentable square feet that expires in September 1998, a lease representing 8,339 net rentable square feet that expires in June 1999 and a lease representing 1,294 net rentable square feet that expires in January 1998. (h) Consists of two leases: a lease representing 38,055 net rentable square feet that expires in December 2001 and a lease representing 1,275 net rentable square feet, which the tenant occupies on a month-to-month basis. Development Entities Since January 1, 1997, the Company, through the Operating Partnership and subsidiaries wholly-owned by the Operating Partnership, has entered into seven Development Entities. On September 19, 1997, the Operating Partnership acquired a 50% interest in a newly-formed company that is currently in the process of developing a three-story office property in Newark, Delaware which is expected to contain approximately 150,000 net rentable square feet upon completion. The Operating Partnership's initial equity contribution commitment to this company is approximately $2.0 million. Total project costs are estimated to be approximately $17.0 million, with construction scheduled to be completed during the second quarter of 1998. Project costs are being financed primarily through a $14.5 million third party construction loan, the repayment of which has been guaranteed by the Operating Partnership. On September 19, 1997, the Operating Partnership also acquired a 50% interest in a newly-formed company that acquired two parcels of undeveloped land containing an aggregate of approximately 11 acres in Newark, Delaware for a purchase price of approximately $1.0 million in anticipation of the construction on such land of two office buildings. The Operating Partnership's initial equity contribution to this company was $1.0 million. Architectural plans for the development of the land have not been completed and development of the land is subject to receipt of a construction loan as well as certain land development and other necessary approvals. On November 4, 1997, the Operating Partnership acquired a 65% interest in a newly-formed partnership that is currently in the process of developing a four-story office property in West Conshohocken, Pennsylvania which is expected to contain approximately 85,000 net rentable square feet upon completion. The Operating Partnership has committed to make an equity investment of $6.75 million upon maturity of the construction loan that is financing construction of the office property. Total project costs are estimated to be approximately $16.8 million, with construction scheduled to be completed during -23- the fourth quarter of 1998. Project costs are being financed primarily through a $16.8 million third party construction loan, the repayment of which has been guaranteed by the Operating Partnership. On November 4, 1997, the Operating Partnership also acquired a 65% interest in a newly-formed partnership that acquired an option to purchase approximately 9.3 acres of undeveloped land in West Conshohocken, Pennsylvania for approximately $3.2 million, subject to reduction in certain circumstances. The Company believes this land can accommodate an office building containing approximately 210,000 net rentable square feet. The term of the option is one-year, subject to extension for an additional one-year period. The Operating Partnership's initial equity contribution to this partnership was approximately $48,000. As part of the November 4, 1997 transactions, the Operating Partnership also acquired the right to become a 35% partner in an existing partnership that owns a four-story office property containing approximately 83,000 net rentable square feet in Conshohocken, Pennsylvania. This property was 100% leased as of December 31, 1997. The Operating Partnership expects to acquire its 35% interest for approximately $2.5 million during the second quarter of 1998. On December 31, 1997, the Operating Partnership acquired a 50% interest in a newly-formed partnership that was established to own and operate a project involving the redevelopment of a building situated on approximately five acres in Delaware County, Pennsylvania. The building has previously been used for retail and office purposes, and the partnership intends to redevelop the building in 1998 at an estimated cost of approximately $1.0 million for office purposes. The Operating Partnership's initial equity contribution to this partnership was approximately $850,000, and the Operating Partnership has agreed to contribute up to $650,000 in connection with the redevelopment of the building. The Operating Partnership has also guaranteed payment of $500,000 to secure a $1.75 million bank loan that funded a portion of the purchase price of the building and related land. On February 3, 1998, the Operating Partnership acquired an approximately 60% economic interest in a partnership that owns approximately 12.5 acres of land in Plymouth Meeting, Pennsylvania. The Company believes the land (on which an inn is currently situated) can accommodate an office building