<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934
For the quarterly period ended September 30, 1999
or
____ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ___________
Commission file number 1-9106
------
Brandywine Realty Trust
-----------------------
(Exact name of registrant as specified in its charter)
Maryland 23-2413352
-------- ----------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
14 Campus Boulevard, Newtown Square, Pennsylvania 19073
(Address of principal executive offices) (Zip Code)
(610) 325-5600
--------------
Registrant's telephone number
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
A total of 37,499,720 Common Shares of Beneficial Interest
were outstanding as of August 15, 1999.
<PAGE>
BRANDYWINE REALTY TRUST
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998
Consolidated Statements of Operations for the three
months and nine months ended September 30, 1999 and
September 30, 1998
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and September 30, 1998
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(unaudited)
ASSETS
<S> <C> <C>
Real estate investments:
Operating properties $ 1,815,202 $ 1,908,095
Accumulated depreciation (110,520) (67,477)
------------ ------------
1,704,682 1,840,618
Cash and cash equivalents 17,213 13,075
Escrowed cash 6,713 3,489
Accounts receivable 25,088 10,769
Due from affiliates 13,707 10,186
Equity investment in management company 278 148
Equity investment in real estate ventures 27,234 10,603
Deferred costs, net 16,346 10,787
Other assets 10,996 12,005
------------ ------------
Total assets $ 1,822,257 $ 1,911,680
============ ============
LIABILITIES AND BENEFICIARIES' EQUITY
Mortgage notes payable $ 458,707 $ 319,235
Borrowings under credit facilities 421,825 681,325
Accounts payable and accrued expenses 14,096 10,295
Distributions payable 18,505 17,850
Tenant security deposits and deferred rents 14,716 12,123
------------ ------------
Total liabilities 927,849 1,040,828
Minority interest 147,038 127,198
Preferred shares (Notes 1 and 5) 68,707 37,500
Beneficiaries' equity:
Common Shares of beneficial interest, $0.01 par value,
100,000,000 common shares authorized,
37,154,114 and 37,573,381 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 372 376
Additional paid-in capital 745,808 751,889
Share warrants 962 962
Cumulative earnings 67,050 44,076
Cumulative distributions (135,529) (91,149)
------------ ------------
Total beneficiaries' equity 678,663 706,154
------------ ------------
Total liabilities and beneficiaries' equity $ 1,822,257 $ 1,911,680
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- -----
Revenue:
<S> <C> <C> <C> <C>
Rents $ 59,528 $ 39,856 180,166 105,409
Tenant reimbursements 8,898 6,699 26,711 16,105
Other 1,768 701 5,772 1,974
-------- --------- --------- ---------
Total revenue 70,194 47,256 212,649 123,488
Operating Expenses:
Interest 16,062 8,040 51,530 19,057
Depreciation and amortization 18,702 11,952 54,737 30,145
Amortization of deferred compensation costs 420 372 1,198 1,116
Property operating expenses 15,856 11,187 48,519 28,082
Real estate taxes 6,369 4,049 18,596 10,604
Management fees 2,939 1,710 8,994 4,592
Administrative expenses 411 395 1,440 1,022
-------- --------- --------- ---------
Total operating expenses 60,759 37,705 185,014 94,618
-------- --------- --------- ---------
Income before equity in income of management company and
real estate ventures, minority interest and
extraordinary items 9,435 9,551 27,635 28,870
Equity in income of management company 50 33 121 108
Equity in income of real estate ventures 238 251 667 251
Gain on sale of interests in real estate 3,465 - 3,465 209
-------- --------- --------- ---------
Income before minority interest and extraordinary items 13,188 9,835 31,888 29,438
Minority interest (2,124) (276) (5,793) (654)
-------- --------- --------- ---------
Net income before extraordinary items 11,064 9,559 26,095 28,784
Extraordinary items - (1,145) - (2,003)
-------- --------- --------- ---------
Net income 11,064 8,414 26,095 26,781
Income allocated to Preferred Shares (1,445) (22) (3,195) (22)
-------- --------- --------- ---------
Income allocated to Common Shares $ 9,619 $ 8,392 $ 22,900 $ 26,759
======== ========= ========= =========
Earnings per Common Share:
Basic $ 0.26 $ 0.22 $ 0.61 $ 0.75
======== ========= ========= =========
Diluted $ 0.26 $ 0.22 $ 0.61 $ 0.75
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------------------
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 26,095 $ 26,781
Adjustments to reconcile net income to net cash from
operating activities:
Minority interest 5,793 654
Depreciation and amortization 54,737 30,145
Equity in income of management company (121) (108)
Equity in income of real estate ventures (667) (251)
