<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 June 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 37,922,189 Common Shares of Beneficial Interest
were outstanding as of August 13, 1999.
<PAGE>
BRANDYWINE REALTY TRUST
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998
Consolidated Statements of Operations for the three
months and six months ended June 30, 1999 and June 30,
1998
Consolidated Statements of Cash Flow for the six months
ended June 30, 1999 and June 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
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PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Real estate investments:
Operating properties $ 1,813,976 $ 1,908,095
Accumulated depreciation (95,539) (67,477)
----------- -----------
1,718,437 1,840,618
Cash and cash equivalents 12,407 13,075
Escrowed cash 7,482 3,489
Accounts receivable 20,510 10,769
Due from affiliates 9,869 10,186
Investment in management company 219 148
Investment in real estate ventures, at equity 18,998 10,603
Deferred costs, net 15,648 10,787
Other assets 5,547 12,005
----------- -----------
Total assets $ 1,809,117 $ 1,911,680
=========== ===========
LIABILITIES AND BENEFICIARIES' EQUITY
Mortgage notes payable $ 483,434 $ 319,235
Borrowings under credit facilities 394,825 681,325
Accounts payable and accrued expenses 9,777 10,295
Distributions payable 18,367 17,850
Tenant security deposits and deferred rents 15,455 12,123
----------- -----------
Total liabilities 921,858 1,040,828
----------- -----------
Minority interest 128,356 127,198
----------- -----------
Preferred shares (Notes 1 and 5) 68,517 37,500
----------- -----------
Commitments and Contingencies
Beneficiaries' equity:
Common Shares of beneficial interest, $0.01 par value,
100,000,000 common shares authorized,
37,573,381 shares issued and outstanding at
June 30, 1999 and December 31, 1998 376 376
Additional paid-in capital 752,352 751,889
Share warrants 1,152 962
Cumulative earnings 57,360 44,076
Cumulative distributions (120,854) (91,149)
----------- -----------
Total beneficiaries' equity 690,386 706,154
----------- -----------
Total liabilities and beneficiaries' equity $ 1,809,117 $ 1,911,680
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
3
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BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Rents $ 61,199 $ 37,058 $ 120,638 $ 65,553
Tenant reimbursements 9,079 5,583 17,813 9,406
Other 1,394 489 4,004 1,273
--------- --------- --------- ---------
Total revenue 71,672 43,130 142,455 76,232
--------- --------- --------- ---------
Operating Expenses:
Interest 17,410 6,630 35,468 11,017
Depreciation and amortization 18,266 10,480 36,035 18,193
Amortization of deferred compensation costs 418 372 778 744
Property operating expenses 16,675 10,428 32,662 16,895
Real estate taxes 6,029 2,885 12,228 6,555
Management fees 2,914 1,551 6,055 2,882
Administrative expenses 626 363 1,029 627
--------- --------- --------- ---------
Total operating expenses 62,338 32,709 124,255 56,913
--------- --------- --------- ---------
Income before equity in income of management company, equity in
income of real estate ventures, minority interest and
extraordinary items 9,334 10,421 18,200 19,319
Equity in income of management company 38 40 71 75
Equity in income of real estate ventures 280 -- 429 --
Gain on sale of interests in real estate -- 209 -- 209
--------- --------- --------- ---------
Income before minority interest and extraordinary items 9,652 10,670 18,700 19,603
Minority interest in income (1,819) (248) (3,669) (378)
--------- --------- --------- ---------
Net income before extraordinary items 7,833 10,422 15,031 19,225
Extraordinary items -- -- -- (858)
--------- --------- --------- ---------
Net income 7,833 10,422 15,031 18,367
Income allocated to Preferred Shares (1,070) -- (1,750) --
--------- --------- --------- ---------
Income allocated to Common Shares $ 6,763 $ 10,422 $ 13,281 $ 18,367
========= ========= ========= =========
Earnings per Common Share:
Basic $ 0.18 $ 0.28 $ 0.35 $ 0.53
========= ========= ========= =========
Diluted $ 0.18 $ 0.28 $ 0.35 $ 0.53
========= ========= ========= =========
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
4
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BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited and in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,031 $ 18,367
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest 3,669 378
Depreciation and amortization 36,035 18,193
Equity in income of management company (71) (75)
Equity in income of real estate ventures (429) --
Amortization of deferred compensation costs 778 744
Issuance of shares to trustees -- 29
Amortization of discounted notes payable 83 142
Gain on sale of interest in real estate -- (209)
