10-K 1 ten-k.htm 10-K Prepared and filed by St Ives Burrups

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the fiscal year ended             December 31, 2002            

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from________________to________________

Commission File Number             1-9106            

Brandywine Realty Trust
(Exact name of registrant as specified in its charter)


 Maryland
(State or other jurisdiction of
Incorporation or organization)		  23-2413352
(I.R.S. Employer
Identification Number)



 401 Plymouth Road, Plymouth Meeting, Pennsylvania
(Address of principal executive offices)		  19462
(Zip Code)

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

  
Securities registered pursuant to Section 12(b) of the Act:


 Title of each class
Common Shares of Beneficial Interest,
(par value $0.01 per share)		  Name of each exchange
on which registered
New York Stock Exchange

 NONE
Securities registered pursuant to Section 12(g) of the Act:

  
(Title of class)

  
(Title of class)

 

 

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.

YES   NO  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

YES     NO  

The aggregate market value of the Common Shares of Beneficial Interest held by non-affiliates of the registrant as of the last day of the registrant’s most recently completed second fiscal quarter was $742.2 million. The aggregate market value has been computed by reference to the closing price of the Common Shares of Beneficial Interest on the New York Stock Exchange on such date. An aggregate of 35,301,820 Common Shares of Beneficial Interest were outstanding as of March 24, 2003.

Documents Incorporated By Reference

Portions of the proxy statement for the Annual Meeting of Shareholders of Brandywine Realty Trust to be held May 5, 2003 are incorporated by reference into Part III of this Form 10-K.

 

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TABLE OF CONTENTS

FORM 10-K

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PART I

Item 1.      Business

General

Brandywine Realty Trust (collectively with its subsidiaries, the “Company”) is a self-administered and self-managed real estate investment trust (“REIT”) active in acquiring, developing, redeveloping, leasing and managing office and industrial properties. As of December 31, 2002, the Company owned 210 office properties, 27 industrial facilities and one mixed-use property (collectively, the “Properties”) containing an aggregate of approximately 16.1 million net rentable square feet. The Company was also performing management and leasing services for 43 properties containing an aggregate of 3.1 million net rentable square feet. In addition, as of December 31, 2002, the Company held economic interests in ten unconsolidated real estate ventures (the “Real Estate Ventures”) that were formed with third parties to develop commercial properties. The Real Estate Ventures own eight office buildings that contain approximately 800,000 net rentable square feet. As of December 31, 2002, the Company had an aggregate investment in the Real Estate Ventures of approximately $14.8 million (net of returns of investment received by Company). As of December 31, 2002, the Company also owned approximately 444 acres of undeveloped land and held options to purchase approximately 63 additional acres. The Company also holds an option to enter into a long-term ground lease of property adjacent to Amtrak’s 30th Street Station in Philadelphia and develop a high-rise office property on the leasehold interest. The Properties are located in the office and industrial markets in and surrounding Philadelphia, Pennsylvania, New Jersey and Richmond, Virginia.

Business Objectives

The Company’s business objectives are to:

  •
maximize cash flow through leasing strategies designed to capture potential rental growth as rental rates increase and as below-market leases are renewed;
     
  •
attain a high tenant retention rate through aggressive tenant service programs responsive to the varying needs of the Company’s diverse tenant base;
     
  •
increase economic diversification while maximizing economies of scale;
     
  •
develop high-quality office and industrial properties on the Company’s existing inventory of land, as warranted by market conditions;
     
  •
capitalize on management’s redevelopment expertise to selectively acquire, redevelop and reposition underperforming properties in desirable locations;
     
  •
acquire high-quality office and industrial properties and portfolios of such properties at attractive yields in selected submarkets within the Mid-Atlantic region that management expects will experience economic growth and that provide barriers to entry; and
     
  •
enhance the Company’s investment strategy through the pursuit of joint venture opportunities with high-quality partners having attractive real estate holdings or significant financial resources.