Amortization of deferred compensation costs 1,198 1,116
Issuance of shares to trustees - 29
Amortization of discounted notes payable 124 188
Gain on sale of interest in real estate (3,465) (209)
Extraordinary items - 2,003
Changes in assets and liabilities:
Accounts receivable (14,319) (5,587)
Due from affiliates (3,521) 510
Prepaid assets and deferred costs (4,769) (8,720)
Accounts payable and accrued expenses (1,224) 1,282
Accrued mortgage interest 5,025 826
Other liabilities 2,593 5,041
---------- ----------
Net cash from operating activites 67,479 53,700
Cash flows from investing activities:
Acquisitions of properties (17,721) (806,085)
Sales of properties, net 157,558 14,704
Investment in real estate ventures (15,964) (9,662)
Increase in escrowed cash (3,224) (7,653)
Capital expenditures (28,696) (12,735)
---------- ----------
Net cash from investing activities 91,953 (821,431)
Cash flows from financing activites:
Proceeds from issuance of shares, net 31,207 301,306
Repurchase of shares (8,234) (1,657)
Distributions paid to shareholders (47,025) (36,961)
Distributions paid to minority partners (6,796) (568)
Proceeds from mortgage notes payable 196,808 9,143
Payments of mortgage notes payable (57,487) (13,621)
Proceeds from credit facility 47,000 1,329,367
Payment of credit facility (306,500) (808,375)
Other debt costs (4,267) (1,806)
---------- ----------
Net cash from financing activities (155,294) 776,828
Increase in cash and cash equivalents 4,138 9,097
Cash and cash equivalents at beginning of period 13,075 29,442
---------- ----------
Cash and cash equivalents at end of period $ 17,213 $ 38,539
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. THE COMPANY
Brandywine Realty Trust (collectively with its subsidiaries, the "Company") is a
self-administered and self-managed real estate investment trust (a "REIT"). The
Company currently owns a portfolio of real estate assets located primarily in
the Mid-Atlantic Region. As of September 30, 1999, the Company's portfolio
included 199 office properties, 50 industrial facilities and one mixed use
property (collectively, the "Properties") that contain an aggregate of
approximately 16.7 million net rentable square feet. As of September 30, 1999,
the Company also held economic interests in nine office real estate ventures
(the "Real Estate Ventures").
The Company's interest in the Properties and the Real Estate Ventures is held
through Brandywine Operating Partnership, L.P. (the "Operating Partnership").
The Company is the sole general partner of the Operating Partnership and, as of
September 30, 1999, the Company held an approximately 87.19% interest in the
Operating Partnership and was entitled to approximately 94.5% of the Operating
Partnership's income after distributions to holders of Series B Preferred Units
(the "Preferred Units") of the limited partnership. The Operating Partnership
holds a 95% economic interest in Brandywine Realty Services Corporation (the
"Management Company") through its ownership of 100% of the Management Company's
non-voting preferred stock and 5% of its voting common stock. As of September
30, 1999, the Management Company was managing and leasing properties containing
an aggregate of 18.4 million net rentable square feet, of which 16.3 million net
rentable square feet related to properties owned by the Company or subject to
purchase options held by the Company, and 2.1 million net rentable square feet
related to properties owned by unaffiliated third parties.
Minority interest relates to interests in the Operating Partnership that are not
owned by the Company. Income allocated to the minority interest is based on the
percentage ownership of the Operating Partnership held by third parties
throughout the year. Minority interest is comprised of Class A Units of limited
partnership interest ("Class A Units") and Preferred Units. The Operating
Partnership issued these interests to persons that contributed assets to the
Operating Partnership. The Operating Partnership, at the request of a holder, is
obligated to redeem each Class A Unit held by such holder (at the option of the
Company) for cash or one Common Share. Each Preferred Unit has a stated value of
$50.00 and is convertible at the option of the holder into Class A Units at a
conversion price of $28.00. The conversion price is subject to reduction to
$26.50 if the average trading price of the Common Shares during the 60-day
period ending December 31, 2003 is $23.00 or lower. The Preferred Units bear a
preferred distribution of 7.25% per annum, subject to an increase in the event
quarterly distributions paid to holders of Common Shares exceed $0.51 per share.
As of September 30, 1999, there were 2,199,968 Class A Units outstanding held by
holders other than the Company, and 1,950,000 Preferred Units outstanding.