Extraordinary items -- 858
Changes in assets and liabilities:
Increase in accounts receivable (9,741) (3,282)
Decrease in affiliate receivable 317 453
Decrease in prepaid assets and deferred costs 2,111 231
(Increase) decrease in accounts payable and accrued expenses (1,175) 1,975
Increase in accrued mortgage interest 657 497
Increase in other liabilities 3,332 5,954
--------- ---------
Net cash provided by operating activites 50,597 44,255
--------- ---------
Cash flows from investing activities:
Acquisitions of properties (12,426) (545,582)
Sales of properties, net 123,109 14,704
Investment in real estate ventures (7,966) (6,485)
Increase in escrowed cash (3,993) (1,113)
Capital expenditures paid (19,773) (7,113)
--------- ---------
Net cash provided by (used in) investing activities 78,951 (545,589)
--------- ---------
Cash flows from financing activites:
Proceeds from issuance of shares, net 31,207 301,336
Repurchase of shares (286) --
Distributions paid to shareholders (31,051) (22,482)
Distributions paid to minority partners (4,397) (286)
Proceeds from mortgage notes payable 195,808 5,708
Repayments of mortgage notes payable (31,719) (5,090)
Proceeds from notes payable, Credit Facility -- 658,642
Repayment of notes payable, Credit Facility (286,500) (422,050)
Other debt costs (3,278) (1,492)
--------- ---------
Net cash (used in) provided by financing activities (130,216) 514,286
--------- ---------
(Decrease) increase in cash and cash equivalents (668) 12,952
Cash and cash equivalents at beginning of period 13,075 29,442
--------- ---------
Cash and cash equivalents at end of period $ 12,407 $ 42,394
========= =========
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 34,957 $ 11,000
--------- ---------
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
5
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BRANDYWINE REALTY TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 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 16.6
million net rentable square feet. As of June 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
June 30, 1999, the Company held an approximately 88.7% 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
of limited partnership (the "Preferred Units"). The Operating Partnership holds
a 95% economic interest in Brandywine Realty Services Corporation (the
"Management Company") through its ownership of 100% of the Management Company's
non-voting preferred stock and 5% of its voting common stock. As of June 30,
1999, the Management Company was managing and leasing properties containing an
aggregate of approximately 18.3 million net rentable square feet, of which
16.1million net rentable square feet related to properties owned by the Company
or subject to purchase options held by the Company, and approximately 2.2
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 will, at the request of a
holder, be 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 June 30, 1999, there were 2,241,702 outstanding Class A Units held
by holders other than the Company, and 1,550,000 outstanding Preferred Units.
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 June 30, 1999 and December 31, 1998 and 1,458,333 convertible
Series B Preferred Shares issued and outstanding at June 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 except as to the balance sheet as of December 31, 1998, which has been
prepared from audited data, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the included
disclosures are adequate to make the information presented not misleading. In
the opinion of the Company, all adjustments (consisting solely of normal
recurring matters) necessary to fairly present the financial position of the
Company as of June 30, 1999, the results of its operations for the three and six
month periods ended June 30, 1999 and 1998, and its cash flows for the six
6
<PAGE>
month periods ended June 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:
Second Quarter - 1999
During the second quarter of 1999, the Company sold 17 industrial properties
(collectively, the "Industrial Properties") containing an aggregate of
approximately 2.0 million net rentable square feet for an aggregate sales price
of approximately $82.9 million, which was satisfied with approximately $82.9
million of cash from a newly-formed limited partnership (the "Industrial
Partnership") of which the Operating Partnership is a limited partner. The
Industrial Partnership funded its purchase of the Industrial Properties from the
Company through an equity contribution by the general partner (an entity
unaffiliated with the Company) of approximately $32.0 million and from a portion
of the proceeds of a non-recourse mortgage loan secured by the Industrial
Properties in the amount of approximately $51.0 million.