The Company expects to continue to concentrate its real estate activities in submarkets within the Mid-Atlantic region where it believes that: (i) barriers to entry (such as zoning restrictions, utility availability, infrastructure limitations, development moratoriums and limited developable land) will create supply constraints on office and industrial space; (ii) current market rents and absorption statistics justify limited new construction activity; (iii) it can maximize market penetration by accumulating a critical mass of properties and thereby enhance operating efficiencies; and (iv) there is potential for economic growth.

 

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Organization

The Company was organized and commenced its operations in 1986 as a Maryland real estate investment trust. The Company owns its assets and conducts its operations through Brandywine Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”), and subsidiaries of the Operating Partnership. As of December 31, 2002, the Company’s ownership interest in the Operating Partnership entitled it to approximately 94.9% of the Operating Partnership’s distributions after distributions by the Operating Partnership to holders of its preferred units. The structure of the Company as an “UPREIT” is designed, in part, to permit persons contributing properties (or interests in properties) to the Company to defer some or all of the tax liability they might otherwise incur in a sale of properties. The Company conducts its real estate management services through Brandywine Realty Services Corporation (the “Management Company”), a subsidiary of which 95% is owned by the Operating Partnership. The remaining five percent is owed by a partnership comprised of two executives of the Company. See “Management Activities.”

The Company’s executive offices are located at 401 Plymouth Road, Suite 500, Plymouth Meeting, Pennsylvania 19462 and its telephone number is (610) 325-5600. The Company has an internet website at www.brandywinerealty.com.

Credit Facility

The Company and the Operating Partnership maintain an unsecured credit facility (the “Credit Facility”) with a bank group (comprising 21 banks) led by Bank of America, N.A. A majority of the Company’s direct and indirect subsidiaries are parties to the Credit Facility as guarantors. The Credit Facility provides up to $500 million in credit availability for working capital advances and letters of credit. As of December 31, 2002, there was unused availability of $179.4 million under the Credit Facility. The Credit Facility is scheduled to mature in June 2004, but may be extended at the Company’s election for a period of one year upon payment of a fee equal to .25% of the amount of the Credit Facility at the time of extension.

Advances under the Credit Facility currently bear interest at the London Inter-Bank Offered Rate (“LIBOR”) (1.38% at December 31, 2002) plus 1.50%. The spread over LIBOR varies, based on the Company’s leverage, from a low of 1.25% to a high of 1.75%. The Company has the option to elect an interest rate equal to the higher of the Federal Funds rate plus .75% or Bank of America’s prime rate plus .25%. The Company generally elects the interest rate based on LIBOR for all or most of the borrowings on the Credit Facility. An alternative rate and pricing structure is set forth in the Credit Facility if the Company or the Operating Partnership obtains at least two investment grade debt ratings.

The Company has entered into interest rate swap and rate cap agreements designed to reduce the impact of interest rate changes on certain variable rate debt. At December 31, 2002, the Company had interest rate swap agreements for notional principal amounts aggregating $175 million. The swap agreements effectively fix the LIBOR portion of the Company’s interest rate on $100 million of Credit Facility borrowings at 4.230% and $75 million of Credit Facility borrowings at 4.215%, in each case until June 2004. The interest rate cap agreement effectively limits the interest rate on a mortgage with a notional value of $28 million at 8.7% until July 2004.

The Credit Facility contains provisions limiting: the incurrence of additional debt; the granting of liens; the consummation of mergers and consolidations; the disposition of certain assets and interests in subsidiaries; the making of certain loans, advances and investments; and the payment of dividends. The restriction on dividends permits the Company to pay dividends in the amount required for it to retain its qualification as a REIT under the Internal Revenue Code of 1986, and otherwise limits dividends to 90% of the Company’s funds from operations, as defined in the Credit Facility.

 

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The Credit Facility also contains financial covenants that require the Company to maintain a debt service coverage ratio, an interest coverage ratio, a fixed charge coverage ratio, an unsecured debt ratio and an unencumbered cash flow ratio above certain specified minimum levels; to maintain net worth above an amount determined on a specified formula; and to maintain a leverage ratio and a secured debt ratio below certain maximum levels. One additional financial covenant limits the percentage of the Company’s total assets (on a consolidated basis) that can be held by subsidiaries not party to the Credit Facility.

