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Section 1: 10-Q (10-Q)

bdn-10q_20180930.htm
BRANDYWINE REALTY TRUST BRANDYWINE OPERATING PARTNERSHIP, L.P. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2018

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission file number

001-9106 (Brandywine Realty Trust)

000-24407 (Brandywine Operating Partnership, L.P.)

 

Brandywine Realty Trust

Brandywine Operating Partnership, L.P.

(Exact name of registrant as specified in its charter)

 

 

MARYLAND (Brandywine Realty Trust)

 

23-2413352

DELAWARE (Brandywine Operating Partnership L.P.)

 

23-2862640

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

2929 Walnut Street

Suite 1700

 

 

Philadelphia, Pennsylvania

 

19104

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (610) 325-5600

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Brandywine Realty Trust

 

Yes   No 

Brandywine Operating Partnership, L.P.

 

Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Brandywine Realty Trust

 

Yes   No 

Brandywine Operating Partnership, L.P.

 

Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Brandywine Realty Trust:

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

 

 

Brandywine Operating Partnership, L.P.:

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Brandywine Realty Trust

 

Yes   No 

Brandywine Operating Partnership, L.P.

 

Yes   No 

A total of 178,602,602 Common Shares of Beneficial Interest, par value $0.01 per share of Brandywine Realty Trust, were outstanding as of October 19, 2018.

 

 


EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2018 of Brandywine Realty Trust (the “Parent Company”) and Brandywine Operating Partnership L.P. (the “Operating Partnership”). The Parent Company is a Maryland real estate investment trust, or REIT, that owns its assets and conducts its operations through the Operating Partnership, a Delaware limited partnership, and subsidiaries of the Operating Partnership. The Parent Company, the Operating Partnership and their consolidated subsidiaries are collectively referred to in this report as the “Company”. In addition, as used in this report, terms such as “we”, “us”, and “our” may refer to the Company, the Parent Company, or the Operating Partnership.

The Parent Company is the sole general partner of the Operating Partnership and, as of September 30, 2018, owned a 99.2% interest in the Operating Partnership. The remaining 0.8% interest consists of common units of limited partnership interest issued by the Operating Partnership to third parties in exchange for contributions of properties to the Operating Partnership. As the sole general partner of the Operating Partnership, the Parent Company has full and complete authority over the Operating Partnership’s day-to-day operations and management.

Management operates the Parent Company and the Operating Partnership as one enterprise. The management of the Parent Company consists of the same members as the management of the Operating Partnership.

As general partner with control of the Operating Partnership, the Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the Parent Company and the Operating Partnership are the same on their respective financial statements. The separate discussions of the Parent Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company's operations on a consolidated basis and how management operates the Company.

The Company believes that combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into a single report will result in the following benefits:

 

facilitate a better understanding by the investors of the Parent Company and the Operating Partnership by enabling them to view the business as a whole in the same manner as management views and operates the business;

 

remove duplicative disclosures and provide a more straightforward presentation in light of the fact that a substantial portion of the disclosure applies to both the Parent Company and the Operating Partnership; and

 

create time and cost efficiencies through the preparation of one combined report instead of two separate reports.

There are few differences between the Parent Company and the Operating Partnership, which are reflected in the footnote disclosures in this report. The Company believes it is important to understand the differences between the Parent Company and the Operating Partnership in the context of how these entities operate as an interrelated consolidated company. The Parent Company is a REIT, whose only material asset is its ownership of partnership interests of the Operating Partnership. As a result, the Parent Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing the debt obligations of the Operating Partnership. The Operating Partnership holds substantially all the assets of the Company and directly or indirectly holds the ownership interests in the Company’s Real Estate Ventures. The Operating Partnership conducts the operations of the Company’s business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness (directly and through subsidiaries) and through the issuance of partnership units of the Operating Partnership or equity interests in subsidiaries of the Operating Partnership.

