10-K 1 c10378e10vk.htm FORM 10-K Form 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-9106 (Brandywine Realty Trust)
000-24407 (Brandywine Operating Partnership, L.P.)
Brandywine Realty Trust
Brandywine Operating Partnership, L.P.
(Exact name of registrant as specified in its charter)
     
MARYLAND (Brandywine Realty Trust)   23-2413352
DELAWARE (Brandywine Operating Partnership L.P.)   23-2862640
     
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
Incorporation or organization)    
     
555 East Lancaster Avenue    
Radnor, Pennsylvania   19087
     
(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,   New York Stock Exchange
par value $0.01 per share    
(Brandywine Realty Trust)    
     
7.50% Series C Cumulative Redeemable Preferred   New York Stock Exchange
Shares of Beneficial Interest    
par value $0.01 per share    
(Brandywine Realty Trust)    
     
7.375% Series D Cumulative Redeemable Preferred   New York Stock Exchange
Shares of Beneficial Interest    
par value $0.01 per share    
(Brandywine Realty Trust)    
Securities registered pursuant to Section 12(g) of the Act:
Units of General Partnership Interest (Brandywine Operating Partnership, L.P.)
 
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
     
Brandywine Realty Trust
  Yes þ No o
Brandywine Operating Partnership, L.P.
  Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
     
Brandywine Realty Trust
  Yes o No þ
Brandywine Operating Partnership, L.P.
  Yes o No þ
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.
     
Brandywine Realty Trust
  Yes þ No o
Brandywine Operating Partnership, L.P.
  Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
     
Brandywine Realty Trust
  Yes þ No o
Brandywine Operating Partnership, L.P.
  Yes þ No o
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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Brandywine Realty Trust:
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
Brandywine Operating Partnership, L.P.:
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     
Brandywine Realty Trust
  Yes o No þ
Brandywine Operating Partnership, L.P.
  Yes o No þ
As of June 30, 2010, the aggregate market value of the Common Shares of Beneficial Interest held by non-affiliates of Brandywine Realty Trust was $1,394,281,711 based upon the last reported sale price of $10.75 per share on the New York Stock Exchange on June 30, 2010. An aggregate of 134,520,391 Common Shares of Beneficial Interest were outstanding as of February 23, 2011.
As of June 30, 2010, the aggregate market value of the 1,896,552 common units of limited partnership (“Units”) held by non-affiliates of Brandywine Operating Partnership, L.P. was $20,387,934 million based upon the last reported sale price of $10.75 per share on the New York Stock Exchange on June 30, 2010 of the Common Shares of Beneficial Interest of Brandywine Realty Trust, the sole general partner of Brandywine Operating Partnership, L.P. (For this computation, the Registrant has excluded the market value of all Units beneficially owned by Brandywine Realty Trust.)
Documents Incorporated By Reference
Portions of the proxy statement for the 2011 Annual Meeting of Shareholders of Brandywine Realty Trust are incorporated by reference into Part III of this Form 10-K.
The exhibit index as required by Item 601(a) of Regulation S-K is included in Item 15 of Part IV of this report.
 
 

 


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EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the year ended December 31, 2010 of Brandywine Realty Trust (the “Parent Company”) and Brandywine Operating Partnership (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust, or REIT that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company”. In addition, terms such as “we”, “us”, or “our” used in this report may refer to the Company, the Parent Company, or the Operating Partnership.
The Parent Company is the sole general partner of the Operating Partnership and as of December 31, 2010, owned a 93.1% interest in the Operating Partnership. The remaining 6.9% interest consists of common units of limited partnership interest issued by the Operating Partnership in exchange for contributions of properties to the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.
The Company believes that combining the annual reports on Form 10-K of the Parent Company and the Operating Partnership into a single report will result in the following benefits:
   
facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;
   
remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and
   
create time and cost efficiencies through the preparation of one combined report instead of two separate reports.
Management operates the Parent Company and the Operating Partnership as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership. These members are officers of both the Parent Company and of the Operating Partnership.
There are few differences between the Parent Company and the Operating Partnership, which are reflected in the footnote disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as an interrelated consolidated company. The Parent Company is a REIT, whose only material asset is its ownership of the partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s real estate ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units of the Operating Partnership or equity interests in subsidiaries of the Operating Partnership.
The equity and non-controlling interests in the Parent Company and the Operating Partnership’s equity are the main areas of difference between the consolidated financial statements of the Parent Company and the Operating Partnership. The common units of limited partnership interest in the Operating Partnership are accounted for as partners’ equity in the Operating Partnership’s financial statements while the common units of limited partnership interests held by parties other than the Parent Company are presented as non-controlling interests in the Parent Company’s financial statements. The differences between the Parent Company and the Operating Partnership’s equity relate to the differences in the equity issued at the Parent Company and Operating Partnership levels.
To help investors understand the significant differences between the Parent Company and the Operating Partnership, this report presents the following as separate notes or sections for each of the Parent Company and the Operating Partnership:
   
consolidated financial statements;
   
the following notes to the consolidated financial statements:
   
Noncontrolling Interests; and
   
Parent Company’s and Operating Partnership’s Equity
   
Liquidity and Capital Resources in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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This report also includes separate Item 9A. (Controls and Procedures) disclosures and separate Exhibit 31 and 32 certifications for each of the Parent Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Parent Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.
In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.
As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company operations on a consolidated basis and how management operates the Company.

 

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TABLE OF CONTENTS
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 Exhibit 3.1.27
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 21
 Exhibit 23.1
 Exhibit 23.2
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 31.3
 Exhibit 31.4
 Exhibit 32.1
 Exhibit 32.2
 Exhibit 32.3
 Exhibit 32.4
 Exhibit 99.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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Filing Format
This combined Form 10-K is being filed separately by Brandywine Realty Trust (the “Parent Company”) and Brandywine Operating Partnership, L.P. (the “Operating Partnership”).
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This Annual Report on Form 10-K and other materials filed by us with the SEC (as well as information included in oral or other written statements made by us) contain statements that are forward-looking, including statements relating to business and real estate development activities, acquisitions, dispositions, future capital expenditures, financing sources, governmental regulation (including environmental regulation) and competition. We intend such forward-looking statements to be covered by the safe-harbor provisions of the 1995 Act. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. As forward-looking statements, these statements involve important risks, uncertainties and other factors that could cause actual results to differ materially from the expected results and, accordingly, such results may differ from those expressed in any forward-looking statements made by us or on our behalf. Factors that could cause actual results to differ materially from our expectations include, but are not limited to:
   
the continuing impact of the recent credit crisis and global economic slowdown, which is having and may continue to have negative effect on the following, among other things:
   
the fundamentals of our business, including overall market occupancy, demand for office space and rental rates;
   
the financial condition of our tenants, many of which are financial, legal and other professional firms, our lenders, counterparties to our derivative financial instruments and institutions that hold our cash balances and short-term investments, which may expose us to increased risks of default by these parties;
   
availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue acquisition and development opportunities and refinance existing debt; and
   
a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis.
   
changes in local real estate conditions (including changes in rental rates and the number of properties that compete with our properties);
   
changes in the economic conditions affecting industries in which our principal tenants compete;
   
the unavailability of equity and debt financing;
   
our failure to lease unoccupied space in accordance with our projections;
   
our failure to re-lease occupied space upon expiration of leases;
   
tenant defaults and the bankruptcy of major tenants;
   
increases in interest rates;
   
failure of interest rate hedging contracts to perform as expected and the effectiveness of such arrangements;
   
failure of acquisitions to perform as expected;
   
unanticipated costs associated with the acquisition, integration and operation of, our acquisitions;
   
unanticipated costs to complete, lease-up and operate our developments and redevelopments;

 

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unanticipated costs associated with land development, including building moratoriums and inability to obtain necessary zoning, land-use, building, occupancy and other required governmental approvals, construction cost increases or overruns and construction delays;
   
impairment charges;
   
increased costs for, or lack of availability of, adequate insurance, including for terrorist acts;
   
actual or threatened terrorist attacks;
   
demand for tenant services beyond those traditionally provided by landlords;
   
liability under environmental or other laws;
   
failure or bankruptcy of real estate venture partners;
   
inability of real estate venture partners to fund venture obligations;
   
failure of dispositions to close in a timely manner;
   
failure of buyers of our properties to comply with terms of their financing agreements to us;
   
earthquakes and other natural disasters;
   
the unforeseen impact of climate change and compliance costs relating to laws and regulations governing climate change;
   
risks associated with federal, state and local tax audits;
   
complex regulations relating to our status as a REIT and the adverse consequences of our failure to qualify as a REIT; and
   
the impact of newly adopted accounting principles on our accounting policies and on period-to-period comparisons of financial results.
Given these uncertainties, and the other risks identified in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, we caution readers not to place undue reliance on forward-looking statements. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

 

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PART I
Item 1.  
Business
Introduction
We are a self-administered and self-managed REIT that provides leasing, property management, development, redevelopment, acquisition and other tenant-related services for a portfolio of office, mixed-use and industrial properties. As of December 31, 2010, we owned and consolidated 233 properties (collectively, the “Properties”) containing an aggregate of approximately 25.6 million net rentable square feet. The Properties include 208 office properties, 20 industrial properties, four mixed-use properties and a garage property under redevelopment. As of December 31, 2010, we also owned interests in 17 unconsolidated real estate ventures (collectively, the “Real Estate Ventures”) that own properties that contain approximately 6.5 million net rentable square feet. In addition, as of December 31, 2010, we owned approximately 509 acres of undeveloped land. The Properties and the properties owned by the Real Estate Ventures are located in or near Philadelphia, Pennsylvania; Metropolitan Washington, D.C.; Southern and Central New Jersey; Richmond, Virginia; Wilmington, Delaware; Austin, Texas and Oakland, Concord, Carlsbad and Rancho Bernardo, California. In addition to managing properties that we own, as of December 31, 2010, we were managing approximately 7.8 million square feet of office and industrial properties for third parties and Real Estate Ventures. Unless otherwise indicated, all references to square feet represent net rentable area.
Organization
The Parent Company was organized and commenced its operations in 1986 as a Maryland REIT. The Parent Company owns its assets and conducts its operations through the Operating Partnership and subsidiaries of the Operating Partnership. The Operating Partnership was formed in 1996 as a Delaware limited partnership. The Parent Company controls the Operating Partnership as its sole general partner. As of December 31, 2010, the Parent Company owned a 93.1% interest in the Operating Partnership. The remaining 6.9% interest in the Operating Partnership consists of common units of limited partnership interest issued to the holders in exchange for contributions of properties to the Operating Partnership. Our structure as an “UPREIT” is designed, in part, to permit persons contributing properties to us to defer some or all of the tax liability they might otherwise incur in a sale of properties.
The common units in the Operating Partnership consist of two classes: Class A units and Class F (2010) units. Holders of Class A units have the right to require redemption of their units at any time. At our option, we may satisfy the redemption of a Class A unit either for a common share of the Parent Company or for an amount of cash equal to the market price of one common share of the Parent Company (based on the average closing prices of the common shares on the New York Stock Exchange for the five-trading days ending on the redemption date). Class F (2010) units rank on a parity with Class A units as to distributions but do not begin to accrue distributions and are not entitled to allocations of income or loss prior to August 5, 2011. Thereafter, Class F (2010) units will be entitled to receive the same distributions that the Parent Company pays on its common shares, and the holder of the units will have the right to exchange the units for an equal number of common shares (or, at the Parent Company’s option, a cash payment equal to the number of units tendered for exchange multiplied by the average closing price of the common shares on the New York Stock Exchange for the five trading days ending on the date of the exchange).
Our executive offices are located at 555 East Lancaster Avenue, Suite 100, Radnor, Pennsylvania 19087 and our telephone number is (610) 325-5600. We have offices in Philadelphia, Pennsylvania; Falls Church, Virginia; Mount Laurel, New Jersey; Richmond, Virginia; Austin, Texas; Oakland, California; and Carlsbad, California. We have an internet website at www.brandywinerealty.com. We are not incorporating by reference into this Annual Report on Form 10-K any material from our website. The reference to our website is an inactive textual reference to the uniform resource locator (URL) and is for your reference only.
2010 Transactions
Real Estate Acquisitions/Dispositions
As of December 31, 2010, two of our building properties located in King of Prussia, Pennsylvania were undergoing demolition and the remaining land balances have been presented as land inventory in our consolidated balance sheets. We have determined that there was a change in the estimated useful lives of the properties resulting from the ongoing demolition causing an acceleration of depreciation expense. During the year ended December 31, 2010, we recognized the remaining net book value of the two buildings aggregating to $2.7 million as depreciation, with the land amounts of $1.1 million being reclassified to land inventory for potential future development. All related demolition costs are charged to earnings.

 

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On December 29, 2010, we acquired a 12 acre parcel of land in Gibbsboro, New Jersey through the foreclosure of a note receivable amounting to $2.8 million which was secured by this land and payment of transaction related costs of $0.3 million. This parcel of land is held for future development.
On August 5, 2010, we acquired Three Logan Square in Philadelphia, together with related ground tenancy rights under a long-term ground lease, from BAT Partners, L.P., a third party unaffiliated with us. Three Logan Square contains approximately 1.0 million of net rentable square feet and is currently 67.2% leased. We acquired Three Logan Square for approximately $129.0 million funded through a combination of $51.2 million in cash and 7,111,112 Class F (2010) Units. As indicated above under “Organization”, the Class F (2010) Units do not begin to accrue distributions and are not entitled to income or loss allocations prior to August 5, 2011. We funded the cash portion of the acquisition price through an advance under our revolving credit facility and with available corporate funds.
On December 23, 2010, we sold four office properties (One and Two Greentree Centre, 8000 Lincoln Drive and Lake Center IV) containing a total of 243,195 net rentable square feet located in Marlton, New Jersey for an aggregate sales price of $20.9 million. The properties were 76.1% occupied at the date of sale.
On November 22, 2010, we sold Spyglass Point, a 58,576 net rentable square feet office property located in Austin, Texas for a sales price of $13.5 million. The property was fully occupied at the date of sale.
On September 20, 2010, we sold 630 Clark Avenue, a 50,000 net rentable square feet office property located in King of Prussia, Pennsylvania for a sales price of $3.6 million. The property was fully occupied at the date of sale.
On August 18, 2010, we sold 479 Thomas Jones Way, a 49,264 net rentable square feet office property located in Exton, Pennsylvania, for a sales price of $3.8 million. The property was 63.0% occupied at the date of sale.
On January 14, 2010, we sold 1957 Westmoreland Street, a 121,815 net rentable square feet property located in Richmond, Virginia, for a sales price of $10.8 million. The property was vacant at the date of sale.
Developments and Redevelopments
During 2010, we placed in service three office properties and one-mixed use property that we developed or redeveloped and that contain an aggregate of 1.9 million net rentable square feet. We place a property in service at the date the property reaches at least 95% occupancy. At December 31, 2010, we were proceeding on one garage redevelopment with total projected costs of $14.8 million of which $0.8 million remained to be funded. We expect to place this project in service in or around the fourth quarter of 2011.
Unsecured Debt Activity
During the year ended December 31, 2010, we repurchased $82.7 million of our unsecured Notes as summarized in the table below:
                                 
    Repurchase                     Deferred Financing  
Notes   Amount     Principal     Loss     Amortization  
2010 5.625% Notes
  $ 2,002     $ 1,942     $ 37     $ 3  
2011 3.875% Notes (a)
    68,741       68,125       1,762       281  
2012 5.750% Notes
    13,333       12,625       431       32  
 
                       
 
  $ 84,076     $ 82,692     $ 2,230     $ 316  
 
                       
     
(a)  
On October 20, 2011, the holders of the Guaranteed Exchangeable Notes have the right to request the redemption of all or a portion of the Guaranteed Exchangeable Notes they hold at a price equal to 100% of the principal amount plus accrued and unpaid interest. Accordingly, the Guaranteed Exchangeable Notes have been presented with an October 20, 2011 maturity date.
We funded these repurchases from a combination of proceeds from asset sales, cash flow from operations and borrowings under our unsecured revolving credit facility (the “Credit Facility”). We use borrowings under the Credit Facility for general business purposes, including the acquisition, development and redevelopment of properties and the repayment of other debt. The maturity date of the Credit Facility is June 29, 2011 (subject to an extension of one year, at our option, upon our payment of an extension fee equal to 15 basis points of the committed amount under the Credit Facility). The per annum variable interest rate on the outstanding balances is LIBOR plus 0.725%. The interest rate and facility fee are subject to adjustment upon a change in our unsecured debt ratings. In addition, the capitalization rate used in the calculation of several of the financial covenants in the Credit Facility is 7.50% and our swing loan availability under the Credit Facility is at $60.0 million. We are allowed four competitive bid loan requests in any 30 day period. Borrowings are available to the extent of borrowing capacity at the stated rates; however, the competitive bid feature allows banks that are part of the lender consortium under the Credit Facility to bid to make loans to us at a reduced LIBOR rate. We have the option to increase the Credit Facility to $800.0 million provided that we have not committed any defaults under the Credit Facility and we are able to acquire additional commitments from its existing lenders or new lenders.

 

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The Credit Facility contains financial and non-financial covenants, including covenants that relate to our incurrence of additional debt; the granting of liens; consummation of mergers and consolidations; the disposition of assets and interests in subsidiaries; the making of loans and investments; and the payment of dividends. The restriction on dividends permits us to pay dividends to the greater of (i) an amount required for us to retain our qualification as a REIT and (ii) 95% of our funds from operations. The Credit Facility includes financial covenants that require us to maintain an interest coverage ratio, a fixed charge coverage ratio, an unsecured debt ratio and an unencumbered cash flow ratio above specified levels; to maintain net worth above an amount determined on a specified formula; and to maintain a leverage ratio and a secured debt ratio below certain maximum levels. Another financial covenant limits the ratio of unsecured debt to unencumbered properties. We were in compliance with all financial and non-financial covenants as of December 31, 2010. We continuously monitor our compliance with all covenants. Certain covenants restrict our ability to obtain alternative sources of capital. While we believe that we will remain in compliance with our covenants, a continued slow-down in the economy and continued decrease in availability of debt financing could result in non-compliance with covenants.
Secured Debt Activity
On August 26, 2010, the Operating Partnership received $254.0 million of gross proceeds from a $256.5 million forward financing commitment that the Operating Partnership obtained on June 29, 2009. The Operating Partnership paid a $17.7 million commitment fee in connection with this commitment. The loan proceeds, together with the commitment fee had been escrowed with an institutional trustee pending the completion of the IRS Philadelphia Campus and the Cira South Garage as well as the commencement of the leases at these facilities. The financing consists of two separate loans: $209.7 million secured by the IRS Philadelphia Campus and $46.8 million secured by the Cira South Garage. The lender held back $2.5 million of the loan proceeds pending completion of certain conditions related to the IRS Philadelphia Campus and the Cira South Garage. As of December 31, 2010, the Operating Partnership received $2.1 million of the amounts held back. The loans are non-recourse and are secured by the IRS Philadelphia Campus and the Cira South Garage, respectively. The loans bear interest at 5.93% with interest only through September 10, 2010 and thereafter require principal and interest monthly payments through its maturity in September 2030. The Operating Partnership used the loan proceeds to reduce borrowings under its Credit Facility and for general corporate purposes.
Additional Financing Activity
On August 5, 2010, the Operating Partnership issued 7,111,112 of Class F (2010) units in connection with the acquisition of Three Logan Square, an office property in Philadelphia, Pennsylvania. The Class F (2010) units do not accrue a dividend and are not entitled to income or loss allocations prior to August 5, 2011. They are also not exchangeable for Parent Company’s common shares for that period. For purposes of computing the total purchase price of Three Logan Square, the Class F (2010) units were valued based on the closing market price of the Parent Company’s common shares on the acquisition date of $11.54 less $0.60 to reflect that these units do not begin to accrue a dividend prior to August 5, 2011.
In June 2010, the Operating Partnership through one of its wholly owned taxable REIT subsidiaries (a“TRS”) received a $27.4 million contribution under the historic tax credit transaction that we entered into in 2008 with US Bancorp bringing the total contributions received to date to $61.4 million.
In March 2010, the Parent Company commenced a continuous equity offering program (the “Offering Program”), under which the Parent Company may sell up to an aggregate amount of 15,000,000 common shares until March 10, 2013. Through December 31, 2010, the Parent Company sold 5,742,268 shares under the Offering Program at an average sales price of $12.54 per share resulting in net proceeds of $70.8 million. The Parent Company contributed the net proceeds from the sale of its shares under the Offering Program to the Operating Partnership in exchange for the issuance of 5,742,268 common partnership units to the Parent Company. The Operating Partnership used the net proceeds from the sales contributed by the Parent Company to reduce borrowings under the Credit Facility and for general corporate purposes.

 

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Business Objective and Strategies for Growth
Our business objective is to deploy capital effectively to maximize our return on investment and thereby maximize our total return to shareholders. To accomplish this objective we seek to:
   
maximize cash flow through leasing strategies designed to capture rental growth as rental rates increase and as above and below-market leases are renewed;
   
attain a high tenant retention rate by providing a full array of property management and maintenance services and tenant service programs responsive to the varying needs of our diverse tenant base;
   
form joint venture opportunities with high-quality partners having attractive real estate holdings or significant financial resources;
   
utilize our reputation as a full-service real estate development and management organization to identify opportunities that will expand our business and create long-term value; and
   
increase the economic diversification of our tenant base while maximizing economies of scale.
We also consider the following to be important objectives:
   
to acquire and develop high-quality office and industrial properties at attractive yields in markets that we expect will experience economic growth and where we can achieve operating efficiencies;
   
to deploy our land inventory for development of high-quality office and industrial properties; and
   
to capitalize on our redevelopment expertise to selectively develop, redevelop and reposition properties in desirable locations.
We expect to concentrate our real estate activities in markets where we believe that:
   
current and projected market rents and absorption statistics justify construction activity;
   
we can maximize market penetration by accumulating a critical mass of properties and thereby enhance operating efficiencies;
   
barriers to entry (such as zoning restrictions, utility availability, infrastructure limitations, development moratoriums and limited developable land) will create supply constraints on office and industrial space; and
   
there is potential for economic growth, particularly job growth and industry diversification.
Operating Strategy
In this current economic environment, we expect to continue to operate in markets where we have a concentration advantage due to economies of scale. We believe that where possible, it is best to operate with a strong base of properties in order to benefit from the personnel allocation and the market strength associated with managing several properties in the same market. However, we intend to selectively dispose of properties and redeploy capital if we determine a property cannot meet long term earnings growth expectations. We believe that recycling capital is an important aspect of maintaining the overall quality of our portfolio.
Our broader strategy remains focused on continuing to enhance liquidity and strengthen our balance sheet through capital retention, targeted sales activity and management of our existing and prospective liabilities.
In the long term, we believe that we are well positioned in our current markets and have the expertise to take advantage of both development and acquisition opportunities, as warranted by market and economic conditions, in new markets that have healthy long-term fundamentals and strong growth projections. This capability, combined with what we believe is a conservative financial structure, should allow us to achieve disciplined growth. These abilities are integral to our strategy of having a geographically and physically diverse portfolio of assets, which will meet the needs of our tenants.
We use experienced on site construction superintendents, operating under the supervision of project managers and senior management, to control the construction process and mitigate the various risks associated with real estate development.
In order to fund developments, redevelopments and acquisitions, as well as refurbish and improve existing Properties, we must use excess cash from operations after satisfying our dividend and other requirements. The availability of funds for new investments and maintenance of existing Properties depends in large measure on capital markets and liquidity factors over which we can exert little control. Past events, including failures and near failures of a number of large financial service companies, have made the capital markets increasingly volatile. As a result, many property owners are finding financing to be increasingly expensive and difficult to obtain. In addition, downgrades of our public debt ratings by Standard & Poor’s and Moody’s Investor Service could increase our cost of capital.

 

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Policies With Respect To Certain Activities
The following is a discussion of our investment, financing and other policies. These policies have been determined by our Board of Trustees and our Board may revise these policies without a vote of shareholders.
Investments in Real Estate or Interests in Real Estate
We may develop, purchase or lease income-producing properties for long-term investment, expand and improve the properties presently owned or other properties purchased, or sell such properties, in whole or in part, as circumstances warrant. Although there is no limitation on the types of development activities that we may undertake, we expect that our development activities will meet current market demand and will generally be on a build-to-suit basis for particular tenants where a significant portion of the building is pre-leased before construction begins. We continue to participate with other entities in property ownership through existing joint ventures or other types of co-ownership. Our equity investments may be subject to existing or future mortgage financing and other indebtedness that will have priority over our equity investments.
Securities of or Interests in Entities Primarily Engaged in Real Estate Activities and Other Issuers
Subject to the percentage of ownership limitations and gross income tests necessary for REIT qualification, we may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers. We may enter into joint ventures or partnerships for the purpose of obtaining an equity interest in a particular property. We do not currently intend to invest in the securities of other issuers except in connection with joint ventures or acquisitions of indirect interests in properties.
Investments in Real Estate Mortgages
While our current portfolio consists of, and our business objectives emphasize, equity investments in commercial real estate, we may, at the discretion of management or our Board of Trustees, invest in other types of equity real estate investments, mortgages and other real estate interests. We do not presently intend to invest to a significant extent in mortgages or deeds of trust, but may invest in participating mortgages if we conclude that we may benefit from the cash flow or any appreciation in the value of the property securing a mortgage. From time to time, we provide seller financing to buyers of our properties. We do this when the buyer requires additional funds for the purchase and provision of seller financing will be beneficial to us and the buyer compared to a mortgage loan from a third party lender.
Dispositions
Our disposition of properties is based upon management’s periodic review of our portfolio and the determination by management or our Board of Trustees that a disposition would be in our best interests. We intend to use selective dispositions to fund our capital and refinancing needs.
Financing Policies
A primary objective of our financing policy has been to manage our financial position to allow us to raise capital from a variety of sources at competitive rates. Our mortgages, credit facilities and unsecured debt securities contain restrictions on our ability to incur indebtedness. Our charter documents do not limit the indebtedness that we may incur. Our financing strategy is to maintain a strong and flexible financial position by limiting our debt to a prudent level and minimizing our variable interest rate exposure. We intend to finance future growth and future maturing debt with the most advantageous source of capital then available to us. These sources may include selling common or preferred equity and debt securities sold through public offerings or private placements, utilizing availability under the Credit Facility or incurring additional indebtedness through secured or unsecured borrowings. To qualify as a REIT, we must distribute to our shareholders each year at least ninety percent of our net taxable income, excluding any net capital gain. This distribution requirement limits our ability to fund future capital needs, including for acquisitions and developments, from income from operations. Therefore, we expect to continue to rely on third party sources of capital to fund future capital needs.