Term Loan

On July 15, 2002, the Company and the Operating Partnership entered into an unsecured term loan agreement with a group of lenders under which those lenders funded a term loan of $100 million (the “Term Loan”) to the Company and the Operating Partnership. The proceeds of the Term Loan were used to repay existing indebtedness, consisting primarily of indebtedness that had been outstanding under the Credit Facility. The Term Loan, like the Credit Facility, is recourse to the Company, the Operating Partnership and those subsidiaries that are parties, as guarantors, to the Term Loan agreement (which are the same subsidiaries that are guarantors of the Credit Facility). Bank of America, N.A. serves as administrative agent for a group of lenders under the Term Loan, as it does for the lenders under the Credit Facility, although the groups of lenders are not identical under the Term Loan and Credit Facility.

There is no required principal amortization of the Term Loan prior to maturity. The Term Loan matures on July 15, 2005, subject to two extensions of one year each upon payment by the Company of an extension fee and the absence of any defaults at the time of each extension.

The Term Loan bears interest at a per annum floating rate equal to the one, two, three or six month LIBOR, plus between 1.05% and 1.90% (1.65% at December 31, 2002), depending on the leverage and debt rating of the Company and the Operating Partnership. At the Company’s option, the Term Loan may bear interest at the prime rate plus .25%. Interest is due at the end of the LIBOR term, unless a six month LIBOR term is selected, in which case interest is also paid at the end of the third month of the LIBOR term. If the Company elects interest based on the prime rate, then interest payments will be due monthly.

The agreement providing for the Term Loan contains financial and operating covenants identical to those in the agreement establishing the Credit Facility. In addition, the Term Loan agreement, like the Credit Facility agreement, requires payment of prepayment premiums in certain instances.

 

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Additional Debt

Mortgage Indebtedness. The following table sets forth information regarding the Company’s mortgage indebtedness outstanding at December 31, 2002:

    Principal
Balance
(in 000’s)		   Interest
Rate(a)		   Annual
DebtService
(in 000’s)
(a) (b)		   Maturity
Date		  
           
           
           
Property / Location
          
 
 
 
 
 
630 Allendale Road (c)
   $ 19,797     2.88 % $ 891     Mar-03  
400 Berwyn Park (c)
     15,726     2.98 %   469     Jul-03  
1009 Lenox Drive
     13,728     8.75 %   1,628     Jul-03  
Lake Ctr II,IV / Wood Falls I, IV /
                          
   Southpoint I,II / Valleybrooke I,II,III
     57,051     6.80 %   4,900     Dec-03  
One & Three Christina, and 10000
                          
   & 15000 Midlantic Drive
     57,608     7.18 %   4,916     Feb-04  
1000 Howard Boulevard
     4,090     9.25 %   803     Nov-04  
Croton Road
     6,309     7.81 %   590     Jan-06  
111 Arrandale Blvd.
     1,200     8.65 %   150     Aug-06  
429 Creamery
     3,371     8.30 %   410     Sep-06  
Interstate Center (a)
     1,285     3.19 %   193     Mar-07  
440 & 442 Creamery
     5,986     8.55 %   631     Jul-07  
Norriton Office Center
     5,409     8.50 %   524     Oct-07  
481 John Young Way
     2,526     8.40 %   261     Nov-07  
400 Commerce Drive
     12,507     7.12 %   1,059     Jun-08  
200 Commerce Drive
     6,272     7.12 %   556     Jan-10  
Plymouth Meeting Executive Campus
     49,033     7.00 %   4,142     Dec-10  
Arboretum I, II, III & V
     24,498     7.59 %   2,235     Jul-11  
993, 997 and 2000 Lenox Drive,
                          