containing approximately 130,000 net rentable square feet. The Operating Partnership acquired its interest through a loan and equity contribution aggregating approximately $4.2 million. As of the date of this Annual Report on Form 10-K, the partnership has not determined its plans for the land. On February 25, 1998, the Operating Partnership acquired a 50% interest in a newly-formed partnership that was established to develop a three-story office property containing approximately 180,000 net rentable square feet in Chester County, Pennsylvania. Total project costs are estimated to be approximately $35.9 million. The Operating Partnership has agreed to contribute $5.4 million to the partnership, and the other partner has agreed to contribute approximately 12.5 acres of undeveloped land to the partnership upon receipt of a construction loan. Architectural plans for the development of the land have not been completed and development of the land is subject to receipt of a construction loan as well as certain land development and other necessary approvals. -24- Item 7. 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. The results of operations, liquidity and capital resources and cash flows of the Company include the historical results of operations of the Properties held by the Company during the years ended December 31, 1997, 1996 and 1995. This Annual Report on Form 10-K contains forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, 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 changes in general economic conditions, changes in local real estate conditions, 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 and the failure of the Company to manage its growth effectively. OVERVIEW The Company believes it has established an effective platform in the suburban Philadelphia, Pennsylvania market that provides a foundation for achieving the Company's goal of maximizing market penetration and operating economies of scale. The Company believes this platform provides a basis to continue its penetration into additional targeted markets in the Mid-Atlantic United States through strategic acquisitions structured to increase cash available for distribution and maximize shareholder value. The Company continued its growth in 1997 by purchasing 80 office and industrial properties for an aggregate purchase price of approximately $403.7 million and investing approximately $5.5 million in unconsolidated real estate ventures. As of December 31, 1997, the Company's portfolio consisted of 95 office and 22 industrial properties totaling approximately 7.1 million net rentable square feet. The 1997 acquisitions expanded the Company's presence in the suburban Philadelphia office and industrial market. The Company believes it is one of the largest owners of suburban office space in this market. The 1997 acquisitions were financed through a combination of proceeds received from four public offerings of an aggregate of approximately 15.4 million Common Shares which raised gross proceeds of approximately $323.7 million, borrowings under the Company's revolving credit facility and the issuance of 389,976 Units in the Operating Partnership valued at approximately $9.5 million. During the period January 1, 1998 through March 15, 1998, the Company acquired 38 additional properties (32 office and 6 industrial) containing an aggregate of approximately 3.4 million net rentable square feet for a total purchase price of approximately $335.1 million. These acquisitions expanded the Company's presence into Maryland, Delaware and Ohio while reinforcing its presence in suburban Philadelphia. 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 additional acquisitions, as well as from rent increases in its current portfolio. -25- RESULTS OF OPERATIONS Comparison of the Year Ended December 31, 1997 to the Year Ended December 31, 1996 Net income for the year ended December 31, 1997 was $15.0 million compared with a net loss of $162,000 for the corresponding period in 1996. The increase in net income was primarily attributable to the operating results contributed by the 112 properties acquired from August 22, 1996 through December 31, 1997, and to a lesser extent attributable to a 1.9% increase in occupancy from 1996 to 1997 at properties owned on December 31, 1996. Revenues, which include rental income, recoveries from tenants and other income, increased by $51.0 million for the year ended December 31, 1997 as compared to the corresponding prior year period primarily as a result of property acquisitions and, to a lesser extent, increased occupancy. The impact of the straight-line rent adjustment increased revenues by $1.7 million for the year ended December 31, 1997. Property operating expenses, depreciation and amortization and management fees increased in the aggregate by $31.5 million for the year ended December 31, 1997 as compared with the prior year period primarily as a result of property acquisitions. Interest expense increased by $4.3 million as a result of additional indebtedness