 

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Working Capital Reserves
We maintain working capital reserves and access to borrowings in amounts that our management determines to be adequate to meet our normal contingencies.
Policies with Respect to Other Activities
We expect to issue additional common and preferred equity in the future and may authorize our Operating Partnership to issue additional common and preferred units of limited partnership interest, including to persons who contribute their interests in properties to us in exchange for such units. We have not engaged in trading, underwriting or agency distribution or sale of securities of unaffiliated issuers and we do not intend to do so. We intend to make investments consistent with our qualification as a REIT, unless because of circumstances or changes in the Internal Revenue Code of 1986, as amended (or the Treasury Regulations), our Board of Trustees determines that it is no longer in our best interests to qualify as a REIT. We may make loans to third parties, including to joint ventures in which we participate and to buyers of our real estate. We intend to make investments in such a way that we will not be treated as an investment company under the Investment Company Act of 1940.
Management Activities
We provide third-party real estate management services primarily through wholly-owned subsidiaries (collectively, the “Management Companies”). As of December 31, 2010, the Management Companies were managing properties containing an aggregate of approximately 33.4 million net rentable square feet, of which approximately 25.6 million net rentable square feet related to Properties owned by us and approximately 7.8 million net rentable square feet related to properties owned by third parties and unconsolidated Real Estate Ventures.
Geographic Segments
As of December 31, 2010, we were managing our portfolio within seven segments: (1) Pennsylvania Suburbs, (2) Philadelphia Central Business District (“CBD”), (3) Metropolitan Washington D.C, (4) New Jersey/Delaware, (5) Richmond, Virginia, (6) Austin, Texas and (7) California. The Pennsylvania Suburbs segment includes properties in Chester, Delaware, and Montgomery counties in the Philadelphia suburbs. The Philadelphia CBD segment includes properties located in the City of Philadelphia in Pennsylvania. The Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban Maryland. The New Jersey/Delaware segment includes properties in Burlington, Camden and Mercer counties and in New Castle county in the state of Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle, Chesterfield, Goochland and Henrico counties and Durham, North Carolina. The Austin, Texas segment includes properties in Austin. The California segment includes properties in Oakland, Concord, Carlsbad and Rancho Bernardo. Our corporate group is responsible for cash and investment management, development of certain real estate properties during the construction period, and certain other general support functions.
Competition
The real estate business is highly competitive. Our Properties compete for tenants with similar properties primarily on the basis of location, total occupancy costs (including base rent and operating expenses), services provided, and the design and condition of the improvements. We also face competition when attempting to acquire or develop real estate, including competition from domestic and foreign financial institutions, other REITs, life insurance companies, pension funds, partnerships and individual investors. Additionally, our ability to compete depends upon trends in the economies of our markets, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, land availability, our ability to obtain necessary construction approvals, taxes, governmental regulations, legislation and population trends.
Insurance
We maintain commercial general liability and “all risk” property insurance on our properties. We intend to obtain similar coverage for properties we acquire in the future. There are types of losses, generally of a catastrophic nature, such as losses from war, terrorism, environmental issues, floods, hurricanes and earthquakes that are subject to limitations in certain areas or which may be uninsurable risks. We exercise our discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance on our investments at a reasonable cost and on suitable terms. If we suffer a substantial loss, our insurance coverage may not be sufficient to pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impractical to use insurance proceeds to fully replace or restore a property after it has been damaged or destroyed.

 

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Employees
As of December 31, 2010, we had 439 full-time employees, including 30 union employees.
Government Regulations Relating to the Environment
Many laws and governmental regulations relating to the environment apply to us and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently and may adversely affect us.
Existing conditions at some of our Properties. Independent environmental consultants have conducted Phase I or similar environmental site assessments on our Properties. We generally obtain these assessments prior to the acquisition of a Property and may later update them as required for subsequent financing of the property or as requested by a tenant. Site assessments are generally performed to ASTM standards then existing for Phase I site assessments, and typically include a historical review, a public records review, a visual inspection of the surveyed site, and the issuance of a written report. These assessments do not generally include any soil samplings or subsurface investigations. Depending on the age of the property, the Phase I may have included an assessment of asbestos-containing materials. For properties where asbestos-containing materials were identified or suspected, an operations and maintenance plan was generally prepared and implemented. See Note 2 to our consolidated financial statements for our evaluation in accordance with the accounting standard governing asset retirement obligations.
Historical operations at or near some of our properties, including the operation of underground storage tanks, may have caused soil or groundwater contamination. We are not aware of any such condition, liability or concern by any other means that would give rise to material, uninsured environmental liability. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns; there may be material environmental conditions, liabilities or compliance concerns that a review failed to detect or which arose at a property after the review was completed; future laws, ordinances or regulations may impose material additional environmental liability; and current environmental conditions at our Properties may be affected in the future by tenants, third parties or the condition of land or operations near our Properties, such as the presence of underground storage tanks. We cannot be certain that costs of future environmental compliance will not affect our ability to make distributions to our shareholders.
Use of hazardous materials by some of our tenants. Some of our tenants handle hazardous substances and wastes on our properties as part of their routine operations. Environmental laws and regulations may subject these tenants, and potentially us, to liability resulting from such activities. We generally require our tenants, in their leases, to comply with these environmental laws and regulations and to indemnify us for any related liabilities. These tenants are primarily involved in the life sciences and the light industrial and warehouse businesses. We are not aware of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of our Properties, and we do not believe that on-going activities by our tenants will have a material adverse effect on our operations.
Costs related to government regulation and private litigation over environmental matters. Under environmental laws and regulations, we may be liable for the costs of removal, remediation or disposal of hazardous or toxic substances present or released on our Properties. These laws could impose liability without regard to whether we are responsible for, or knew of, the presence or release of the hazardous materials. Government investigations and remediation actions may entail substantial costs and the presence or release of hazardous substances on a property could result in governmental cleanup actions or personal injury or similar claims by private plaintiffs.

 

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Potential environmental liabilities may exceed our environmental insurance coverage limits. We carry what we believe to be sufficient environmental insurance to cover potential liability for soil and groundwater contamination, mold impact, and the presence of asbestos-containing materials at the affected sites identified in our environmental site assessments. Our insurance policies are subject to conditions, qualifications and limitations. Therefore, we cannot provide any assurance that our insurance coverage will be sufficient to cover all liabilities for losses.
Potential environmental liabilities may adversely impact our ability to use or sell assets. The presence of contamination or the failure to remediate contamination may impair our ability to sell or lease real estate or to borrow using the real estate as collateral.
Other
We do not have any foreign operations and our business is not seasonal. Our operations are not dependent on a single tenant or a few tenants and no single tenant accounted for more than 10.0% of our total 2010 revenue.
Code of Conduct
We maintain a Code of Business Conduct and Ethics applicable to our Board and all of our officers and employees, including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. A copy of our Code of Business Conduct and Ethics is available on our website, www.brandywinerealty.com. In addition to being accessible through our website, copies of our Code of Business Conduct and Ethics can be obtained, free of charge, upon written request to Investor Relations, 555 East Lancaster Avenue, Suite 100, Radnor, PA 19087. Any amendments to or waivers of our Code of Business Conduct and Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions and that relate to any matter enumerated in Item 406(b) of Regulation S-K promulgated by the SEC will be disclosed on our website.
Corporate Governance Principles and Board Committee Charters
Our Corporate Governance Principles and the charters of the Executive Committee, Audit Committee, Compensation Committee and Corporate Governance Committee of the Board of Trustees of Brandywine Realty Trust and additional information regarding our corporate governance are available on our website, www.brandywinerealty.com. In addition to being accessible through our website, copies of our Corporate Governance Principles and charters of our Board Committees can be obtained, free of charge, upon written request to Investor Relations, 555 Lancaster Avenue, Suite 100, Radnor, PA 19087.
Availability of SEC Reports
We file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other information with the SEC. Members of the public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Members of the public may also obtain information on the Public Reference Room by calling the SEC at 1-800-732-0330. The SEC also maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers, including us, that file electronically with the SEC. The address of that site is http://www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other information filed by us with the SEC are available, without charge, on our Internet web site, http://www.brandywinerealty.com as soon as reasonably practicable after they are filed electronically with the SEC. Copies are also available, free of charge, upon written request to Investor Relations, Brandywine Realty Trust, 555 East Lancaster Avenue, Suite 100, Radnor, PA 19087.

 

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Item 1A.  
Risk Factors
Our results from operations and ability to make distributions on our equity and to pay debt service on our indebtedness may be affected by the risk factors set forth below. All investors should consider the following risk factors before deciding to purchase our securities.
Adverse economic and geopolitical conditions could have a material adverse effect on our results of operations, financial condition and our ability to pay distributions to you.
Our business is affected by the continued uncertainty in the financial and credit markets, the sluggish recovery in the global economy from the recent recession, and other market or economic challenges experienced by the U.S. economy or the real estate industry as a whole. While there are signs of recovery in the U.S. economy, the recovery rate has been much slower than anticipated. Our portfolio consists primarily of office buildings (as compared to a more diversified real estate portfolio); if economic conditions persist or again deteriorate, then our results of operations, financial condition, financial results and ability to service current debt and to pay distributions to our shareholders may be adversely affected by the following, among other potential conditions:
   
significant job losses in the financial and professional services industries may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted;
   
our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to complete development opportunities and refinance existing debt;
   
reduce our returns from both our existing operations and our development activities and increase our future interest expense;
   
reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans;
   
the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold our cash deposits or the institutions or assets in which we have made short-term investments, the dislocation of the markets for our short-term investments, increased volatility in market rates for such investments or other factors;
   
reduced liquidity in debt markets and increased credit risk premiums for certain market participants may impair our ability to access capital; and
   
one or more lenders under our line of credit could refuse or be unable to fund their financing commitment to us and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.
These conditions, which could have a material adverse effect on our results of operations, financial condition and ability to pay distributions, may continue or worsen in the future.
Our performance is subject to risks associated with our properties and with the real estate industry.
Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our shareholders will be adversely affected. Events or conditions beyond our control that may adversely affect our operations or the value of our properties include:
   
downturns in the national, regional and local economic climate including increases in the unemployment rate and inflation;
   
competition from other office, mixed use, industrial and commercial buildings;
   
local real estate market conditions, such as oversupply or reduction in demand for office, industrial or commercial space;
   
changes in interest rates and availability of financing;

 

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vacancies, changes in market rental rates and the need to periodically repair, renovate and re-lease space;
   
increased operating costs, including insurance expense, utilities, real estate taxes, janitorial costs, state and local taxes, labor shortages and heightened security costs;
   
civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;
   
significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property; and
   
declines in the financial condition of our tenants and our ability to collect rents from our tenants.
The disruption in the debt capital markets could adversely affect us.
Notwithstanding the recent improvement in capital and credit markets, these markets are still considered volatile and disruptions in these markets are still possible. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. These events have an adverse effect on the availability of credit, the terms on which credit can be sourced and the overall cost of debt capital. This could negatively affect us by:
   
increasing our costs to finance our ongoing operations and fund our development and redevelopment activities;
   
reducing the availability of potential bidders for, and the amounts offered for, any properties we may wish to sell; and
   
preventing us from accessing necessary debt capital on a timely basis leading us to consider potentially more dilutive capital transactions such as undesirable sales of properties or equity securities.
We may suffer adverse consequences due to the financial difficulties, bankruptcy or insolvency of our tenants.
The current economic conditions have caused some of our tenants to experience financial difficulties. If more of our tenants were to continue to experience financial difficulties, including bankruptcy, insolvency or a general downturn in their business, there could be an adverse effect on our financial performance and distributions to shareholders. We cannot assure you that any tenant that files for bankruptcy protection will continue to pay us rent. A bankruptcy filing by or relating to one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its property, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. Any such unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.
The terms and covenants relating to our indebtedness could adversely impact our economic performance.
Like other real estate companies which incur debt, we are subject to risks associated with debt financing, such as the insufficiency of cash flow to meet required debt service payment obligations and the inability to refinance existing indebtedness. If our debt cannot be paid, refinanced or extended at maturity, we may not be able to make distributions to shareholders at expected levels or at all. Furthermore, an increase in our interest expense could adversely affect our cash flow and ability to make distributions to shareholders. If we do not meet our debt service obligations, any properties securing such indebtedness could be foreclosed on, which would have a material adverse effect on our cash flow and ability to make distributions and, depending on the number of properties foreclosed on, could threaten our continued viability.

 

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Our Credit Facility, term loan and the indenture governing our unsecured public debt securities contain (and any new or amended facility will contain) restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt which we must maintain. Our ability to borrow under our credit facilities is subject to compliance with such financial and other covenants. In the event that we fail to satisfy these covenants, we would be in default under the credit facilities, the term loan and the indenture and may be required to repay such debt with capital from other sources. Under such circumstances, other sources of capital may not be available to us, or may be available only on unattractive terms. In addition, the mortgages on our properties contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. If we breach covenants in our secured debt agreements, the lenders can declare a default and take possession of the property securing the defaulted loan.
Increases in interest rates on variable rate indebtedness will increase our interest expense, which could adversely affect our cash flow and ability to make distributions to shareholders. Rising interest rates could also restrict our ability to refinance existing debt when it matures. In addition, an increase in interest rates could decrease the amounts that third parties are willing to pay for our assets, thereby limiting our ability to alter our portfolio promptly in relation to economic or other conditions. We entered into and may, from time to time, enter into agreements such as interest rate hedges, swaps, floors, caps and other interest rate hedging contracts with respect to a portion of our variable rate debt. Although these agreements may lessen the impact of rising interest rates on us, they also expose us to the risk that other parties to the agreements will not perform or that we cannot enforce the agreements.
Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our equity shares or debt securities.
Our degree of leverage could affect our ability to obtain additional financing for working capital expenditures, development, acquisitions or other general corporate purposes In the event that our unsecured debt is downgraded by Moody’s Investor Services or Standard & Poor’s from the current ratings, we would likely incur higher borrowing costs and the market prices of our common shares and debt securities might decline. Our degree of leverage could also make us more vulnerable to a downturn in business or the economy in general.
We may experience increased operating costs, which might reduce our profitability.
Our properties are subject to increases in operating expenses such as for cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping and repairs and maintenance of our properties. In general, under our leases with tenants, we pass through all or a portion of these costs to them. We cannot assure you, however, that tenants will actually bear the full burden of these higher costs, or that such increased costs will not lead them, or other prospective tenants, to seek office space elsewhere. If operating expenses increase, the availability of other comparable office space in our core geographic markets might limit our ability to increase rents; if operating expenses increase without a corresponding increase in revenues, our profitability could diminish and limit our ability to make distributions to shareholders.
Our investment in property development or redevelopment may be more costly or difficult to complete than we anticipate.
We intend to continue to develop properties where market conditions warrant such investment. Once made, these investments may not produce results in accordance with our expectations. Risks associated with our development and construction activities include:
   
the unavailability of favorable financing alternatives in the private and public debt markets;
   
having sufficient capital to pay development costs;
   
unprecedented market volatility in the share price of REITs;
   
dependence on the financial services sector as part of our tenant base;
   
construction costs exceeding original estimates due to rising interest rates, diminished availability of materials and labor, and increases in the costs of materials and labor;
   
construction and lease-up delays resulting in increased debt service, fixed expenses and construction or renovation costs;
   
expenditure of funds and devotion of management’s time to projects that we do not complete;
   
the unavailability or scarcity of utilities;

 

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occupancy rates and rents at newly completed properties may fluctuate depending on a number of factors, including market and economic conditions, resulting in lower than projected rental rates and a corresponding lower return on our investment;
   
complications (including building moratoriums and anti-growth legislation) in obtaining necessary zoning, occupancy and other governmental permits; and
   
increased use restrictions by local zoning or planning authorities limiting our ability to develop and impacting the size of developments.
We face risks associated with property acquisitions.
We have recently acquired properties, and may in the future continue to acquire, properties and portfolios of properties, including large portfolios that would increase our size and potentially alter our capital structure. Although we believe that the acquisitions that we have completed and that we expect to undertake in the future have, and will, enhance our future financial performance, the success of such transactions is subject to a number of factors, including the risks that:
   
we may not be able to obtain financing for acquisitions on favorable terms;
   
acquired properties may fail to perform as expected;
   
the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates;
   
acquired properties may be located in new markets where we may have limited knowledge and understanding of the local economy, an absence of business relationships in the area or unfamiliarity with local governmental and permitting procedures; and
   
we may not be able to efficiently integrate acquired properties, particularly portfolios of properties, into our organization and manage new properties in a way that allows us to realize cost savings and synergies.
We acquired in the past and in the future may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our Operating Partnership. This acquisition structure has the effect, among other factors, of reducing the amount of tax depreciation we can deduct over the tax life of the acquired properties, and typically requires that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions on dispositions could limit our ability to sell an asset or pay down partnership debt during a specified time, or on terms, that would be favorable absent such restrictions.
Acquired properties may subject us to known and unknown liabilities.
Properties that we acquire may be subject to known and unknown liabilities for which we would have no recourse, or only limited recourse, to the former owners of such properties. As a result, if a liability were asserted against us based upon ownership of an acquired property, we might be required to pay significant sums to settle it, which could adversely affect our financial results and cash flow. Unknown liabilities relating to acquired properties could include:
   
liabilities for clean-up of pre-existing disclosed or undisclosed environmental contamination;
   
claims by tenants, vendors or other persons arising on account of actions or omissions of the former owners of the properties; and
   
liabilities incurred in the ordinary course of business.

 

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We have agreed not to sell certain of our properties and to maintain indebtedness subject to guarantees.
We agreed not to sell some of our properties for varying periods of time, in transactions that would trigger taxable income to the former owners, and we may enter into similar arrangements as a part of future property acquisitions. These agreements generally provide that we may dispose of the subject properties only in transactions that qualify as tax-free exchanges under Section 1031 of the Internal Revenue Code or in other tax deferred transactions. Such transactions can be difficult to complete and can result in the property acquired in exchange for the disposed of property inheriting the tax attributes (including tax protection covenants) of the sold property. Violation of these tax protection agreements would impose significant costs on us. As a result, we are restricted with respect to decisions related to financing, encumbering, expanding or selling these properties.
We have also entered into agreements that provide prior owners of properties with the right to guarantee specific amounts of indebtedness and, in the event that the specific indebtedness that they guarantee is repaid or reduced, we would be required to provide substitute indebtedness for them to guarantee. These agreements may hinder actions that we may otherwise desire to take to repay or refinance guaranteed indebtedness because we would be required to make payments to the beneficiaries of such agreements if we violate these agreements.
We may be unable to renew leases or re-lease space as leases expire; certain leases may expire early.
If tenants do not renew their leases upon expiration, we may be unable to re-lease the space. Even if the tenants do renew their leases or if we can re-lease the space, the terms of renewal or re-leasing (including the cost of required renovations) may be less favorable than the current lease terms. Certain leases grant the tenants an early termination right upon payment of a termination penalty or if we fail to comply with certain material lease terms. Our inability to renew or release spaces and the early termination of certain leases could affect our ability to make distributions to shareholders.
We face significant competition from other real estate developers.
We compete with real estate developers, operators and institutions for tenants and acquisition and development opportunities. Some of these competitors may have significantly greater financial resources than we have. Such competition may reduce the number of suitable investment opportunities available to us, may interfere with our ability to attract and retain tenants and may increase vacancies, which could result in increased supply and lower market rental rates, reducing our bargaining leverage and adversely affect our ability to improve our operating leverage. In addition, some of our competitors may be willing (e.g., because their properties may have vacancy rates higher than those for our properties) to make space available at lower rental rates or with higher tenant concession percentages than available space in our properties. We cannot assure you that this competition will not adversely affect our cash flow and our ability to make distributions to shareholders.
Property ownership through joint ventures may limit our ability to act exclusively in our interest.
We develop and acquire properties in joint ventures with other persons or entities when we believe circumstances warrant the use of such structures. As of December 31, 2010, we had investments in 17 unconsolidated real estate ventures. Our net investments in the 17 unconsolidated real estate ventures aggregated approximately $84.4 million as of December 31, 2010. We could become engaged in a dispute with one or more of our joint venture partners that might affect our ability to operate a jointly-owned property. Moreover, our joint venture partners may, at any time, have business, economic or other objectives that are inconsistent with our objectives, including objectives that relate to the appropriate timing and terms of any sale or refinancing of a property. In some instances, our joint venture partners may have competing interests in our markets that could create conflicts of interest. If the objectives of our joint venture partners or the lenders to our joint ventures are inconsistent with our own objectives, we may not be able to act exclusively in our interests. Furthermore, if the current constrained credit conditions in the capital markets persist or deteriorate further, the value of our investments could deteriorate and we could be required to reduce the carrying value of our equity method investments if a loss in the carrying value of the investment is other than a temporary decline pursuant to the accounting standard governing the equity method of accounting for investments in common stock.

 

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Because real estate is illiquid, we may not be able to sell properties when appropriate.
Real estate investments generally, and in particular large office and industrial/flex properties like those that we own, often cannot be sold quickly. The capitalization rates at which properties may be sold are generally higher than historic rates, thereby reducing our potential proceeds from sale. Consequently, we may not be able to alter our portfolio promptly in response to changes in economic or other conditions. In addition, the Internal Revenue Code limits our ability to sell properties that we have held for fewer than four years without potential adverse consequences to our shareholders. Furthermore, properties that we have developed and have owned for a significant period of time or that we acquired in exchange for partnership interests in our operating partnership often have a low tax basis. If we were to dispose of any of these properties in a taxable transaction, we may be required under provisions of the Internal Revenue Code applicable to REITs to distribute a significant amount of the taxable gain to our shareholders and this could, in turn, impact our cash flow. In some cases, tax protection agreements with third parties will prevent us from selling certain properties in a taxable transaction without incurring substantial costs. In addition, purchase options and rights of first refusal held by tenants or partners in joint ventures may also limit our ability to sell certain properties. All of these factors reduce our ability to respond to changes in the performance of our investments and could adversely affect our cash flow and ability to make distributions to shareholders as well as the ability of someone to purchase us, even if a purchase were in our shareholders’ best interests.
Some potential losses are not covered by insurance.
We currently carry comprehensive “all-risk” property, and rental loss insurance and commercial general liability coverage on all of our properties. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are, however, types of losses, such as lease and other contract claims, biological, radiological and nuclear hazards and acts of war that generally are not insured. We cannot assure you that we will be able to renew insurance coverage in an adequate amount or at reasonable prices. In addition, insurance companies may no longer offer coverage against certain types of losses, such as losses due to earthquake, terrorist acts and mold, or, if offered, these types of insurance may be prohibitively expensive. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. We cannot assure you that material losses in excess of insurance proceeds will not occur in the future. If any of our properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Such events could adversely affect our cash flow and ability to make distributions to shareholders. If one or more of our insurance providers were to fail to pay a claim as a result of insolvency, bankruptcy or otherwise, the nonpayment of such claims could have an adverse effect on our financial condition and results of operations. In addition, if one or more of our insurance providers were to become subject to insolvency, bankruptcy or other proceedings and our insurance policies with the provider were terminated or cancelled as a result of those proceedings, we cannot guarantee that we would be able to find alternative coverage in adequate amounts or at reasonable prices. In such case, we could experience a lapse in any or adequate insurance coverage with respect to one or more properties and be exposed to potential losses relating to any claims that may arise during such period of lapsed or inadequate coverage.
Terrorist attacks and other acts of violence or war may adversely impact our performance and may affect the markets on which our securities are traded.
Terrorist attacks against our properties, or against the United States or our interests, may negatively impact our operations and the value of our securities. Attacks or armed conflicts could result in increased operating costs; for example, it might cost more in the future for building security, property and casualty insurance, and property maintenance. As a result of terrorist activities and other market conditions, the cost of insurance coverage for our properties could also increase. We might not be able to pass through the increased costs associated with such increased security measures and insurance to our tenants, which could reduce our profitability and cash flow. Furthermore, any terrorist attacks or armed conflicts could result in increased volatility in or damage to the United States and worldwide financial markets and economy. Such adverse economic conditions could affect the ability of our tenants to pay rent and our cost of capital, which could have a negative impact on our results.
Our ability to make distributions is subject to various risks.
Historically, we have paid quarterly distributions to our shareholders. Our ability to make distributions in the future will depend upon:
   
the operational and financial performance of our properties;
   
capital expenditures with respect to existing, developed and newly acquired properties;
   
general and administrative costs associated with our operation as a publicly-held REIT;
   
the amount of, and the interest rates on, our debt; and
   
the absence of significant expenditures relating to environmental and other regulatory matters.

 

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Certain of these matters are beyond our control and any significant difference between our expectations and actual results could have a material adverse effect on our cash flow and our ability to make distributions to shareholders.
Changes in the law may adversely affect our cash flow.
Because increases in income and service taxes are generally not passed through to tenants under leases, such increases may adversely affect our cash flow and ability to make expected distributions to shareholders. Our properties are also subject to various regulatory requirements, such as those relating to the environment, fire and safety. Our failure to comply with these requirements could result in the imposition of fines and damage awards and could result in a default under some of our tenant leases. Moreover, the costs to comply with any new or different regulations could adversely affect our cash flow and our ability to make distributions. Although we believe that our properties are in material compliance with all such requirements, we cannot assure you that these requirements will not change or that newly imposed requirements will not require significant expenditures in order to be compliant.
Potential liability for environmental contamination could result in substantial costs.
Under various federal, state and local laws, ordinances and regulations, we may be liable for the costs to investigate and remove or remediate hazardous or toxic substances on or in our properties, often regardless of whether we know of or are responsible for the presence of these substances. These costs may be substantial. While we do maintain environmental insurance, we can not be assured that our insurance coverage will be sufficient to protect us from all of the aforesaid remediation costs. Also, if hazardous or toxic substances are present on a property, or if we fail to properly remediate such substances, our ability to sell or rent the property or to borrow using that property as collateral may be adversely affected.
Other laws and regulations govern indoor and outdoor air quality including those that can require the abatement or removal of asbestos-containing materials in the event of damage, demolition, renovation or remodeling and also govern emissions of and exposure to asbestos fibers in the air. The maintenance and removal of lead paint and certain electrical equipment containing polychlorinated biphenyls (PCBs) and underground storage tanks are also regulated by federal and state laws. We are also subject to risks associated with human exposure to chemical or biological contaminants such as molds, pollens, viruses and bacteria which, above certain levels, can be alleged to be connected to allergic or other health effects and symptoms in susceptible individuals. We could incur fines for environmental compliance and be held liable for the costs of remedial action with respect to the foregoing regulated substances or tanks or related claims arising out of environmental contamination or human exposure to contamination at or from our properties.
Additionally, we develop, manage, lease and/or operate various properties for third parties. Consequently, we may be considered to have been or to be an operator of these properties and, therefore, potentially liable for removal or remediation costs or other potential costs that could relate to hazardous or toxic substances.
An earthquake or other natural disasters could adversely affect our business.
Some of our properties are located in California which is a high risk geographical area for earthquakes or other natural disasters. Depending upon its magnitude, an earthquake could severely damage our properties which would adversely affect our business. We maintain earthquake insurance for our California properties and the resulting business interruption. We cannot assure you that our insurance will be sufficient if there is a major earthquake.
Americans with Disabilities Act compliance could be costly.
The Americans with Disabilities Act of 1990, as amended (“ADA”) requires that all public accommodations and commercial facilities, including office buildings, meet certain federal requirements related to access and use by disabled persons. Compliance with ADA requirements could involve the removal of structural barriers from certain disabled persons’ entrances which could adversely affect our financial condition and results of operations. Other federal, state and local laws may require modifications to or restrict further renovations of our properties with respect to such accesses. Although we believe that our properties are in material compliance with present requirements, noncompliance with the ADA or similar or related laws or regulations could result in the United States government imposing fines or private litigants being awarded damages against us. In addition, changes to existing requirements or enactments of new requirements could require significant expenditures. Such costs may adversely affect our cash flow and ability to make distributions to shareholders.