In addition during the second quarter of 1999, the Company acquired three office
properties which contain an aggregate of approximately 164,434 net rentable
square feet and sold one office property containing approximately 112,905 net
rentable square feet. The aggregate purchase price of the three properties was
approximately $14.4 million, which was satisfied with approximately $12.4
million of cash and the issuance of 83,333 Class A Units valued at $2.0 million
($24 per unit). The sale price for the property sold was approximately $16.9
million.
First Quarter - 1999
During the first quarter of 1999, the Company sold three office properties
containing an aggregate of approximately 323,671 net rentable square feet for an
aggregate sale price of approximately $23.8 million. The property sales were
made in three separate transactions:
o On March 23, 1999, the Company sold an office property located in Bristol,
Pennsylvania containing approximately 96,000 net rentable square feet for
approximately $8.8 million.
o On March 25, 1999, the Company sold an office property located in Blue
Bell, Pennsylvania containing approximately 15,918 net rentable square feet
for approximately $2.0 million.
o A third property containing approximately 211,753 net rentable square feet,
located in Bryn Athyn, Pennsylvania was sold on March 31, 1999 for
approximately $13.0 million.
1998
During 1998, the Company purchased 153 office, industrial and mixed-use
properties containing approximately 11.6 million net rentable square feet. The
aggregate purchase price of the 153 properties was approximately $1.3 billion,
which was satisfied with approximately $848.8 million of cash, debt assumption
of $265.5 million, the issuance of 1,754,763 Class A Units, the issuance of
1,550,000 Preferred Units with a stated value of $77.5 million; and the issuance
of 750,000 Series A Preferred Shares with a stated value of $37.5 million. The
Company also sold one office property containing approximately 156,175 net
rentable square feet for a net sale price of approximately $14.7 million.
Pro Forma
The following unaudited pro forma financial information of the Company for the
six months ended June 30, 1999 and June 30, 1998 gives effect to the Properties
acquired and sold during 1999 and 1998 and the offerings of Common Shares during
1998 as if the purchases, sales and offerings had occurred on January 1, 1998.
7
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------
1999 1998
-------------------------------------
(in thousands, except per share data)
(Unaudited)
<S> <C> <C>
Pro forma total revenues $137,782 $124,391
Pro forma net income before extraordinary items allocated to Common Shares $14,315 $15,614
Pro forma net income after extraordinary items allocated to Common Shares $14,315 $14,756
Pro forma net income per Common Share before extraordinary item (diluted) $0.38 $0.42
Pro forma net income per Common Share after extraordinary item (diluted) $0.38 $0.39
</TABLE>
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 acquisitions had been
consummated on the respective dates indicated, nor does the pro forma
information purport to represent the results of operations for future periods.
4. INDEBTEDNESS:
Borrowings under Credit Facilities -
As of June 30, 1999, the Company had approximately $394.8 million of
indebtedness outstanding under the Company's $550.0 million unsecured credit
facility (the "Credit Facility"). The weighted average interest rate for
borrowings under the Company's Credit Facility was 6.75% during the six months
ended June 30, 1999. The Company is currently in compliance with all convenants
related to the Credit Facility.
As of August 6, 1999, the Credit Facility was amended. Pursuant to the amendment
(the "Credit Agreement Amendment"), the maximum amount available under the
Credit Facility was reduced from $550.0 million to approximately $480.6 million.
In the Credit Agreement Amendment, the Company also agreed to use 75% of the
proceeds of certain potential property sales and of any additional proceeds of
preferred securities discussed in Note 5 below, and 100% of the proceeds of any
unsecured debt of the Company incurred in the remainder of 1999 to further repay
and permanently reduce the Credit Facility, until the available amount
thereunder has been reduced to $350.0 million.
Mortgage Notes Payable -
As of June 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
5.0% to 10.73% and had a weighted average interest rate of 6.95% during the six
months ended June 30, 1999.
In January 1999, the Company obtained a $119.0 million, five-year loan from two
financial institutions. The loan has a fixed interest rate of 7.18% and is
secured by five Properties. The loan proceeds were used to reduce the Company's
borrowings under its credit facilities by $80.0 million and to fund working
capital.