incurred to finance certain of the Company's acquisitions. Minority interest primarily represents the portion of the Operating Partnership which is not owned by the Company. Comparison of the Year Ended December 31, 1996 to the Year Ended December 31, 1995 The Company had a net loss of $162,000 for the year ended December 31, 1996 compared with a net loss of $824,000 for the corresponding period in 1995. Revenues, which include rental income, recoveries from tenants and other income, increased by $6.4 million for the year ended December 31, 1996 as compared to 1995 primarily as a result of property acquisitions. These increases were primarily attributable to the operating results contributed by the 33 properties acquired during 1996. The impact of the straight-line rent adjustment increased revenues by $337,000 for the year ended December 31, 1996. Property operating expenses, depreciation and amortization and management fees increased in aggregate by $3.5 million for the year ended December 31, 1996 as compared with the prior year period primarily as a result of property acquisitions. Interest expense increased by $2.0 million as a result of additional indebtedness incurred to finance certain of the Company's acquisitions. LIQUIDITY AND CAPITAL RESOURCES Cash Flows During the year ended December 31, 1997, the Company generated $33.6 million in cash flow from operating activities. Other sources of cash flow consisted of (i) $115.2 million in net additional borrowings under the Company's revolving credit facility, (ii) $0.4 million in additional mortgage notes payable, (iii) $305.1 million in net proceeds from share issuances and (iv) escrowed cash of $1.8 million. During the year ended December 31, 1997, the Company used an aggregate $456.1 million to (i) finance the cash portion ($406.9 million) of the acquisition cost of 80 Properties, (ii) invest $5.5 million in unconsolidated real estate ventures, (iii) fund capital expenditures and leasing commissions of $7.7 million, (iv) pay distributions to shareholders and minority partners in the Operating Partnership totaling $18.5 million, (v) pay scheduled amortization on mortgage principal of $1.0 million, (vi) satisfy $3.5 million of mortgage notes payable, (vii) purchase minority interests in the Operating Partnership for $0.5 million, (viii) pay other debt costs of $1.3 million and (ix) increase existing cash reserves by $11.2 million. -26- Capitalization As of December 31, 1997, the Company had approximately $163.9 million of debt outstanding, consisting of mortgage loans totaling $48.7 million and notes payable under the 1997 Credit Facility of $115.2 million. The mortgage loans mature between February 1998 and November 2004. As of December 31, 1997, the Company had $34.8 million of remaining availability under the 1997 Credit Facility, which provided for total borrowings up to $150.0 million and bore interest at a per annum floating rate equal to the 30, 60 or 90-day LIBOR, plus 175 basis points. For the year ended December 31, 1997, the weighted average interest rates on the Company's debt were 7.4% and 8.3% for borrowings under the 1997 Credit Facility and mortgage notes payable, respectively. The Company's debt to market capitalization was 20.8% as of December 31, 1997 and averaged 17.7% during the year. As a general policy, the Company intends, but is not obligated, to adhere to a policy of maintaining a debt to market capitalization ratio of no more than 50%. This policy is intended to provide the Company with financial flexibility to select the optimal source of capital to finance its growth. During the first quarter of 1998, the Company replaced the 1997 Credit Facility with the Credit Facility. The interest rate was reduced by 37.5 to 60 basis points depending on the Company's degree of leverage. Upon attainment of an investment rating, the overall interest rate reduction would be between 60 to 75 basis points regardless of the degree of leverage. The Credit Facility matures on January 5, 2001 and is extendible, under certain circumstances, at the Company's option to January 5, 2002. The Credit Facility requires the Company to maintain ongoing compliance with customary financial and other covenants, including leverage ratios based on gross implied asset value and debt service coverage ratios, limitations on liens and distributions and a minimum net worth requirement. During the period January 1, 1998 through March 15, 1998, the Company sold an aggregate 12,642,741 Common Shares for gross proceeds of $303.4 million pursuant to three public offerings. Short and Long Term Liquidity The Company believes that its cash flow from operations is adequate to fund its 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 its principal short-term liquidity needs, which are to fund operating expenses, debt service requirements, recurring capital expenditures, tenant allowances, leasing commissions and the minimum distribution required to maintain the Company's REIT qualifications under the Internal Revenue Code. On