<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 March 31, 1999
or
____ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
or 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 38,011,655 Common Shares of Beneficial Interest were
outstanding as of May 14, 1999.
<PAGE>
BRANDYWINE REALTY TRUST
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998
Consolidated Statements of Operations for the three
months ended March 31, 1999 and March 31, 1998
Consolidated Statements of Cash Flow for the three
months ended March 31, 1999 and March 31, 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
(unaudited and in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Real estate investments:
Operating properties $ 1,893,266 $ 1,908,095
Accumulated depreciation (83,407) (67,477)
----------- -----------
1,809,859 1,840,618
Cash and cash equivalents 57,485 13,075
Escrowed cash 7,885 3,489
Accounts receivable 18,247 10,769
Due from affiliates 11,358 10,186
Investment in management company 181 148
Investment in real estate ventures, at equity 14,410 10,603
Deferred costs, net 14,012 10,787
Other assets 8,790 12,005
----------- -----------
Total assets $ 1,942,227 $ 1,911,680
=========== ===========
LIABILITIES AND BENEFICIARIES' EQUITY
Mortgage notes payable $ 505,433 $ 319,235
Borrowings under credit facilities 531,325 681,325
Accounts payable and accrued expenses 9,881 10,295
Distributions payable 17,107 17,850
Tenant security deposits and deferred rents 16,038 12,123
----------- -----------
Total liabilities 1,079,784 1,040,828
----------- -----------
Minority interest 126,802 127,198
----------- -----------
Preferred Shares, $0.01 par value, 10,000,000 shares authorized,
750,000 convertible preferred shares issued
and outstanding at March 31, 1999 37,500 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
March 31, 1999 and December 31, 1998 376 376
Additional paid-in capital 752,219 751,889
Share warrants 962 962
Cumulative earnings 50,597 44,076
Cumulative distributions (106,013) (91,149)
----------- -----------
Total beneficiaries' equity 698,141 706,154
----------- -----------
Total liabilities and beneficiaries' equity $ 1,942,227 $ 1,911,680
=========== ===========
</TABLE>
The accompanying condensed notes are integral part of these consolidated
financial statements.
3
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CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------
1999 1998
-------- ---------
<S> <C> <C>
Revenue:
Rents $ 59,439 $ 28,495
Tenant reimbursements 8,734 3,823
Other 2,610 784
-------- --------
Total revenue 70,783 33,102
-------- --------
Operating Expenses:
Interest 18,058 4,387
Depreciation and amortization 17,769 7,713
Amortization of deferred compensation costs 360 372
Property operating expenses 22,186 10,137
Management fees 3,141 1,331
Administrative expenses 403 264
-------- --------
Total operating expenses 61,917 24,204
-------- --------
Income before equity in income of management company, equity in
income of real estate ventures, minority interest and
extraordinary items 8,866 8,898
Equity in income of management company 33 35
Equity in income of real estate ventures 149 -
-------- --------
Income before minority interest and extraordinary items 9,048 8,933
Minority interest in income (1,850) (130)
-------- --------
Net income before extraordinary items 7,198 8,803
Extraordinary items - (858)
-------- --------
Net income 7,198 7,945
Income allocated to Preferred Shares (680) -
-------- --------
Income allocated to Common Shares $ 6,518 $ 7,945
======== ========
Earnings per Common Share:
Before extraordinary item
Basic $ 0.17 $ 0.28
======== ========
Diluted $ 0.17 $ 0.28
======== ========
After extraordinary item
Basic $ 0.17 $ 0.25
======== ========
Diluted $ 0.17 $ 0.25
======== ========
</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>
Three Months
Ended March 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,198 $ 7,945
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest 1,850 130
Depreciation and amortization 17,769 7,713
Equity in income of management company (33) (35)
Equity in income of real estate ventures (149) -
Amortization of deferred compensation costs 360 372
Amortization of discounted notes payable 41 67
Extraordinary items - 858
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (7,478) (1,188)
(Increase) decrease in affiliate receivable (1,172) (134)
(Increase) decrease in prepaid assets and deferred costs 43 (2,440)
Increase (decrease) in accounts payable and accrued expenses (126) 3,066
Increase (decrease) in accrued mortgage interest (288) 367
Increase (decrease) in other liabilities 3,915 3,364
----------- ----------
Net cash provided by operating activites 21,930 20,085
----------- ----------
Cash flows from investing activities:
Acquisitions of properties - (445,035)
Sales of properties 23,161 -
Investment in real estate ventures (3,658) (1,796)
Decrease (increase) in escrowed cash (4,396) (4,413)
Capital expenditures paid (8,742) (3,379)
----------- ----------
Net cash provided by (used in) investing activities 6,365 (454,623)
----------- ----------
Cash flows from financing activites:
Proceeds from issuance of shares, net - 287,462
Distributions paid to shareholders (15,540) (8,634)
Distributions paid to minority partners (2,993) (134)
Proceeds from mortgage notes payable 195,695 -
Repayments of mortgage notes payable (9,565) (646)
Proceeds from notes payable, Credit Facility - 570,867
Repayment of notes payable, Credit Facility (150,000) (407,800)
Other debt costs (1,482) (1,361)
----------- ----------
Net cash provided by financing activities 16,115 439,754
----------- ----------
Increase in cash and cash equivalents 44,410 5,216
Cash and cash equivalents at beginning of period 13,075 29,442
----------- ----------
Cash and cash equivalents at end of period $ 57,485 $ 34,658
=========== ==========
Supplemental Cash Flow Disclosure:
Cash paid for interest $18,770,113 $3,811,787
=========== ==========
</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
MARCH 31, 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 March 31, 1999, the Company's portfolio included
198 office properties, 70 industrial facilities and one mixed use property
(collectively, the "Properties") that contain an aggregate of approximately 18.5
million net rentable square feet. As of March 31, 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
March 31, 1999, the Company held an approximately 88.5% interest in the
Operating Partnership and was entitled to approximately 94.6% 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 March 31,
1999, the Management Company was managing and leasing properties containing an
aggregate of approximately 16.6 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 approximately 259,000 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 March 31, 1999, there were 2,158,368 outstanding Class A Units held
by holders other than the Company, and 1,550,000 outstanding Preferred Units.
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 March 31, 1999, the results of its operations for the three month
periods ended March 31, 1999 and 1998, and its cash flows for the three month
periods ended March 31, 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.
6
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3. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS:
First Quarter - 1999
During the first quarter of 1999, the Company consummated the sale of 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 through three separate transactions:
o On March 23, 1999, the Company sold an office property located in Bristol,
Pennsylvania containing 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 15,918 net rentable square feet for
approximately $2.0 million.
o A third property containing 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 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
three months ended March 31, 1998 gives effect to the Properties acquired during
1998 and the offerings of Common Shares during 1998 as if the purchases and
offerings had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998
-------------------------------------
(in thousands, except per share data)
(Unaudited)
<S> <C>
Pro forma total revenues $65,478
Pro forma net income before extraordinary items allocated to Common Shares $6,674
Pro forma net income after extraordinary items allocated to Common Shares $5,816
Pro forma net income per Common Share before extraordinary item (diluted) $0.18
Pro forma net income per Common Share after extraordinary item (diluted) $0.15
</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.
7
<PAGE>
4. INDEBTEDNESS:
Borrowings under Credit Facilities-
At March 31, 1999, the Company had approximately $531.3 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 6.83%. The Company is currently in compliance with
all convenants related to the Credit Facility.
Mortgage Notes Payable-
As of March 31, 1999, mortgage loans encumbered 94 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 7.27% during the
first quarter of 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 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.
5. DISTRIBUTIONS:
On March 19, 1999, the Company declared a distribution of $0.39 per share,
totaling approximately $14.9 million, which was paid on April 15, 1999 to
shareholders of record as of March 30, 1999. The Operating Partnership
simultaneously declared a $0.39 per unit cash distribution to holders of Class A
Units totaling approximately $842,000.