In March 1999, the Company obtained a $75.0 million, three-year loan. The loan
has a blended interest rate of LIBOR plus 2.50% per annum. To offset the risks
of a variable interest rate, the Company purchased, through Merrill Lynch, a
two-year interest rate cap agreement that limits the Company's exposure in the
event that the LIBOR exceeds 6.25%. The Company has also obtained an interest
rate cap agreement that commences in two years and limits the Company's exposure
until the maturity date of the financing in the event that the LIBOR exceeds 7%.
The loan is secured by five Properties. The net proceeds were primarily used to
reduce the Company's borrowings under its credit facilities.
8
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5. 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 ("Series B
Preferred Shares") with an 8.75% coupon rate.
The Series B Preferred Shares are convertible into Common Shares at a conversion
price of $24.00 per share and 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 on April
27, 1999, the Company issued Series B Preferred Shares for total gross proceeds
of $25.0 million. On June 30, 1999, the Company issued an additional $10.0
million of preferred shares. The remaining $70.0 million may be drawn at the
Company's option in up to two closings by December 31, 1999. The Company has
agreed to sell a minimum of $55.0 million of Series B Preferred Shares.
The convertible 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 preferred shares prior to the first anniversary of
the initial closing; provided that following the redemption, at least $55.0
million of Preferred Shares shall remain outstanding. In addition, the Company
may force the conversion of the 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 or changes in the Company's status as a real estate
investment trust, Five Arrows may require the Company to redeem its 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 (valued at $0.38 per warrant).
6. DISTRIBUTIONS:
On June 18, 1999, the Company declared a distribution of $0.39 per share,
totaling approximately $14.9 million, which was paid on July 15, 1999 to
shareholders of record as of June 30, 1999. The Operating Partnership
simultaneously declared a $0.39 per unit cash distribution to holders of Class A
Units totaling approximately $861,000.
On June 18, 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
were paid on July 15, 1999 to holders of Series A Preferred Shares, Series B
Preferred Shares and Preferred Units and totaled approximately $680,000,
$391,000 and $1.4 million, respectively.
9
<PAGE>
EARNINGS PER COMMON SHARE:
A reconciliation between basic and diluted earnings per share is shown below (in
thousands, except share and per share data).
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------------------
1999 1998
--------------------------------- -------------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income before extraordinary item $ 7,833 $ 7,833 $ 10,422 $ 10,422
Income allocated to Preferred Shares (1,070) (1,070) -- --
------------ ------------ ------------ ------------
Income available to common shareholders before
extraordinary item $ 6,763 $ 6,763 $ 10,422 $ 10,422
Extraordinary item -- -- -- --
------------ ------------ ------------ ------------
Net income available to common shareholders $ 6,763 $ 6,763 $ 10,422 $ 10,422
------------ ------------ ------------ ------------
Weighted average shares outstanding 37,573,381 37,573,381 37,475,025 37,475,025
Options and warrants -- 17,077 -- 110,232
------------ ------------ ------------ ------------
Total weighted average shares outstanding 37,573,381 37,590,458 37,475,025 37,585,257
------------ ------------ ------------ ------------
Earnings per share before extraordinary item $ 0.18 $ 0.18 $ 0.28 $ 0.28
============ ============ ============ ============
Earnings per share after extraordinary item $ 0.18 $ 0.18 $ 0.28 $ 0.28
============ ============ ============ ============
Six Months Ended June 30,
------------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
Net income before extraordinary item $ 15,031 $ 15,031 $ 19,225 $ 19,225
Income allocated to Preferred Shares (1,750) (1,750) -- --
------------ ------------ ------------ ------------
Income available to common shareholders before
extraordinary item $ 13,281 $ 13,281 $ 19,225 $ 19,225
Extraordinary item -- -- (858) (858)
------------ ------------ ------------ ------------
Net income available to common shareholders $ 13,281 $ 13,281 $ 18,367 $ 18,367
------------ ------------ ------------ ------------
Weighted average shares outstanding 37,573,381 37,573,381 34,524,113 34,524,113
Options and warrants -- 15,627 -- 121,279
------------ ------------ ------------ ------------
Total weighted average shares outstanding 37,573,381 37,589,008 34,524,113 34,645,392
------------ ------------ ------------ ------------
Earnings per share before extraordinary item $ 0.35 $ 0.35 $ 0.56 $ 0.55
============ ============ ============ ============
Earnings per share after extraordinary item $ 0.35 $ 0.35 $ 0.53 $ 0.53
============ ============ ============ ============
</TABLE>
8. NEWLY ISSUED ACCOUNTING STANDARDS:
Statement on Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities" established standards related to
the Company's financial risks associated with its financial activities with
respect to derivative instruments and hedging. This statement was initially
scheduled to become effective January 1, 2000. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of SFAS No.