 

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Our status as a REIT (or any of our REIT subsidiaries) is dependent on compliance with federal income tax requirements.
If we (or any of our REIT subsidiaries) fail to qualify as a REIT, we or the affected REIT subsidiaries would be subject to federal income tax at regular corporate rates. Also, unless the IRS granted us or our affected REIT subsidiaries, as the case may be, relief under certain statutory provisions, we or it would remain disqualified as a REIT for four years following the year it first failed to qualify. If we or any of our REIT subsidiaries fails to qualify as a REIT, we or they would be required to pay significant income taxes and would, therefore, have less money available for investments or for distributions to shareholders. This would likely have a material adverse effect on the value of the combined company’s securities. In addition, we or our affected REIT subsidiaries would no longer be required to make any distributions to shareholders.
Failure of the Operating Partnership (or a subsidiary partnership) to be treated as a partnership would have serious adverse consequences to our shareholders. If the IRS were to successfully challenge the tax status of the Operating Partnership or any of its subsidiary partnerships for federal income tax purposes, the Operating Partnership or the affected subsidiary partnership would be taxable as a corporation. In such event we would cease to qualify as a REIT and the imposition of a corporate tax on the Operating Partnership or a subsidiary partnership would reduce the amount of cash available for distribution from the Operating Partnership to us and ultimately to our shareholders.
Even if we qualify as a REIT, we will be required to pay certain federal, state and local taxes on our income and properties. In addition, our taxable REIT subsidiaries will be subject to federal, state and local income tax at regular corporate rates on their net taxable income derived from management, leasing and related service business. If we have net income from a prohibited transaction, such income will be subject to a 100% tax.
Failure to qualify as a REIT would subject us to U.S. federal income tax which would reduce the cash available for distribution to our shareholders.
We operate our business to qualify to be taxed as a REIT for federal income tax purposes. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT, and the statements in this Annual Report on Form 10-K are not binding on the IRS or any court. As a REIT, we generally will not be subject to federal income tax on the income that we distribute currently to our shareholders. Many of the REIT requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must come from specific passive sources, such as rent, that are itemized in the REIT tax laws. In addition, to qualify as a REIT, we cannot own specified amounts of debt and equity securities of some issuers. We also are required to distribute to our shareholders with respect to each year at least 90% of our REIT taxable income (excluding net capital gains). The fact that we hold substantially all of our assets through the Operating Partnership and its subsidiaries further complicates the application of the REIT requirements for us. Even a technical or inadvertent mistake could jeopardize our REIT status and, given the highly complex nature of the rules governing REITs and the ongoing importance of factual determinations, we cannot provide any assurance that we will continue to qualify as a REIT. Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult, or impossible, for us to remain qualified as a REIT. If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the statutory savings provisions in order to maintain our REIT status, we would nevertheless be required to pay penalty taxes of $50,000 or more for each such failure.
If we fail to qualify as a REIT for federal income tax purposes, and are unable to avail ourselves of certain savings provisions set forth in the Internal Revenue Code, we would be subject to federal income tax at regular corporate rates on all of our income. As a taxable corporation, we would not be allowed to take a deduction for distributions to shareholders in computing our taxable income or pass through long term capital gains to individual shareholders at favorable rates. We also could be subject to the federal alternative minimum tax and possibly increased state and local taxes. We would not be able to elect to be taxed as a REIT for four years following the year we first failed to qualify unless the IRS were to grant us relief under certain statutory provisions. If we failed to qualify as a REIT, we would have to pay significant income taxes, which would reduce our net earnings available for investment or distribution to our shareholders. This likely would have a significant adverse effect on our earnings and likely would adversely affect the value of our securities. In addition, we would no longer be required to pay any distributions to shareholders.
Failure of the Operating Partnership (or a subsidiary partnership) to be treated as a partnership would have serious adverse consequences to our shareholders. If the IRS were to successfully challenge the tax status of the Operating Partnership or any of its subsidiary partnerships for federal income tax purposes, the Operating Partnership or the affected subsidiary partnership would be taxable as a corporation. In such event we would cease to qualify as a REIT and the imposition of a corporate tax on the Operating Partnership or a subsidiary partnership would reduce the amount of cash available for distribution from the Operating Partnership to us and ultimately to our shareholders.

 

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To maintain our REIT status, we may be forced to borrow funds on a short term basis during unfavorable market conditions.
As a REIT, we are subject to certain distribution requirements, including the requirement to distribute 90% of our REIT taxable income, that may result in our having to make distributions at disadvantageous time or to borrow funds at unfavorable rates. Compliance with this requirement may hinder our ability to operate solely on the basis of maximizing profits.
We will pay some taxes even if we qualify as a REIT, which will reduce the cash available for distribution to our shareholders.
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property. For example, we will be subject to income tax to the extent we distribute less than 100% of our REIT taxable income, including capital gains. Additionally, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business. The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale. We cannot guarantee that sales of our properties would not be prohibited transactions unless we comply with certain statutory safe-harbor provisions.
In addition, any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our shareholders.
We face possible federal, state and local tax audits.
Because we are organized and qualify as a REIT, we are generally not subject to federal income taxes, but are subject to certain state and local taxes. Certain entities through which we own real estate either have undergone, or are currently undergoing, tax audits. Although we believe that we have substantial arguments in favor of our positions in the ongoing audits, in some instances there is no controlling precedent or interpretive guidance on the specific point at issue. There can be no assurance that these or future audits will not have a material adverse effect on our results of operations. The Operating Partnership has been audited by the Internal Revenue Service for its 2004 tax year. The audit concerns the tax treatment of a transaction in September 2004 in which we acquired a portfolio of properties through the acquisition of a limited partnership. On December 17, 2010, the IRS proposed an adjustment to the allocation of recourse liabilities allocated to the contributor of the properties. The Operating Partnership intends to appeal the proposed adjustment. The proposed adjustment, if upheld, would not result in a material tax liability for us. However, an adjustment could raise a question as to whether a contributor of partnership interests in the 2004 transaction could assert a claim against us under the tax protection agreement entered into as part of the transaction.
Competition for skilled personnel could increase labor costs.
We compete with various other companies in attracting and retaining qualified and skilled personnel. We depend on our ability to attract and retain skilled management personnel who are responsible for the day-to-day operations of our company. Competitive pressures may require that we enhance our pay and benefits package to compete effectively for such personnel. We may not be able to offset such added costs by increasing the rates we charge our tenants. If there is an increase in these costs or if we fail to attract and retain qualified and skilled personnel, our business and operating results could be harmed.
We are dependent upon our key personnel.
We are dependent upon our key personnel whose continued service is not guaranteed. We are dependent on our executive officers for strategic business direction and real estate experience. Loss of their services could adversely affect our operations.

 

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Although we have an employment agreement with Gerard H. Sweeney, our President and Chief Executive Officer, this agreement does not restrict his ability to become employed by a competitor following the termination of his employment. We do not have key man life insurance coverage on our executive officers.
Certain limitations will exist with respect to a third party’s ability to acquire us or effectuate a change in control.
Limitations imposed to protect our REIT status. In order to protect us against the loss of our REIT status, our Declaration of Trust limits any shareholder from owning more than 9.8% in value of our outstanding shares, subject to certain exceptions. The ownership limit may have the effect of precluding acquisition of control of us. If anyone acquires shares in excess of the ownership limit, we may:
   
consider the transfer to be null and void;
   
not reflect the transaction on our books;
   
institute legal action to stop the transaction;
   
not pay dividends or other distributions with respect to those shares;
   
not recognize any voting rights for those shares; and
   
consider the shares held in trust for the benefit of a person to whom such shares may be transferred.
Limitation due to our ability to issue preferred shares. Our Declaration of Trust authorizes our Board of Trustees to cause us to issue preferred shares, without limitation as to amount and without shareholder consent. Our Board of Trustees is able to establish the preferences and rights of any preferred shares issued and these shares could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our shareholders’ best interests.
Limitation imposed by the Maryland Business Combination Law. The Maryland General Corporation Law, as applicable to Maryland REITs, establishes special restrictions against “business combinations” between a Maryland REIT and “interested shareholders” or their affiliates unless an exemption is applicable. An interested shareholder includes a person, who beneficially owns, and an affiliate or associate of the trust who, at any time within the two-year period prior to the date in question, was the beneficial owner of, ten percent or more of the voting power of our then-outstanding voting shares. Among other things, Maryland law prohibits (for a period of five years) a merger and certain other transactions between a Maryland REIT and an interested shareholder unless the board of trustees had approved the transaction before the party became an interested shareholder. The five-year period runs from the most recent date on which the interested shareholder became an interested shareholder. Thereafter, any such business combination must be recommended by the board of trustees and approved by two super-majority shareholder votes unless, among other conditions, the common shareholders receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for our shares or unless the board of trustees approved the transaction before the party in question became an interested shareholder. The business combination statute could have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating any such offers, even if the acquisition would be in our shareholders’ best interests.
Maryland Control Share Acquisition Act. Maryland law provides that “control shares” of a REIT acquired in a “control share acquisition” shall have no voting rights except to the extent approved by a vote of two-thirds of the vote eligible to be cast on the matter under the Maryland Control Share Acquisition Act. “Control Shares” means shares that, if aggregated with all other shares previously acquired by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing trustees within one of the following ranges of voting power: one-tenth or more but less than one-third, one-third or more but less than a majority or a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions. If voting rights or control shares acquired in a control share acquisition are not approved at a shareholder’s meeting, then subject to certain conditions and limitations the issuer may redeem any or all of the control shares for fair value. If voting rights of such control shares are approved at a shareholder’s meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other shareholders may exercise appraisal rights. Any control shares acquired in a control share acquisition which are not exempt under our Bylaws are subject to the Maryland Control Share Acquisition Act. Our Bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of our shares. We cannot assure you that this provision will not be amended or eliminated at any time in the future.

 

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Advance Notice Provisions for Shareholder Nominations and Proposals. Our bylaws require advance notice for shareholders to nominate persons for election as trustees at, or to bring other business before, any meeting of our shareholders. This bylaw provision limits the ability of shareholders to make nominations of persons for election as trustees or to introduce other proposals unless we are notified in a timely manner prior to the meeting.
Many factors can have an adverse effect on the market value of our securities.
A number of factors might adversely affect the price of our securities, many of which are beyond our control. These factors include:
   
increases in market interest rates, relative to the dividend yield on our shares. If market interest rates go up, prospective purchasers of our securities may require a higher yield. Higher market interest rates would not, however, result in more funds for us to distribute and, to the contrary, would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common shares to go down;
   
anticipated benefit of an investment in our securities as compared to investment in securities of companies in other industries (including benefits associated with tax treatment of dividends and distributions);
   
perception by market professionals of REITs generally and REITs comparable to us in particular;
   
level of institutional investor interest in our securities;
   
relatively low trading volumes in securities of REITs;
   
our results of operations and financial condition; and
   
investor confidence in the stock market generally.
The market value of our common shares is based primarily upon the market’s perception of our growth potential and our current and potential future earnings and cash distributions. Consequently, our common shares may trade at prices that are higher or lower than our net asset value per common share. If our future earnings or cash distributions are less than expected, it is likely that the market price of our common shares will diminish.
Additional issuances of equity securities may be dilutive to shareholders.
The interests of our shareholders could be diluted if we issue additional equity securities to finance future developments or acquisitions or to repay indebtedness. Our Board of Trustees may authorize the issuance of additional equity securities without shareholder approval. Our ability to execute our business strategy depends upon our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including the issuance of common and preferred equity.
The issuance of preferred securities may adversely affect the rights of holders of our common shares.
Because our Board of Trustees has the power to establish the preferences and rights of each class or series of preferred shares, we may afford the holders in any series or class of preferred shares preferences, distributions, powers and rights, voting or otherwise, senior to the rights of holders of common shares. Our Board of Trustees also has the power to establish the preferences and rights of each class or series of units in Brandywine Operating Partnership, and may afford the holders in any series or class of preferred units preferences, distributions, powers and rights, voting or otherwise, senior to the rights of holders of common units.
The acquisition of new properties or the development of new properties which lack operating history with us may give rise to difficulties in predicting revenue potential.
We may continue to acquire additional properties and may seek to develop our existing land holdings strategically as warranted by market conditions. These acquisitions and developments could fail to perform in accordance with expectations. If we fail to accurately estimate occupancy levels, operating costs or costs of improvements to bring an acquired property or a development property up to the standards established for our intended market position, the performance of the property may be below expectations. Acquired properties may have characteristics or deficiencies affecting their valuation or revenue potential that we have not yet discovered. We cannot assure you that the performance of properties acquired or developed by us will increase or be maintained under our management.

 

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Our performance is dependent upon the economic conditions of the markets in which our properties are located.
Our properties are located in Pennsylvania, New Jersey, Delaware, Maryland, Virginia, Texas, and California. Like other real estate markets, these commercial real estate markets have been impacted by the sluggish economic recovery from the recent recession, and any adverse changes in economic conditions in the future in any of these economies or real estate markets could negatively affect cash available for distribution. Our financial performance and ability to make distributions to our shareholders will be particularly sensitive to the economic conditions in these markets. The local economic climate, which may be adversely impacted by business layoffs or downsizing, industry slowdowns, changing demographics and other factors, and local real estate conditions, such as oversupply of or reduced demand for office, industrial and other competing commercial properties, may affect revenues and the value of properties, including properties to be acquired or developed. We cannot assure you that these local economies will grow in the future.
Item 1B.  
Unresolved Staff Comments
None.
Item 2.  
Properties
Property Acquisitions
On December 29, 2010, we acquired a 12-acre parcel of land in Gibbsboro, New Jersey through the foreclosure of a note receivable amounting to $2.8 million under which the said property was encumbered and payment of transaction related costs of $0.3 million. The parcel of land is held for future development.
On August 5, 2010, we acquired Three Logan Square in Philadelphia, together with related ground tenancy rights under a long-term ground lease, from BAT Partners, L.P, a third party unaffiliated with us. Three Logan Square contains approximately 1.0 million of net rentable square feet and is currently 67.2% leased. We acquired Three Logan Square for approximately $129.0 million funded through a combination of $51.2 million in cash and 7,111,112 Class F (2010) units. The Class F (2010) units do not accrue a dividend and are not entitled to income or loss allocations prior to August 5, 2011. We funded the cash portion of the acquisition price through an advance under the Credit Facility and with available corporate funds.
Development and Redevelopment Properties Placed in Service
We placed in service the following office properties during the year ended December 31, 2010:
                         
Month Placed           # of     Rentable  
in Service   Property/Portfolio Name   Location   Buildings     Square Feet  
Aug-10  
IRS Philadelphia Campus
  Philadelphia, PA     1       862,692  
Aug-10  
Cira South Garage
  Philadelphia, PA     1       553,421  
Apr-10  
Radnor Corporate Center I
  Radnor, PA     1       201,980  
Jan-10  
300 Delaware Avenue
  Wilmington, DE     1       298,071  
   
 
               
   
 
                   
   
Total Properties Placed in Service
        4       1,916,164  
   
 
               
As of December 31, 2010, two of our properties located in King of Prussia, Pennsylvania were undergoing demolition and the remaining land balances have been presented as land inventory in our consolidated balance sheets. We have determined that there was a change in the estimated useful lives of the buildings resulting from the ongoing demolition causing an acceleration of depreciation expense. During year ended December 31, 2010, we recognized the remaining net book value of the two buildings aggregating to $2.7 million as depreciation, with the land amounts of $1.1 million being reclassified to land inventory for potential future development. All related demolition costs are charged to earnings.

 

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Property Sales
We sold the following office properties during the year ended December 31, 2010:
                                                 
Month of                 # of     Rentable Square     Occupancy %     Sales  
Sale     Property/Portfolio Name   Location     Bldgs.     Feet/ Acres     at Date of Sale     Price  
                                            (in 000’s)  
Dec-10  
One and Two Greentree Centre, 8000 Lincoln Drive and Lake Center IV
  Marlton, NJ     4       243,195       76.1 %   $ 20,915  
Nov-10  
Spyglass Point
  Austin, TX     1       58,576       100.0 %     13,472  
Sep-10  
630 Clark Avenue
  King of Prussia, PA     1       50,000       100.0 %     3,610  
Aug-10  
479 Thomas Jones Way
  Exton, PA     1       49,264       63.0 %     3,780  
Jan-10  
1957 Westmoreland Plaza
  Richmond, VA     1       121,815       0.0 %     10,780  
       
 
                                 
       
 
                                       
       
Total Office Properties Sold
            8       522,850             $ 52,557  
       
 
                                 
Properties
As of December 31, 2010, we owned 208 office properties, 20 industrial facilities and four mixed-use properties that contain an aggregate of approximately 25.6 million net rentable square feet. The properties are located in or near Philadelphia, Pennsylvania, Metropolitan Washington, D.C., Southern and Central New Jersey, Richmond, Virginia, Wilmington, Delaware, Austin, Texas, and Oakland, Concord, Carlsbad and Rancho Bernardo, California. As of December 31, 2010, the Properties were approximately 85.6% occupied by 1,368 tenants and had an average age of approximately 18.2 years. The office properties are primarily suburban office buildings containing an average of approximately 0.1 million net rentable square feet. The industrial and mixed-use properties accommodate a variety of tenant uses, including light manufacturing, assembly, distribution and warehousing. We carry comprehensive liability, fire, extended coverage and rental loss insurance covering all of the properties, with policy specifications and insured limits which we believe are adequate.
As of December 31, 2010, we were proceeding on one garage redevelopment with total projected costs of $14.8 million, of which $0.8 million remained to be funded. The garage redevelopment project is expected to be completed in or around the fourth quarter of 2011.

 

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The following table sets forth information with respect to our core properties at December 31, 2010:
                                                           
                                                      Average  
                                              Total Base Rent     Annualized  
                              Net     Percentage     for the Twelve     Rental Rate  
                      Year     Rentable     Leased as of     Months Ended     as of  
                      Built/     Square     December 31,     December 31,     December 31,  
Property Name     Location     State     Renovated     Feet     2010 (a)     2010 (b) (000’s)     2010 (c)  
PENNSYLVANIA SUBURBS SEGMENT
                                                         
150 Radnor Chester Road
    Radnor   PA     1983       340,262       99.2 %     9,575       29.41  
201 King of Prussia Road
    Radnor   PA     2001       251,434       100.0 %     6,045       28.97  
555 Lancaster Avenue
    Radnor   PA     1973       241,778       99.0 %     5,890       25.89  
One Radnor Corporate Center
    Radnor   PA     1998       201,980       90.8 %     2,054       1.89  
401 Plymouth Road
    Plymouth Meeting     PA     2001       201,883       79.5 %     5,087       33.36  
101 West Elm Street
    W. Conshohocken   PA     1999       175,009       95.1 %     3,546       20.61  
Four Radnor Corporate Center
    Radnor   PA     1995       164,723       90.7 %     3,507       25.60  
Five Radnor Corporate Center
    Radnor   PA     1998       164,655       100.0 %     4,636       30.45  
751-761 Fifth Avenue
    King Of Prussia   PA     1967       158,000       100.0 %     574       3.64  
630 Allendale Road
    King of Prussia   PA     2000       150,000       76.0 %     3,198       23.30  
640 Freedom Business Center
  (d) King Of Prussia   PA     1991       132,000       87.8 %     2,209       24.23  
52 Swedesford Square
    East Whiteland Twp.     PA     1988       131,017       0.0 %     1,913        
400 Berwyn Park
    Berwyn   PA     1999       124,182       100.0 %     3,049       29.61  
4000 Chemical Road
    Plymouth Meeting   PA     2007       120,877       100.0 %     2,424       17.47  
Three Radnor Corporate Center
    Radnor   PA     1998       119,107       82.3 %     2,504       29.12  
101 Lindenwood Drive
    Malvern   PA     1988       118,121       63.5 %     1,186       19.14  
300 Berwyn Park
    Berwyn   PA     1989       106,038       87.8 %     1,385       12.91  
442 Creamery Way
  (f) Exton   PA     1991       104,500       100.0 %     598       5.71  
Two Radnor Corporate Center
    Radnor   PA     1998       97,936       58.9 %     1,272       24.15  
301 Lindenwood Drive
    Malvern   PA     1984       97,813       87.3 %     1,692       21.07  
1 West Elm Street
    W. Conshohocken   PA     1999       97,737       100.0 %     2,176       27.15  
555 Croton Road
    King of Prussia     PA     1999       96,909       90.3 %     2,324       30.54  
500 North Gulph Road
    King Of Prussia   PA       1979       93,082       84.3 %     1,496       18.70  
620 West Germantown Pike
    Plymouth Meeting   PA     1990       90,183       86.6 %     1,454       24.35  
610 West Germantown Pike
    Plymouth Meeting   PA     1987       90,152       79.6 %     1,438       29.17  
630 West Germantown Pike
    Plymouth Meeting   PA     1988       89,925       97.1 %     2,040       27.91  
600 West Germantown Pike
    Plymouth Meeting   PA     1986       89,681       83.3 %     1,421       24.71  
630 Freedom Business Center
  (d) King Of Prussia   PA     1989       86,683       76.8 %     1,232       21.43  
1200 Swedesford Road
    Berwyn   PA     1994       86,622       87.0 %     1,366       29.41  
620 Freedom Business Center
  (d) King Of Prussia   PA     1986       86,570       89.4 %     1,766       20.53  
595 East Swedesford Road
    Wayne   PA     1998       81,890       100.0 %     1,750       23.66  
1050 Westlakes Drive
    Berwyn   PA     1984       80,000       100.0 %     1,984       25.50  
One Progress Drive
    Horsham   PA     1986       79,204       100.0 %     841       13.42  
1060 First Avenue
  (e) King Of Prussia   PA     1987       77,718       100.0 %     1,378       21.41  
741 First Avenue
    King Of Prussia   PA     1966       77,184       100.0 %     193        
1040 First Avenue
  (e) King Of Prussia   PA     1985       75,488       78.6 %     1,267       23.65  
200 Berwyn Park
    Berwyn   PA     1987       75,025       100.0 %     1,505       22.77  
1020 First Avenue
  (e) King Of Prussia   PA     1984       74,556       100.0 %     1,608       21.00  
1000 First Avenue
  (e) King Of Prussia   PA     1980       74,139       88.9 %     1,386       22.86  
436 Creamery Way
    Exton   PA     1991       72,300       100.0 %     731       14.43  
130 Radnor Chester Road
    Radnor   PA     1983       71,349       100.0 %     2,150       32.48  

 

29


Table of Contents

                                                           
                                                    Average  
                                            Total Base Rent     Annualized  
                            Net     Percentage     for the Twelve     Rental Rate  
                    Year     Rentable     Leased as of     Months Ended     as of  
                    Built/     Square     December 31,     December 31,     December 31,  
Property Name   Location     State     Renovated     Feet     2010 (a)     2010 (b) (000’s)     2010 (c)  
PENNSYLVANIA SUBURBS SEGMENT
                                                       
14 Campus Boulevard
  Newtown Square   PA     1998       69,542       100.0 %     1,815       25.86  
170 Radnor Chester Road
  Radnor   PA     1983       68,143       100.0 %     1,670       26.85  
500 Enterprise Road
  Horsham   PA     1990       66,751       100.0 %     412       9.76  
575 East Swedesford Road
  Wayne   PA     1985       66,265       100.0 %     1,230       28.65  
429 Creamery Way
  Exton   PA     1996       63,420       83.9 %     569       14.47  
610 Freedom Business Center
  (d) King Of Prussia   PA     1985       62,991       52.7 %     827       6.89  
925 Harvest Drive
  Blue Bell   PA     1990       62,957       93.3 %     913       19.08  
980 Harvest Drive
  Blue Bell   PA     1988       62,379       71.4 %     966       20.15  
426 Lancaster Avenue
  Devon   PA     1990       61,102       100.0 %     1,213       20.29  
1180 Swedesford Road
  Berwyn   PA     1987       60,371       100.0 %     1,880       33.65  
1160 Swedesford Road
  Berwyn   PA     1986       60,099       97.4 %     1,385       26.68  
100 Berwyn Park
  Berwyn   PA     1986       57,731       91.7 %     512       20.90  
440 Creamery Way
  Exton   PA     1991       57,218       100.0 %     813       16.38  
640 Allendale Road
  (f) King of Prussia   PA     2000       56,034       100.0 %     323       8.86  
565 East Swedesford Road
  Wayne   PA     1984       55,456       88.5 %     911       19.85  
650 Park Avenue
  King Of Prussia   PA     1968       54,338       87.8 %     727       17.33  
910 Harvest Drive
  Blue Bell   PA     1990       52,611       100.0 %     1,040       20.71  
2240/50 Butler Pike
  Plymouth Meeting   PA     1984       52,229       100.0 %     1,014       21.94  
920 Harvest Drive
  Blue Bell   PA     1990       51,875       74.6 %     822       21.54  
486 Thomas Jones Way
  Exton   PA     1990       51,372       70.9 %     620       18.30  
875 First Avenue
  King Of Prussia   PA     1966       50,000       100.0 %     1,038       22.64  
620 Allendale Road
  King Of Prussia   PA     1961       50,000       67.0 %     536       16.05  
15 Campus Boulevard
  Newtown Square   PA     2002       49,621       100.0 %     1,063       25.77  
17 Campus Boulevard
  Newtown Square   PA     2001       48,565       100.0 %     841       19.07  
11 Campus Boulevard
  Newtown Square   PA     1998       47,699       100.0 %     1,256       25.90  
456 Creamery Way
  Exton   PA     1987       47,604       100.0 %     371       9.31  
585 East Swedesford Road
  Wayne   PA     1998       43,683       100.0 %     771       28.04  
1100 Cassett Road
  Berwyn   PA     1997       43,480       100.0 %     1,106       31.95  
467 Creamery Way
  Exton   PA     1988       42,000       100.0 %     603       19.08  
1336 Enterprise Drive
  West Goshen   PA     1989       39,330       0.0 %     518        
600 Park Avenue
  King Of Prussia   PA     1964       39,000       100.0 %     545       16.75  
412 Creamery Way
  Exton   PA     1999       38,098       86.0 %     671       26.54  
18 Campus Boulevard
  Newtown Square   PA     1990       37,374       100.0 %     790       23.90  
457 Creamery Way
  Exton   PA     1990       36,019       100.0 %     401       15.29  
100 Arrandale Boulevard
  Exton   PA     1997       34,931       100.0 %     456       17.75  
300 Lindenwood Drive
  Malvern   PA     1991       33,000       100.0 %     794       23.81  
2260 Butler Pike
  Plymouth Meeting   PA     1984       31,892       100.0 %     658       22.54  
120 West Germantown Pike
  Plymouth Meeting   PA     1984       30,574       100.0 %     505       21.10  
468 Thomas Jones Way
  Exton   PA     1990       28,934       100.0 %     550       20.00  
1700 Paoli Pike
  Malvern   PA     2000       28,000       0.0 %            
140 West Germantown Pike
  Plymouth Meeting   PA     1984       25,357       76.0 %     406       25.22  
481 John Young Way
  Exton   PA     1997       19,275       100.0 %     483       26.59  
100 Lindenwood Drive
  Malvern   PA     1985       18,400       100.0 %     363       21.51  
200 Lindenwood Drive
  Malvern   PA     1984       12,600       40.2 %     36       6.45  
111 Arrandale Road
  Exton   PA     1996       10,479       100.0 %     198       19.49  
 
                                               
SUBTOTAL/WEIGHTED AVG — PENNSYLVANIA SUBURBS SEGMENT
                            7,026,511       89.3 %     128,471       21.34  

 

30


Table of Contents

                                                           
                                                    Average  
                                            Total Base Rent     Annualized  
                            Net     Percentage     for the Twelve     Rental Rate  
                    Year     Rentable     Leased as of     Months Ended     as of  
                    Built/     Square     December 31,     December 31,     December 31,  
Property Name   Location     State     Renovated     Feet     2010 (a)     2010 (b) (000’s)     2010 (c)  
METROPOLITAN WASHINGTON D.C. SEGMENT
                                                       
1676 International Drive
  McLean   VA     1999       299,387       93.8 %     8,712       34.06  
13820 Sunrise Valley Drive
  Herndon   VA     2007       268,240       100.0 %     9,085       31.76  
2340 Dulles Corner Boulevard
  Herndon   VA     1987       264,405       100.0 %     8,024       31.19  
2291 Wood Oak Drive
  Herndon   VA     1999       230,389       98.8 %     5,326       30.89  
7101 Wisconsin Avenue
  Bethesda   MD     1975       223,054       96.8 %     6,864       32.60  
1900 Gallows Road
  Vienna   VA     1989       210,632       52.1 %     3,283       28.27  
3130 Fairview Park Drive
  Falls Church   VA     1999       180,645       79.7 %     5,014       33.66  
3141 Fairview Park Drive
  Falls Church   VA     1988       180,611       86.6 %     4,401       28.24  
2411 Dulles Corner Park
  Herndon   VA     1990       180,510       98.7 %     5,530       31.23  
2355 Dulles Corner Boulevard
  Herndon   VA     1988       179,176       83.6 %     4,873       33.43  
1880 Campus Commons Drive
  Reston   VA     1985       173,026       100.0 %     3,069       10.47  
2121 Cooperative Way
  Herndon   VA     2000       161,275       83.5 %     3,961       32.14  
6600 Rockledge Drive
  (d) Bethesda   MD     1981       160,173       71.0 %     3,165       28.97  
8260 Greensboro Drive
  McLean   VA     1980       158,961       77.5 %     3,099       26.36  
2251 Corporate Park Drive
  Herndon   VA     2000       158,016       100.0 %     5,073       34.39  
12015 Lee Jackson Memorial Highway
  Fairfax   VA     1985       153,255       96.5 %     3,971       26.85  
13880 Dulles Corner Lane
  Herndon   VA     1997       151,747       100.0 %     4,678       36.45  
8521 Leesburg Pike
  Vienna   VA     1984       150,897       69.1 %     2,751       27.48  
2273 Research Boulevard
  Rockville   MD     1999       147,689       98.4 %     4,295       30.69  
2275 Research Boulevard
  Rockville   MD     1990       147,650       100.0 %     4,127       29.95  
2201 Cooperative Way
  Herndon   VA     1990       138,806       85.7 %     3,685       32.60  
2277 Research Boulevard
  Rockville   MD     1986       137,045       100.0 %     3,360       29.24  
11781 Lee Jackson Memorial Highway
  Fairfax   VA     1982       130,935       93.3 %     3,137       26.76  
11720 Beltsville Drive
  Beltsville   MD     1987       128,903       57.4 %     1,776       23.73  
13825 Sunrise Valley Drive
  Herndon   VA     1989       104,150       12.4 %     331       25.61  
198 Van Buren Street
  Herndon   VA     1996       98,934       100.0 %     2,886       32.24  
196 Van Buren Street
  Herndon   VA     1991       97,781       78.9 %     1,673       32.63  
11700 Beltsville Drive
  Beltsville   MD     1981       96,843       96.3 %     2,150       22.90  
11710 Beltsville Drive
  Beltsville   MD     1987       81,281       89.2 %     1,699       17.27  
4401 Fair Lakes Court
  Fairfax   VA     1988       55,972       95.6 %     1,438       28.43  
11740 Beltsville Drive
  Beltsville   MD     1987       6,783       100.0 %     140       27.60  
 