On March 19, 1999, the Company and the Operating Partnership, respectively, also
declared distributions to holders of Preferred Shares and Preferred Units, which
are each currently entitled to a 7.25% preferential return. Distributions to
holders of Preferred Shares and Preferred Units were approximately $680,000 and
$1.4 million, respectively.
6. EARNINGS PER COMMON SHARE:
A reconciliation between basic and diluted EPS is shown below (in thousands,
except share and per share data).
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------
1999 1998
------------------------------ ----------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income before extraordinary item $ 7,198 $ 7,198 $ 8,803 $ 8,803
Income allocated to Preferred Shares (680) (680) - -
----------- ----------- ----------- -----------
Income available to common shareholders before
extraordinary item $ 6,518 $ 6,518 $ 8,803 $ 8,803
Extraordinary item - - (858) (858)
----------- ----------- ----------- -----------
Net income available to common shareholders $ 6,518 $ 6,518 $ 7,945 $ 7,945
----------- ----------- ----------- -----------
Weighted average shares outstanding 37,573,381 37,573,381 31,540,412 31,540,412
Options and warrants - 13,974 - 133,353
----------- ----------- ----------- -----------
Total weighted average shares outstanding 37,573,381 37,587,355 31,540,412 31,673,765
----------- ----------- ----------- -----------
Earnings per share before extraordinary item $ 0.17 $ 0.17 $ 0.28 $ 0.28
=========== =========== =========== ===========
Earnings per share after extraordinary item $ 0.17 $ 0.17 $ 0.25 $ 0.25
=========== =========== =========== ===========
</TABLE>
8
<PAGE>
7. 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 activity as it relates to
financial activities with respect to derivative instruments and hedging. The
Company will implement SFAS 133 effective January 1, 2000 and does not believe
it will have a material impact on the Company's financial position or results of
operations.
8. SUBSEQUENT EVENTS:
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. The
remaining $80.0 million may be drawn at the Company's option in up to three
closings by December 31, 1999. The Company has agreed to sell a minimum of $55.0
million of 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. 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 the preferred shares to repay
outstanding indebtedness and to fund the continued growth of the Company.
As part of this transaction, D. Pike Aloian, a Managing Director of Rothschild
Realty Inc., was elected to the Company's Board of Trustees.
Property Acquisition
In May 1999, the Company purchased three properties in Long Island, New York,
containing an aggregate of approximately 163,500 net rentable square feet. The
aggregate purchase price for the properties was approximately $14.4 million
which was satisfied through the issuance of 83,333 Class A Units and $12.4
million in cash. The sellers of the properties were Donald E. Axinn, a member of
the Company's Board of Trustees, and an entity controlled by Mr. Axinn. The
terms of the purchase were negotiated as part of the Company's October 1998
portfolio purchase from Mr. Axinn which preceded Mr. Axinn's Board position.
9
<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 Suburban
Philadelphia, Pennsylvania market that provides a foundation for achieving the
Company's goal of maximizing market penetration and operating economies of
scale. The Company believes this platform provides a basis to continue its
penetration into additional targeted markets in the Mid-Atlantic United States
through strategic transactions structured to increase cash available for
distribution and maximize shareholder value.
In the first quarter of 1999, the Company sold three office properties
containing approximately 324,000 net rentable square feet for an aggregate sales
price of approximately $23.8 million. The property sales occurred through three
separate transactions. As of March 31, 1999, the Company's portfolio consisted
of 198 office properties, 70 industrial facilities and one mixed use property
totaling approximately 18.5 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 redevelopment,
development and acquisition projects as well as from rent and occupancy
increases in its current portfolio.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1999 and March 31, 1998
Net income before extraordinary items for the three months ended March 31, 1999
was $7.2 million compared with net income before extraordinary items of $8.8
million for the corresponding period in 1998. The decrease in net income was
primarily attributable to increased depreciation expense related to properties
acquired during 1998 and increased interest expense related to funding the
acquired properties.
Revenues, which include rental income, recoveries from tenants and other income,
increased to $70.8 million for the three months ended March 31, 1999 compared to
$33.1 million in the corresponding period in 1998. The increase was primarily a
result of property acquisitions and, to a lesser extent, increased occupancy.