133", which delays the effective date of SFAS 133 implementation until January
1, 2001. The Company will implement SFAS 137 effective January 1, 2001 and does
not believe it will have a material impact on the Company's financial position
or results of operations.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements appearing elsewhere herein. This Form 10-Q contains forward-looking
statements for purposes of the Securities Act of 1933 and the Securities
Exchange Act of 1934 and as such may involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, there can
be no assurance that these expectations will be realized. Factors that could
cause actual results to differ materially from current expectations include, but
are not limited to, changes in general economic conditions, changes in local
real estate conditions (including rental rates and competing properties),
changes in industries in which the Company's principal tenants compete, the
failure to timely lease unoccupied space, the failure to timely re-lease
occupied space upon expiration of leases, the inability to generate sufficient
revenues to meet debt service payments and operating expenses, the
unavailability of equity and debt financing, unanticipated costs associated with
the acquisition and integration of the Company's 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
penetration into additional targeted markets in the Mid-Atlantic United States
through strategic transactions structured to increase cash available for
distribution and maximize shareholder value.
During the second quarter of 1999, the Company sold 17 industrial properties
containing an aggregate of approximately 2.0 million net rentable square feet
for an aggregate sales price of approximately $82.9 million and sold one office
property containing approximately 112,905 net rentable square feet for a sales
price of approximately $16.9 million. In addition, during the second quarter of
1999, pursuant to its obligations under a portfolio acquisition completed in the
fourth quarter of 1998, the Company acquired three office properties which
contain an aggregate of approximately 164,434 net rentable square feet. The
aggregate purchase price of the three properties was approximately $14.4
million, which was satisfied with approximately $12.4 million of cash and the
issuance of 83,333 Class A Units valued at $2.0 million ($24 per unit). As of
June 30, 1999, the Company's portfolio consisted of 199 office properties, 50
industrial facilities and 1 mixed use property totaling approximately 16.6
million net rentable square feet.
In the first quarter of 1999, the Company sold, in three separate transactions,
three office properties containing approximately 324,000 net rentable square
feet for an aggregate sales price of approximately $23.8 million.
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 redevelopment,
development and acquisition projects as well as from rent and occupancy
increases in its current portfolio.
RESULTS OF OPERATIONS
The results of operations for the three and six month periods ended June 30,
1999 and 1998 include the respective operations of the Company. For comparative
purposes, the Company had a total of 131 of the Properties ("Same Store
Properties") for the entire three months ended June 30, 1999 and 1998 as
compared to 250 properties as of June 30, 1999. Consequently, the comparison of
the periods provides limited information regarding the operation of the Company
as currently constituted.
11
<PAGE>
Comparison of Three and Six Months Ended June 30, 1999 and 1998
Revenues, which include rental income, recoveries from tenants and other income,
increased to $71.7 million and $142.4 million for the three and six months ended
June 30, 1999 as compared to $43.1 million and $76.2 million for the comparable
periods in 1998. This increase was primarily the result of property
acquisitions, and to a lesser extent, increased occupancy. The impact of the
straight-line rent adjustment increased revenues by $4.3 million for the six
months ended June 30, 1999 and $2.5 million for the six months ended June 30,
1998. Rental income for the Same Store Properties increased from $32.1 million
for the three months ended June 30, 1998 to $33.9 million for the comparable
period in 1999, or an increase of $1.8 million. This increase was attributable
to increased occupancy of 1.3% from 93.4% as of June 30, 1998 to 94.7% as of
June 30, 1999, and to a lesser extent, increased rental rates.