Preferred shares (10,000,000 shares authorized with a $0.01 par value per share)
consisted of 750,000 convertible Series A Preferred Shares issued and
outstanding at September 30, 1999 and December 31, 1998 and 700,000 convertible
Series B Preferred Shares issued and outstanding at September 30, 1999. There
were no convertible Series B Preferred Shares issued or outstanding at December
31, 1998.
2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the included disclosures are
adequate to make the information presented not misleading. In the opinion of the
Company, all adjustments (consisting solely of normal recurring matters)
necessary to fairly present the financial position of the Company as of
September 30, 1999, the results of its operations for the three and nine month
periods ended
6
<PAGE>
September 30, 1999 and 1998, and its cash flows for the nine month
periods ended September 30, 1999 and 1998 have been included. The results of
operations for such interim periods are not necessarily indicative of the
results for a full year. For further information, refer to the Company's
consolidated financial statements and footnotes included in the Annual Report on
Form 10-K for the year ended December 31, 1998.
3. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS
Third Quarter - 1999
In July 1999, the Company acquired an industrial property located in Allentown,
Pennsylvania containing 114,000 net rentable square feet for $3.8 million.
In August 1999, the Company completed a $28 million acquisition of an office
property in McLean, Virginia containing 154,000 rentable square feet. The $20
million amount due on settlement was satisfied through the issuance of 400,000
Preferred Units ($50 per unit) that carry a 7.25% coupon and $28 per share
conversion price. In September 1999, the Company contributed the property to a
newly-formed joint venture for $28 million, receiving $16.5 million in cash and
an equity investment in the joint venture. In addition, as part of the
transaction, the Company assigned its right to acquire an office property in
McLean, Virginia containing 295,000 rentable square feet to the newly-formed
joint venture.
In September 1999, the Company sold an office property located in Raleigh, North
Carolina containing 73,000 net rentable square feet for $7.8 million resulting
in a gain of $3.5 million.
Pro Forma
All acquisitions described above were accounted for by the purchase method. The
results of operations for each of the acquired properties have been included
from the respective purchase dates. All pro forma financial information
presented within this footnote is unaudited and is not necessarily indicative of
the results which actually would have occurred if the properties acquired or
sold had been consummated on the respective dates indicated, nor does the pro
forma information purport to represent the results of operations for future
periods.
The following unaudited pro forma financial information for the nine months
ended September 30, 1999 and September 30, 1998 gives effect to the properties
acquired and sold during 1999 and 1998 as if the transactions had occurred on
January 1, 1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1999 1998
----------------- -----------------
(in thousands, except per share data)
(Unaudited)
<S> <C> <C>
Pro forma total revenues $207,406 $188,271
Pro forma net income before extraordinary items allocated to Common Shares $23,985 $23,243
Pro forma net income after extraordinary items allocated to Common Shares $23,985 $21,240
Pro forma net income per Common Share before extraordinary item (diluted) $0.64 $0.62
Pro forma net income per Common Share after extraordinary item (diluted) $0.64 $0.57
</TABLE>
4. INDEBTEDNESS
Borrowings under Credit Facilities -
As of September 30, 1999, the Company had $421.8 million outstanding under its
$480.6 million unsecured credit facility (the "Credit Facility") bearing
interest at a weighted-average rate of 6.84% during the nine months ended
September 30, 1999.
7
<PAGE>
During August 1999, the Company amended the Credit Facility reducing the maximum
amount available from $550 million to $480.6 million. The Company also agreed to
use 75% of the proceeds from certain potential property sales, any additional
proceeds from the sale of Series B Preferred Shares to further repay and
permanently reduce the Credit Facility, until the available amount thereunder
has been reduced to $450 million. The Company has also agreed to use 75% of the
proceeds from certain unsecured debt incurred in the remainder of 1999 to
further repay and permanently reduce the Credit Facility, until the available
amount thereunder has been reduced to $350 million. The Company is not obligated
under the Credit Facility to complete any of the transactions designed to repay
and permanently reduce the Credit Facility.
Mortgage Notes Payable -
As of September 30, 1999, mortgage loans encumbered 101 of the Properties and
certain of the Company's land holdings. Interest rates on the mortgage loans
ranged from 5% to 11.2% and had a weighted-average interest rate of 6.97% during
the nine months ended September 30, 1999.
For the nine months ended September 30, 1999 and 1998, the Company paid interest
totaling $46 million and $19.9 million.