   2000, 4000, 9000 Midlantic Drive
                          
   and 1 Righter Parkway
     66,963     8.05 %   6,325     Oct-11  
Newtown Square, Berwyn, Libertyview
     66,000     7.25 %   4,785     May-13  
Southpoint III
     6,674     7.75 %   887     Apr-14  
Grande B (30 properties)
     82,902     7.48 %   7,444     Jul-27  
Grande A (24 properties)
                          
   Tranche 1
     64,966     7.48 %   6,317     Jul-27  
   Tranche 2 (a)
     20,000     2.14 %   428     Jul-27  
   Tranche 3 (a)
     3,828     2.31 %   88     Jul-27  
   
       
       
   Total mortgage indebtedness
   $ 597,729         $ 50,632        
   
       
       
   
(a)
For loans that bear interest at a variable rate, the rates in effect at December 31, 2002 have been assumed to remain constant.
(b)
“Annual Debt Service” is calculated by annualizing the regularly scheduled principal and interest amortization.
(c)
“Annual Debt Service” for construction loans that require payment of interest only is calculated by annualizing the interest payment based on the outstanding debt balances and rates in effect at December 31, 2002.

Guaranties. As of December 31, 2002, the Company had guaranteed repayment of approximately $2.0 million of loans on behalf of the Real Estate Ventures. See Item 2. Properties — Real Estate Ventures. The Company also guaranteed a $16.2 million loan on behalf of a former Real Estate Venture. Payment under the guaranty, which expires in January 2004, would be required only in the event of a default on the loan and if and to the extent the collateral for the loan were insufficient to provide for payment in full of the loan. The Company also provides customary environmental indemnities in connection with construction and permanent financing both for its own account and on behalf of its Real Estate Ventures.

Management Activities

The Company conducts its third-party real estate management services business through the Management Company, a taxable REIT subsidiary. As of December 31, 2002, the Management Company was managing properties containing an aggregate of approximately 19.0 million net rentable square feet, of which approximately 15.9 million net rentable square feet related to Properties owned by the Company or subject to purchase options held by the Company, and approximately 3.1 million net rentable square feet related to properties owned by unaffiliated third parties.

 

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Geographic Segments

The Company currently manages its portfolio within three segments: (1) Pennsylvania, (2) New Jersey and (3) Virginia. (See Note 12 to the Financial Statements.) The Company does not have any foreign operations and its business is not seasonal.

Competition

The leasing of real estate is highly competitive. The Properties compete for tenants with similar properties primarily on the basis of location, total occupancy costs (including base rent and operating expenses), services provided, and the design and condition of the improvements. The Company also faces competition when attempting to acquire real estate, including competition from domestic and foreign financial institutions, other REIT’s, life insurance companies, pension funds, partnerships and individual investors.

Employees

As of December 31, 2002, the Company had 231 full-time employees.

Regulations

Many laws and governmental regulations are applicable to the Company and the Properties and changes in these laws and regulations or their interpretation by agencies and the courts occur frequently. See “Risk Factors — Environmental problems at the Properties are possible and may be costly.”

Availability of SEC Reports

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other information with the SEC. Members of the public may read and copy materials that the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Members of the public may also obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers, including the Company, that file electronically with the SEC. The address of that site is http://www.sec.gov. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other information filed by the Company with the SEC are available, without charge, on the Company’s Internet web site, http://www.brandywinerealty.com, as soon as reasonably practicable after they are filed electronically with the SEC. Copies are also available, without charge, from Secretary, Brandywine Realty Trust, 401 Plymouth Road, Suite 500, Plymouth Meeting, PA 19462.