                                               
SUBTOTAL/WEIGHTED AVG — METROPOLITAN WASHINGTON D.C. SEGMENT
                            4,857,171       87.7 %     121,576       29.58  
 
PHILADELPHIA CBD
                                                       
1717 Arch Street
  (d) Philadelphia   PA     1990       1,029,413       67.2 %     4,855       20.91  
2970 Market Street
  Philadelphia   PA     2010       862,692       100.0 %     6,658       31.03  
2929 Arch Street
  (d) Philadelphia   PA     2005       729,897       100.0 %     24,406       35.41  
100 North 18th Street
  (e) Philadelphia   PA     1988       706,288       93.7 %     20,102       32.82  
130 North 18th Street
  Philadelphia   PA     1989       595,041       100.0 %     12,800       28.95  
2930 Chestnut Street
  (d), (g) Philadelphia   PA     2010       553,421       93.2 %           11.84  
Philadelphia Marine Center
  (d), (g) Philadelphia   PA   Various     181,900       100.0 %     1,311       3.99  
 
                                               
SUBTOTAL/WEIGHTED AVG — PHILADELPHIA CBD SEGMENT
                            4,658,652       91.0 %     70,132       26.15  

 

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Table of Contents

                                                           
                                                    Average  
                                            Total Base Rent     Annualized  
                            Net     Percentage     for the Twelve     Rental Rate  
                    Year     Rentable     Leased as of     Months Ended     as of  
                    Built/     Square     December 31,     December 31,     December 31,  
Property Name   Location     State     Renovated     Feet     2010 (a)     2010 (b) (000’s)     2010 (c)  
NEW JERSEY/DELAWARE SEGMENT
                                                       
300 Delaware Avenue
  Wilmington   DE     1989       298,071       74.7 %     2,576       16.81  
920 North King Street
  Wilmington   DE     1989       203,328       96.7 %     4,576       26.90  
10000 Midlantic Drive
  Mt. Laurel   NJ     1990       183,147       46.5 %     2,056       25.27  
1009 Lenox Drive
  Lawrenceville   NJ     1989       180,734       88.5 %     4,579       26.96  
525 Lincoln Drive West
  Marlton   NJ     1986       165,956       94.2 %     2,829       24.68  
Main Street — Plaza 1000
  Voorhees   NJ     1988       162,364       33.0 %     1,559       22.16  
400 Commerce Drive
  Newark   DE     1997       154,086       100.0 %     2,321       16.64  
2000 Lenox Drive
  Lawrenceville   NJ     2000       122,169       81.8 %     2,560       27.12  
457 Haddonfield Road
  Cherry Hill   NJ     1990       121,737       91.2 %     2,125       24.87  
2000 Midlantic Drive
  Mt. Laurel   NJ     1989       121,658       61.3 %     1,041       23.20  
700 East Gate Drive
  Mt. Laurel   NJ     1984       119,272       88.8 %     1,834       24.98  
989 Lenox Drive
  Lawrenceville   NJ     1984       112,055       67.8 %     1,806       26.77  
993 Lenox Drive
  Lawrenceville   NJ     1985       111,124       100.0 %     2,552       28.75  
1000 Howard Boulevard
  Mt. Laurel   NJ     1988       105,312       44.7 %     1,723       22.09  
One Righter Parkway
  (d) Wilmington   DE     1989       104,761       82.3 %     1,965       22.82  
1000 Atrium Way
  Mt. Laurel   NJ     1989       99,668       76.4 %     1,430       22.58  
997 Lenox Drive
  Lawrenceville   NJ     1987       97,277       80.4 %     2,144       26.66  
Two Righter Parkway
  (d) Wilmington   DE     1987       95,514       60.7 %     986       14.31  
1120 Executive Boulevard
  Mt. Laurel   NJ     1987       95,278       50.9 %     1,031       25.17  
15000 Midlantic Drive
  Mt. Laurel   NJ     1991       84,056       77.8 %     966       25.26  
220 Lake Drive East
  Cherry Hill   NJ     1988       78,509       77.2 %     954       24.67  
1200 Lenox Drive
  Lawrenceville   NJ     2007       76,419       92.5 %     1,327       29.30  
200 Lake Drive East
  Cherry Hill   NJ     1989       76,352       91.1 %     1,161       22.67  
Three Greentree Centre
  Marlton   NJ     1984       69,300       87.1 %     1,250       24.50  
200 Commerce Drive
  Newark   DE     1998       68,034       100.0 %     1,327       20.32  
9000 Midlantic Drive
  Mt. Laurel   NJ     1989       67,299       74.2 %     558        
6 East Clementon Road
  Gibbsboro   NJ     1980       66,236       28.6 %     707       19.72  
100 Commerce Drive
  Newark   DE     1989       62,787       81.4 %     846       19.02  
701 East Gate Drive
  Mt. Laurel   NJ     1986       61,794       66.1 %     761       23.24  
210 Lake Drive East
  Cherry Hill   NJ     1986       60,604       89.2 %     831       23.41  
308 Harper Drive
  Moorestown   NJ     1976       59,500       88.6 %     367       13.94  
305 Fellowship Drive
  Mt. Laurel   NJ     1980       56,824       83.5 %     873       21.10  
309 Fellowship Drive
  Mt. Laurel   NJ     1982       55,911       77.2 %     729       24.23  
307 Fellowship Drive
  Mt. Laurel   NJ     1981       54,485       75.5 %     549       17.38  
303 Fellowship Drive
  Mt. Laurel   NJ     1979       53,768       63.7 %     517       23.00  
1000 Bishops Gate
  Mt. Laurel   NJ     2005       53,281       95.3 %     990       24.41  
1000 Lenox Drive
  Lawrenceville   NJ     1982       52,264       100.0 %     1,329       30.34  
100 Lenox Drive
  Lawrenceville   NJ     1991       50,942       100.0 %     972       23.45  
2 Foster Avenue
  (f) Gibbsboro   NJ     1974       50,761       94.6 %     220       4.62  
4000 Midlantic Drive
  Mt. Laurel   NJ     1998       46,945       100.0 %     602       21.39  
Five Eves Drive
  Marlton   NJ     1986       45,564       100.0 %     726       22.48  
161 Gaither Drive
  Mount Laurel   NJ     1987       44,739       100.0 %     643       23.82  
Main Street — Piazza
  Voorhees   NJ     1990       44,708       65.4 %     521       21.05  
30 Lake Center Drive
  Marlton   NJ     1986       40,287       54.0 %     377       20.60  

 

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                                                    Average  
                                            Total Base Rent     Annualized  
                            Net     Percentage     for the Twelve     Rental Rate  
                    Year     Rentable     Leased as of     Months Ended     as of  
                    Built/     Square     December 31,     December 31,     December 31,  
Property Name   Location     State     Renovated     Feet     2010 (a)     2010 (b) (000’s)     2010 (c)  
NEW JERSEY/DELAWARE SEGMENT
                                                       
20 East Clementon Road
  Gibbsboro   NJ     1986       38,260       68.1 %     316       20.41  
Two Eves Drive
  Marlton   NJ     1987       37,532       89.8 %     349       17.59  
304 Harper Drive
  Moorestown   NJ     1975       32,978       97.4 %     472       22.39  
Main Street — Promenade
  Voorhees   NJ     1988       31,445       80.0 %     318       16.64  
Four B Eves Drive
  Marlton   NJ     1987       27,011       100.0 %     412       16.42  
815 East Gate Drive
  Mt. Laurel   NJ     1986       25,500       65.1 %     171       17.97  
817 East Gate Drive
  Mt. Laurel   NJ     1986       25,351       100.0 %     266       14.22  
Four A Eves Drive
  Marlton   NJ     1987       24,687       100.0 %     319       16.85  
1 Foster Avenue
  (f) Gibbsboro   NJ     1972       24,255       100.0 %     111       4.65  
4 Foster Avenue
  (f) Gibbsboro   NJ     1974       23,372       100.0 %     157       7.56  
7 Foster Avenue
  Gibbsboro   NJ     1983       22,158       76.3 %     252       19.64  
10 Foster Avenue
  Gibbsboro   NJ     1983       18,651       90.4 %     181       18.48  
5 U.S. Avenue
  (f) Gibbsboro   NJ     1987       5,000       100.0 %     24       5.00  
50 East Clementon Road
  Gibbsboro   NJ     1986       3,080       100.0 %     174       56.41  
5 Foster Avenue
  Gibbsboro   NJ     1968       2,000       100.0 %            
 
                                               
SUBTOTAL/WEIGHTED AVG — NEW JERSEY/DELAWARE SEGMENT
                            4,476,160       78.7 %     65,318       22.06  
 
RICHMOND, VA SEGMENT
                                                       
300 Arboretum Place
  Richmond   VA     1988       212,228       92.8 %     3,587       18.45  
6800 Paragon Place
  Richmond   VA     1986       144,722       76.1 %     2,251       20.06  
6802 Paragon Place
  Richmond   VA     1989       143,717       90.4 %     2,391       16.14  
7501 Boulders View Drive
  Richmond   VA     1990       136,641       94.0 %     1,777       8.90  
2511 Brittons Hill Road
  (f) Richmond   VA     1987       132,548       100.0 %     686       6.75  
2100-2116 West Laburnam Avenue
  Richmond   VA     1976       128,337       97.5 %     1,762       14.81  
7300 Beaufont Springs Drive
  Richmond   VA     2000       120,665       100.0 %     2,569       22.41  
1025 Boulders Parkway
  Richmond   VA     1994       93,143       100.0 %     1,789       18.94  
2201-2245 Tomlynn Street
  (f) Richmond   VA     1989       85,860       74.5 %     377       6.15  
7401 Beaufont Springs Drive
  Richmond   VA     1998       82,706       60.5 %     1,074       20.09  
7325 Beaufont Springs Drive
  Richmond   VA     1999       75,218       100.0 %     1,554       22.22  
100 Gateway Centre Parkway
  Richmond   VA     2001       74,991       72.0 %     551       16.52  
6806 Paragon Place
  Richmond   VA     2007       74,480       100.0 %     1,755       25.42  
9011 Arboretum Parkway
  Richmond   VA     1991       73,183       85.5 %     1,121       19.24  
4805 Lake Brooke Drive
  Glen Allen   VA     1996       60,867       100.0 %     777       19.48  
9100 Arboretum Parkway
  Richmond   VA     1988       58,445       86.2 %     884       16.92  
2812 Emerywood Parkway
  Henrico   VA     1980       56,984       100.0 %     821       16.81  
4364 South Alston Avenue
  Durham   NC     1985       56,601       100.0 %     1,133       21.79  
2277 Dabney Road
  (f) Richmond   VA     1986       50,400       100.0 %     266       7.40  
9200 Arboretum Parkway
  Richmond   VA     1988       49,542       100.0 %     721       15.41  
9210 Arboretum Parkway
  Richmond   VA     1988       48,012       84.6 %     599       15.15  
2212-2224 Tomlynn Street
  (f) Richmond   VA     1985       45,353       100.0 %     235       7.63  
2221-2245 Dabney Road
  (f) Richmond   VA     1994       45,250       100.0 %     237       6.74  
2251 Dabney Road
  (f) Richmond   VA     1983       42,000       100.0 %     210       6.83  
2161-2179 Tomlynn Street
  (f) Richmond   VA     1985       41,550       89.9 %     204       7.98  
2256 Dabney Road
  (f) Richmond   VA     1982       33,413       100.0 %     233       8.63  
2246 Dabney Road
  (f) Richmond   VA     1987       33,271       100.0 %     287       11.37  
2244 Dabney Road
  (f) Richmond   VA     1993       33,050       100.0 %     297       11.68  
9211 Arboretum Parkway
  Richmond   VA     1991       30,791       13.3 %     183       13.00  
2248 Dabney Road
  (f) Richmond   VA     1989       30,184       87.6 %     189       8.66  
2130-2146 Tomlynn Street
  (f) Richmond   VA     1988       29,700       57.6 %     194       14.11  
2120 Tomlyn Street
  (f) Richmond   VA     1986       23,850       100.0 %     115       8.14  
2240 Dabney Road
  (f) Richmond   VA     1984       15,389       100.0 %     139       12.04  
 
                                               
SUBTOTAL/WEIGHTED AVG — RICHMOND, VA SEGMENT
                            2,363,091       90.5 %     30,968       15.25  

 

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                                                    Average  
                                            Total Base Rent     Annualized  
                            Net     Percentage     for the Twelve     Rental Rate  
                    Year     Rentable     Leased as of     Months Ended     as of  
                    Built/     Square     December 31,     December 31,     December 31,  
Property Name   Location     State     Renovated     Feet     2010 (a)     2010 (b) (000’s)     2010 (c)  
AUSTIN, TX
                                                       
1250 Capital of Texas Highway South
  Austin   TX     1984       270,711       82.7 %     2,945       21.60  
1301 Mopac Expressway
  Austin   TX     2001       222,580       99.8 %     4,307       30.25  
3711 South Mopac Expressway
  Austin   TX     2007       205,195       97.7 %     3,598       27.96  
1601 Mopac Expressway
  Austin   TX     2000       195,639       100.0 %     2,962       26.29  
1501 South Mopac Expressway
  Austin   TX     1999       195,324       100.0 %     2,560       23.22  
1221 Mopac Expressway
  Austin   TX     2001       173,302       99.0 %     3,257       29.07  
 
                                               
SUBTOTAL/WEIGHTED — AUSTIN, TX SEGMENT
                            1,262,751       95.8 %     19,629       26.16  
 
CALIFORNIA
                                                       
155 Grand Avenue
  Oakland   CA     1990       200,996       71.1 %     3,932       29.35  
2 Kaiser Land
  (g) Oakland   CA     N/A                          
Oakland Lot B
  (g) Oakland   CA     N/A                          
1220 Concord Avenue
  Concord   CA     1984       175,153       100.0 %     3,469       22.74  
1200 Concord Avenue
  Concord   CA     1984       175,103       100.0 %     4,248       24.69  
5780 & 5790 Fleet Street
  Carlsbad   CA     1999       121,381       73.0 %     2,087       25.25  
5900 & 5950 La Place Court
  Carlsbad   CA     1988       80,506       62.6 %     1,395       25.21  
16870 West Bernardo Drive
  Rancho Bernardo   CA     2002       68,708       84.1 %     1,282       31.99  
5963 La Place Court
  Carlsbad   CA     1987       61,587       56.0 %     764       21.74  
2035 Corte Del Nogal
  Carlsbad   CA     1991       53,982       72.9 %     623       17.45  
5973 Avendia Encinas
  Carlsbad   CA     1986       51,695       88.3 %     1,087       16.30  
 
                                               
SUBTOTAL/WEIGHTED — CALIFORNIA SEGMENT
                            989,111       81.8 %     18,887       24.89  
 
TOTAL CORE PORTFOLIO
                            25,633,447       87.6 %     454,981       23.63  
 
                                               
     
(a)  
Calculated by dividing net rentable square feet included in leases signed on or before December 31, 2010 at the property by the aggregate net rentable square feet of the property.
 
(b)  
“Total Base Rent” for the twelve months ended December 31, 2010 represents base rents earned during such period, excluding tenant reimbursements and deferred market rent adjustments, calculated in accordance with generally accepted accounting principles (GAAP) determined on a straight-line basis.
 
(c)  
“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, 2010 plus the prorata 2010 budgeted operating expense recoveries 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, 2010. In both cases, the annualized rental rate is divided by the total square footage leased as of December 31, 2010 without giving effect to free rent or scheduled rent increases that would be taken into account under GAAP.
 
(d)  
These properties are subject to a ground lease with a third party.
 
(e)  
We hold our interest in Two Logan Square (100 North 18th Street) through our ownership of second and third mortgages that are secured by this property and that are junior to a first mortgage with a third party. Our ownership of these two mortgages currently provides us with all of the cash flows from Two Logan Square after the payment of operating expenses and debt service on the first mortgage.

 

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(f)  
These properties are industrial facilities.
     
(g)  
These are mixed-use properties.
The following table shows information regarding rental rates and lease expirations for the Properties at December 31, 2010 and assumes that none of the tenants exercises 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 (a)     Leases     Leases     Total  
2011
    324       2,210,359     $ 45,814,934     $ 20.73       8.8 %     8.8 %
2012
    310       2,826,334       68,786,205       24.34       13.3 %     22.1 %
2013
    218       2,344,110       46,837,279       19.98       9.0 %     31.1 %
2014
    187       2,451,204       55,670,270       22.71       10.7 %     41.9 %
2015
    187       2,485,688       56,156,913       22.59       10.8 %     52.7 %
2016
    131       1,543,286       36,493,928       23.65       7.0 %     59.8 %
2017
    85       2,111,282       56,838,758       26.92       11.0 %     70.7 %
2018
    46       1,207,241       35,169,498       29.13       6.8 %     77.5 %
2019
    35       932,710       32,894,121       35.27       6.3 %     83.9 %
2020
    26       818,232       19,491,601       23.82       3.8 %     87.6 %
2021 and thereafter
    47       3,009,356       64,224,192       21.34       12.4 %     100.0 %
 
                                     
 
                                               
 
    1,596       21,939,802     $ 518,377,699     $ 23.63       100.0 %        
 
                                     
     
(a)  
“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 a portion of real estate taxes, operating expenses and common area maintenance and utility charges.
At December 31, 2010, our Properties were leased to 1,368 tenants that are engaged in a variety of businesses. The following table sets forth information regarding leases at the Properties with the 20 tenants with the largest amounts leased based upon Annualized Base Rent as of December 31, 2010:
                                                 
            Weighted                             Percentage of  
            Average     Aggregate     Percentage     Annualized     Aggregate  
    Number     Remaining     Leased     of Aggregate     Base     Annualized  
    of     Lease Term     Square     Leased     Rent (in     Base  
Tenant Name (a)   Leases     in Months     Feet     Square Feet     000) (b)     Rent  
General Services Administration — U.S. Govt.
    14       201       1,551,557       7.1 %   $ 29,477       6.4 %
Northrop Grumman Corporation
    6       59       471,789       2.2 %     14,137       3.1 %
Wells Fargo Bank, N.A.
    14       70       477,900       2.2 %     11,280       2.5 %
Pepper Hamilton LLP
    2       47       312,324       1.4 %     10,960       2.4 %
Time Warner Cable, Inc.
    2       98       288,645       1.3 %     9,007       2.0 %
Lockheed Martin
    8       33       556,584       2.5 %     8,769       1.9 %
Dechert LLP
    1       106       218,565       1.0 %     7,213       1.6 %
KPMG, LLP
    2       43       241,828       1.1 %     7,160       1.6 %
Lincoln National Management Co.
    1       115       193,626       0.9 %     6,085       1.3 %
CA, Inc.
    1       0       227,574       1.0 %     5,772       1.3 %
Blank Rome LLP
    1       133       236,903       1.1 %     5,613       1.2 %
Hewlett Packard
    2       66       141,339       0.6 %     3,911       0.9 %
Marsh USA, Inc.
    2       31       128,090       0.6 %     3,831       0.8 %
Deltek Systems, Inc.
    3       15       116,172       0.5 %     3,790       0.8 %
AT&T
    4       95       124,603       0.6 %     3,673       0.8 %
Computer Sciences
    5       39       226,637       1.0 %     3,643       0.8 %
Woodcock Washburn, LLC
    1       132       109,323       0.5 %     3,608       0.8 %
United Healthcare Services
    2       84       122,602       0.6 %     3,499       0.8 %
Scitor Corporation
    1       18       109,736       0.5 %     3,483       0.8 %
Drinker Biddle & Reath LLP
    1       42       209,584       1.0 %     3,449       0.8 %
                                     
 
                                               
Consolidated Total/Weighted Average
    73       98       6,065,381       27.7 %   $ 148,360       32.6 %
                                     
     
(a)  
The identified tenant includes affiliates in certain circumstances.
 
(b)  
Annualized Base Rent represents the monthly Base Rent, excluding tenant reimbursements, for each lease in effect at December 31, 2010 multiplied by 12. Tenant reimbursements generally include payment of a portion of real estate taxes, operating expenses and common area maintenance and utility charges.

 

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Real Estate Ventures
As of December 31, 2010, we had an aggregate investment (net of returns of investment) of approximately $84.4 million in 17 unconsolidated Real Estate Ventures. We formed these ventures with unaffiliated third parties to develop or manage office properties or to acquire land in anticipation of possible development of office properties. As of December 31, 2010, 15 of the Real Estate Ventures owned 50 office buildings that contain an aggregate of approximately 6.5 million net rentable square feet, one Real Estate Venture owned three acres of undeveloped land, and one Real Estate Venture developed a hotel property that contains 137 rooms in Conshohocken, PA.
We account for our investments in these Real Estate Ventures using the equity method. Our ownership interests range from 3% to 65%, subject to specified priority allocations in certain of the Real Estate Ventures. Our investments, initially recorded at cost, are subsequently adjusted for our share of the Real Estate Ventures’ income or loss and contributions to capital and distributions, unless we have no intent or obligation to fund losses in which case our investment would not go below zero.
During November 2010, we acquired a 25% interest in two partnerships which own One and Two Commerce Square in Philadelphia, Pennsylvania. The other partner holds the remaining 75% interest in each of the two partnerships.
As of December 31, 2010, we had guaranteed repayment of approximately $0.7 million of loans for the Real Estate Ventures. We also provide customary environmental indemnities and completion guarantees in connection with construction and permanent financing both for our own account and on behalf of the Real Estate Ventures.
Item 3.  
Legal Proceedings
We are involved from time to time in legal proceedings, including tenant disputes, employee disputes, disputes arising out of agreements to purchase or sell properties and disputes relating to state and local taxes. We generally consider these disputes to be routine to the conduct of our business and management believes that the final outcome of such proceedings will not have a material adverse effect on our financial position, results of operations or liquidity.
Item 4.  
Removed and Reserved

 

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PART II
Item 5.  
Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities
Our common shares are traded on the New York Stock Exchange (“NYSE”) under the symbol “BDN.” There is no established trading market for the Class A units or Class F (2010) of the Operating Partnership. On February 16, 2011, there were 691 holders of record of our common shares; 41 holders of record of the Class A units (in addition to Brandywine Realty Trust); and one holder of the Class F (2010) units. On February 23, 2011, the last reported sales price of the common shares on the NYSE was $11.92. The following table sets forth the quarterly high and low sales price per common share reported on the NYSE for the indicated periods and the distributions paid by us with respect to each such period.
                         
    Share Price     Share Price     Distributions  
    High     Low     Paid During Quarter  
 
                       
First Quarter 2009
  $ 7.36     $ 2.52     $ 0.30  
Second Quarter 2009
  $ 7.45     $ 2.91     $ 0.10  
Third Quarter 2009
  $ 11.46     $ 6.61     $ 0.10  
Fourth Quarter 2009
  $ 11.85     $ 9.48     $ 0.10  
First Quarter 2010
  $ 12.90     $ 10.29     $ 0.15  
Second Quarter 2010
  $ 13.36     $ 10.75     $ 0.15  
Third Quarter 2010
  $ 12.62     $ 10.00     $ 0.15  
Fourth Quarter 2010
  $ 12.99     $ 10.22     $ 0.15  
For each quarter in 2010 and 2009, the Operating Partnership paid a cash distribution per Class A unit in an amount equal to the dividend paid on a common share for each such quarter.
In order to maintain the status of Brandywine Realty Trust as a REIT, we must make annual distributions to shareholders of at least 90% of our taxable income (not including net capital gains). Future distributions will be declared at the discretion of our Board of Trustees and will depend on our actual cash flow, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986 and such other factors as our Board deems relevant.
On December 2, 2010, our Board of Trustees declared a quarterly dividend distribution of $0.15 per common share that was paid on January 20, 2011. Our Board of Trustees has adopted a dividend policy designed to match our distributions to our projected, normalized taxable income for 2011.
On June 30, 2010, we filed with the NYSE our annual CEO Certification and Annual Written Affirmation pursuant to Section 303A.12 of the NYSE Listed Company Manual, each certifying that we were in compliance with all of the listing standards of the NYSE.

 

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The following table provides information as of December 31, 2010 with respect to compensation plans under which our equity securities are authorized for issuance:
                         
    (a)     (b)     (c)  
                    Number of securities  
                    remaining available for  
    Number of securities to     Weighted-average     future issuance under  
    be issued upon exercise of     exercise price of     equity compensation  
    outstanding options,     outstanding options,     plans (excluding securities  
Plan category   warrants and rights     warrants and rights     reflected in column (a))  
Equity compensation plans approved by security holders (1)
    3,116,611     $ 14.56       6,742,239  
Equity compensation plans not approved by security holders
                 
Total
    3,116,611     $ 14.56       6,742,239  
 
     
(1)  
Relates to our Amended and Restated 1997 Long-Term Incentive Plan (the “1997 Plan”) and 46,667 options awarded prior to adoption of the 1997 Plan. In June 2010, our shareholders approved amendments to the 1997 Plan. The amendments, among other things, increased the number of common shares available for awards under the 1997 Plan by 6,000,000 (of which 3,600,000 are available solely for awards of options and share appreciation rights).
The following table presents information related to our common share repurchases during the year ended December. 31, 2010:
                                 
                    Purchased as Part of     Shares that May Yet Be  
    Total Number of     Average Price Paid     Publicly Announced     Purchased Under the  
Period   Shares Purchased     per Share     Plans or Programs     Plans or Programs (a)  
                            (in thousands)  
January 1 to January 31
    14,355 (b)   $ 11.42             539,200  
February 1 to February 28
                        539,200  
March 1 to March 31
    4,846 (b)     12.30             539,200  
April 1 to April 31
                        539,200  
May 1 to May 31
                        539,200  
June 1 to June 30
                        539,200  
July 1 to July 31
                        539,200  
August 1 to August 31
                        539,200  
September 1 to September 31
                        539,200  
October 1 to October 31
                        539,200  
November 1 to November 31
                        539,200  
December 1 to December 31
                        539,200  
 
                           
Total
    19,201                        
 
                           
     
(a)  
Relates to the remaining share repurchase availability under the Parent Company’s share repurchase program. There is no expiration date on the share repurchase program. The Parent Company’s Board of Trustees initially authorized this program in 1998 and has periodically replenished capacity under the program.
 
(b)  
Represents common shares cancelled by the Parent Company upon vesting of restricted common shares previously awarded to Company employees in satisfaction of tax withholding obligations. Such shares do not impact the total number of shares that may yet be purchased under the share repurchase program.