The impact of the straight-line rent adjustment increased revenues by $2.0
million for the three months ended March 31, 1999 and $924,000 for the three
months ended March 31, 1998.
Property operating expenses, depreciation and amortization and management fees
increased to $43.5 million for the three months ended March 31, 1999 compared to
$19.2 million for the corresponding period in 1998. These increases were
primarily as a result of property acquisitions.
10
<PAGE>
Property level operating income for the 165 properties owned as of March 31,
1999 increased from $20.3 million for the three months ended March 31, 1998 to
$21.3 million for the corresponding period in 1999, an increase of 5.1%.
Occupancy for these 165 properties increased from 93% to 94%.
During the three month period ended March 31, 1999, 22 new leases representing
229,302 square feet of office and industrial space commenced at an average rate
per square foot of $14.23 which was 16.9% higher than the average rate per
square foot on the expired leases.
Interest expense increased from $4.4 million for the three months ended March
31, 1998 to $18.1 million for the corresponding period in 1999. The increase in
interest expense was primarily a result of additional indebtedness incurred to
finance certain of the Company's acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the three months ended March 31, 1999, the Company generated $21.9
million in cash flow from operating activities. Other sources of cash flow
consisted of: (i) $23.1 million of net proceeds from property sales and (ii)
$195.7 million in additional mortgage notes payable. During the three months
ended March 31, 1999, the Company used its cash to: (i) repay borrowings under
its credit facilities of $150.0 million, (ii) invest $3.7 million in
unconsolidated real estate ventures, (iii) fund capital expenditures and leasing
commissions of $8.7 million, (iv) pay distributions to shareholders and minority
partners in the Operating Partnership totaling $18.5 million, (v) repay mortgage
notes payable of $9.6 million and (vi) pay other debt costs of $1.5 million.
Development
The Company is in the process of developing five sites (three wholly owned and
two 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 three
months ended March 31, 1999, the Company capitalized interest totaling
approximately $137,000 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 March 31, 1999, the Company had approximately $1.0 billion of debt
outstanding, consisting of mortgage loans totaling $505.5 million and borrowings
under the Company's unsecured credit facility (the "Credit Facility") of $531.3
million. The mortgage loans mature between March 1999 and July 2027. As of March
31, 1999, the Company had approximately $18.7 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 three months ended
March 31, 1999, the weighted average interest rate under the Credit Facility was
approximately 6.83%, and the weighted average interest rate for borrowings under
mortgage notes payable was approximately 7.27%.
11
<PAGE>
As of March 31, 1999, the Company's debt to market capitalization ratio was 58%.
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.
The Company expects to reduce its current leverage through a combination of
asset sales, formation of joint venture transactions and the issuance of
preferred securities in the next three to nine months.
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. The
remaining $80.0 million may be drawn at the Company's option in up to three
closings by December 31, 1999. The Company has agreed to sell a minimum of $55.0
million of 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. 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 the 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 March 19, 1999, the Company declared a distribution of $0.39 per Common
Share, totaling $14.9 million, which was paid on April 15, 1999 to shareholders
of record as of March 30, 1999. The Operating Partnership simultaneously
declared a $0.39 per unit cash distribution to holders of Class A Units totaling
approximately $842,000.
On April 15, 1999, the Company and the Operating Partnership, respectively, also
paid distributions to holders of Preferred Shares and Preferred Units, which are
each currently entitled to a 7.25% preferential return. The distributions to the
Preferred Shares and the Preferred Units were approximately $680,000 and $1.4
million, respectively.
As of March 31, 1999, the Company anticipated making equity contributions to
Real Estate Ventures under development totaling approximately $11.5 million of
which $1.5 million was contributed as of March 31, 1999. As of March 31, 1999,
the Company had also entered into guarantees for the benefit of certain Real
Estate Ventures, aggregating approximately $16.8 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.
12
<PAGE>
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 other REIT's. 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 months ended March 31, 1999 and 1998 is summarized in the
following table (in thousands, except share data).