December 5, 1997, the Board of Trustees declared a quarterly dividend distribution of $0.37 per share, paid on January 15, 1998 to shareholders of record as of December 15, 1997. The increase to $0.37 in the fourth quarter was the fifth increase in the last six quarters. Cumulative distributions for 1997 were $1.44 per share compared to $0.82 in 1996, representing an increase of over 75%. As of December 31, 1997, the Company had entered into guaranties, and agreements contemplating the provision of guaranties, for the benefit of unconsolidated real estate ventures, aggregating approximately $33.3 million. Payment under these guaranties would constitute loan obligations of, or preferred equity positions in, the applicable unconsolidated real estate venture. The Company expects to meet its long-term liquidity requirements, such as for property acquisitions and development, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements, through the Credit Facility and other long-term secured and unsecured indebtedness and the issuance of additional Operating Partnership units and equity securities. -27- Funds from Operations Management generally considers Funds from Operations ("FFO") as one measure of REIT performance. The Company adopted the NAREIT definition of FFO in 1996 and has used this definition for all periods presented in the financial statements included herein. 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 and nonrecurring items. FFO may not be calculated in the same manner for all companies and accordingly FFO presented below may not be comparable to similarly titled measures by other companies. 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 years ended December 31, 1997 and 1996 is summarized in the following table (in thousands).
Year ended December 31, ----------------------------------- 1997 1996 (2) ---------------- --------------- Income before minority interest $ 15,377 $ (117) Add (Deduct): Depreciation attributable to real property 13,966 2,493 Amortization attributable to leasing costs 708 230 Minority interest not attributable to unit holders (16) (17) ------------ ----------- Funds from Operations before minority interest $ 30,035 $ 2,589 ============ =========== Weighted average Common Shares (including common share equivalents) and Operating Partnership units 16,175,258 (1) 1,700,910 ============ ===========
(1) Includes the weighted average effect of 1,424,736 Common Shares issued upon the conversion of preferred shares for the period prior to conversion, the weighted average effect of 317,450 Common Shares issuable upon the conversion of 317,450 Units, the weighted average effect of the 53,123 Common Shares issued upon the conversion of 53,123 Units for the period prior to conversion and the weighted average effect of the 28,994 convertible Units for the period prior to cancellation. (2) In 1997 the Company began computing FFO using a methodology which, in management's opinion, is more consistent with industry practice. This methodology presents FFO before any adjustments for amounts attributable to minority unit holders of the Operating Partnership. In restating FFO for the year ended December 31, 1996, FFO increased from $2,103 to $2,589. Year 2000 Issue The Company has recognized the need to ensure that its systems, equipment and operations will not be adversely impacted by the change to the calendar year 2000. The Company has initiated the process of identifying potential areas of risk and the related effects on planning, purchasing and daily operations. No estimates can be made as to the potential adverse impact resulting from the failure of third party suppliers and tenants to prepare for the year 2000. However, the Company does not anticipate the total cost of successfully converting all internal systems, equipment and operations to the year 2000 to be material. 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 the expense reimbursement and contractual rent increases. -28- Item 13. Certain Relationships and Related Transactions The Company believes that each of the transactions identified below was consummated on terms that are as favorable to the Company as would have been obtained from unrelated third parties. August 22, 1996 Transaction On August 22, 1996, the Company consummated a transaction (the "SSI/TNC Transaction") in which the Company acquired, through the Operating Partnership, substantially all of the real estate holdings of Safeguard Scientifics, Inc. ("SSI") and SSI's real estate affiliate, The Nichols Company ("TNC"), then a private real estate development and management services company. The then President of TNC, Anthony A. Nichols, Sr. and the Chairman and Chief Executive Officer of SSI, Warren V. Musser, became members of the Board of Trustees on August 22, 1996. In addition to the 495,837 Units issued on August 22, 1996 by the Operating Partnership to SSI, TNC and the other persons that became limited partners in the Operating Partnership as part of the SSI/TNC Transaction (collectively, the "Original