5. PREFERRED SHARE ISSUANCE
The Company entered into an agreement with Five Arrows Realty Securities III
L.L.C., an investment fund managed by Rothschild Realty Inc., to sell up to
$105.0 million of convertible preferred securities ("Series B Preferred Shares")
with an 8.75% coupon rate. The Series B Preferred Shares, convertible into
Common Shares at a conversion price of $24.00 per share, are entitled to
quarterly dividends equal to the greater of $0.525 per share or the dividend on
the number of Common Shares into which a Series B Preferred Share is
convertible. At the initial funding in April 1999, the Company issued 1,041,667
Series B Preferred Shares for total gross proceeds of $25 million. In June 1999,
the Company issued an additional 416,667 Series B Preferred Shares for total
gross proceeds of $10 million. The remaining $70 million is anticipated to be
drawn at the Company's option in up to two closings by December 31, 1999.
6. DISTRIBUTIONS
On September 16, 1999, the Company declared a distribution of $0.39 per Common
Share, totaling $14.7 million, which was paid on October 15, 1999 to
shareholders of record as of September 30, 1999. The Operating Partnership
simultaneously declared a $0.39 per unit cash distribution to holders of Class A
Units totaling $858,000.
On September 16, 1999, the Company and the Operating Partnership, respectively,
also declared distributions to holders of Series A Preferred Shares, Series B
Preferred Shares and Preferred Units, which are currently entitled to a
preferential return of 7.25%, 8.75% and 7.25%, respectively. The distributions
paid on October 15, 1999 to holders of Series A Preferred Shares, Series B
Preferred Shares and Preferred Units totaled $680,000, $766,000 and $1.5
million, respectively.
7. EARNINGS PER COMMON SHARE
A reconciliation between basic and diluted earnings per share is shown below (in
thousands, except share and per share data).
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------------------
1999 1998
------------------------------------ ----------------------------------
Basic Diluted Basic Diluted
------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net income before extraordinary item $ 11,064 $ 11,064 $ 9,559 $ 9,559
Income allocated to Preferred Shares (1,445) (1,445) (22) (22)
------------ ------------ ------------ -------------
Income available to common shareholders before
extraordinary item 9,619 9,619 9,537 9,537
Extraordinary item - - (1,145) (1,145)
------------ ------------ ------------ -------------
Net income available to common shareholders $ 9,619 $ 9,619 $ 8,392 $ 8,392
============ ============ ============ =============
Weighted-average shares outstanding 37,422,651 37,422,651 37,622,205 37,622,205
Options and warrants - 15,630 - 24,252
------------ ------------ ------------ -------------
Total weighted-average shares outstanding 37,422,651 37,438,281 37,622,205 37,646,457
============ ============ ============ =============
Earnings per share before extraordinary item $ 0.26 $ 0.26 $ 0.25 $ 0.25
============ ============ ============ =============
Earnings per share after extraordinary item $ 0.26 $ 0.26 $ 0.22 $ 0.22
============ ============ ============ =============
Nine Months Ended September 30,
-------------------------------------------------------------------
1999 1998
------------------------------- ----------------------------------
Basic Diluted Basic Diluted
------------ ------------------ ---------------- ----------------
Net income before extraordinary item $ 26,095 $ 26,095 $ 28,784 $ 28,784
Income allocated to Preferred Shares (3,195) (3,195) (22) (22)
------------ ------------ ------------ ------------
Income available to common shareholders before
extraordinary item 22,900 22,900 28,762 28,762
Extraordinary item - - (2,003) (2,003)
------------ ------------ ------------ ------------
Net income available to common shareholders $ 22,900 $ 22,900 $ 26,759 $ 26,759
============ ============ ============ ============
Weighted-average shares outstanding 37,522,585 37,522,585 35,568,411 35,568,411
Options and warrants - 15,628 - 92,367
------------ ------------ ------------ ------------
Total weighted-average shares outstanding 37,522,585 37,538,213 35,568,411 35,660,778
============ ============ ============ ============
Earnings per share before extraordinary item $ 0.61 $ 0.61 $ 0.81 $ 0.81
============ ============ ============ ============
Earnings per share after extraordinary item $ 0.61 $ 0.61 $ 0.75 $ 0.75
============ ============ ============ ============
</TABLE>
8. NEWLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities" established accounting and
reporting standards for derivative instruments and for hedging activities. This
statement, initially scheduled to become effective January 1, 2000, was delayed
by the Financial Accounting Standards Board until January 1, 2001. The Company
does not believe this Statement will have a material impact on it's financial
position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements appearing elsewhere herein. This Quarterly Report on Form 10-Q
contains forward-looking statements for purposes of the Securities Act of 1933
and the Securities Exchange Act of 1934 and as such may involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, there can be no assurance that these expectations will be realized.