The equity and non-controlling interests in the Parent Company and the Operating Partnership’s equity are the main areas of difference between the consolidated financial statements of the Parent Company and the Operating Partnership. The common units of limited partnership interest in the Operating Partnership are accounted for as partners’ equity in the Operating Partnership’s financial statements while the common units of limited partnership interests held by parties other than the Parent Company are presented as non-controlling interests in the Parent Company’s financial statements. The differences between the Parent Company and the Operating Partnership’s equity relate to the differences in the equity issued at the Parent Company and Operating Partnership levels.

2


 

To help investors understand the significant differences between the Parent Company and the Operating Partnership, this report presents the following as separate notes or sections for each of the Parent Company and the Operating Partnership:

 

Consolidated Financial Statements; and

 

Notes to the Parent Company’s and Operating Partnership’s Equity.

This report also includes separate Item 4. (Controls and Procedures) disclosures and separate Exhibit 31 and 32 certifications for each of the Parent Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Parent Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. § 1350.

In order to highlight the differences between the Parent Company and the Operating Partnership, the separate sections in this report for the Parent Company and the Operating Partnership specifically refer to the Parent Company and the Operating Partnership. In the sections that combine disclosures of the Parent Company and the Operating Partnership, this report refers to such disclosures as those of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and real estate ventures and holds assets and incurs debt, reference to the Company is appropriate because the business is one enterprise and the Parent Company operates the business through the Operating Partnership.

 

3


 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Brandywine Realty Trust

 

 

 

 

 

Financial Statements of Brandywine Realty Trust

 

5

 

 

 

Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

5

 

 

 

Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2018 and 2017

 

6

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine-month periods ended September 30, 2018 and 2017

 

7

 

 

 

Consolidated Statements of Beneficiaries’ Equity for the nine-month periods ended September 30, 2018 and 2017

 

8

 

 

 

Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2018 and 2017

 

10

 

 

 

Brandywine Operating Partnership, L.P.

 

 

 

 

 

Financial Statements of Brandywine Operating Partnership, L.P.

 

12

 

 

 

Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

12

 

 

 

Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2018 and 2017

 

13

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine-month periods ended September 30, 2018 and 2017

 

14

 

 

 

Consolidated Statements of Partners’ Equity for the nine-month periods ended September 30, 2018 and 2017

 

15

 

 

 

Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2018 and 2017

 

17

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

19

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

45

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

68

 

 

 

Item 4. Controls and Procedures

 

69

 

 

 

PART II — OTHER INFORMATION

 

71

 

 

 

Item 1. Legal Proceedings

 

71

 

 

 

Item 1A. Risk Factors

 

71

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

71

 

 

 

Item 3. Defaults Upon Senior Securities

 

71

 

 

 

Item 4. Mine Safety Disclosures

 

71

 

 

 

Item 5. Other Information

 

71

 

 

 

Item 6. Exhibits

 

72

 

 

 

Signatures

 

73

 

 

 

 

 

 

Filing Format

This combined Form 10-Q is being filed separately by Brandywine Realty Trust and Brandywine Operating Partnership, L.P.

 

4


 

PART I - FINANCIAL INFORMATION

Item 1. — Financial Statements

BRANDYWINE REALTY TRUST

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Real estate investments:

 

 

 

 

 

 

 

 

Operating properties

 

$

3,429,048

 

 

$

3,832,348

 

Accumulated depreciation

 

 

(845,674

)

 

 

(895,091

)

Operating real estate investments, net

 

 

2,583,374

 

 

 

2,937,257

 

Construction-in-progress

 

 

157,075

 

 

 

121,188

 

Land held for development

 

 

77,578

 

 

 

98,242

 

Prepaid leasehold interests in land held for development, net

 

 

40,100

 

 

 

-

 

Total real estate investments, net

 

 

2,858,127

 

 

 

3,156,687

 

Assets held for sale, net

 

 

297,194

 

 

 

392

 

Cash and cash equivalents

 

 

70,360

 

 

 

202,179

 

Accounts receivable, net of allowance of $3,782 and $3,467 as of September 30, 2018 and December 31, 2017, respectively

 

 

13,871

 

 

 

17,938

 