Interest expense increased to $17.4 million and $35.5 million for the three and
six months ended June 30, 1999, respectively, as compared to $6.6 million and
$11.0 million for the comparable periods in 1998. These increases reflect the
increased borrowings incurred in connection with Property acquisitions
subsequent to June 30, 1998. The average debt balances outstanding for the three
and six months ended June 30, 1999 were $958.0 million and $939.0 million,
respectively, as compared to $385.0 million and $294.0 million for the
comparable periods in 1998, respectively. Such increases were partially offset
by reduced interest rates. The weighted average interest rate for the six months
ended June 30, 1999 decreased to 6.73% from 7.14% for the comparable period in
1998.
Depreciation and amortization expense increased to $18.3 million and $36.0
million for the three and six months ended June 30, 1999 as compared to $10.5
million and $18.2 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 $22.7 million and
$44.9 million for the three and six months ended June 30, 1999 as compared to
$13.3 million and $23.5 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
$14.4 million for the three months ended June 30, 1998 to $14.9 million for the
comparable period in 1999. This increase was attributable to increased
occupancy, increases in real estate taxes and maintenance/repair work on the
properties offset by the expense savings from the Company's "Preferred Vendor
Program" which is designed to take advantage of economies of scale and bulk
purchasing power.
Administrative expenses increased to $0.6 million and $1.0 million for the three
and six months ended June 30, 1999 as compared to $0.4 million and $0.6 million
for the comparable periods in 1998. These increases are primarily the result of
management and staffing additions to support the Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the six months ended June 30, 1999, the Company generated $50.6 million
in cash flow from operating activities. Other sources of cash flow consisted of:
(i) $195.8 million in additional mortgage notes payable, (ii) $123.1 million of
net proceeds from property sales and (iii) $31.2 million in net proceeds from
share issuances. During the six months ended June 30, 1999, the Company used its
cash to: (i) repay borrowings under its credit facilities of $286.5 million,
(ii) pay distributions totaling $35.4 million to shareholders and minority
partners in the Operating Partnership, (iii) repay mortgage notes payable of
$31.7 million, (iv) finance the cash portion, $12.4 million, of the acquisition
cost of properties, (v) fund capital expenditures and leasing commissions of
$19.8 million, (vi) invest $8.0 million in unconsolidated real estate ventures,
(vii) increase escrowed cash by $4.0 million and (viii) pay debt costs of $3.3
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 six months ended June 30,
12
<PAGE>
1999, the Company capitalized interest totaling approximately $295,000 related
to development and redevelopment projects.
Capitalization
In January 1999, the Company obtained a $119.0 million, five-year loan from two
financial institutions. The loans have a fixed interest rate of 7.18% and are
secured by five properties. The proceeds were used to reduce the Company's
borrowings under its credit facilities by $80.0 million and to fund working
capital.
In March 1999, the Company obtained a $75.0 million, three-year loan. The loan
has a blended interest rate of LIBOR plus 2.50% per annum. To offset the risks
of a variable interest rate, the Company has purchased, through Merrill Lynch, a
two-year interest rate cap agreement that limits the Company's exposure in the
event that the LIBOR exceeds 6.25%. The Company has also obtained an interest
rate cap agreement that commences in two years and limits the Company's exposure
until the maturity date of the financing in the event that the LIBOR exceeds 7%.
The loan is secured by five properties. The net proceeds were primarily used to
reduce the Company's borrowings under its credit facilities.
As of June 30, 1999, the Company had approximately $878.3 million of debt
outstanding, consisting of mortgage loans totaling $483.4 million and borrowings
under the Company's unsecured credit facility (the "Credit Facility") of $394.8
million. The mortgage loans mature between August 1999 and July 2027. As of June
30, 1999, the Company had approximately $155.2 million of remaining availability
under the Credit Facility. The Credit Facility bore interest at LIBOR plus 150
basis points initially, with the spread over LIBOR subject to reductions of from
12.5 to 25 basis points and a possible increase of 25 basis points based on the
Company's leverage. The spread over LIBOR may also be reduced to either 115 or
100 basis points depending on the Company's long term debt rating. The Credit
Facility matures in September 2001 and requires the Company to maintain ongoing
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 six months ended June
30, 1999, the weighted average interest rate under the Credit Facility was
approximately 6.75% and the weighted average interest rate for borrowings under
mortgage notes payable was approximately 6.95%.