 

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SHARE PERFORMANCE GRAPH
The Securities and Exchange Commission requires us to present a chart comparing the cumulative total shareholder return on the common shares with the cumulative total shareholder return of (i) a broad equity index and (ii) a published industry or peer group index. The following chart compares the cumulative total shareholder return for the common shares with the cumulative shareholder return of companies on (i) the S&P 500 Index (ii) the Russell 2000 and (iii) the NAREIT ALL-REIT Total Return Index as provided by NAREIT for the period beginning December 31, 2005 and ending December 31, 2010.
(PERFORMANCE GRAPH)
                                                 
    Period Ending  
Index   12/31/05     12/31/06     12/31/07     12/31/08     12/31/09     12/31/10  
Brandywine Realty Trust
    100.00       124.09       71.01       33.97       55.38       59.60  
S&P 500
    100.00       115.79       122.16       76.96       97.33       111.99  
Russell 2000
    100.00       118.37       116.51       77.15       98.11       124.46  
NAREIT All Equity REIT Index
    100.00       135.06       113.87       70.91       90.76       116.12  

 

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Item 6.  
Selected Financial Data
The following table sets forth selected financial and operating data and should be read in conjunction with the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. The selected data have been revised to reflect disposition of all properties since January 1, 2006, which have been reclassified as discontinued operations for all periods presented in accordance with the accounting standard governing discontinued operations.
Brandywine Realty Trust
(in thousands, except per common share data and number of properties)
                                         
Year Ended December 31,   2010 (a)     2009 (a)     2008 (a)     2007     2006  
 
                                       
Operating Results
                                       
Total revenue
  $ 566,897     $ 575,058     $ 580,932     $ 595,759     $ 542,999  
Income (loss) from continuing operations
    (29,638 )     5,339       (662 )     6,885       (40,003 )
Net income (loss)
    (17,606 )     8,089       38,525       55,335       10,949  
Income (loss) allocated to Common Shares
    (25,578 )     (245 )     28,462       44,124       332  
Income (loss) from continuing operations per Common Share
                                       
Basic
  $ (0.28 )   $ (0.02 )   $ (0.11 )   $ (0.03 )   $ (0.52 )
Diluted
  $ (0.28 )   $ (0.02 )   $ (0.11 )   $ (0.03 )   $ (0.52 )
Earnings per Common Share
                                       
Basic
  $ (0.19 )   $     $ 0.32     $ 0.50     $  
Diluted
  $ (0.19 )   $     $ 0.32     $ 0.50     $  
Cash distributions paid per Common Share
  $ 0.60     $ 0.60     $ 1.76     $ 1.76     $ 1.76  
 
                                       
Balance Sheet Data
                                       
Real estate investments, net of accumulated depreciation
  $ 4,201,410     $ 4,164,992     $ 4,191,367     $ 4,657,333     $ 4,739,726  
Total assets
    4,690,378       4,663,750       4,742,619       5,213,968       5,508,479  
Total indebtedness
    2,430,446       2,454,577       2,741,495       3,081,949       3,133,934  
Total liabilities
    2,712,604       2,742,010       3,020,121       3,363,759       3,462,272  
Noncontrolling interest
    128,272       38,308       52,961       84,076       123,630  
Brandywine Realty Trust’s equity
    1,849,502       1,883,432       1,669,537       1,766,133       1,922,577  
 
                                       
Other Data
                                       
Cash flows from:
                                       
Operating activities
    185,127       220,405       233,867       224,805       238,299  
Investing activities
    (171,936 )     (102,549 )     164,046       39,162       (912,813 )
Financing activities
    1,807       (120,213 )     (399,589 )     (283,746 )     692,719  
 
                                       
Property Data
                                       
Number of properties owned at year end
    233       245       248       257       313  
Net rentable square feet owned at year end
    25,633       25,563       26,257       28,888       31,764  
     
(a)  
During 2010, we recorded depreciation expense of $1.2 million related to projects completed in prior years that were not closed out of our job cost system in a timely manner. This resulted in the understatement of depreciation and amortization expense in the prior years. During the years ended December 31, 2009 and 2008, depreciation expense was understated by $0.9 million and $0.2 million, respectively. The remaining difference relates to other prior years and was nominal. As these errors, both individually and in aggregate, were not material to prior years’ consolidated financial statements and the impact of correcting this error in the current year is not material to the our full year consolidated financial statements, we recorded the related adjustments in the current year.

 

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Brandywine Operating Partnership, L.P.
(in thousands, except per common partnership unit data and number of properties)
                                         
Year Ended December 31,   2010 (a)     2009 (a)     2008 (a)     2007     2006  
 
                                       
Operating Results
                                       
Total revenue
  $ 566,897     $ 575,058     $ 580,932     $ 595,759     $ 542,999  
Income (loss) from continuing operations
    (29,638 )     5,339       (662 )     6,885       (40,003 )
Net income
    (17,606 )     8,089       38,525       55,335       10,949  
Income from continuing operations per Common Partnership Unit
                                       
Basic
  $ (0.28 )   $ (0.02 )   $ (0.11 )   $ (0.03 )   $ (0.52 )
Diluted
  $ (0.28 )   $ (0.02 )   $ (0.11 )   $ (0.03 )   $ (0.52 )
Earnings per Common Partnership Units
                                       
Basic
  $ (0.19 )   $     $ 0.32     $ 0.50     $ 0.02  
Diluted
  $ (0.19 )   $     $ 0.32     $ 0.50     $ 0.02  
Cash distributions paid per Common Partnership Unit
  $ 0.60     $ 0.60     $ 1.76     $ 1.76     $ 1.76  
 
                                       
Balance Sheet Data
                                       
Real estate investments, net of accumulated depreciation
  $ 4,201,410     $ 4,164,992     $ 4,191,367     $ 4,657,333     $ 4,739,726  
Total assets
    4,690,378       4,663,750       4,742,619       5,213,968       5,508,479  
Total indebtedness
    2,430,446       2,454,577       2,741,495       3,081,949       3,133,935  
Total liabilities
    2,712,604       2,742,010       3,020,121       3,363,759       3,462,272  
Redeemable limited partnership units
    132,855       44,620       54,166       90,151       96,544  
Non-controlling interest
          65             28       34,414  
Brandywine Operating Partnership’s equity
    1,844,919       1,877,055       1,668,332       1,760,030       1,915,249  
 
                                       
Other Data
                                       
Cash flows from:
                                       
Operating activities
    185,127       220,405       233,867       224,805       238,299  
Investing activities
    (171,936 )     (102,549 )     164,046       39,162       (912,813 )
Financing activities
    1,807       (120,213 )     (399,589 )     (283,746 )     692,719  
 
                                       
Property Data
                                       
Number of properties owned at year end
    233       245       248       257       313  
Net rentable square feet owned at year end
    25,663       25,563       26,257       28,888       31,764  
     
(a)  
During 2010, we recorded depreciation expense of $1.2 million related to projects completed in prior years that were not closed out of our job cost system in a timely manner. This resulted in the understatement of depreciation and amortization expense in the prior years. During the years ended December 31, 2009 and 2008, depreciation expense was understated by $0.9 million and $0.2 million, respectively. The remaining difference relates to other prior years and was nominal. As these errors, both individually and in aggregate, were not material to prior years’ consolidated financial statements and the impact of correcting this error in the current year is not material to the our full year consolidated financial statements, we recorded the related adjustments in the current year.

 

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Item 7.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements appearing elsewhere herein and is based primarily on our consolidated financial statements for the years ended December 31, 2010, 2009 and 2008.
OVERVIEW
As of December 31, 2010, we manage our portfolio within seven segments: (1) Pennsylvania Suburbs, (2) Philadelphia CBD, (3) Metropolitan Washington D.C, (4) New Jersey/Delaware, (5) Richmond, Virginia, (6) Austin, Texas and (7) California. The Pennsylvania Suburbs segment includes properties in Chester, Delaware, and Montgomery counties in the Philadelphia suburbs. The Philadelphia CBD segment includes properties located in the City of Philadelphia in Pennsylvania. The Metropolitan Washington, D.C. segment includes properties in Northern Virginia and suburban Maryland. The New Jersey/Delaware segment includes properties in Burlington, Camden and Mercer counties and in New Castle county in the state of Delaware. The Richmond, Virginia segment includes properties primarily in Albemarle, Chesterfield, Goochland and Henrico counties and Durham, North Carolina. The Austin, Texas segment includes properties in Austin. The California segment includes properties in Oakland, Concord, Carlsbad and Rancho Bernardo.
We generate cash and revenue from leases of space at our properties and, to a lesser extent, from the management of properties owned by third parties and from investments in the Real Estate Ventures. Factors that we evaluate when leasing space include rental rates, costs of tenant improvements, tenant creditworthiness, current and expected operating costs, the length of the lease, vacancy levels and demand for office and industrial space. We also generate cash through sales of assets, including assets that we do not view as core to our portfolio, either because of location or expected growth potential, and assets that are commanding premium prices from third party investors.
Factors that May Influence Future Results of Operations
Global Market and Economic Conditions
In the U.S., market and economic conditions have been unprecedented and challenging, characterized by tighter credit conditions and slower growth. As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued volatility in the U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our tenants. If these market conditions continue, they may limit our ability and the ability of our tenants, to timely refinance maturing liabilities and access the capital markets to meet liquidity needs.
Real Estate Asset Valuation
General economic conditions and the resulting impact on market conditions or a downturn in tenants’ businesses may adversely affect the value of our assets. Significantly challenging economic conditions in the U.S., declining demand for leased office, mixed use, or industrial properties and/or a decrease in market rental rates and/or market values of real estate assets in our submarkets could have a negative impact on the value of our assets, including the value of our properties and related tenant improvements. If we were required under GAAP to write down the carrying value of any of our properties to the lower of cost or fair value due to impairment, or if as a result of an early lease termination we were required to remove or dispose of material amounts of tenant improvements that are not reusable to another tenant, our financial condition and results of operations would be negatively affected.

 

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Leasing Activity and Rental Rates
The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods.
Development and Redevelopment Programs
Historically, a significant portion of our growth has come from our development and redevelopment efforts. We have a proactive planning process by which we continually evaluate the size, timing, costs and scope of our development and redevelopment programs and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our strategic submarkets. Given the economic conditions, we do not intend to commence new development or redevelopment projects in the near future. We believe that a portion of our future potential growth will continue to come from our newly developed or redeveloped properties once current economic conditions normalize. However, we anticipate that the general economic conditions and the resulting impact on conditions in our core markets will delay timing and reduce the scope of our development program in the near future, which will further impact the average development and redevelopment asset balances qualifying for interest and other carry cost capitalization. We cease capitalizing such costs once a project does not qualify for interest and other carry cost capitalization under GAAP.
In addition, we may be unable to lease committed development or redevelopment properties at expected rental rates or within projected timeframes or complete development or redevelopment properties on schedule or within budgeted amounts, which could adversely affect our financial condition, results of operations and cash flow.
Financial and Operating Performance
Our financial and operating performance is dependent upon the demand for office, industrial and other commercial space in our markets, our leasing results, our acquisition, disposition and development activity, our financing activity, our cash requirements and economic and market conditions, including prevailing interest rates.
In seeking to increase revenue through our operating, financing and investment activities, we also seek to minimize operating risks, including (i) tenant rollover risk, (ii) tenant credit risk and (iii) development risk.
Tenant Rollover Risk:
We are subject to the risks that tenant leases, upon expiration, are not renewed, that space may not be relet; and that the terms of renewal or reletting (including the cost of renovations) may be less favorable to us than the current lease terms. Leases accounting for approximately 8.8% of our aggregate final annualized base rents as of December 31, 2010 (representing approximately 8.6% of the net rentable square feet of the properties) expire without penalty in 2011. We maintain an active dialogue with our tenants in an effort to maximize lease renewals. Our retention rate for leases that were scheduled to expire in 2010 was 65.9%. If we are unable to renew leases or relet space under expiring leases, at anticipated rental rates, or if tenants terminate their leases early, our cash flow would be adversely impacted.
Tenant Credit Risk:
In the event of a tenant default, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. Our management regularly evaluates our accounts receivable reserve policy in light of our tenant base and general and local economic conditions. Our accounts receivable allowance was $15.2 million or 12.0% of total receivables (including accrued rent receivable) as of December 31, 2010 compared to $16.4 million or 14.3% of total receivables (including accrued rent receivable) as of December 31, 2009.
If economic conditions persist or deteriorate further, we may experience increases in past due accounts, defaults, lower occupancy and reduced effective rents. This condition would negatively affect our future net income and cash flows and could have a material adverse effect on our financial condition.

 

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Development Risk:
At December 31, 2010, we were redeveloping one garage project located in Philadelphia with total projected costs of $14.8 million of which $0.8 million then remained to be funded. In addition, we were completing the lease-up of five recently completed developments, aggregating 0.9 million square feet, for which we expect to spend an additional $14.2 million in 2011. We are actively marketing space at these projects to prospective tenants but can provide no assurance as to the timing or terms of any leases of space at these projects.
As of December 31, 2010, we owned approximately 509 acres of undeveloped land. As market conditions warrant, we will seek to opportunistically dispose of those parcels that we do not anticipate developing. For the parcels of land that we ultimately develop, we will be subject to risks associated with development of this land including construction cost increases or overruns and construction delays, insufficient occupancy rates, building moratoriums and inability to obtain necessary zoning, land-use, building, occupancy and other required governmental approvals.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting periods. Certain accounting policies are considered to be critical accounting policies, as they require management to make assumptions about matters that are highly uncertain at the time the estimate is made and changes in the accounting estimate are reasonably likely to occur from period to period. Management believes the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For a summary of all of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere in this report.
Revenue Recognition
We recognize rental revenue on the straight-line basis from the later of the date of the commencement of the lease or the date of acquisition of the property subject to existing leases, which averages minimum rents over the terms of the leases. Lease incentives, which are included as reductions of rental revenue are recognized on a straight-line basis over the term of the lease. Certain lease agreements contain provisions that require tenants to reimburse a pro rata share of real estate taxes and common area maintenance costs. For certain leases in the portfolio, there are significant assumptions and judgments made by management in determining the lease term such as when termination options are provided to the tenant. The lease term impacts the period over which minimum rents are determined and recorded and also considers the period over which lease related costs are amortized. In addition, our rental revenue is impacted by our determination of whether the improvements made by us or the tenant are landlord assets. The determination of whether an asset is a landlord asset requires judgment and principally considers whether improvements would be utilizable by another tenant upon move out by the existing tenant. To the extent they are determined not to be landlord assets, and we fund them, they are considered as lease incentives. To the extent the tenant funds the improvements that we consider to be landlord assets, we treat them as deferred revenue which is amortized to revenue over the lease term.
Real Estate Investments
Real estate investments are carried at cost. We record acquisition of real estate investments under the acquisition method of accounting and allocate the purchase price to land, buildings and intangible assets on a relative fair value basis. Depreciation is computed using the straight-line method over the useful lives of buildings and capital improvements (5 to 55 years) and over the shorter of the lease term or the life of the asset for tenant improvements. Direct construction costs related to the development of Properties and land holdings are capitalized as incurred. Capitalized costs include pre-construction costs essential to the development of the property, development and constructions costs, interest, property taxes, insurance, salaries and other project costs during the period of development. Estimates and judgments are required in determining when capitalization of certain costs such as interest should commence and cease. We expense routine repair and maintenance expenditures and capitalize those items that extend the useful lives of the underlying assets.

 

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Real Estate Ventures
When we obtain an economic interest in an entity, we evaluate the entity to determine if the entity is deemed a variable interest entity (“VIE”), and if we are deemed to be the primary beneficiary, in accordance with the accounting standard for the consolidation of variable interest entities. This accounting standard requires significant use of judgments and estimates in determining its application. If the entity is not deemed to be a VIE, and we serve as the general partner within the entity, we evaluate to determine if our presumed control as the general partner is overcome by the “kick out” rights and other substantive participating rights of the limited partners in accordance with the same accounting standard.
We consolidate (i) entities that are VIEs and of which we are deemed to be the primary beneficiary and (ii) entities that are non-VIEs which we control. Entities that we account for under the equity method (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions) include (i) entities that are VIEs and of which we are not deemed the primary beneficiary (ii) entities that are non-VIEs which we do not control, but over which we have the ability to exercise significant influence and (iii) entities that are non-VIEs which we control through our general partner status, but the limited partners in the entity have the substantive ability to dissolve the entity or remove us without cause or have substantive participating rights. We continuously assess our determination of whether an entity is a VIE and who the primary beneficiary is, and whether or not the limited partners in an entity have substantive rights, more particularly if certain events occur that are likely to cause a change in original determinations.
On a periodic basis, management assesses whether there are any indicators that the value of our investments in unconsolidated joint ventures may be impaired. An investment is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the fair value of the investment. Our estimates of value for each investment (particularly in commercial real estate joint ventures) are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and operating costs. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions; accordingly, the values estimated by management in its impairment analyses may not be realized.
Our Broadmoor Joint Venture owns an office park in Austin, Texas which is currently leased to a single tenant who is also a partner in the joint venture. The said tenant is also the owner of the land which the joint venture currently leases under an existing ground lease agreement. The office buildings’ lease renewals are currently under negotiation. Given the current circumstances, we have performed an impairment assessment of our investment in the venture using probability weighted scenarios that include varying outcomes. We believe that a market participant would assess the probabilities of these outcomes in the same fashion. In evaluating the scenarios, we have determined that the fair value of our investment marginally exceeded its carrying value and the investment is not impaired at December 31, 2010. However, given the lease has not yet been executed and the negotiations of specific terms of the lease are ongoing, the ultimate outcome is uncertain and could cause an impairment of our investment that could be material.
Impairment of Long-Lived Assets
We review long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a long-lived asset, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair-value of the property. We are required to make subjective assessments as to whether there are impairments in the values of the investments in long-lived assets. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. There are also operating properties evaluated as they have been identified for potential sale. No impairment was determined; however, if actual cashflows or the estimated holding periods change, an impairment could be recorded in the future and it could be material. Although our strategy is generally to hold our properties over the long-term, we will dispose of properties to meet our liquidity needs or for other strategic needs. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair value less costs to sell, and such loss could be material. If we determine that impairment has occurred and the assets are classified as held and used, the affected assets must be reduced to their fair-value.

 

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Where properties have been identified as having a potential for sale, additional judgments are required related to the determination as to the appropriate period over which the undiscounted cash flows should include the operating cash flows and the amount included as the estimated residual value. Management determines the amounts to be included based on a probability weighted cash flow. This requires significant judgment. In some cases, the results of whether an impairment is indicated are sensitive to changes in assumptions input into the estimates, including the hold period until expected sale. At December 31, 2010, we performed an impairment assessment of our land holdings as management determined that a sale scenario was the most likely source of future cash flows for certain of the land parcels aggregating to total cost of $15.7 million which is included in land inventory. This impairment assessment required management to estimate the expected proceeds from sale at some point in the future, to determine whether an impairment was indicated. This estimate requires significant judgment. If our expectations as to the expected sales proceeds, or timing of the anticipated sale change based on market conditions or otherwise, our evaluation of impairment could be different and such differences could be material.
During our impairment review for 2010, we determined that no impairment charges were necessary. During the first quarter of 2009, we determined that one of our properties, during our testing for impairment under the held and used model, had a historical cost greater than the probability-weighted undiscounted cash flows. Accordingly, an impairment on the property of $3.7 million was recorded to reduce its carrying value to an amount equal to management’s estimate of the then current fair value. We sold this property in the second quarter of 2009. We also recorded a $6.85 million impairment charge on properties designated as held for sale at June 30, 2008, and sold these properties during the fourth quarter of 2008.
We also entered into development agreements related to our two parcels of land under option for ground lease that require us to commence development by December 31, 2012. If we determine that we will not be able to start the construction by the date specified, or if we determine development is not in our best economic interest and an extension of the development period cannot be negotiated, we will have to write off all costs that we have incurred in preparing these parcels of land for development amounting to $7.7 million as of December 31, 2010.
Income Taxes
Parent Company
The Parent Company has elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). In addition, the Parent Company has several subsidiary REITs. In order to continue to qualify as a REIT, the Parent Company and each of its REIT subsidiaries are required to, among other things, distribute at least 90% of their REIT taxable income to their stockholders and meet certain tests regarding the nature of its income and assets. As REITs, the Parent Company and its REIT subsidiaries are not subject to federal income tax with respect to the portion of their income that meets certain criteria and is distributed annually to the stockholders. Accordingly, no provision for federal income taxes is included in the accompanying consolidated financial statements with respect to the operations of these REITs. The Parent Company and its REIT subsidiaries intend to continue to operate in a manner that allows them to continue to meet the requirements for taxation as REITs. Many of these requirements, however, are highly technical and complex. If the Parent Company or one of its REIT subsidiaries were to fail to meet these requirements, they would be subject to federal income tax.
The Parent Company may elect to treat one or more of its subsidiaries as a TRS. In general, a TRS may perform additional services for our tenants and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the provision to any person, under a franchise, license or otherwise, of rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal income tax. The Parent Company has elected to treat certain of its corporate subsidiaries as TRSs; these entities provide third party property management services and certain services to tenants that could not otherwise be provided.
Operating Partnership
In general, the Operating Partnership is not subject to federal and state income taxes, and accordingly, no provision for income taxes has been made in the accompanying consolidated financial statements. The partners of the Operating Partnership are required to include their respective share of the Operating Partnership’s profits or losses in their respective tax returns. The Operating Partnership’s tax returns and the amount of allocable Partnership profits and losses are subject to examination by federal and state taxing authorities. If such examination results in changes to the Operating Partnership profits or losses, then the tax liability of the partners would be changed accordingly.

 

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The Operating Partnership has elected to treat several of its subsidiaries as REITs under Sections 856 through 860 of the Code. Each subsidiary REIT has met the requirements for treatment as a REIT under Sections 856 through 860 of the Code, and, accordingly, no provision has been made for federal and state income taxes in the accompanying consolidated financial statements. If any subsidiary REIT fails to qualify as a REIT in any taxable year, that subsidiary REIT will be subject to federal and state income taxes and may not be able to qualify as a REIT for the four subsequent taxable years. Also, each subsidiary REIT may be subject to certain local income taxes.
The Operating Partnership has elected to treat several of its subsidiaries as taxable TRSs, which are subject to federal, state and local income tax.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts that represents an estimate of losses that may be incurred from the inability of tenants to make required payments. The allowance is an estimate based on two calculations that are combined to determine the total amount reserved. First, we evaluate specific accounts where we have determined that a tenant may have an inability to meet its financial obligations. In these situations, we use our judgment, based on the facts and circumstances, and record a specific reserve for that tenant against amounts due to reduce the receivable to the amount that we expect to collect. These reserves are re-evaluated and adjusted as additional information becomes available. Second, a reserve is established for all tenants based on a range of percentages applied to receivable aging categories. If the financial condition of our tenants were to deteriorate, additional allowances may be required. For accrued rent receivables, we consider the results of the evaluation of specific accounts as well as other factors including assigning risk factors to different industries based on our tenants SIC classification. Considering various factors including assigning a risk factor to different industries, these percentages are based on historical collection and write-off experience adjusted for current market conditions.
Deferred Costs
We incur direct costs related to the financing, development and leasing of our properties. Management exercises judgment in determining whether such costs, particularly internal costs, meet the criteria for capitalization or must be expensed. Capitalized financing fees are amortized over the related loan term on a basis that approximates the effective interest method while capitalized leasing costs are amortized over the related lease term. Management re-evaluates the remaining useful lives of leasing costs as the creditworthiness of our tenants and economic and market conditions change.
Purchase Price Allocation
We allocate the purchase price of properties to net tangible and identified intangible assets acquired based on fair values. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of the fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancellable term of the lease (includes the below market fixed renewal period, if applicable). Capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancellable terms of the respective leases. Capitalized below-market lease values are amortized as an increase of rental income over the remaining non-cancellable terms of the respective leases, including any fixed-rate renewal periods.

 

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Other intangible assets also include amounts representing the value of tenant relationships and in-place leases based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the respective tenant. We estimate the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, include leasing commissions, legal and other related expenses. This intangible asset is amortized to expense over the remaining term of the respective leases and any fixed-rate bargain renewal periods. We estimate fair value through methods similar to those used by independent appraisers or by using independent appraisals. Factors that we consider in our analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from three to twelve months.
Characteristics that we consider in allocating value to our tenant relationships include the nature and extent of our business relationship with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of tenant relationship intangibles is amortized over the remaining initial lease term and expected renewals, but in no event longer than the remaining depreciable life of the building. The value of in-place leases is amortized over the remaining non-cancellable term of the respective leases and any fixed-rate renewal periods.
In the event that a tenant terminates its lease prior to the end of the lease term, the unamortized portion of each intangible, including market rate adjustments, in-place lease values and tenant relationship values, would be charged to expense.

 

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RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 2010 to the Year Ended December 31, 2009
The table below shows selected operating information for the “Same Store Property Portfolio” and the “Total Portfolio.” The Same Store Property Portfolio consists of 223 properties containing an aggregate of approximately 22.3 million net rentable square feet that we owned for the entire twelve-month periods ended December 31, 2010 and 2009. This table also includes a reconciliation from the Same Store Property Portfolio to the Total Portfolio net income (i.e., all properties owned by us during the twelve-month periods ended December 31, 2010 and 2009) by providing information for the properties which were acquired, under development (including lease-up assets) or placed into service and administrative/elimination information for the twelve-month periods ended December 31, 2010 and 2009 (in thousands).
The Total Portfolio net income presented in the table is equal to the net income of Brandywine Realty Trust and Brandywine Operating Partnership.

 

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Comparison of twelve-months ended December 31, 2010 to the twelve-months ended December 31, 2009
                                                                                                 
                            Acquired/Completed     Development/Redevelopment     Other/        
    Same Store Property Portfolio     Properties     Properties (a)     (Eliminations) (b)     Total Portfolio  
                    Increase/                                                                     Increase/  
(dollars in thousands)   2010     2009     (Decrease)     2010     2009     2010     2009     2010     2009     2010     2009     (Decrease)  
 
                                                                                               
Revenue:
                                                                                               
Cash rents
  425,787     439,381     $ (13,594 )   $ 13,665     $ 9,202     $ 9,626     $ 3,985     $ (2,544 )   $ 4,839     $ 446,534     $ 457,407     $ (10,873 )
Straight-line rents
    10,595       7,995     $ 2,600       1,954       810       1,125       (146 )           33       13,674       8,692       4,982  
Above/below market rent amortization
    5,574       6,542     $ (968 )     417       508             (379 )                 5,991       6,671       (680 )
 
                                                                       
Total rents
    441,956       453,918       (11,962 )     16,036       10,520       10,751       3,460       (2,544 )     4,872       466,199       472,770       (6,571 )
Tenant reimbursements
    72,762       74,023       (1,261 )     3,359       2,197       2,260       557       393       1,420       78,774       78,197       577  
Termination fees
    5,553       2,387       3,166       107             106       1,214                   5,766       3,601       2,165  
Third party management fees, labor reimbursement and leasing
                                              11,830       17,151       11,830       17,151       (5,321 )
Other
    2,555       1,913       642       539       188       15       125       1,219       1,113       4,328       3,339       989  
 
                                                                       
Total revenue
    522,826       532,241       (9,415 )     20,041       12,905       13,132       5,356       10,898       24,556       566,897       575,058       (8,161 )
 
                                                                                               
Property operating expenses
    165,283       160,917       4,366       9,853       5,927       3,137       1,813       (8,122 )     (3,486 )     170,151       165,171       4,980  
Real estate taxes
    50,189       54,074       (3,885 )     2,840       1,235       550       526       865       1,258       54,444       57,093       (2,649 )
Third party management expenses
                                              5,866       7,996       5,866       7,996       (2,130 )
 
                                                                                               
Subtotal
    307,354       317,250       (9,896 )     7,348       5,743       9,445       3,017       12,289       18,788       336,436       344,798       (8,362 )
 
                                                                                               
General & administrative expenses
    1             1       281             23             23,001       20,821       23,306       20,821       2,485  
Depreciation and amortization
    191,040       188,776       2,264       11,535       7,457       5,089       3,741       5,111       5,889       212,775       205,863       6,912  
 
                                                                       
 
                                                                                               
Operating Income (loss)
  116,313     128,474     $ (12,161 )   $ (4,468 )   $ (1,714 )   $ 4,333     $ (724 )   $ (15,823 )   $ (7,922 )   $ 100,355     $ 118,114     $ (17,759 )
 
                                                                                               
Number of properties
    223       223               6       6       4       4                       233       233          
Square feet
    22,282       22,282               1,734       1,734       1,618       1,618                       25,634       25,634          
 
                                                                                               
Other Income (Expense):
                                                                                               
Interest income
                                                                            3,222       2,499       723  
Interest expense
                                                                            (132,640 )     (135,740 )     3,100  
Interest expense — Deferred financing costs
                                                                            (3,770 )     (5,864 )     2,094  
Recognized hedge activity
                                                                                  (916 )     916  
Equity in income of real estate ventures
                                                                            5,305       4,069       1,236  
Gain (loss) on early extinguishment of debt
                                                                            (2,110 )     23,177       (25,287 )
 
                                                                                         
Income (loss) from continuing operations
                                                                            (29,638 )     5,339       (34,977 )
 
                                                                                               
Income from discontinued operations
                                                                            12,032       2,750       9,282  
 
                                                                                         
Net Income
                                                                          $ (17,606 )   $ 8,089     $ (25,695 )
 
                                                                                         
Earnings per common share
                                                                          $ (0.19 )   $ 0.00     $ (0.19 )
 
                                                                                         
 
                                                                                               
EXPLANATORY NOTES
     
(a)  
- Results include: two development and two redevelopment properties.
 