Factors that could cause actual results to differ materially from current
expectations include, but are not limited to, changes in general economic
9
<PAGE>
conditions, changes in local real estate conditions (including rental rates and
competing properties), changes in industries in which the Company's principal
tenants compete, the failure to timely lease unoccupied space, the failure to
timely re-lease occupied space upon expiration of leases, the inability to
generate sufficient revenues to meet debt service payments and operating
expenses, the unavailability of equity and debt financing, unanticipated costs
associated with the acquisition and integration of the Company's recent
acquisitions, potential liability under environmental or other laws and
regulations, the failure of the Company to manage its growth effectively and the
other risks identified in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998
OVERVIEW
The Company believes it has established an effective platform in the
Mid-Atlantic United States that provides a foundation for achieving the
Company's goal of maximizing market penetration and operating economies of
scale. The Company believes this platform provides a basis to continue its
market penetration in the Mid-Atlantic United States through strategic
transactions structured to increase cash available for distribution and maximize
shareholder value.
During the third quarter of 1999, the Company acquired an office property
located in Allentown, Pennsylvania containing 114,000 net rentable square feet
for $3.7 million and sold an office property located in Raleigh, North Carolina
containing 73,000 net rentable square feet for $7.8 million, resulting in a gain
of $3.5 million. The Company also completed a $28 million acquisition of an
office property located in McLean, Virginia containing 154,000 rentable square
feet. The $20 million amount due was satisfied through the issuance of 400,000
Preferred Units ($50 per unit) that carry a 7.25% coupon and $28 per share
conversion price. Subsequently, the Company contributed the property to a
newly-formed joint venture for $28 million, receiving $16.5 million in cash and
an equity investment in the joint venture. In addition, as part of the
transaction, the Company assigned its right to acquire an office property in
McLean, Virginia containing 295,000 rentable square feet to the newly-formed
joint venture. As of September 30, 1999, the Company's portfolio consisted of
199 office properties, 50 industrial facilities and 1 mixed use property
totaling approximately 16.7 million net rentable square feet.
The Company receives income primarily from rental revenue (including tenant
reimbursements) from the Properties and, to a lesser extent, from the management
of certain properties owned by third parties. The Company expects that revenue
growth in the next two years will result from additional acquisitions and
redevelopment and development projects, as well as from rent and occupancy
increases in its current portfolio.
RESULTS OF OPERATIONS
The results of operations for the three and nine months ended September 30, 1999
and 1998 include the respective operations of the Company. For comparative
purposes, the Company had a total of 144 of the Properties ("Same Store
Properties") for the entire three months ended September 30, 1999 and 1998 as
compared to 250 properties as of September 30, 1999. Consequently, the
comparison of the periods provides limited information regarding the operation
of the Company as currently constituted.
Comparison of Three and Nine Months Ended September 30, 1999 and 1998
Revenue (which includes rental income, recoveries from tenants, and other
income) increased to $70.2 million and $212.6 million for the three and nine
months ended September 30, 1999 as compared to $47.3 million and $123.5 million
for the comparable periods in 1998. This increase was primarily the result of
property acquisitions, and to a lesser extent, increased rental rates.
Straight-line rent adjustment increased revenues by $7.1 million for the nine
months ended September 30, 1999 and $4 million for the nine months ended
September 30, 1998. Rental income for the Same Store Properties increased from
$35.9 million for the three months ended September 30, 1998 to $37.1 million for
the comparable period in 1999. This increase of $1.2 million or 3.3% was
primarily attributable to increased rental rates during 1999 as compared to
1998.
Interest expense increased to $16.1 million and $51.5 million for the three and
nine months ended September 30, 1999, respectively, as compared to $8 million
and $19.1 million for the comparable periods in 1998. These increases reflect
the increased borrowings incurred in connection with property acquisitions
subsequent to September 30, 1998. Average debt balances outstanding for the
three and nine months ended September 30, 1999 were $879 million and $949
million, respectively, as compared to $683 million and $469 million for the
comparable periods in 1998, respectively. Such increases were partially offset
by reduced interest rates. The weighted-average interest rate for the nine
months ended September 30, 1999 decreased to 6.76% from 8.12% for the comparable
period in 1998.