As of August 6, 1999, the Credit Facility was amended. Pursuant to the amendment
(the "Credit Agreement Amendment"), the maximum amount available under the
Credit Facility was reduced from $550.0 million to approximately $480.6 million.
In the Credit Agreement Amendment, the Company also agreed to use 75% of the
proceeds of certain potential property sales and of any additional proceeds of
the preferred securities described below, and 100% of the proceeds of any
unsecured debt of the Company incurred in the remainder of 1999 to further repay
and permanently reduce the Credit Facility, until the available amount
thereunder has been reduced to $350.0 million.
As of June 30, 1999, the Company's debt to market capitalization ratio was 48%.
As a general policy, the Company seeks to maintain a long-term average debt to
market capitalization ratio of no more than 50%. This policy is intended to
provide the Company with financial flexibility to select what management
believes to be the optimal source of capital to finance the Company's growth.
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 preferred shares are convertible into Common Shares at a conversion price of
$24.00 per share and 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
preferred share is convertible. At the initial funding on April 27, 1999, the
Company issued preferred shares for total gross proceeds of $25.0 million. On
June 30, 1999, the Company issued an additional $10.0 million of preferred
shares. The remaining $70.0 million may be drawn at the Company's option in up
to two closings by December 31, 1999. The Company has agreed to sell a minimum
of $55.0 million of Preferred Shares.
13
<PAGE>
The convertible 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 preferred shares prior to the first anniversary of
the initial closing. In addition, the Company may force the conversion of the
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 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.
The Company expects to use the net proceeds from additional issuances of
preferred shares to repay outstanding indebtedness and to fund the continued
growth of the Company.
Short and Long Term Liquidity
The Company believes that its cash flow from operations is adequate to fund its
short-term liquidity requirements for the foreseeable future. Cash flow from
operations is generated primarily from rental revenues and operating expense
reimbursements from tenants and management services income from the provision of
services to third parties. The Company intends to use these funds to meet its
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 June 18, 1999, the Company declared a distribution of $0.39 per Common Share,
totaling $14.9 million, which was paid on July 15, 1999 to shareholders of
record as of June 30, 1999. The Operating Partnership simultaneously declared a
$0.39 per unit cash distribution to holders of Class A Units totaling
approximately $861,000.
On June 18, 1999, the Company and the Operating Partnership, respectively, also
paid distributions to holders of Series A Preferred Shares, Series C 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 C Preferred Shares and the Preferred Units were
approximately $680,000, $391,000 and $1.4 million, respectively.
As of June 30, 1999, three of the Real Estate Ventures were in the process of
developing office properties. As of June 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 through December 31, 1999, when the
developments are expected to be completed. As of June 30, 1999, the Company had
also entered into guarantees for the benefit of certain Real Estate Ventures,
aggregating approximately $39.3 million. Payment under these guaranties would
constitute loan obligations of, or preferred equity positions in, the applicable
Real Estate Venture.
The Company expects to meet its long-term liquidity requirements, such as for
property acquisitions, development, investments in unconsolidated real estate
ventures, scheduled debt maturities, renovations, expansions and other
non-recurring capital improvements, through borrowings under the Credit Facility
and other long-term secured and unsecured indebtedness and the issuance of
additional Class A Units and other equity securities.
Funds from Operations
Management generally considers Funds from Operations ("FFO") as one measure of
REIT performance. FFO is calculated as net income (loss) adjusted for
depreciation expense attributable to real property, amortization expense
attributable to capitalized leasing costs, gains on sales of real estate
investments and extraordinary and nonrecurring 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 six months ended June 30, 1999 and 1998 is summarized in
the following table (in thousands, except share data).