(b)  
- Represents certain revenues and expenses at the corporate level as well as various intercompany costs that are eliminated in consolidation and third-party management fees.

 

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Total Revenue
Cash rents from the Total Portfolio decreased by $10.9 million from 2009 to 2010, primarily reflecting:
   
decrease of $13.6 million of rental income at the same store portfolio as a result of the decrease in same store occupancy of 320 basis points;
 
   
decrease of $7.3 million due to the deconsolidation of three of our real estate ventures as a result of the adoption of the new accounting standard for the consolidation of variable interest entities beginning January 1, 2010 during the first quarter of 2010. This standard does not require retrospective adoption;
 
   
decrease of $3.9 million of rental income due to the decrease in occupancy at three redevelopment properties that we recently placed in service; and
 
   
an offsetting increase of $13.9 million of rental income due to our acquisition of Three Logan Square and the completion and placement in service of the IRS Philadelphia Campus and the Cira South Garage during the third quarter of 2010.
Straight-line rents at the Total Portfolio increased by $5.0 million due to $1.1 million of straight-line rents from the acquisition of Three Logan Square during the third quarter of 2010. The remainder of the increase is due to leases that commenced during the year of 2010 with free rent periods at our same store properties and at one of our redevelopment properties.
Tenant reimbursements increased by $0.6 million from 2009 to 2010 primarily due to the significant number of leases which includes base year operating expense recovery calculations that reached their base year amounts quicker in 2010 than in 2009. Lease structure, the significant northeast snowfall expenses in the first quarter of 2010, as well as the deferral to later months and timing of the repairs and maintenance expenses in the second quarter of 2009, resulted in the base year leases achieving their base year amounts earlier in 2010 than in 2009. This is consistent with the increase in property operating expenses.
Termination fees at the Total Portfolio increased $2.2 million from 2009 to 2010 is mainly due to increased tenant move-outs during 2010 which is consistent with the decrease in occupancy noted above.
Third party management fees, labor reimbursement and leasing decreased by $5.3 million from 2009 to 2010 mainly due to the termination of third party management contracts during the course of 2009 totaling 4.3 million square feet. This is consistent with the decrease in third party management fees. This decrease was off-set by the Company no longer eliminating third party management fee income related to two of our real estate ventures of $0.4 million in 2010.
Other Income
Other Income increased by $1.0 million mainly as a result of additional construction management fee income of $0.5 million from our agreement with the GSA relating to the IRS Philadelphia Campus. In addition, we received $0.4 million of proceeds from bankruptcy settlements with two of our former tenants and $0.1 million from a new energy efficiency rebate program in 2010.
Property Operating Expenses
Property operating expenses increased by $5.0 million mainly due to our acquisition of Three Logan Square and the completion and placement in service of the IRS Philadelphia Campus and the Cira South Garage during the third quarter of 2010 totaling $5.3 million of additional expenses. In addition, we incurred higher snow removal and repairs and maintenance expenses totaling $2.1 million during 2010 compared to 2009. This net increase was off-set by a decrease of $2.7 million in bad debt expense during 2010 as compared to 2009.
Real Estate Taxes
Real estate taxes decreased by $2.6 million mainly due to lower taxes assessed on our properties during 2010 compared to 2009 and refunds related to prior years, offset by additional real estate taxes due to our acquisition of Three Logan Square during the third quarter of 2010.

 

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General & Administrative Expenses
General and Administrative Expense increased by $2.5 million primarily due to:
   
an increase of $0.8 million in amortization of stock-based compensation as a result of stock option and restricted stock performance units granted in March 2010;
 
   
an increase of $1.4 million in salaries, bonus and recruiting fees due to new hires during 2010;
 
   
a $0.2 million one-time bonus payment made during 2010; and
 
   
a net increase of $0.1 million as a result of various corporate level expenses during 2010, none of which were individually significant;
Depreciation and Amortization Expense
Depreciation and amortization increased by $6.9 million from 2009 to 2010, primarily due to our depreciation and amortization expense on assets placed in service since 2009, particularly Three Logan Square and the IRS Philadelphia Campus which totaled $8.2 million of depreciation and amortization expense. During 2010, we also recorded $1.2 million of depreciation related to 2009 and prior years principally with respect to completed projects that were not closed out of our job cost system timely. This net increase was off-set by a decrease in depreciation and amortization expense from assets written-off related to early move-outs and fully amortized assets when comparing 2010 to 2009.
Provision for Impairment on Real Estate
During our first quarter 2009 impairment review, we determined that one of the properties tested for impairment under the held and used model had a historical cost greater than the probability weighted undiscounted cash flows. Accordingly, the recorded amount was reduced to an amount based on management’s estimate of its fair value.
Where properties have been identified as having a potential for sale, additional judgments are required related to the determination as to the appropriate period over which the undiscounted cash flows should include the operating cash flows and the amount included as the estimated residual value. Management determines the amounts to be included based on a probability weighted cash flow. This requires significant judgment. In some cases, the results of whether an impairment is indicated are sensitive to changes in assumptions input into the estimates, including the hold period until expected sale.
Interest Expense
The decrease in interest expense of $3.1 million is primarily due to the following:
   
a decrease of $14.6 million resulting from our buybacks of various unsecured notes subsequent to 2009. The details of the various purchases completed during 2010 are noted in the (Loss) gain on early extinguishment of debt section below;
 
   
a decrease of $5.5 million resulting from the pay-off of an unsecured note at maturity during the fourth quarter of 2009;
 
   
a decrease of $0.4 million resulting from lower weighted average interest rates on our $183.0 million term loan and our three Preferred Trust borrowings. Such borrowings have variable interest rates and a portion of such borrowings are swaps which matured early in the quarters; and
 
   
an increase of $1.5 million in capitalized interest as a result of the increase in cumulative spending on development projects in 2010 compared to 2009.

 

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The above described decrease of $22.0 million was offset by an increase of $14.3 million from the sale of $250.0 million of unsecured notes in the third quarter of 2009 and a net increase of $3.4 million resulting from a higher outstanding mortgage notes payable balance as of December 31, 2010 compared to December 31, 2009. We also had an increase of $0.5 million in interest expense related to the interest accretion of the Two Logan Square $2.9 million future liability (expected to be settled in 2019). In addition, there was an increase of $0.6 million in interest expense related to the estimated equity interest payments as a result of our partnership in the IRS Philadelphia Campus.
Deferred financing costs decreased by $2.1 million mainly due to the acceleration of such expenses incurred from greater debt repurchase activities during the 2009 compared to the 2010 offset by deferred financing costs amortized relating to the forward financing on the IRS Philadelphia Campus and Cira South Garage.
Recognized hedge activity
During 2009, we recorded a $1.1 million mark to market adjustment relating to two of our swaps that were applied to our September 2009 offering of $250.0 million 7.50% senior unsecured notes due 2015. The swaps no longer qualified for hedge accounting upon completion of this offering as the hedging relationship was terminated. Accordingly, the changes in the fair value of the swaps were reflected in our statement of operations until they were settled in cash in December 2009. We paid $5.1 million to terminate these swaps. We also recorded a net $0.1 million of income related to the write-off of AOCI and the ineffective portion of certain of our hedges.
Equity in income of real estate ventures
The increase in equity in income of real estate ventures of $1.2 million from 2009 to 2010 is mainly due to a distribution in 2010 of $0.6 million of sales proceeds that were held in escrow until resolution of certain contingencies arising from the sale of the property held by the Five Tower Bridge partnership. The remainder of the increase is the result of normal operating activities at the partnership level, and includes $0.1 million of preferred return pick-up from our ownership in a newly created real estate venture with Thomas Properties Group (Commerce Square).
Gain (loss) on early extinguishment of debt
During 2010, we repurchased (i) $68.1 million of our $345.0 million 3.875% Exchangeable Notes, (ii) $1.9 million of our $300.0 million 5.625% Guaranteed Notes due 2010 and (iii) $12.6 million of our $300.0 million 5.750% Guaranteed Notes due 2012 which resulted in a net loss on early extinguishment of debt of $2.2 million. The net loss was off-set by a gain from the write-off of the remaining premium on the PMEC note at the time of pay-off of $0.1 million resulting in an aggregate net loss on early extinguishment of debt of $2.1 million.
During 2009, we repurchased $154.1 million of our $345.0 million 3.875% Exchangeable Notes, $94.1 million of our $275.0 million 4.500% Guaranteed Notes due 2009, $77.0 million of our $300.0 million 5.625% Guaranteed Notes due 2010, $112.2 million of our $300.0 million 5.750% Guaranteed Notes due 2012 and $7.3 million of our $250.0 million 5.400% Guaranteed Notes due 2014 which resulted in a net gain on early extinguishment of debt of $23.2 million. The gain on early extinguishment of debt is inclusive of adjustments made to reflect our adoption of the new accounting standard for convertible debt instruments.
Discontinued Operations
During 2010, we sold one property in Richmond, VA, one property in Exton, PA, one property in King of Prussia, PA, one property in Austin, TX, and four properties in Marlton, NJ. These properties had total revenue of $6.4 million, operating expenses of $3.3 million, depreciation and amortization expenses of $2.0 million and gain on sale of $11.0 million.
The December 31, 2009 amounts are reclassified to include the operations of the properties sold during the twelve months period ended December 31, 2010, as well as all properties that were sold through the year ended December 31, 2009. Therefore, the discontinued operations amount for the twelve-months period ended December 31, 2009 includes total revenue of $20.6 million, operating expenses of $10.6 million and depreciation and amortization expense of $4.9 million. During the 2009, we also recognized a provision for impairment of $3.7 million on a property that was sold during the second quarter of 2009.

 

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Net Income
Net income decreased by $25.7 million from the twelve-month period ended December 31, 2009 as a result of the factors described above. Net income is significantly impacted by depreciation of operating properties and amortization of acquired intangibles. These non-cash charges do not directly affect our ability to pay dividends. Such charges can be expected to continue until lease intangibles are fully amortized. These intangibles are amortizing over the related lease terms or estimated duration of the tenant relationship.
Earnings per Common Share
Loss per share (basic and diluted) were $0.19 for the twelve-month period ended December 31, 2010 as compared to loss per share of $0.00 for the twelve-month period ended December 31, 2009 as a result of the factors described above and an increase in the average number of common shares outstanding. The increase in the average number of common shares outstanding is primarily due to the commencement of the continuous equity Offering Program in March 2010 and the result of the $242.3 million public equity offering of 40,250,000 shares during the second quarter of 2009.

 

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RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008
The table below shows selected operating information for the “Same Store Property Portfolio” and the “Total Portfolio.” The Same Store Property Portfolio consists of 232 properties containing an aggregate of approximately 22.6 million net rentable square feet that we owned for the entire twelve-month periods ended December 31, 2009 and 2008. This table also includes a reconciliation from the Same Store Property Portfolio to the Total Portfolio net income (i.e., all properties owned by us during the twelve-month periods ended December 31, 2009 and 2008) by providing information for the properties which were acquired, under development (including lease-up assets) or placed into service and administrative/elimination information for the twelve-month periods ended December 31, 2009 and 2008 (in thousands).
The Total Portfolio net income presented in the table is equal to the net income of Brandywine Realty Trust and Brandywine Operating Partnership.

 

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Comparison of twelve-months ended December 31, 2009 to the twelve-months ended December 31, 2008
                                                                                                 
                            Acquired/Completed     Development/Redevelopment     Other/        
    Same Store Property Portfolio     Properties     Properties (a)     (Eliminations) (b)     Total Portfolio  
                    Increase/                                                                     Increase/  
(dollars in thousands)   2009     2008     (Decrease)     2009     2008     2009     2008     2009     2008     2009     2008     (Decrease)  
 
                                                                                               
Revenue:
                                                                                               
Cash rents
  445,370     450,291     $ (4,921 )   $ 6,739     $ 902     $ 13,187     $ 12,156     $ (2,413 )   $ (2,940 )   $ 462,883     $ 460,409     $ 2,474  
Straight-line rents
    5,471       14,102     $ (8,631 )     2,567       322       664       1,123                   8,702       15,547       (6,845 )
Above/below market rent amortization
    6,514       5,914     $ 600                   129       1,342                   6,643       7,256       (613 )
 
                                                                       
Total rents
    457,355       470,307       (12,952 )     9,306       1,224       13,980       14,621       (2,413 )     (2,940 )     478,228       483,212       (4,984 )
Tenant reimbursements
    75,390       73,831       1,559       1,351       376       2,754       3,198       301       685       79,796       78,090       1,706  
Termination fees
    2,385       4,800       (2,415 )                 1,216                         3,601       4,800       (1,199 )
Third party management fees, labor reimbursement and leasing
                                              17,151       20,401       17,151       20,401       (3,250 )
Other
    2,019       1,831       188       1             314       (6 )     1,109       1,093       3,443       2,918       525  
 
                                                                       
Total revenue
    537,149       550,769       (13,620 )     10,658       1,600       18,264       17,813       16,148       19,239       582,219       589,421       (7,202 )
 
                                                                                               
Property operating expenses
    163,138       159,236       3,902       3,626       (737 )     7,740       8,100       (6,345 )     (5,829 )     168,159       160,770       7,389  
Real estate taxes
    53,621       54,601       (980 )     2,056       1,712       1,761       1,753       792       583       58,230       58,649       (419 )
Third party management expenses
                                              7,996       8,965       7,996       8,965       (969 )
 
                                                                       
 
                                                                                               
Subtotal
    320,390       336,932       (16,542 )     4,976       625       8,763       7,960       13,705       15,520       347,834       361,037       (13,203 )
 
                                                                                               
General & administrative expenses
                                              20,821       23,002       20,821       23,002       (2,181 )
Depreciation and amortization
    189,020       190,584       (1,564 )     5,145       872       11,198       6,680       3,227       3,907       208,590       202,043       6,547  
 
                                                                       
 
                                                                                               
Operating Income (loss)
  131,370     146,348     $ (14,978 )   $ (169 )   $ (247 )   $ (2,435 )   $ 1,280     $ (10,343 )   $ (11,389 )   $ 118,423     $ 135,992     $ (17,569 )
 
                                                                                               
Number of properties
    232       232               4       4       9       9                       245       245          
Square feet
    22,583       22,583               669       669       2,311       2,311                       25,563       25,563          
 
                                                                                               
Other Income (Expense):
                                                                                               
Interest income
                                                                            2,499       1,839       660  
Interest expense
                                                                            (135,740 )     (146,646 )     10,906  
Interest expense — Deferred financing costs
                                                                            (5,864 )     (5,450 )     (414 )
Recognized hedge activity
                                                                            (916 )           (916 )
Equity in income of real estate ventures
                                                                            4,069       8,447       (4,378 )
Net (loss) gain on disposition of undepreciated assets
                                                                                  (24 )     24  
Provision for impairment on land inventory
                                                                                  (10,841 )     10,841  
Gain on early extinguishment of debt
                                                                            23,177       18,105       5,072  
 
                                                                                         
Income (loss) from continuing operations
                                                                            5,648       1,422       4,226  
 
                                                                                               
Income from discontinued operations
                                                                            2,441       37,103       (34,662 )
 
                                                                                         
Net Income
                                                                          $ 8,089     $ 38,525     $ (30,436 )
 
                                                                                         
Earnings per common share
                                                                          $     $ 0.33     $ (0.33 )
 
                                                                                         
 
                                                                                               
EXPLANATORY NOTES
     
(a)  
- Results include: two developments and three redevelopment properties.
 
(b)  
- Represents certain revenues and expenses at the corporate level as well as various intercompany costs that are eliminated in consolidation and third-party management fees.

 

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Total Revenue
Cash rents from the Total Portfolio increased by $2.5 million from 2008 to 2009, primarily reflecting:
  1)  
An additional $5.8 million from four development/redevelopment properties that we completed and placed in service subsequent to 2008.
  2)  
An additional $1.0 million of rental income due to increased occupancy at nine development/redevelopment properties in 2009 in comparison to 2008.
  3)  
The increase was offset by the decrease of $4.9 million of rental income at our Same Store properties from 2008 to 2009 due to a decrease in occupancy of 380 basis points.
Straight-line rents at the Total Portfolio decreased by $6.8 million primarily due to free rent converting to cash rent during 2009.
Tenant reimbursements increased by $1.7 million from 2008 to 2009 primarily due to the increase in property operating expenses at our Same Store Portfolio. Tenant reimbursements increased by $1.6 million at our same store portfolio and the property operating expenses including real estate taxes at those properties increased by $2.9 million.
The decrease in termination fees of $1.2 million from 2008 to 2009 is mainly due to the recognition of a $3.1 million termination fee from one tenant during 2008 in comparison to a $1.2 million termination fee received from one tenant at one of redevelopment properties and a $0.6 million termination fee received from one tenant at one of our same store properties in 2009.
Third party management fees, labor reimbursement and leasing decreased by $3.3 million from 2008 to 2009 as a result of the termination of the management fee contract on March 31, 2008 that we entered into when we sold the 10 office properties located in Reading and Harrisburg, PA. As the contract was terminated early, approximately $0.8 million of unamortized deferred management fees were taken into income during 2008. The decrease also resulted from the termination of other third party management contracts totaling 4.3 million square feet subsequent to 2008.
Property Operating Expenses
Property operating expenses, including real estate taxes, at the Total Portfolio increased by $7.4 million due to increased repairs and maintenance expenses along with increased snow removal expenses during 2009 compared to 2008. We also incurred an additional $4.7 million of expenses from four properties that we completed and placed in service subsequent to 2008. These increases were offset by a decrease in the bad debt expense of $1.4 million from 2008 to 2009.
General & Administrative Expenses
General & administrative expenses decreased by $2.2 million from 2008 to 2009 mainly due to the severance costs of $2.4 million in 2008 that we did not have in 2009.
Depreciation and Amortization Expense
Depreciation and amortization increased by $6.5 million from 2008 to 2009, primarily due to $4.3 million of depreciation and amortization expense recorded on the four properties completed and placed in service subsequent to 2008. An additional $4.3 million of depreciation and amortization expense was recorded on portions of the nine development properties that were placed in service subsequent to 2008. The increase was offset by the decrease of $1.6 million at the Same Store Portfolio for asset write-offs related to early move-outs and fully amortized assets when comparing 2009 to 2008.
Interest Income/ Expense
Interest income increased by approximately $0.7 million, mainly due to the accretion of the $40.0 million non-interest bearing note receivable from the sale of the five Northern California properties in the fourth quarter of 2008. The note receivable was recorded at its present value on the date of sale of $37.1 million. During 2009, we recognized $1.6 million of interest income related to this note receivable and $0.2 million of interest income related to the $22.5 million note receivable from the sale of the two Trenton properties during the fourth quarter of 2009. During 2008, we recognized $0.4 million of interest income related to the note receivable from the sale of the five Northern California properties and $0.5 million of interest income received from a certificate of deposit investment.

 

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The decrease in interest expense of $10.9 million is mainly due to the following:
   
decrease of $4.9 million resulting from the payoff at maturity of our $113.0 million private placement notes in December 2008.
   
decrease of $3.4 million resulting from a lower average Credit Facility balance at the end of 2009 and a lower weighted average interest rate on such borrowings in 2009 compared to December 31, 2008.
   
decrease of $6.9 million resulting from lower weighted average interest rates on our $183.0 million Bank Term Loan and our three Preferred Trust borrowings. Such borrowings have variable interest rates and a portion of such borrowings are swapped to fixed rate debt through our hedging program. This decrease is offset by an increase of $5.7 million paid under these hedges since the variable interest rates on such debt is lower than the swapped fixed rate on the hedges assigned to these borrowings.
   
decrease of $17.5 million resulting from our buybacks of unsecured notes in 2009. The details of the repurchases completed during the twelve months ended December 31, 2009 and 2008 are noted in the Gain on early extinguishment of debt section below. This decrease is offset by an increase of $5.1 million of interest on issuance of new notes.
The above explained net decrease of $21.9 million is offset by a decrease in capitalized interest of $7.9 million as a result of the decrease in the average balance, on open development and redevelopment projects, $0.3 million of interest expense related to our tax credit transactions, and an increase of $2.6 million from a higher outstanding mortgage notes payable balance as of December 31, 2009 compared to December 31, 2008.
Amortization of deferred financing costs increased by $0.4 million due to the acceleration of such expenses incurred in the debt repurchase activities of 2009.
Provision for impairment on land inventory
As part of our review of long-lived assets in accordance with the accounting standard for long-lived assets, during the quarter ending December 31, 2008, management determined that certain of the parcels in our land inventory considered at that time more likely to be sold had historical carrying values in excess of the current estimate of their fair value. Our impairment was recorded based on management’s estimate of the current fair value of the land inventory at that time.
Provision for Impairment on Real Estate
During the quarter ended March 31, 2009 impairment review, we determined that one of the properties tested for impairment under the held and used model had a historical cost greater than the probability weighted undiscounted cash flows. Accordingly, the recorded amount was reduced to an amount based on management’s estimate of the current fair value. During the nine months period ended September 30, 2008, we recorded a provision of $6.85 million for impairment relating to the sale of the five Northern California properties classifies as held for sale.
Where properties have been identified as having a potential for sale, additional judgments are required related to the determination as to the appropriate period over which the undiscounted cash flows should include the operating cash flows and the amount included as the estimated residual value. Management determines the amounts to be included based on a probability weighted cash flow. This requires significant judgment. In some cases, the results of whether an impairment is indicated are sensitive to changes in assumptions input into the estimates, including the hold period until expected sale.
Recognized hedge activity
During 2009, we recorded a $1.1 million mark to market adjustment relating to two of our swaps that were applied to our offering of $250.0 million 7.50% senior unsecured notes due 2015 completed in September 2009. The swaps no longer qualified for hedge accounting upon completion of this offering as the hedging relationship was terminated. Accordingly, the changes in the fair value of the swaps were reflected in our statement of operations until they were cash settled in December 2009. We paid $5.1 million to terminate these swaps. During the year, we also recorded a net $0.1 million of income related to the write-off of AOCI and the ineffective portion of certain of our hedges.

 

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Equity in income of real estate ventures
The decrease in equity in income of real estate venture from 2008 to 2009 was mainly due to a payout of $3.2 million that we received for our interest in a real estate venture that was sold during the fourth quarter of 2008. The remainder of the decrease is primarily attributable to lower net income at the real estate venture properties.
Gain on early extinguishment of debt
During 2009, we repurchased $154.1 million of our $345.0 million 3.875% Exchangeable Notes, $94.1 million of our $275.0 million 4.500% Guaranteed Notes due 2009, $77.0 million of our $300.0 million 5.625% Guaranteed Notes due 2010, $112.2 million of our $300.0 million 5.750% Guaranteed Notes due 2012 and $7.3 million of our $250.0 million 5.400% Guaranteed Notes due 2014 which resulted in a net gain on early extinguishment of debt of $23.2 million. The gain on early extinguishment of debt is inclusive of adjustments made to reflect our adoption of the new accounting standard for convertible debt instruments.
During 2008, we repurchased $63.0 million of our $345.0 million 3.875% Guaranteed Exchangeable Notes, $78.3 million of our $275.0 million 4.500% Guaranteed Notes due 2009 and $24.5 million of our $300.0 million 5.625% Guaranteed Notes due 2010 which resulted in an $18.1 million gain that we reported for the early extinguishment of debt. The gain on extinguishment of debt has been retrospectively adjusted to reflect our adoption of the new accounting standard for convertible debt instruments.
Discontinued Operations
During the twelve month period ended December 31, 2009, we sold two properties in Exton, PA, one property in Moorestown, NJ, one property in Bethesda, MD, two properties in Trenton, NJ and a condominium unit and an undivided interest in an office building in Lawrenceville, NJ. These properties had total revenue of $13.5 million, operating expenses of $6.4 million, depreciation and amortization expenses of $2.2 million and gain on sale of $1.2 million. We determined that the sale of the two properties in Trenton, NJ should be accounted for using the Installment Sale Method. As a result, we deferred the portion of the gain which exceeded the calculated gain following the installment sale method. These amounts will decrease in proportion with the paydown of the principal balance on our note receivable from the buyer of the properties. The buyer is not obligated to make any principal payments over the next seven years. If they do make principal payments in advance, a portion of these amounts that are deferred will be recognized as a gain on sale in the period that we receive the cash for the principal payments. We also recorded a $3.7 million loss provision during the first quarter of 2009 in connection with the property in Bethesda, MD sold during the second quarter of 2009 which reduced our income from discontinued operations.
The December 31, 2008 amounts are reclassified to include the operations of the properties sold during the twelve months period ended December 31, 2009, as well as all properties that were sold through the year ended December 31, 2008. Therefore, the discontinued operations amount for the twelve months period ended December 31, 2008 includes total revenue of $60.8 million, operating expenses of $27.3 million, depreciation and amortization expense of $13.4 million, interest expense of $4.6 million and gains on sale of $28.5 million. We also recorded a $6.85 million loss provision in connection with the five Northern California properties classified as held for sale during the second quarter of 2008 which reduced our income from discontinued operations.
Net Income
Net income decreased by $30.4 million from the twelve-month period ended December 31, 2008 as a result of the factors described above. Net income is significantly impacted by depreciation of operating properties and amortization of acquired intangibles. These non-cash charges do not directly affect our ability to pay dividends. Such charges can be expected to continue until lease intangibles are fully amortized. These intangibles are amortizing over the related lease terms or estimated duration of the tenant relationship.
Earnings per Common Share
Loss per share (basic and diluted) were $0.00 for the twelve-month period ended December 31, 2009 as compared to earnings per share of $0.33 for the twelve-month period ended December 31, 2008 as a result of the factors described above and an increase in the average number of common shares outstanding. The increase in the average number of common shares outstanding is primarily the result of a $242.3 million public equity offering of 40,250,000 shares during the second quarter of 2009.