10
<PAGE>
Depreciation and amortization expense increased to $18.7 million and $54.7
million for the three and nine months ended September 30, 1999 as compared to
$12.0 million and $30.1 million for the comparable periods in 1998. These
increases are due to an increase in the number of properties owned during the
respective periods.
Property operating expenses and real estate taxes increased to $22.2 million and
$67.1 million for the three and nine months ended September 30, 1999 as compared
to $15.2 million and $38.7 million for the comparable periods in 1998. The
overall increase was primarily the result of property acquisitions. Property
operating expenses and real estate taxes for the Same Store Properties increased
from $16 million for the three months ended September 30, 1998 to $16.5 million
for the comparable period in 1999. This increase was attributable to increases
in real estate taxes and maintenance/repair work on the properties offset by
expense savings from the Company's "Preferred Vendor Program," designed to take
advantage of economies of scale.
Administrative expenses remained consistent at $0.4 million for the three months
ended September 30, 1999 and 1998. Administrative expenses increased $0.5
million for the nine months ended September 30, 1999 as compared to the same
period in 1998 primarily due to management and staffing additions during the
first half of 1999 to support the Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the nine months ended September 30, 1999, the Company generated $67.5
million in cash flow from operating activities. Other sources of cash flow
consisted of: $196.8 million in additional mortgage notes payable, $157.6
million of net proceeds from property sales, $47 million in proceeds from
drawing on the credit facilities, and $31.2 million in net proceeds from share
issuances. During the nine months ended September 30, 1999, the Company used its
cash to: repay $306.5 million of borrowings under its credit facilities, repay
$57.5 million of mortgage notes payable, pay $53.8 million of distributions to
shareholders and minority partners in the Operating Partnership, fund $28.7
million of capital expenditures and leasing commissions, finance $17.7 million
of property acquisitions, invest $16 million in unconsolidated real estate
ventures, and increase escrowed cash by $3.2 million.
Development
The Company is in the process of developing six sites (three wholly-owned and
three through Real Estate Ventures) and redeveloping two wholly-owned sites.
These projects are in various stages of development and there can be no
assurance that any of these projects will be completed or opened on schedule.
During the nine months ended September 30, 1999, the Company capitalized
interest totaling approximately $525,000 related to development and
redevelopment projects.
Capitalization
During August 1999, the Company amended the Credit Facility reducing the maximum
amount available from $550 million to $480.6 million. The Company also agreed to
use 75% of the proceeds from certain potential property sales, any additional
proceeds from the sale of Series B Preferred Shares to further repay and
permanently reduce the Credit Facility, until the available amount thereunder
has been reduced to $450 million. The Company has also agreed to use 75% of the
proceeds from certain unsecured debt incurred in the remainder of 1999 to
further repay and permanently reduce the Credit Facility, until the available
amount thereunder has been reduced to $350 million. The Company is not obligated
under the Credit Facility to complete any of the transactions designed to repay
and permanently reduce the Credit Facility.
11
<PAGE>
As of September 30, 1999, the Company had $880.5 million of debt outstanding,
consisting of $458.7 million of mortgage loans and $421.8 million of borrowings
under the Credit Facility. The mortgage loans mature between December 1999 and
July 2027. As of September 30, 1999, the Company had approximately $58.8 million
of remaining availability under the Credit Facility. The Credit Facility bears
interest at LIBOR plus 1.5%, with the spread over LIBOR subject to reductions of
from .125% to .25% and a possible increase of .25% based on the Company's
leverage. The spread over LIBOR may also be reduced to either 1.15% or 1%
depending on the Company's long-term debt rating. The Credit Facility, which
matures in September 2001, requires the Company to maintain on-going compliance
with a number of customary financial and other convenants, including leverage
ratios and debt service coverage ratios, limitations on liens and distributions,
and a minimum net worth requirement. For the nine months ended September 30,
1999, the weighted-average interest rate under the Credit Facility was
approximately 6.84% and the weighted-average interest rate for borrowings under
mortgage notes payable was approximately 6.97%.
Preferred Share Issuance
In April 1999, the Company entered into an agreement with Five Arrows Realty
Securities III L.L.C., an investment fund managed by Rothschild Realty Inc., to
sell up to $105.0 million of convertible preferred securities with an 8.75%
coupon rate.