Limited Partners") the Operating Partnership will be required to issue to certain of the Original Limited Partners 44,322 Units by September 1, 1999 to acquire residual interests retained by them in certain of the Properties contributed to the Operating Partnership on August 22, 1996. The Partnership Agreement of the Operating Partnership gives the Original Limited Partners the right to cause the Company to redeem their Units for cash, at a per Unit price based on the average closing price of the Common Shares for the five consecutive trading days prior to such determination (or, at the option of the Company, Common Shares on a one Common Share per Unit basis, subject to customary antidilution adjustments). In the Partnership Agreement, SSI and TNC made customary representations and warranties, on a several basis, in favor of the Company. The Company also made customary representations and warranties in favor of SSI and TNC. These representations survive until August 22, 1998. Option Properties At the closing of the SSI/TNC Transaction, the Operating Partnership acquired an option from an affiliate of TNC entitling it to acquire, in the Operating Partnership's discretion, four properties containing an aggregate of approximately 159,000 net rentable square feet (collectively, the "Option Properties") at any time during the two-year period ending August 22, 1998 (subject to two extensions of one year each). The parties have agreed that the purchase price payable by the Operating Partnership upon exercise of its option will consist of $10.00 in excess of the mortgage debt encumbering the Option Properties at the time of exercise (which as of December 31, 1997 aggregated $21.4 million, including accrued interest). Exercise of the option is subject to a right of first refusal in favor of, and the consent of, the holder of the mortgage encumbering the Option Properties. There can be no assurance that the Company will exercise its option or that the holder of such mortgage will consent to the exercise of the option. Lease with SSI Affiliate Approximately 21,580 square feet of space is leased by the Company to an affiliate of SSI at an average rental rate of $9.66 per square foot under a lease that expires in April 1999. The Company believes that this is the prevailing market rate for comparable space. Environmental Indemnity SSI has agreed to indemnify the Operating Partnership against the cost of remediation that may be required to be undertaken on account of certain environmental conditions at one of the Properties acquired in the SSI/TNC Transaction subject to an aggregate maximum liability of approximately $2.0 million. The term of the SSI indemnity agreement expires on August 22, 2001. Repayment of Certain Obligations On August 21, 1997, the Company paid an aggregate of approximately $594,384 (the "Payment Amount") to satisfy obligations of TNC (a company controlled by Mr. Nichols, Sr.) on account of brokerage commissions and tenant improvements. In exchange, TNC transferred to the Company 28,994 Units. The number of Units transferred to the Company equaled the Payment Amount divided by -29- the then market value of the number of Common Shares into which such transferred Units were then redeemable. Involvement of Legg Mason Walter D'Alessio, a member of the Company's Board of Trustees and Compensation Committee, is President of Legg Mason Real Estate Services, Inc., a mortgage banking firm and a subsidiary of Legg Mason, Inc. Legg Mason, Inc. is the parent of Legg Mason Wood Walker, Incorporated, which was an underwriter in five of the seven public offerings of Common Shares consummated by the Company between January 1, 1997 and the date of this Annual Report on Form 10-K. Interests in Sellers On March 7, 1997, the Company acquired a 6.8 acre parcel of undeveloped land located in Horsham Township, Montgomery County, Pennsylvania for approximately $1.0 million. The seller was Horsham Valley, Inc. The purchase price was paid through a combination of approximately $645,000 in cash and a non-interest bearing promissory note for $369,166 that was paid on February 27, 1998. The purchase price for the property was determined by negotiation between the Company and the seller. Mr. Nichols, Sr., the Company's Chairman, holds an approximately 25% interest in the seller. On December 17, 1997, the Company acquired an office property in Valley Forge, Montgomery County, Pennsylvania (the "PECO Building") from PECO Energy Company for a purchase price of $9.5 million. Mr. D'Alessio, a member of the Company's Board of Trustees, is a director of PECO Energy Company. A committee of the Board of Trustees, of which Mr. D'Alessio was not a participant, made the decision to purchase the PECO Building and negotiated the terms of the transaction. -30- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRANDYWINE REALTY TRUST By: /s/ Gerard H. Sweeney Dated: July 24, 1998 ------------------------ Gerard H. Sweeney President and Chief Executive Officer -31- -----END PRIVACY-ENHANCED MESSAGE-----