 

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LIQUIDITY AND CAPITAL RESOURCES OF THE PARENT COMPANY
The Parent Company conducts its business through the Operating Partnership and its only material asset is its ownership of the partnership interests of the Operating Partnership. The Parent Company, other than acting as the sole general partner of the Operating Partnership, issues public equity from time to time and guarantees the debt obligations of the Operating Partnership. The Parent Company’s principal funding requirement is the payment of dividends on its common stock and preferred stock. The Parent Company’s principal source of funding for its dividend payments is the distributions it receives from the Operating Partnership.
As of December 31, 2010, the Parent Company owned a 93.1% interest in the Operating Partnership. The remaining 6.9% interest consists of common units of limited partnership interest owned by non-affiliated investors. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.
The Parent Company’s principal source of capital is from the distributions it receives from the Operating Partnership. The Parent Company believes that the Operating Partnership’s sources of working capital, particularly its cash flows from operations and borrowings available under its Credit Facility, are adequate for it to make its distribution payments to the Parent Company, which in turn will enable the Parent Company to make dividend payments to its stockholders.
The Parent Company receives proceeds from equity issuances from time to time, but is required by the Operating Partnership’s partnership agreement to contribute the proceeds from its equity issuances to the Operating Partnership in exchange for partnership units of the Operating Partnership. The Parent Company’s ability to sell common shares and preferred shares is dependent on, among other things, general market conditions for REITs, market perceptions about the Company as a whole and the current trading price of its shares. The Parent Company regularly analyzes which source of capital is most advantageous to it at any particular point in time. In March 2010, the Parent Company commenced a continuous equity Offering Program, under which it may sell up to an aggregate amount of 15,000,000 common shares until March 10, 2013 in amounts and at times to be determined by the Parent Company. Actual sales will depend on a variety of factors to be determined by the Parent Company, including market conditions, the trading price of its common shares and determinations by the Parent Company of the appropriate sources of funding. In conjunction with the Offering Program, the Parent Company engaged sales agents who received compensation, in aggregate, of up to 2% of the gross sales price per share sold during the twelve months ended December 31, 2010. Through December 31, 2010, the Parent Company sold 5,742,268 shares under this program at an average sales price of $12.54 per share resulting in net proceeds of $70.8 million. The Parent Company contributed the net proceeds from the sales to the Operating Partnership.
On December 2, 2010, the Parent Company declared a distribution of $0.15 per common share, totaling $20.3 million, which it paid on January 20, 2011 to its shareholders of record as of January 6, 2011. In addition, the Parent Company declared distributions on its Series C Preferred Shares and Series D Preferred Shares to holders of record as of December 30, 2010. These shares are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on January 18, 2011 to holders of Series C Preferred Shares and Series D Preferred Shares totaled $0.9 million and $1.1 million, respectively.
The Parent Company also maintains a share repurchase program under which its Board of Trustees has authorized the Parent Company to repurchase its common shares from time to time. As of December 31, 2010, there were approximately 0.5 million shares remaining to be repurchased under this program. The Parent Company’s Board of Trustees has not limited the duration of the program; however, it may be terminated at any time.
Together with the Operating Partnership, the Parent Company maintains a shelf registration statement that has registered common shares, preferred shares, depositary shares and warrants and unsecured debt securities. Subject to the Company’s ongoing compliance with securities laws, and if warranted by market conditions, the Company may offer and sell equity and debt securities from time to time under the shelf registration statement.
The Parent Company also guarantees the Operating Partnership’s secured and unsecured debt obligations which as of December 31, 2010, amounted to $712.2 million and $1,722.3 million, respectively. If the Operating Partnership were to fail to comply with its debt requirements, the Parent Company would be required to fulfill the Operating Partnership’s commitments under such guarantees. As of December 31, 2010, the Operating Partnership was in compliance with all of its debt covenants.
In order to maintain its qualification as a REIT, the Parent Company is required to, among other things, pay dividends to its shareholders of at least 90% of its REIT taxable income. The Parent Company has historically satisfied this requirement.
Overall, the liquidity of the Parent Company is dependent on the Operating Partnership’s ability to make distributions to the Parent Company. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available to meet its working capital needs including its ability to make distribution payments to the Parent Company. In cases where the Operating Partnership is faced with working capital problems or would need to raise capital to fund acquisitions and developments, the Parent Company will have to consider alternative sources to increase liquidity, including, among other things, equity issuances through its existing Offering Program, use of its available line of credit and potential sale of properties.

 

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LIQUIDITY AND CAPITAL RESOURCES OF THE OPERATING PARTNERSHIP
General
The Operating Partnership’s principal liquidity needs for the next twelve months are as follows:
   
fund normal recurring expenses,
   
fund capital expenditures, including capital and tenant improvements and leasing costs,
   
fund repayment of certain debt instruments when they mature,
   
fund current development and redevelopment costs, and
   
fund distributions to the Parent Company.
The Operating Partnership believes that with the uncertain economic conditions, it is likely that vacancy rates may continue to increase, effective rental rates on new and renewed leases may continue to decrease and tenant installation costs, including concessions, may continue to increase in most or all of its markets in 2011 and possibly beyond. As a result, the Operating Partnership’s revenue from the overall reduced demand for office space, and its cash flow could be insufficient to cover increased tenant installation costs over the short-term. If this situation were to occur, the Operating Partnership expects that it would finance cash deficits through borrowings under our Credit Facility and other debt and equity financings.
The Operating Partnership believes that its liquidity needs will be satisfied through cash flows generated by operations, financing activities and selective property sales. Rental revenue, expense recoveries from tenants, and other income from operations are its principal sources of cash used to pay operating expenses, debt service, recurring capital expenditures and the minimum distributions required to maintain its REIT qualification. The Operating Partnership seeks to increase cash flows from its properties by maintaining quality standards for its properties that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. The Operating Partnership’s revenue also includes third-party fees generated by its property management, leasing, development, and construction businesses. The Operating Partnership believes that its revenue, together with proceeds from property sales and debt financings, will continue to provide funds for its short-term liquidity needs. However, material changes in its operating or financing activities may adversely affect its net cash flows. Such changes, in turn, would adversely affect its ability to fund distributions to the Parent Company, debt service payments and tenant improvements. In addition, a material adverse change in its cash provided by operations would affect the financial performance covenants under its Credit Facility, unsecured term loan and unsecured notes.
Financial markets have experienced unusual volatility and uncertainty. The Operating Partnership’s ability to fund development projects, as well as its ability to repay or refinance debt maturities could be adversely affected by its inability to secure financing at reasonable terms beyond those already completed. It is possible, in these unusual and uncertain times that one or more lenders in its Credit Facility could fail to fund a borrowing request. Such an event could adversely affect its ability to access funds from its Credit Facility when needed.
The Operating Partnership’s liquidity management remains a priority. The Operating Partnership is proactively pursuing new financing opportunities to ensure an appropriate balance sheet position. As a result of these dedicated efforts, the Operating Partnership is comfortable with its ability to meet future debt maturities and development or property acquisition funding needs. The Operating Partnership believes that its current balance sheet is in an adequate position at the date of this filing, despite the volatility in the credit markets. The following are the Operating Partnership’s significant activities during 2010 affecting its liquidity management:
   
From the inception of the Parent Company’s continuous equity Offering Program in March 2010 through December 31, 2010, the Parent Company had contributed $70.8 million in net proceeds from the sale of 5,742,268 common shares to the Operating Partnership in exchange for the issuance of 5,742,268 common partnership units to the Parent Company. The Operating Partnership used the net proceeds contributed by the Parent Company to reduce borrowings under the Credit Facility and for general corporate purposes.
   
In June 2010, the Operating Partnership through one of its wholly owned TRS entities, received a $27.4 million contribution under the historic tax credit transaction entered into in 2008 with US Bancorp.

 

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On August 5, 2010, the Operating Partnership issued 7,111,112 units of its newly-established Class F (2010) Units in connection with the acquisition of Three Logan Square. The Class F (2010) Units do not accrue a dividend and are not entitled to income or loss allocations prior to the first anniversary of the closing. They are also not convertible into the Parent Company’s common shares for that period. For purposes of computing the total purchase price of Three Logan Square, the Class F (2010) Units were valued based on the closing market price of the Parent Company’s common shares on the acquisition date of $11.54 less the annual dividend rate per share of $0.60 to reflect that these units do not begin to accrue a dividend prior to the first anniversary of their issuance.
   
On August 26, 2010, the Operating Partnership received $254.0 million of gross proceeds from a $256.5 million forward financing commitment that the Operating Partnership obtained on June 29, 2009. The Operating Partnership paid a $17.7 million commitment fee in connection with this commitment. The loan proceeds, together with the commitment fee, had been escrowed with an institutional trustee pending the completion of the IRS Philadelphia Campus and the Cira South Garage as well as the commencement of the leases at these facilities. The financing consists of two separate loans: $209.7 million secured by the IRS Philadelphia Campus and $46.8 million secured by the Cira South Garage. The lender held back $2.5 million of the loan proceeds pending the completion of certain conditions related to the IRS Philadelphia Campus and the Cira South Garage. As of December 31, 2010, the Operating Partnership has received $2.1 million of the total amount held back. The loans are non-recourse and are secured by the IRS Philadelphia Campus and the Cira South Garage, respectively. The loans bear interest at 5.93% per annum with interest only through September 10, 2010 and thereafter require principal and interest monthly payments through its maturity in September 2030. The Operating Partnership used the loan proceeds to reduce borrowings under its Credit Facility and for general corporate purposes.
The Operating Partnership uses multiple financing sources to fund its long-term capital needs. It uses its Credit Facility for general business purposes, including the acquisition, development and redevelopment of properties and the repayment of other debt. It will also consider other properties within its portfolio as necessary, where it may be in its best interest to obtain a secured mortgage.
The Operating Partnership’s ability to incur additional debt is dependent upon a number of factors, including its credit ratings, the value of its unencumbered assets, its degree of leverage and borrowing restrictions imposed by its current lenders. If more than one rating agency were to downgrade its credit rating, its access to capital in the unsecured debt market would be more limited and the interest rate under its existing Credit Facility and the term loan would increase.
The Operating Partnership’s ability to sell its limited partnership and preferred units is dependent on, among other things, general market conditions for REITs, market perceptions about the Company and the current trading price of the Parent Company’s shares. The Parent Company contributes the proceeds it receives from its equity issuances to the Operating Partnership in exchange for partnership units of the Operating Partnership in accordance with the Operating Partnership’s partnership agreement. The Operating Partnership uses the net proceeds from the sales contributed by the Parent Company to reduce borrowings under the Credit Facility and for general corporate purposes. The Operating Partnership, from time to time, also issues its own partnership units as consideration for property acquisitions and developments as shown in one of the Operating Partnership’s activities during 2010 above
The Operating Partnership will also consider sales of selected Properties as another source of managing its liquidity. Asset sales during 2009 and through 2010 have been a source of cash. During 2010, it sold 8 properties containing 0.5 million in net rentable square feet for net cash proceeds of $50.1 million. Since mid-2007, the Operating Partnership has used proceeds from asset sales to repay existing indebtedness, provide capital for its development activities and strengthen its financial condition. There is no guarantee that it will be able to raise similar or even lesser amounts of capital from future asset sales.
Cash Flows
The following summary discussion of the Operating Partnership’s cash flows is based on the consolidated statement of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented.
As of December 31, 2010 and 2009, the Operating Partnership maintained cash and cash equivalents of $16.6 million and $1.6 million, respectively. The following are the changes in cash flows from its activities for the years ended (in thousands):
                         
Activity   2010     2009     2008  
Operating
  $ 185,127     $ 220,405     $ 233,867  
Investing
    (171,936 )     (102,549 )     164,046  
Financing
    1,807       (120,213 )     (399,589 )
 
                 
Net cash flows
  $ 14,998     $ (2,357 )   $ (1,676 )
 
                 

 

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The Operating Partnership’s principal source of cash flows is from the operation of its properties. The Operating Partnership does not restate its cash flow for discontinued operations.
The net decrease of $35.3 million in cash flows from operating activities of the Operating Partnership during the year ended December 31, 2010 compared to the year ended December 31, 2009 is primarily the result of the following:
   
a decrease in average occupancy from 89.3% during the year ended December 31, 2009 to 87.6% during the year ended December 31, 2010;
   
a decrease in the number of operating properties due to dispositions. We sold a total of eight properties during the year ended December 31, 2010;
   
timing of cash receipts from our tenants and cash expenditures in the normal course of operations.
The net increase of $69.4 million in cash flows used in investing activities of the Operating Partnership during the year ended December 31, 2010 compared to the year ended December 31, 2009 is primarily attributable to the following:
   
$50.7 million of net cash paid related to the acquisition of Three Logan Square ($50.3 million) and the parcel of land in Gibbsboro, New Jersey ($0.4 million);
   
a decrease in cash of $1.4 million due to the deconsolidation of variable interest entities;
   
receipt of funds placed in escrow during the last quarter of 2008 related to the Cira South Garage amounting to $31.4 million which was also used to finance the development of the Cira South Garage during the first quarter of 2009;
   
a decrease in net proceeds from sales of properties from $101.3 million during the year ended December 31, 2009 to $50.1 million during the year ended December 31, 2010;
   
a decrease in cash distributions from unconsolidated Real Estate Ventures of $10.9 million during the year ended December 31, 2010 compared to the year ended December 31, 2009. This was offset by the $9.8 million decrease in contributions made to unconsolidated Real Estate Ventures during the year ended December 31, 2010 compared to the year ended December 31, 2009;
   
advances made for purchase of tenant assets, net of repayment, amounting to $1.7 million; and
   
a $0.8 million loan was provided to an unconsolidated Real Estate Venture partner.
The net increase in cash used in investing activities was partially offset by the following transactions:
   
receipt of $40.0 million of proceeds from repayment of notes receivable; and
   
decreased capital expenditures for tenant and building improvements and leasing commissions by $28.9 million during the year ended December 31, 2010 compared to the year ended December 31, 2009.
The net decrease of $118.4 million in cash used in financing activities of the Operating Partnership during the year ended December 31, 2010 compared to the year ended December 31, 2009 is mainly due to the following:
   
an increase of $106.3 million in proceeds from mortgage notes payable during the year ended December 31, 2010 compared to the year ended December 31, 2009, primarily due to the receipt of the $256.1 million from the forward financing entered into during 2009. In addition, repayments of mortgage notes payable decreased from $84.1 million during the year ended December 31, 2009 to $52.0 million during the year ended December 31, 2010;
 
   
a decrease in repayments of the Credit Facility and unsecured notes of $808.0 million during the year ended December 31, 2010 compared to the year ended December 31, 2009, offset by the decrease in proceeds from the Credit Facility and unsecured term loan borrowings of $665.0 million;

 

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net settlement of hedge transactions during the year ended December 31, 2009 amounting to $5.0 million; and
   
a decrease in debt financing costs of $24.0 million during the year ended December 31, 2010 compared to the year ended December 31, 2009, primarily due to the $17.7 million forward financing commitment fee paid in 2009.
The above described net decrease in cash used in financing activities was partially offset by the following transactions:
   
decrease in net proceeds received from the issuance of common shares of the Parent Company amounting to $171.5 million during the year ended December 31, 2010 compared to the year ended December 31, 2009; and
   
increase in distributions paid by the Parent Company to its shareholders and on non-controlling interests from $70.6 million during the year ended December 31, 2009 to $89.0 during the year ended December 31, 2010.
Capitalization
Indebtedness
The Operating Partnership is the issuer of our unsecured notes and the Parent Company has fully and unconditionally guaranteed the payment of principal and interest on the notes. During the year ended December 31, 2010, the Operating Partnership repurchased $82.7 million of its unsecured Notes as summarized in the table below:
                                 
    Repurchase                     Deferred Financing  
Notes   Amount     Principal     Loss     Amortization  
2010 5.625% Notes
  $ 2,002     $ 1,942     $ 37     $ 3  
2011 3.875% Notes (a)
    68,741       68,125       1,762       281  
2012 5.750% Notes
    13,333       12,625       431       32  
 
                       
 
  $ 84,076     $ 82,692     $ 2,230     $ 316  
 
                       
     
(a)  
On October 20, 2011, the holders of the Guaranteed Exchangeable Notes have the right to request the redemption of all or a portion of the Guaranteed Exchangeable Notes they hold at a price equal to 100% of the principal amount plus accrued and unpaid interest. Accordingly, the Guaranteed Exchangeable Notes have been presented with an October 20, 2011 maturity date.
On August 26, 2010, the Operating Partnership received $254.0 million of gross proceeds from a $256.5 million forward financing commitment the Operating Partnership obtained on June 29, 2009. The Operating Partnership paid a $17.7 million commitment fee in connection with this commitment. The loan proceeds, together with the commitment fee, had been escrowed with an institutional trustee pending the completion of the IRS Philadelphia Campus and the Cira South Garage as well as the commencement of the leases at these facilities. The financing consists of two separate loans: $209.7 million secured by the IRS Philadelphia Campus and $46.8 million secured by the Cira South Garage. The lender held back $2.5 million of the loan proceeds pending completion of certain conditions related to the IRS Philadelphia Campus and the Cira South Garage. As of December 31, 2010, the Operating Partnership has received $2.1 million of the amounts held back. The loans are non-recourse and are secured by the IRS Philadelphia Campus and the Cira South Garage, respectively. The loans bear interest at 5.93% with interest only through September 10, 2010 and thereafter require principal and interest monthly payments though its maturity in September 2030. The Operating Partnership used the loan proceeds to reduce borrowings under its Credit Facility and for general corporate purposes.

 

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As of December 31, 2010, the Operating Partnership had approximately $2.4 billion of outstanding indebtedness. The table below summarizes the Operating Partnership’s mortgage notes payable, its unsecured notes and its Credit Facility at December 31, 2010 and December 31, 2009:
                 
    December 31,     December 31,  
    2010     2009  
    (dollars in thousands)  
Balance:
               
Fixed rate (includes variable swapped to fixed)
  $ 1,929,962     $ 2,246,375  
Variable rate — unhedged
    504,610       214,836  
 
           
Total
  $ 2,434,572     $ 2,461,211  
 
           
 
               
Percent of Total Debt:
               
Fixed rate (includes variable swapped to fixed)
    79.3 %     91.3 %
Variable rate — unhedged
    20.7 %     8.7 %
 
           
Total
    100 %     100 %
 
           
 
               
Weighted-average interest rate at period end:
               
Fixed rate (includes variable swapped to fixed)
    6.4 %     5.9 %
Variable rate — unhedged
    1.6 %     2.6 %
Total
    5.4 %     5.6 %
The variable rate debt shown above generally bears interest based on various spreads over a LIBOR term selected by the Operating Partnership.
The Operating Partnership uses Credit Facility borrowings for general business purposes, including the acquisition, development and redevelopment of properties and the repayment of other debt. It has the option to increase the maximum borrowings under its Credit Facility to $800.0 million subject to the absence of any defaults and its ability to obtain additional commitments from its existing or new lenders.
The interest rates incurred under our revolving Credit Facility and term loan are subject to modification depending on our rating status with qualified agencies.
As of December 31, 2010, the Operating Partnership had $183.0 million of borrowings and $11.2 million of letters of credit outstanding under the Credit Facility, leaving $405.8 million of unused availability. For the years ended December 31, 2010 and 2009, the Operating Partnership’s weighted average interest rates, including the effects of interest rate hedges discussed in Note 7 to the consolidated financial statements included herein, and including both the new Credit Facility and prior credit facility, were 1.03% and 2.08% per annum, respectively.
The Credit Facility contains financial and non-financial covenants, including covenants that relate to the Operating Partnership’s incurrence of additional debt; the granting of liens; consummation of mergers and consolidations; the disposition of assets and interests in subsidiaries; the making of loans and investments; and the payment of dividends. The restriction on dividends permits the Operating Partnership to make distributions to the Parent Company based on the greater of (i) an amount required for the Parent Company to retain its qualification as a REIT and (ii) 95% of the Operating Partnership’s funds from operations. The Credit Facility also contains financial covenants that require the Operating Partnership to maintain an interest coverage ratio, a fixed charge coverage ratio, an unsecured debt ratio and an unencumbered cash flow ratio above certain specified minimum levels; to maintain net worth above an amount determined on a specified formula; and to maintain a leverage ratio and a secured debt ratio below certain maximum levels. Another financial covenant limits the ratio of unsecured debt to unencumbered properties. The Operating Partnership continuously monitors its compliance with the covenants. Certain of the covenants restrict the Operating Partnership’s ability to obtain alternative sources of capital. The Operating Partnership was in compliance with all covenants as of December 31, 2010.
The indenture under which the Operating Partnership issued its unsecured Notes contains financial covenants, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 40%, (3) a debt service coverage ratio of greater than 1.5 to 1.0 and (4) an unencumbered asset value of not less than 150% of unsecured debt. The Operating Partnership was in compliance with all covenants as of December 31, 2010.
The Operating Partnership has mortgage loans that are collateralized by certain of its Properties. Payments on mortgage loans are generally due in monthly installments of principal and interest, or interest only. The Operating Partnership intends to refinance or repay its mortgage loans as they mature through the use of proceeds from selective Property sales and secured or unsecured borrowings. However, in the current and future economic environment one or more of these sources may not be available on attractive terms or at all.

 

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The Parent Company’s charter documents do not limit the amount or form of indebtedness that the Operating Partnership may incur, and its policies on debt incurrence are solely within the discretion of the Parent Company’s Board of Trustees, subject to financial covenants in the Credit Facility, indenture and other credit agreements.
As of December 31, 2010, the Operating Partnership had guaranteed repayment of approximately $0.7 million of loans on behalf of one Real Estate Venture. See Item 2. Properties — Real Estate Ventures. The Operating Partnership also provides customary environmental indemnities and completion guarantees in connection with construction and permanent financing both for its own account and on behalf of certain of the Real Estate Ventures.
Equity
On December 2, 2010, the Operating Partnership declared a distribution of $0.15 per Class A common unit, totaling $20.3 million, which was paid on January 20, 2011 to unitholders of record as of January 6, 2011.
On December 2, 2010, the Operating Partnership declared distributions on its Series D Preferred Mirror Units and Series E Preferred Mirror Units to holders of record as of December 30, 2010. These units are entitled to a preferential return of 7.50% and 7.375%, respectively. Distributions paid on January 18, 2011 to holders of Series D Preferred Mirror Units and Series E Preferred Mirror Units totaled $0.9 million and $0.1 million, respectively.
From the inception of the Offering Program in March 2010 through December 31, 2010, the Parent Company contributed net proceeds of $70.8 million from the sale of 5,742,268 shares to the Operating Partnership in exchange for the issuance of 5,742,268 common partnership units to the Parent Company. The Operating Partnership used the net proceeds from the sales to reduce borrowings under the Credit Facility and for general corporate purposes.
On August 5, 2010, the Operating Partnership issued 7,111,112 Class F (2010) units as part of its consideration for the acquisition of Three Logan Square. The Class F (2010) units were valued based on the closing market price of the Parent Company’s common shares on the acquisition date of $11.54 less the annual dividend rate per share of $0.60 to reflect that these units do not begin to accrue a dividend prior to the first anniversary of their issuance. The Class F (2010) units are subject to redemption at the option of holder after August 5, 2011. The Operating Partnership may, at its option, satisfy the redemption either for an amount, per unit, of cash equal to the market price of one Parent Company common share (based on the five-day trading average ending on the date of the redemption) or for one Parent Company common share. The Class F (2010) units do not begin to accrue dividends and are not entitled to income or loss allocations prior to August 5, 2011. Thereafter, the Class F (2010) units will receive the same dividend that the Parent Company pays on its common shares.
The Parent Company did not purchase any shares during the year ended December 31, 2010 and accordingly, during the year ended December 31, 2010, the Operating Partnership did not repurchase any units in connection with the Parent Company’s share repurchase program.
Together with the Operating Partnership, the Parent Company maintains a shelf registration statement that registered common shares, preferred shares, depositary shares and warrants and unsecured debt securities. Subject to the Company’s ongoing compliance with securities laws, if warranted by market conditions, the Company may offer and sell equity and debt securities from time to time under the shelf registration statement.

 

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Short- and Long-Term Liquidity
The Operating Partnership believes that its cash flow from operations is adequate to fund its short-term liquidity requirements, excluding principal payments under its debt obligations. Cash flow from operations is generated primarily from rental revenues and operating expense reimbursements from tenants and management services income from providing services to third parties. The Operating Partnership intends to use these funds to meet short-term liquidity needs, which are to fund operating expenses, recurring capital expenditures, tenant allowances, leasing commissions, interest expense and the minimum distributions to the Parent Company required to maintain the Parent Company’s REIT qualification under the Internal Revenue Code. The Operating Partnership expects to meet short-term scheduled debt maturities through borrowings under the Credit Facility and proceeds from asset dispositions. As of December 31, 2010, the Operating Partnership has $1,722.3 million of unsecured debt and $712.2 million of mortgage debt of which $425.8 million and $128.5 million, respectively, are scheduled to mature through December 2011. The Operating Partnership extended the maturity date of the $183.0 million Term Loan from October 18, 2010 to June 29, 2011. The Operating Partnership may extend the maturity dates of the Credit Facility and the term loan to June 29, 2012. For the remaining debt maturities, the Operating Partnership expects to have sufficient capacity under its Credit Facility but it will also evaluate other listed sources to fund these maturities.
The Operating Partnership expects to meet its long-term liquidity requirements, such as for property acquisitions, development, investments in real estate ventures, scheduled debt maturities, major renovations, expansions and other significant capital improvements, through cash from operations, borrowings under the Credit Facility, additional secured and unsecured indebtedness, the issuance of equity securities, contributions from joint venture investors and proceeds from asset dispositions.
Many commercial real estate lenders have substantially tightened underwriting standards or have withdrawn from the lending marketplace. Also, spreads in the investment grade bond market remain wider than historic spreads. These circumstances have impacted liquidity in the debt markets, making financing terms less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. As a result, the Operating Partnership expects debt financings will be more difficult to obtain and that borrowing costs on new and refinanced debt will be more expensive. Moreover, the volatility in the financial markets, in general, will make it more difficult or costly, for it to raise capital through the issuance of common stock, preferred stock or other equity instruments or through public issuances of debt securities from its shelf registration statement as it has been able to do in the past. Such conditions would also limit its ability to raise capital through asset dispositions at attractive prices or at all.
Off-Balance Sheet Arrangements
We are not dependent on any off-balance sheet financing arrangements for liquidity. Our off-balance sheet arrangements are discussed in Note 4 to the financial statements, “Investment in Unconsolidated Real Estate Ventures”. Additional information about the debt of our unconsolidated Real Estate Ventures is included in “Item 2 — Properties”.
Inflation
A majority of the Operating Partnership’s leases provide for tenant reimbursement of real estate taxes and operating expenses either on a triple net basis or over a base amount. In addition, many of its office leases provide for fixed base rent increases. The Operating Partnership believes that inflationary increases in expenses will be partially offset by expense reimbursement and contractual rent increases.

 

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Commitments and Contingencies
The following table outlines the timing of payment requirements related to the Operating Partnership’s contractual commitments as of December 31, 2010.
                                         
    Payments by Period (in thousands)  
            Less than                     More than  
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
 
                                       
Mortgage notes payable (a)
  $ 712,246     $ 128,544     $ 112,973     $ 113,357     $ 357,372  
Revolving credit facility
    183,000       183,000                    
Unsecured term loan
    183,000       183,000                    
Unsecured debt (a)
    1,356,326             175,200       742,681       438,445  
Ground leases (b)
    298,712       1,818       5,545       5,727       285,622  
Interest expense (d)
    684,842       122,031       204,038       191,426       167,347  
Development contracts (c)
    5,519       5,519                    
Other liabilities
    9,221                         9,221  
 
                             
 
  $ 3,432,866     $ 623,912     $ 497,756     $ 1,053,191     $ 1,258,007  
 
                             
     
(a)  
Amounts do not include unamortized discounts and/or premiums.
 
(b)  
Future minimum rental payments under the terms of all non-cancelable ground leases under which we are the lessee are expensed on a straight-line basis regardless of when payments are due. The table above does not include the future minimum annual rental payments related to the ground lease that we assumed in connection with the acquisition of Three Logan Square as the amounts cannot be determined at this time as discussed below.
 