The Series B Preferred Shares, convertible into Common Shares at a conversion
price of $24.00 per share, are entitled to quarterly dividends equal to the
greater of $0.525 per share or the dividend on the number of Common Shares into
which a Series B Preferred Share is convertible. At the initial funding in April
1999, the Company issued 1,041,667 Series B Preferred Shares for total gross
proceeds of $25 million. In June 1999, the Company issued an additional 416,667
Series B Preferred Shares for total gross proceeds of $10 million. The remaining
$70 million may be drawn at the Company's option in up to two closings by
December 31, 1999. The Company anticipates drawing the remaining funds by
December 31, 1999.
The Series B Preferred Shares are perpetual, and may be redeemed at the
Company's option at par after eight years. The Company also has the right to
redeem up to $50.0 million of Series B Preferred Shares prior to the first
anniversary of the initial closing. In addition, the Company may force the
conversion of the Series B Preferred Shares into Common Shares after five years
if certain conditions are met, including that the Common Shares are then trading
in excess of 130% of the conversion price. Upon certain changes in control of
the Company, Five Arrows may require the Company to redeem its Series B
Preferred Shares. In addition, as part of the transaction, the Company issued to
Five Arrows seven-year warrants exercisable for 500,000 Common Shares at a per
share exercise price of $24.00.
Liquidity
The Company believes that cash flow from operations is adequate to fund
short-term liquidity requirements for the foreseeable future. Cash flow from
operations is generated primarily from rental revenues and operating expense
reimbursements from tenants and management services income from the provision of
services to third parties. The Company intends to use these funds to meet its
short-term liquidity needs, which are to fund operating expenses, debt service
requirements, recurring capital expenditures, tenant allowances, leasing
commissions and the minimum distribution required to maintain the Company's REIT
qualification under the Internal Revenue Code.
On September 16, 1999, the Company declared a distribution of $0.39 per Common
Share, totaling $14.7 million, which was paid on October 15, 1999 to
shareholders of record as of September 30, 1999. The Operating Partnership
simultaneously declared a $0.39 per unit cash distribution to holders of Class A
Units totaling $858,000.
On September 16, 1999, the Company and the Operating Partnership, respectively,
also paid distributions to holders of Series A Preferred Shares, Series B
Preferred Shares and Preferred Units, which are each currently entitled to a
preferential return of 7.25%, 8.75% and 7.25%, respectively. The distributions
to the Series A Preferred Shares, Series B Preferred Shares and the Preferred
Units were $680,000, $766,000 and $1.5 million, respectively.
12
<PAGE>
As of September 30, 1999, three of the Real Estate Ventures were in the process
of developing office properties. As of September 30, 1999, the Company had
contributed an aggregate of $6.6 million to these three Real Estate Ventures and
anticipates contributing an additional $5.2 million.
The Company expects to meet its long-term liquidity requirements, such as for
property acquisitions, development, investments in real estate ventures,
scheduled debt maturities, renovations, expansions and other non-recurring
capital improvements, through borrowings under its Credit Facility, long-term
secured and unsecured indebtedness, and the issuance of additional Class A
Units, Series B Preferred Shares and other equity securities.
Funds from Operations
Funds from Operations ("FFO"), one measure of REIT performance, is calculated as
net income (loss) adjusted for depreciation expense attributable to real
property, amortization expense attributable to capitalized leasing costs, gains
on sales of real estate investments and extraordinary and non-recurring items.
Management believes that FFO is a useful disclosure in the real estate industry;
however, the Company's disclosure may not be comparable to FFO disclosures of
other REITs. FFO should not be considered an alternative to net income as an
indication of the Company's performance or to cash flows as a measure of
liquidity.
FFO for the three and nine months ended September 30, 1999 and 1998 is
summarized in the following table (in thousands, except share data).
<TABLE>
<CAPTION>
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before gains on sales, minority interest and
extraordinary items $ 9,723 $ 9,835 $ 28,423 $ 29,229
Add:
Depreciation attributable to real property 16,989 11,225 50,260 28,326
Amortization attributable to leasing costs 820 489 2,151 1,225
Depreciation attributable to real estate ventures 219 - 690 -
----------- ----------- ----------- -----------
Funds from operations before minority interest $ 27,751 $ 21,549 $ 81,524 $ 58,780
=========== =========== =========== ===========
Weighted-average Common Shares (including Common
Share equivalents) and Operating Partnership units (1) 45,693,688 38,734,972 44,959,645 36,461,052
=========== =========== =========== ===========
</TABLE>
- ------------------
(1) Includes the weighted-average effect of Common Shares and Class A Units
issuable upon the conversion of Series A Preferred Shares (assuming a
conversion price of $26.50 per share), Series B Preferred Shares (assuming a
conversion price of $24.00 per share) and Preferred Units (assuming a
conversion price of $26.50 per share).