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before gains on sales, minority interest and extraordinary items $ 9,652 $ 10,461 $ 18,700 $ 19,394
Add (Deduct):
Depreciation attributable to real property 16,931 9,801 33,271 17,101
Amortization attributable to leasing costs 605 493 1,331 736
Depreciation attributable to real estate ventures 230 -- 471 --
----------- ----------- ----------- -----------
Funds from Operations before minority interest $ 27,418 $ 20,755 $ 53,773 $ 37,231
=========== =========== =========== ===========
Weighted average Common Shares (including common
share equivalents) and Operating Partnership units (1) 45,082,040 38,420,032 44,586,540 35,299,165
=========== =========== =========== ===========
</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 is currently upgrading and replacing its internal computer
information systems as a normal part of its business. During this conversion,
the Company is assessing the new hardware and software systems for Year 2000
compliance. The Company expects to complete its conversion by August 31, 1999 at
an estimated cost of approximately $250,000. The planned conversion was not
accelerated, nor were incremental costs incurred as a result of the Year 2000
issue.
The Company is continuing to evaluate and assess 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
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. This assessment is approximately 95% complete for
properties owned by the Company as of June 30,1999. 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 expects to be Year 2000 compliant by August 31, 1999. The Company is
currently evaluating the consequences of a potential failure and has developed
contingency plans regarding these matters. The Company expects to have such
contingency plans in place by September 30, 1999. Under a most reasonably likely
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 by September 30, 1999. The Company would
15
<PAGE>
consider changing to third party service providers and vendors who are Year 2000
compliant before incurring any significant additional costs.
To date, the Company has not expended significant funds to assess its Year 2000
issues, as the Company's evaluation of its Year 2000 concerns has been conducted
by its own personnel at routine staffing levels and without any out-of-pocket
expenses for consultants. The Company's evaluation has not been subject to any
independent verification or review process.
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.
16
<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 have subsequently filed a
motion for reconsideration, and as of the date of this Report, the court has not
ruled on the plaintiff's motion.
Item 2. Changes in Securities
(c) On April 27, 1999 the Company issued 1,041,667 8.75% Series B Senior
Cumulative Convertible Preferred Shares (the "Series B Preferred Shares") to
Five Arrows Realty Securities III L.L.C. ("Five Arrows"). On April 10, the
Company also issued Five Arrows a warrant exercisable for 500,000 Common Shares.
Reference is made to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 26, 1999 (the "April Form 8-K") for
a description of these securities and the transaction. On June 30, 1999, the
Company issued an additional 416,666 Series B Preferred Shares to Five Arrows
pursuant to the agreements described in the April Form 8-K. These shares and the
warrant were issued in reliance on the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 18, 1999. At the
meeting, each of the seven individuals nominated for election to the Company's
Board of Trustees was elected to the Board. The number of shares cast for,
against or withheld for each nominee is set forth below:
For Withheld
--- --------
Anthony A. Nichols, Sr. 30,694,320 374,484
Gerard H. Sweeney 30,697,653 371,151
Donald E. Axinn 30,684,370 384,434
Walter D'Alessio 30,688,353 380,451
Matthew J. Lustig 30,695,983 372,821
Warren V. Musser 24,116,939 6,951,865
Charles P. Pizzi 30,866,625 202,179
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule (electronic filers)
(b) Reports on Form 8-K:
During the three months ended June 30, 1999, and through August 13, 1999, the
Company filed the following:
(i) Current Report on Form 8-K filed April 26, 1999 (reporting under Item 5
and 7). This Current Report disclosed the preferred share agreement
with Five Arrows Realty Securities, the $75.0 million mortgage loan
financing from Merrill Lynch and three property sales.
(ii) Current Report on Form 8-K filed June 25, 1999 (reporting under Item 5
and 7). This Current Report disclosed the sale of seventeen industrial
properties and one office property.
17
<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: August 13, 1999 By: /s/ Gerard H. Sweeney
--------------- -----------------------------------------
Gerard H. Sweeney, President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 By: /s/ Jeffrey F. Rogatz
--------------- -----------------------------------------
Jeffrey F. Rogatz, Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
<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-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,407
<SECURITIES> 0
<RECEIVABLES> 20,510
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<CURRENT-ASSETS> 40,399
<PP&E> 1,813,976
<DEPRECIATION> 95,539
<TOTAL-ASSETS> 1,809,117
<CURRENT-LIABILITIES> 43,599
<BONDS> 878,259
0
68,517
<COMMON> 376
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<TOTAL-LIABILITY-AND-EQUITY> 1,809,117
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<TOTAL-REVENUES> 71,672
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