(c)  
Represents contractual obligations for certain development projects and does not contemplate all costs expected to be incurred. to be incurred for such developments
 
(d)  
Variable rate debt future interest expense commitments are calculated using December 31, 2010 interest rates.
The Operating Partnership has ground tenancy rights under a long term ground lease agreement through its acquisition of Three Logan Square on August 5, 2010. The annual rental payment under this ground lease is ten dollars through August 2022 which is when the initial term of the ground lease will end. After the initial term, the Operating Partnership has the option to renew the lease until 2091. The Operating Partnership also has the option to purchase the land at fair market value after providing a written notice to the owner. The annual rental payment after 2022 will be adjusted at the lower of $3.0 million or the prevailing market rent at that time until 2030. Subsequent to 2030, the annual rental payment will be adjusted at the lower of $4.0 million or the prevailing market rent at that time until 2042 and at fair market value until 2091. The Operating Partnership believes that based on conditions as of the date the lease was assigned (August 5, 2010), the lease will reset to market after the initial term. Using the estimated fair market rent as of the date of the acquisition over the extended term of the ground lease (assuming the purchase option is not exercised), the future payments will aggregate $27.4 million. The Operating Partnership has not included the amounts in the table above since such amounts are not fixed and determinable.
As part of the Operating Partnership’s September 2004 acquisition of a portfolio of properties from The Rubenstein Company (which the Operating Partnership refers to as the “TRC acquisition”), the Operating Partnership acquired interest in Two Logan Square, a 706,288 square foot office building in Philadelphia, primarily through its ownership of a second and third mortgage secured by this property. This property is consolidated as the borrower is a variable interest entity and the Operating Partnership, through its ownership of the second and third mortgages is the primary beneficiary. It currently does not expect to take title to Two Logan Square until, at the earliest, September 2019. If the Operating Partnership takes fee title to Two Logan Square upon a foreclosure of its mortgage, the Operating Partnership has agreed to pay an unaffiliated third party that holds a residual interest in the fee owner of this property an amount equal to $2.9 million. On the TRC acquisition, the Operating Partnership recorded a liability of $0.7 million and this amount will accrete up to $2.9 million through September 2019. As of December 31, 2010, the Operating Partnership has a balance of $1.2 million for this liability in its consolidated balance sheet.
The Operating Partnership has been audited by the Internal Revenue Service (the “IRS”) for its 2004 tax year. The audit concerns the tax treatment of the TRC acquisition in September 2004 in which the Operating Partnership acquired a portfolio of properties through the acquisition of a limited partnership. On December 17, 2010, the Operating Partnership received notice that the IRS proposed an adjustment to the allocation of recourse liabilities allocated to the contributor of the properties. The Operating Partnership intends to appeal the proposed adjustment. The proposed adjustment, if upheld, would not result in a material tax liability for the Operating Partnership. However, an adjustment could raise a question as to whether a contributor of partnership interests in the 2004 transaction could assert a claim against the Operating Partnership under the tax protection agreement entered into as part of the transaction.

 

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As part of the Operating Partnership’s 2006 Prentiss acquisition and the TRC acquisition in 2004, it agreed not to sell certain of the properties it acquired in transactions that would trigger taxable income to the former owners. In the case of the TRC acquisition, the Operating Partnership agreed not to sell acquired properties for periods up to 15 years from the date of the TRC acquisition as follows at December 31, 2010: One Rodney Square and 130/150/170 Radnor Financial Center (January 2015); and One Logan Square, Two Logan Square and Radnor Corporate Center (January 2020). In the Prentiss acquisition, the Operating Partnership assumed the obligation of Prentiss not to sell Concord Airport Plaza before March 2018. The Operating Partnership’s agreements generally provide that we may dispose of the subject properties only in transactions that qualify as tax-free exchanges under Section 1031 of the Internal Revenue Code or in other tax deferred transactions. If the Operating Partnership was to sell a restricted property before expiration of the restricted period in a non-exempt transaction, it would be required to make significant payments to the parties who sold the applicable property to the Operating Partnership for tax liabilities triggered to them.
As part of the Operating Partnership’s acquisition of properties from time to time in tax-deferred transactions, it has agreed to provide certain of the prior owners of the acquired properties with the right to guarantee its indebtedness. If the Operating Partnership was to seek to repay the indebtedness guaranteed by the prior owner before the expiration of the applicable agreement, it will be required to provide the prior owner an opportunity to guarantee a qualifying replacement debt. These debt maintenance agreements may limit its ability to refinance indebtedness on terms that will be favorable to the Operating Partnership.
In connection with the development of the IRS Philadelphia Campus and the Cira South Garage, during 2008, the Operating Partnership entered into a historic tax credit and new markets tax credit arrangement, respectively. The Operating Partnership is required to be in compliance with various laws, regulations and contractual provisions that apply to its historic and new market tax credit arrangements. Non-compliance with applicable requirements could result in projected tax benefits not being realized and therefore, require a refund to USB or reduction of investor capital contributions, which are reported as deferred income in the Operating Partnership’s consolidated balance sheet, until such time as its obligation to deliver tax benefits is relieved. The remaining compliance periods for its tax credit arrangements runs through 2015. The Operating Partnership does not anticipate that any material refunds or reductions of investor capital contributions will be required in connection with these arrangements.
The Operating Partnership invests in properties and regularly incurs capital expenditures in the ordinary course of its business to maintain the properties. The Operating Partnership believes that such expenditures enhance its competitiveness. The Operating Partnership also enters into construction, utility and service contracts in the ordinary course of its business which may extend beyond one year. These contracts typically provide for cancellation with insignificant or no cancellation penalties.
Interest Rate Risk and Sensitivity Analysis
The analysis below presents the sensitivity of the market value of the Operating Partnership’s financial instruments to selected changes in market rates. The range of changes chosen reflects its view of changes which are reasonably possible over a one-year period. Market values are the present value of projected future cash flows based on the market rates chosen.
The Operating Partnership’s financial instruments consist of both fixed and variable rate debt. As of December 31, 2010, its consolidated debt consisted of $652.2 million in fixed rate mortgages, $60.0 million of variable rate mortgages, $183.0 million in borrowings under its Credit Facility, $183.0 million borrowings in an unsecured term loan and $1,356.3 million in unsecured notes (before reduction of discounts) of which $1,277.7 million are fixed rate borrowings and $78.6 million are variable rate borrowings. All financial instruments were entered into for other than trading purposes and the net market value of these financial instruments is referred to as the net financial position. Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position.
As of December 31, 2010, based on prevailing interest rates and credit spreads, the fair value of the Operating Partnership’s unsecured notes was $1.3 billion. For sensitivity purposes, a 100 basis point change in the discount rate equates to a change in the total fair value of its debt, including the Notes, of approximately $12.7 million at December 31, 2010.
From time to time or as the need arises, the Operating Partnership uses derivative instruments to manage interest rate risk exposures and not for speculative purposes. All of the Operating Partnership’s interest rate swap agreements matured on October 18, 2010.
The total carrying value of the Operating Partnership’s variable rate debt was approximately $444.6 million and $353.6 million at December 31, 2010 and December 31, 2009, respectively. The total fair value of the Operating Partnership’s debt was approximately $432.6 million and $341.2 million at December 31, 2010 and December 31, 2009, respectively. For sensitivity purposes, a 100 basis point change in the discount rate equates to a change in the total fair value of its debt of approximately $4.4 million at December 31, 2010, and a 100 basis point change in the discount rate equates to a change in the total fair value of its debt of approximately $1.5 million at December 31, 2009.

 

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If market rates of interest were to increase by 1%, the fair value of the Operating Partnership’s outstanding fixed-rate mortgage debt would decrease by approximately $33.4 million. If market rates of interest were to decrease by 1%, the fair value of its outstanding fixed-rate mortgage debt would increase by approximately $36.5 million.
At December 31, 2010, the Operating Partnership’s outstanding variable rate debt based on LIBOR totaled approximately $444.6 million. At December 31, 2010, the interest rate on its variable rate debt was approximately 1.1%. If market interest rates on its variable rate debt change by 100 basis points, total interest expense would change by approximately $1.1 million for the year ended December 31, 2010.
These amounts were determined solely by considering the impact of hypothetical interest rates on the Operating Partnership’s financial instruments. Due to the uncertainty of specific actions the Operating Partnership may undertake to minimize possible effects of market interest rate increases, this analysis assumes no changes in its applicable financial instruments or structure.
Item 7A.  
Quantitative and Qualitative Disclosure About Market Risk
See discussion in Management’s Discussion and Analysis included in Item 7 herein.
Item 8.  
Financial Statements and Supplementary Data
The financial statements and supplementary financial data of Brandywine Realty Trust and Brandywine Operating Partnership, L.P. and the reports thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, with respect thereto are listed under Item 15(a) and filed as part of this Annual Report on Form 10-K. See Item 15.
Item 9.  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.  
Controls and Procedures
Controls and Procedures (Parent Company)
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Parent Company’s management, including its principal executive officer and principal financial officer, the Parent Company’s management conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, the principal executive officer and the principal financial officer of the Parent Company concluded that the Parent Company’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
The management of the Parent Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of the Parent Company’s management, including its principal executive officer and principal financial officer, the Parent Company’s management conducted an evaluation of the effectiveness of the its internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control — Integrated Framework, the Parent Company’s management concluded that the its internal control over financial reporting was effective as of December 31, 2010.

 

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Management of the Parent Company has excluded Three Logan Square from its assessment of internal control over financial reporting as of December 31, 2010 because it was acquired by the Parent Company in a purchase business combination during 2010. Three Logan Square is a wholly-owned property of the Parent Company whose total assets and total revenue represent, 2.7% and 1.3%, respectively, of the Parent Company’s consolidated financial statement amounts as of and for the year ended December 31, 2010.
The effectiveness of the Parent Company’s internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their reports which are included herein.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Parent Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Parent Company’s internal control over financial reporting.
Controls and Procedures (Operating Partnership)
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of the Operating Partnership’s management, including its principal executive officer and principal financial officer, the Operating Partnership’s management conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, the principal executive officer and the principal financial officer of Operating Partnership concluded that the Operating Partnership’s disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
The management of the Operating Partnership is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of the Operating Partnership’s management, including its principal executive officer and principal financial officer, the Operating Partnership’s management conducted an evaluation of the effectiveness its internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control — Integrated Framework, the Operating Partnership’s management concluded that the its internal control over financial reporting was effective as of December 31, 2010.
Management of the Operating Partnership has excluded Three Logan Square from its assessment of internal control over financial reporting as of December 31, 2010 because it was acquired by the Operating Partnership in a purchase business combination during 2010. Three Logan Square is a wholly-owned property of the Operating Partnership whose total assets and total revenue represent, 2.7% and 1.3%, respectively, of the Operating Partnership’s consolidated financial statement amounts as of and for the year ended December 31, 2010.
The effectiveness of the Operating Partnership’s internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their reports which are included herein.
Changes in Internal Control over Financial Reporting.
There have not been any changes in the Operating Partnership’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
Item 9B.  
Other Information
None.

 

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PART III
Item 10.  
Directors, Executive Officers and Corporate Governance
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2011 Annual Meeting of Shareholders.
Item 11.  
Executive Compensation
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2011 Annual Meeting of Shareholders.
Item 12.  
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2011 Annual Meeting of Shareholders.
Item 13.  
Certain Relationships and Related Transactions, and Director Independence
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2011 Annual Meeting of Shareholders.
Item 14.  
Principal Accounting Fees and Services
Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its 2011 Annual Meeting of Shareholders.

 

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PART IV
Item 15.  
Exhibits and Financial Statement Schedules.
  (a)  
1. and 2. Financial Statements and Schedules
The financial statements and schedules of Brandywine Realty Trust and Brandywine Operating Partnership listed below are filed as part of this annual report on the pages indicated.

 

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Index to Financial Statements and Schedules
         
    Page  
 
       
    F-1  
 
       
    F-2  
 
       
Financial Statements of Brandywine Realty Trust
       
 
       
    F-3  
 
       
    F-4  
 
       
    F-5  
 
       
    F-6  
 
       
    F-7  
 
       
Financial Statements of Brandywine Operating Partnership, L.P.
       
 
       
    F-9  
 
       
    F-10  
 
       
    F-11  
 
       
    F-12  
 
       
    F-13  
 
       
    F-15  
 
       
    F-57  
 
       
    F-58  
 
       

 

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3. Exhibits
         
Exhibits No.   Description
  3.1.1    
Amended and Restated Declaration of Trust of Brandywine Realty Trust (amended and restated as of May 12, 1997) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated June 9, 1997 and incorporated herein by reference)
       
 
  3.1.2    
Articles of Amendment to Declaration of Trust of Brandywine Realty Trust (September 4, 1997) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated September 10, 1997 and incorporated herein by reference)
       
 
  3.1.3    
Articles of Amendment to Declaration of Trust of Brandywine Realty Trust (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated June 3, 1998 and incorporated herein by reference)
       
 
  3.1.4    
Articles Supplementary to Declaration of Trust of Brandywine Realty Trust (September 28, 1998) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 13, 1998 and incorporated herein by reference)
       
 
  3.1.5    
Articles of Amendment to Declaration of Trust of Brandywine Realty Trust (March 19, 1999) (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference)
       
 
  3.1.6    
Articles Supplementary to Declaration of Trust of Brandywine Realty Trust (April 19, 1999) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 26, 1999 and incorporated herein by reference)
       
 
  3.1.7    
Articles Supplementary to Declaration of Trust of Brandywine Realty Trust (December 30, 2003) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-A dated December 29, 2003 and incorporated herein by reference)
       
 
  3.1.8    
Articles Supplementary to Declaration of Trust of Brandywine Realty Trust (February 5, 2004) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-A dated February 5, 2004 and incorporated herein by reference)
       
 
  3.1.9    
Articles of Amendment to Declaration of Trust of Brandywine Realty Trust (October 3, 2005) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 4, 2005 and incorporated herein by reference)
       
 
  3.1.10    
Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (the “Operating Partnership”) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated December 17, 1997 and incorporated herein by reference)
       
 
  3.1.11    
First Amendment to Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated December 17, 1997 and incorporated herein by reference)
       
 
  3.1.12    
Second Amendment to the Amended and Restated Agreement of Limited Partnership Agreement of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 13, 1998 and incorporated herein by reference)
       
 
  3.1.13    
Third Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated May 14, 1998 and incorporated herein by reference)
       
 
  3.1.14    
Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 13, 1998 and incorporated herein by reference)
       
 
  3.1.15    
Fifth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 13, 1998 and incorporated herein by reference)

 

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Exhibits No.   Description
  3.1.16    
Sixth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 13, 1998 and incorporated herein by reference)
       
 
  3.1.17    
Seventh Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference)
       
 
  3.1.18    
Eighth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference)
       
 
  3.1.19    
Ninth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference)
       
 
  3.1.20    
Tenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference)
       
 
  3.1.21    
Eleventh Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference)
       
 
  3.1.22    
Twelfth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference)
       
 
  3.1.23    
Thirteenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated September 21, 2004 and incorporated herein by reference)
       
 
  3.1.24    
Fourteenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated January 10, 2006 and incorporated herein by reference)
       
 
  3.1.25    
Fifteenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated August 18, 2006 and incorporated herein by reference)
       
 
  3.1.26    
Sixteenth Amendment to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated August 9, 2010 and incorporated herein by reference)
       
 
  3.1.27    
List of partners of Brandywine Operating Partnership, L.P.
       
 
  3.2    
Amended and Restated Bylaws of Brandywine Realty Trust (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated June 4, 2010 and incorporated herein by reference)
       
 
  4.1    
Form of 7.50% Series C Cumulative Redeemable Preferred Share Certificate (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-A dated December 29, 2003 and incorporated herein by reference)
       
 
  4.2    
Form of 7.375% Series D Cumulative Redeemable Preferred Share Certificate (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-A dated February 5, 2004 and incorporated herein by reference)
       
 
  4.3.1    
Indenture dated October 22, 2004 by and among Brandywine Operating Partnership, L.P., Brandywine Realty Trust, certain subsidiaries of Brandywine Operating Partnership, L.P. named therein and The Bank of New York, as Trustee (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 22, 2004 and incorporated herein by reference)
       
 
  4.3.2    
First Supplemental Indenture dated as of May 25, 2005 by and among Brandywine Operating Partnership, L.P., Brandywine Realty Trust, certain subsidiaries of Brandywine Operating Partnership, L.P. named therein and The Bank of New York, as Trustee (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated May 26, 2005 and incorporated herein by reference)
       
 
  4.3.3    
Second Supplemental Indenture dated as of October 4, 2006 by and among Brandywine Operating Partnership, L.P., Brandywine Realty Trust and the Bank of New York, as Trustee (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 4, 2006 and incorporated herein by reference)

 

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Exhibits No.   Description
  4.4    
Form of $250,000,000 5.40% Guaranteed Note due 2014 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 22, 2004 and incorporated herein by reference)
       
 
  4.5    
Form of $300,000,000 aggregate principal amount of 5.75% Guaranteed Note due 2012 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated March 28, 2006 and incorporated herein by reference).
       
 
  4.6    
Form of $250,000,000 aggregate principal amount of 6.00% Guaranteed Note due 2016 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated March 28, 2006 and incorporated herein by reference).
       
 
  4.7    
Form of 3.875% Exchangeable Guaranteed Notes due 2026 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 4, 2006 and incorporated herein by reference)
       
 
  4.8    
Form of $300,000,000 aggregate principal amount of 5.70% Guaranteed Notes due 2017 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 30, 2007 and incorporated herein by reference)
       
 
  4.9    
Form of $250,000,000 aggregate principal amount of 7.50% Guaranteed Notes due 2015 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated September 25, 2009 and incorporated herein by reference)
       
 
  10.1    
Second Amended and Restated Revolving Credit Agreement dated as of June 29, 2007 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated June 29, 2007 and incorporated herein by reference)
       
 
  10.2    
Term Loan Agreement dated as of October 15, 2007 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 16, 2007 and incorporated herein by reference)
       
 
  10.3    
Contribution Agreement dated as of July 10, 1998 (with Donald E. Axinn) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated July 30, 1998 and incorporated herein by reference)
       
 
  10.4    
First Amendment to Contribution Agreement (with Donald E. Axinn) (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 13, 1998 and incorporated herein by reference)
       
 
  10.5    
Modification Agreement dated as of June 20, 2005 between Brandywine Operating Partnership, L.P. and Donald E. Axinn (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated June 21, 2005 and incorporated herein by reference)
       
 
  10.6    
Contribution Agreement dated August 18, 2004 with TRC Realty, Inc.-GP, TRC-LB LLC and TRC Associates Limited Partnership (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated August 19, 2004 and incorporated herein by reference)
       
 
  10.7    
Registration Rights Agreement (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated September 21, 2004 and incorporated herein by reference)
       
 
  10.8    
Tax Protection Agreement (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated September 21, 2004 and incorporated herein by reference)
       
 
  10.9    
Registration Rights Agreement dated as of October 3, 2005 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 4, 2005 and incorporated herein by reference)
       
 
  10.10    
Letter to Cohen & Steers Capital Management, Inc. relating to waiver of share ownership limit (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference)
       
 
  10.11    
Registration Rights Agreement dated as of October 4, 2006 relating to 3.875% Exchangeable Guaranteed Notes due 2026 (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 4, 2006 and incorporated herein by reference)
       
 
  10.12    
Common Share Delivery Agreement (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated October 4, 2006 and incorporated herein by reference)
       
 
  10.13    
Sales Agency Financing Agreement dated as of March 10, 2010 with BNY Mellon Capital Markets, LLC (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated March 10, 2010 and incorporated herein by reference)

 

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Exhibits No.   Description
  10.14    
Sales Agency Financing Agreement dated as of March 10, 2010 with Citigroup Global Markets Inc. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated March 10, 2010 and incorporated herein by reference)
       
 
  10.15    
Sales Agency Financing Agreement dated as of March 10, 2010 with Deutsche Bank Securities Inc. (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated March 10, 2010 and incorporated herein by reference)
       
 
  10.16    
Registration Rights Agreement (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated August 9, 2010 and incorporated herein by reference)
       
 
  10.17    
Amended and Restated Employment Agreement dated as of February 9, 2007 of Gerard H. Sweeney** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated February 14, 2007 and incorporated herein by reference)
       
 
  10.18    
Amended and Restated 1997 Long-Term Incentive Plan (as amended effective June 2, 2010)** (previously filed as an exhibit to Brandywine Realty Trust’s Registration Statement on Form S-8, File No. 333-167266 and incorporated herein by reference)
       
 
  10.19    
Amended and Restated Executive Deferred Compensation Plan effective March 25, 2004** (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference)
       
 
  10.20    
Amended and Restated Executive Deferred Compensation Plan effective January 1, 2009** (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 2008 and incorporated herein by reference)
       
 
  10.21    
2007 Non-Qualified Employee Share Purchase Plan** (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-Q for the quarter ended March 31, 2007 and incorporated herein by reference)
       
 
  10.22    
Performance Share Award to Howard M. Sipzner** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated December 12, 2006 and incorporated herein by reference)
       
 
  10.23    
2007 Performance Share Award to Gerard H. Sweeney** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated February 14, 2007 and incorporated herein by reference)
       
 
  10.24    
Form of 2007 Performance Share Award to executive officers (other than the President and Chief Executive Officer)** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated February 14, 2007 and incorporated herein by reference)
       
 
  10.25    
Summary of Trustee Compensation** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated March 17, 2006 and incorporated herein by reference)
       
 
  10.26    
Form of Performance Share Award to the President and CEO and Executive Vice President and CFO** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 11, 2008 and incorporated herein by reference)
       
 
  10.27    
Form of Performance Share Award to the executive officers (other than the President and CEO and Executive Vice President and CFO)** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 11, 2008 and incorporated herein by reference)
       
 
  10.28    
Form of Non-Qualified Share Option Agreement to the President and CEO and Executive Vice President and CFO** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 11, 2008 and incorporated herein by reference)
       
 
  10.29    
Form of Non-Qualified Share Option Agreement to the executive officers (other than the President and CEO and Executive Vice President and CFO)** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 11, 2008 and incorporated herein by reference)
       
 
  10.30    
Form of Incentive Stock Option Agreement to the President and CEO and Executive Vice President and CFO ** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 11, 2008 and incorporated herein by reference)
       
 
  10.31    
Form of Incentive Stock Option Agreement to the executive officers (other than the President and CEO and Executive Vice President and CFO)** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 11, 2008 and incorporated herein by reference)

 

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Exhibits No.   Description
  10.32    
Form of Restricted Share Award for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 1, 2009 and incorporated herein by reference)
       
 
  10.33    
Form of Restricted Performance Share Unit and Dividend Equivalent Rights Award Agreement for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 1, 2009 and incorporated herein by reference)
       
 
  10.34    
2009-2011 Restricted Performance Share Unit Program** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 1, 2009 and incorporated herein by reference)
       
 
  10.35    
Forms of Non-Qualified Share Option Agreement for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 1, 2009 and incorporated herein by reference)
       
 
  10.36    
Forms of Incentive Stock Option Agreement for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated April 1, 2009 and incorporated herein by reference)
       
 
  10.37    
Form of Amended and Restated Change of Control Agreement with Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K filed on February 4, 2010 and incorporated herein by reference)
       
 
  10.38    
Employment Agreement dated February 3, 2010 with Howard M. Sipzner** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K filed on February 4, 2010 and incorporated herein by reference)
       
 
  10.39    
Form of Restricted Share Award (March 2010) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K filed on March 8, 2010 and incorporated herein by reference)
       
 
  10.40    
Form of Restricted Performance Share Unit and Dividend Equivalent Rights Award Agreement (March 2010) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K filed on March 8, 2010 and incorporated herein by reference)
       
 
  10.41    
Forms of Incentive Stock Option Agreement (March 2010) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K filed on March 8, 2010 and incorporated herein by reference)
       
 
  10.42    
Forms of Non-Qualified Share Option Agreement (March 2010) for Executive Officers** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K filed on March 8, 2010 and incorporated herein by reference)
       
 
  10.43    
2010-2012 Restricted Performance Share Unit Program** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K filed on March 8, 2010 and incorporated herein by reference)
       
 
  10.44    
Letter to RREEF America LLC relating to waiver of share ownership limit (previously filed as an exhibit to Brandywine Realty Trust’s Form 10-K for the fiscal year ended December 31, 2009 and incorporated herein by reference)
       
 
  12.1    
Statement re Computation of Ratios of Brandywine Realty Trust
       
 
  12.2    
Statement re Computation of Ratios of Brandywine Operating Partnership, L.P.
       
 
  14.1    
Code of Business Conduct and Ethics** (previously filed as an exhibit to Brandywine Realty Trust’s Form 8-K dated December 22, 2004 and incorporated herein by reference)
       
 
  21    
List of subsidiaries
       
 
  23.1    
Consent of PricewaterhouseCoopers LLP relating to financial statements of Brandywine Realty Trust
       
 
  23.2    
Consent of PricewaterhouseCoopers LLP relating to financial statements of Brandywine Operating Partnership, L.P.

 

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Exhibits No.   Description
  31.1    
Certification of the Chief Executive Officer of Brandywine Realty Trust pursuant to 13a-14 under the Securities Exchange Act of 1934
       
 
  31.2    
Certification of the Chief Financial Officer of Brandywine Realty Trust pursuant to 13a-14 under the Securities Exchange Act of 1934
       
 
  31.3    
Certification of the Chief Executive Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P., pursuant to 13a-14 under the Securities Exchange Act of 1934
       
 
  31.4    
Certification of the Chief Financial Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P., pursuant to 13a-14 under the Securities Exchange Act of 1934
       
 
  32.1    
Certification of the Chief Executive Officer of Brandywine Realty Trust pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
  32.2    
Certification of the Chief Financial Officer of Brandywine Realty Trust pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
  32.3    
Certification of the Chief Executive Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P., pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
  32.4    
Certification of the Chief Financial Officer of Brandywine Realty Trust, in its capacity as the general partner of Brandywine Operating Partnership, L.P., pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
  99.1    
Material Tax Consequences
 
     
**  
Management contract or compensatory plan or arrangement
 
(b)  
Financial Statement Schedule: See Item 15 (a) (1) and (2) above

 

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  BRANDYWINE REALTY TRUST
 
 
  By:   /s/ Gerard H. Sweeney    
    Gerard H. Sweeney   
    President and Chief Executive Officer   
Date: February 25, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
Signature   Title   Date
 
       
/s/ Walter D’Alessio
 
Walter D’Alessio
  Chairman of the Board and Trustee    February 25, 2011
 
       
/s/ Gerard H. Sweeney
 
Gerard H. Sweeney
  President, Chief Executive Officer and Trustee (Principal Executive Officer)   February 25, 2011
 
       
/s/ Howard M. Sipzner
 
Howard M. Sipzner
  Executive Vice President and Chief Financial Officer (Principal Financial Officer)   February 25, 2011
 
       
/s/ Gabriel J. Mainardi
 
Gabriel J. Mainardi
  Vice President and Chief Accounting Officer (Principal Accounting Officer)   February 25, 2011
 
       
/s/ D. Pike Aloian
 
D. Pike Aloian
  Trustee    February 25, 2011
 
       
/s/ Wyche Fowler
 
Wyche Fowler
  Trustee    February 25, 2011
 
       
/s/ Michael J. Joyce
 
Michael J. Joyce
  Trustee    February 25, 2011
 
       
/s/ Anthony A. Nichols, Sr.
 
Anthony A. Nichols, Sr.
  Trustee    February 25, 2011
 
       
/s/ Charles P. Pizzi
 
Charles P. Pizzi
  Trustee    February 25, 2011

 

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  BRANDYWINE OPERATING PARTNERSHIP, L.P.
 
 
  By:   Brandywine Realty Trust, its General Partner    
 
  By:   /s/ Gerard H. Sweeney    
    Gerard H. Sweeney   
    President and Chief Executive Officer   
Date: February 25, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
Signature   Title   Date
 
       
/s/ Walter D’Alessio
 
Walter D’Alessio
  Chairman of the Board and Trustee    February 25, 2011
 
       
/s/ Gerard H. Sweeney
 
Gerard H. Sweeney
  President, Chief Executive Officer and Trustee (Principal Executive Officer)   February 25, 2011
 
       
/s/ Howard M. Sipzner
 
Howard M. Sipzner
  Executive Vice President and Chief Financial Officer (Principal Financial Officer)   February 25, 2011
 
       
/s/ Gabriel J. Mainardi
 
Gabriel J. Mainardi
  Vice President and Chief Accounting Officer (Principal Accounting Officer)   February 25, 2011
 
       
/s/ D. Pike Aloian
 
D. Pike Aloian
  Trustee    February 25, 2011
 
       
/s/ Wyche Fowler
 
Wyche Fowler
  Trustee    February 25, 2011
 
       
/s/ Michael J. Joyce
 
Michael J. Joyce
  Trustee    February 25, 2011
 
       
/s/ Anthony A. Nichols, Sr.
 
Anthony A. Nichols, Sr.
  Trustee    February 25, 2011
 
       
/s/ Charles P. Pizzi
 
Charles P. Pizzi
  Trustee    February 25, 2011

 

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Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Brandywine Realty Trust:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Brandywine Realty Trust and its subsidiaries (the “Company”) at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules and on the Company’