Year 2000 Compliance
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after 1999.
This could result in a system failure or miscalculations causing disruptions of
operations. The Year 2000 issue affects virtually all companies and all
organizations. The Company recognizes the importance of ensuring that its
business operations are not disrupted as a result of Year 2000 related computer
system and software issues.
The Company has upgraded or replaced its internal computer information systems
as a normal part of its business. During this process, the Company assessed the
new hardware and software systems for Year 2000 compliance. In addition, the
Company is currently evaluating and assessing those computer systems that do not
relate to information technology (such as systems designed to operate a
building, which typically include embedded technology), including, without
limitation, its telecommunication systems, security systems (such as card-access
door lock systems), energy management systems, sprinkler systems and elevator
systems. The Company's Year 2000 compliance program is being centrally
coordinated, but involves all property management personnel. For each of the
Company's properties, compliance letters have been sent to the manufacturers of
13
<PAGE>
key operational systems, third-party service providers and vendors. In the event
a satisfactory response was not received, the Company changed service providers,
upgraded or replaced systems. The Company estimates the total cost of bringing
these internal systems and equipment into Year 2000 compliance to be
approximately $150,000. These costs have not had a material adverse effect on
the Company's business, financial condition or results of operations.
The Company is currently evaluating the consequences of a potential failure and
has developed contingency plans regarding these matters. Under an unlikely worst
case scenario, until systems became operational, the Company would resort to a
combination of temporary hiring, operational system repair or replacement and
alternative software to process normal accounts and financial information.
Further, no estimates have been made as to any potential adverse impact
resulting from the failure of third-party service providers (including, without
limitation, the Company's banks, payroll processor and telecommunications
providers), vendors and tenants to prepare for the Year 2000. The Company is
attempting to identify those risks that could have a material impact on the
Company's operations and is also attempting to receive compliance certificates
from all third-parties that could have a material impact on the Company's
operations. The Company would consider changing to third-party service providers
and vendors who are Year 2000 compliant before incurring any significant
additional costs.
Inflation
A majority of the Company's leases provide for separate escalations of real
estate taxes and operating expenses either on a triple net basis or over a base
amount. In addition, many of the office leases provide for fixed base rent
increases or indexed escalations (based on the CPI or other measure). The
Company believes that inflationary increases in expenses will be significantly
offset by the expense reimbursement and contractual rent increases.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Reference is made to Item 7 included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998. There have been no material changes in
quantitative and qualitative disclosures in 1999.
14
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to the litigation disclosed in Part II, Item 1 of the
Company's Form 10-Q for the quarterly period ended March 31, 1999. On July 9,
1999, the Superior Court of New Jersey, Camden County, dismissed the complaint
against the Company with prejudice. The plaintiffs subsequently filed a motion
for reconsideration, which motion the Superior Court denied. The plaintiffs then
filed an appeal on the dismissal and on the detail of the motion for
reconsideration. In response, the Company filed a motion to dismiss the appeal.
As of the date of this Report, the Company has not been notified of the ruling
of this motion.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule (electronic filers)
(b) Reports on Form 8-K:
During the three months ended September 30, 1999, and through October 15, 1999,
the Company did not file any Reports on Form 8-K.
15
<PAGE>
BRANDYWINE REALTY TRUST
SIGNATURES OF REGISTRANT
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BRANDYWINE REALTY TRUST
(Registrant)
Date: November 15, 1999 By: /s/ Gerard H. Sweeney
----------------- ----------------------------------------
Gerard H. Sweeney, President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 By: /s/ Jeffrey F. Rogatz
----------------- ----------------------------------------
Jeffrey F. Rogatz, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: November 15, 1999 By: /s/ Bradley W. Harris
----------------- ----------------------------------------
Bradley W. Harris, Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000790816
<NAME> BRANDYWINE REALTY TRUST
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,213
<SECURITIES> 0
<RECEIVABLES> 25,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,014
<PP&E> 1,815,202
<DEPRECIATION> 110,520
<TOTAL-ASSETS> 1,822,257
<CURRENT-LIABILITIES> 47,317
<BONDS> 880,532
0
68,707
<COMMON> 372
<OTHER-SE> 678,291
<TOTAL-LIABILITY-AND-EQUITY> 1,822,257
<SALES> 0
<TOTAL-REVENUES> 70,194
<CGS> 0
<TOTAL-COSTS> 60,759
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,062
<INCOME-PRETAX> 11,064
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,064
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.26
</TABLE>