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Income before gains on sales, minority interest and extraordinary items $ 9,048 $ 8,933
Add (Deduct):
Depreciation attributable to real property 16,340 7,300
Amortization attributable to leasing costs 726 243
Depreciation attributable to real estate ventures 241 -
----------- -----------
Funds from Operations before minority interest $ 26,355 $ 16,476
=========== ===========
Weighted average Common Shares (including common
share equivalents) and Operating Partnership units (1) 44,085,536 32,144,535
=========== ===========
</TABLE>
(1) Includes the weighted average effect of Common Shares and Class A Units
issuable upon the conversion of Preferred Shares and Preferred Units
assuming a conversion price of $26.50 per Preferred Share or Preferred Unit.
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 its internal computer information systems as
a normal part of its business. During this conversion, the Company will assess
the new hardware and software systems for Year 2000 compliance. The Company
expects to complete its conversion by June 30, 1999 at an estimated cost of
$250,000. The planned conversion was not accelerated, nor were incremental costs
incurred as a result of the Year 2000 issue.
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
key operational systems, third-party service providers and vendors. In the event
a satisfactory response is not received, the Company intends to consider
changing service providers, testing systems for compliance, replacing systems,
or pursuing alternative measures to ensure Year 2000 compliance. This assessment
is approximately 75% complete for properties owned by the Company as of March
31, 1999. The total cost of bringing these internal systems and equipment into
Year 2000 compliance has not been quantified. The Company is unable to
determine, based on available information, whether these costs will have a
material adverse effect on its business, financial condition or results of
operations.
13
<PAGE>
The Company expects to be Year 2000 compliant by June 30, 1999. The Company is
currently evaluating the consequences of a potential failure to remediate these
matters on time and is in the process of developing contingency plans regarding
these matters. The Company expects to have such contingency plans in place by
June 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, its banks, its payroll processor and its 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 by June 30, 1999 and is also attempting to receive
compliance certificates from all third-parties that could have a material impact
on the Company's operations by June 30, 1999. Although the Company is in the
process of working with such third-parties in order to attempt to eliminate its
Year 2000 concerns the cost to the Company of the third-party Year 2000
compliance has not been quantified. The Company would 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
There have been no material changes in Quantitative and Qualitative disclosures
in 1999. Reference is made to Item 7 included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
14
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In May 1999, the United States District Court for the District of New Jersey
noted a probable absence of federal jurisdiction over the matter reported in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. In
response, plaintiffs voluntarily dismissed their federal court complaint, and
the following week brought a complaint in the Superior Court for Camden County,
New Jersey. The state court complaint is materially the same as the former
federal court complaint. Brandywine intends to move to dismiss the state court
complaint.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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 March 31, 1999, and through May 14, 1999, the
Company filed the following:
(i) Current Report on Form 8-K filed January 20, 1999 (reporting under Item 5).
This Current Report disclosed the closing on a $119.0 million mortgage loan
financing from Massachusetts Mutual Life Insurance Company and Connecticut
General Life Insurance Company of America.
(ii) 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.
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: May 14, 1999 By: /s/ Gerard H. Sweeney
------------ -------------------------------
Gerard H. Sweeney, President and Chief Executive
Officer
(Principal Executive Officer)
Date: May 14, 1999 By: /s/ Jeffrey F. Rogatz
------------ -------------------------------
Jeffrey F. Rogatz, Senior Vice President and Chief
Financial Officer
(Principal Financial and 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-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 57,485
<SECURITIES> 0
<RECEIVABLES> 18,247
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 83,617
<PP&E> 1,893,266
<DEPRECIATION> 83,407
<TOTAL-ASSETS> 1,942,227
<CURRENT-LIABILITIES> 43,026
<BONDS> 1,036,758
0
37,500
<COMMON> 376
<OTHER-SE> 697,765
<TOTAL-LIABILITY-AND-EQUITY> 1,942,227
<SALES> 0
<TOTAL-REVENUES> 70,783
<CGS> 0
<TOTAL-COSTS> 61,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,058
<INCOME-PRETAX> 0
<INCOME-TAX> 7,198
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,198
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