Accrued rent receivable, net of allowance of $13,562 and $13,645 as of September 30, 2018 and December 31, 2017, respectively

 

 

178,013

 

 

 

169,760

 

Investment in Real Estate Ventures, equity method

 

 

167,782

 

 

 

194,621

 

Deferred costs, net

 

 

97,004

 

 

 

96,695

 

Intangible assets, net

 

 

55,139

 

 

 

64,972

 

Other assets

 

 

186,132

 

 

 

92,204

 

Total assets

 

$

3,923,622

 

 

$

3,995,448

 

LIABILITIES AND BENEFICIARIES' EQUITY

 

 

 

 

 

 

 

 

Mortgage notes payable, net

 

$

322,588

 

 

$

317,216

 

Unsecured term loan, net

 

 

248,677

 

 

 

248,429

 

Unsecured senior notes, net

 

 

1,366,272

 

 

 

1,365,183

 

Accounts payable and accrued expenses

 

 

116,994

 

 

 

107,074

 

Distributions payable

 

 

32,492

 

 

 

32,456

 

Deferred income, gains and rent

 

 

26,731

 

 

 

42,593

 

Acquired lease intangibles, net

 

 

17,680

 

 

 

20,274

 

Liabilities related to assets held for sale

 

 

826

 

 

 

-

 

Other liabilities

 

 

14,559

 

 

 

15,623

 

Total liabilities

 

$

2,146,819

 

 

$

2,148,848

 

Commitments and contingencies (See Note 13)

 

 

 

 

 

 

 

 

Brandywine Realty Trust's Equity:

 

 

 

 

 

 

 

 

Common Shares of Brandywine Realty Trust's beneficial interest, $0.01 par value; shares authorized 400,000,000; 178,602,602 and 178,285,236 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

1,787

 

 

 

1,784

 

Additional paid-in-capital

 

 

3,223,817

 

 

 

3,218,564

 

Deferred compensation payable in common shares

 

 

14,021

 

 

 

12,445

 

Common shares in grantor trust, 977,120 and 894,736 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

(14,021

)

 

 

(12,445

)

Cumulative earnings

 

 

674,599

 

 

 

660,174

 

Accumulated other comprehensive income

 

 

10,239

 

 

 

2,399

 

Cumulative distributions

 

 

(2,150,463

)

 

 

(2,053,741

)

Total Brandywine Realty Trust's equity

 

 

1,759,979

 

 

 

1,829,180

 

Noncontrolling interests

 

 

16,824

 

 

 

17,420

 

Total beneficiaries' equity

 

$

1,776,803

 

 

$

1,846,600

 

Total liabilities and beneficiaries' equity

 

$

3,923,622

 

 

$

3,995,448

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

5


 

BRANDYWINE REALTY TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except share and per share information)

 

  

Three-month periods ended

 

 

Nine-month periods ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rents

$

107,580

 

 

$

102,557

 

 

$

321,597

 

 

$

307,446

 

Tenant reimbursements

 

20,557

 

 

 

17,239

 

 

 

59,094

 

 

 

53,812

 

Termination fees

 

498

 

 

 

200

 

 

 

1,630

 

 

 

2,013

 

Third party management fees, labor reimbursement and leasing

 

4,944

 

 

 

6,918

 

 

 

17,531

 

 

 

20,483

 

Other

 

1,419

 

 

 

1,524

 

 

 

5,290

 

 

 

3,395

 

Total revenue

 

134,998

 

 

 

128,438

 

 

 

405,142

 

 

 

387,149

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

37,833

 

 

 

36,847

 

 

 

115,052

 

 

 

110,947

 

Real estate taxes

 

12,433

 

 

 

11,235

 

 

 

37,272

 

 

 

34,062

 

Third party management expenses

 

2,612

 

 

 

2,619

 

 

 

9,605

 

 

 

7,391

 

Depreciation and amortization

 

43,900

 

 

 

42,429

 

 

 

130,908

 

 

 

132,584

 

General and administrative expenses

 

5,963

 

 

 

5,813

 

 

 

22,209

 

 

 

21,797

 

Provision for impairment

 

56,865

 

 

 

-

 

 

 

56,865

 

 

 

3,057

 

Total operating expenses

 

159,606

 

 

 

98,943

 

 

 

371,911

 

 

 

309,838

 

Operating income (loss)

 

(24,608

)

 

 

29,495

 

 

 

33,231

 

 

 

77,311

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

1,220

 

 

 

79

 

 

 

2,564

 

 

 

635

 

Interest expense

 

(19,257

)

 

 

(19,732

)

 

 

(58,091

)

 

 

(61,473

)

Interest expense - amortization of deferred financing costs

 

(618

)

 

 

(577

)

 

 

(1,872

)

 

 

(1,807

)

Equity in income (loss) of Real Estate Ventures

 

1

 

 

 

(5,723

)

 

 

(1,182

)

 

 

(5,387

)

Net gain (loss) on disposition of real estate

 

-

 

 

 

-

 

 

 

(35

)

 

 

8,411

 

Net gain on sale of undepreciated real estate

 

-

 

 

 

953

 

 

 

2,859

 

 

 

953

 

Net gain on Real Estate Venture transactions

 

-

 

 

 

13,758

 

 

 

37,263

 

 

 

28,340

 

Net income (loss) before income taxes

 

(43,262

)

 

 

18,253

 

 

 

14,737

 

 

 

46,983

 

Income tax (provision) benefit

 

-

 

 

 

793

 

 

 

(158

)

 

 

1,032

 

Net income (loss)

 

(43,262

)

 

 

19,046

 

 

 

14,579

 

 

 

48,015

 

Net (income) loss attributable to noncontrolling interests

 

339

 

 

 

(170

)

 

 

(167

)

 

 

(384

)

Net income (loss) attributable to Brandywine Realty Trust

 

(42,923

)

 

 

18,876

 

 

 

14,412

 

 

 

47,631

 

Distribution to preferred shareholders

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,032

)

Preferred share redemption charge

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,181

)

Nonforfeitable dividends allocated to unvested restricted shareholders

 

(80

)

 

 

(73

)

 

 

(280

)

 

 

(245

)

Net income (loss) attributable to Common Shareholders of Brandywine Realty Trust

$

(43,003

)

 

$

18,803

 

 

$

14,132

 

 

$

42,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per Common Share

$

(0.24

)

 

$

0.11

 

 

$

0.08

 

 

$

0.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per Common Share

$

(0.24

)

 

$

0.11

 

 

$

0.08

 

 

$

0.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

178,602,622

 

 

 

175,433,657

 

 

 

178,515,993

 

 

 

175,315,581

 

Diluted weighted average shares outstanding

 

178,602,622

 

 

 

176,835,022

 

 

 

179,752,544

 

 

 

176,599,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per Common Share

$

0.18

 

 

$

0.16

 

 

$

0.54

 

 

$

0.48

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

6


 

BRANDYWINE REALTY TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

 

Three-month periods ended

 

 

Nine-month periods ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

$

(43,262

)

 

$

19,046

 

 

$

14,579

 

 

$

48,015

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative financial instruments

 

734

 

 

 

312

 

 

 

7,008

 

 

 

(59

)

Amortization of interest rate contracts (1)

 

293

 

 

 

314

 

 

 

898

 

 

 

905

 

Total comprehensive income

 

1,027

 

 

 

626

 

 

 

7,906

 

 

 

846

 

Comprehensive income (loss)

 

(42,235

)

 

 

19,672

 

 

 

22,485

 

 

 

48,861

 

Comprehensive (income) loss attributable to noncontrolling interest

 

330

 

 

 

(174

)

 

 

(233

)

 

 

(391

)

Comprehensive income (loss) attributable to Brandywine Realty Trust

$

(41,905

)

 

$

19,498

 

 

$

22,252

 

 

$

48,470

 

 

(1)

Amounts reclassified from comprehensive income to interest expense within the Consolidated Statements of Operations.