Risk Factors

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Annual Report on Form 10-K and other materials filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contain statements that are forward-looking, such as statements relating to business development and real estate development activities, acquisitions, dispositions, future capital expenditures, financing sources and availability, and the effects of regulation (including environmental regulation) and competition. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. As forward-looking statements, these statements involve risks, uncertainties and other factors that could cause actual results to differ materially from the expected results and, accordingly, such results may differ from those expressed in any forward-looking statements made by, or on behalf of, the Company. Factors that could cause actual

 

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results to differ materially from management’s current expectations include, but are not limited to, changes in general economic conditions, changes in local real estate conditions (including changes in rental rates and the number of competing properties), changes in the economic conditions affecting industries in which the Company’s principal tenants compete, the Company’s failure to lease unoccupied space in accordance with the Company’s projections, the failure of the Company to re-lease occupied space upon expiration of leases, the bankruptcy of major tenants, changes in prevailing interest rates, the unavailability of equity and debt financing, unanticipated costs associated with the acquisition and integration of the Company’s acquisitions, unanticipated costs to complete and lease-up pending developments, increased costs for, or lack of availability of, adequate insurance, including for terrorist acts, demand for tenant services beyond those traditionally provided by landlords, potential liability under environmental or other laws, the existence of complex regulations relating to the Company’s status as a REIT and to the Company’s acquisition, disposition and development activities, the adverse consequences of the Company’s failure to qualify as a REIT and the other risks identified in this Annual Report on Form 10-K. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. The Company refers to itself as “we” or “our” in the following risk factors.

Our operations are concentrated in the Mid-Atlantic region, and our operational and financial performance depend on the economies in the markets in which we have a presence; changes in such markets may adversely affect our financial condition.

Our Properties are located in suburban markets in Pennsylvania, New Jersey, Virginia and Delaware. Like other real estate markets, these markets have experienced economic downturns in the past, and they are currently experiencing a downturn similar to the broader economic slowdown in the U.S. Such slowdowns can lead companies to lay off employees, which might cause them to require less office space. They can also result in companies experiencing difficulty with their cash flow, which might cause them to delay or miss making their lease payments or to declare bankruptcy. Furthermore, the sluggish climate might affect the timing of lease commitments by new tenants or of lease renewals by existing tenants as such parties delay or defer their leasing decisions to get the most current information possible about trends in their businesses or industries. A prolonged decline in the economies of these real estate markets could adversely affect our operations or cash flow and ability to make distributions to shareholders.

Financially distressed tenants may reduce our cash flow.

We cannot assure you that any tenant that files for bankruptcy protection will continue to pay us rent. A bankruptcy filing by or relating to one of our tenants or a lease guarantor would bar all efforts by us to collect pre-bankruptcy debts from that tenant or the lease guarantor, or their property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant or lease guarantor bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims, and there are restrictions under bankruptcy laws that limit the amount of the claim we can make if a lease is rejected. As a result, it is likely that we will recover substantially less than the full value of any unsecured claims we hold. For additional detail on tenant credit risk, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Tenant Credit Risk.

We may be unable to renew leases or relet space as leases expire.

If tenants do not to renew their leases upon expiration, we may be unable to relet the subject space. Even if the tenants do renew their leases or we can relet the space, the terms of renewal or reletting (including the cost of required renovations) may be less favorable than current lease terms. Certain leases grant the tenants an early termination right upon payment of a termination penalty. For additional detail on the risk of non-renewal of expiring leases, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Tenant Rollover Risk.

 

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New development and acquisitions may not produce results in accordance with our expectations and may require development and renovation costs exceeding our estimates.

Once made, our investments may not produce results in accordance with our expectations. Our actual renovation and improvement costs in bringing an acquired property up to market standards may exceed our estimates.

In addition, we are active in developing and redeveloping office properties. Risks associated with these activities include:

  •
the unavailability of favorable financing, including permanent financing to repay construction financing;
     
  •
construction costs exceeding original estimates;
     
  •
construction and lease-up delays resulting in increased debt service and construction costs;
     
  •
complications (including building moratoriums and anti-growth legislation) in obtaining necessary zoning, occupancy and other governmental permits; and
     
  •
insufficient occupancy levels and rental rates at a newly completed property causing the property to be unprofitable.

For additional detail on development risks, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Development Risk.

Some potential losses are not covered by insurance.

We carry comprehensive liability, fire, extended coverage and rental loss insurance on all of our Properties. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are, however, types of losses, such as lease and other contract claims and acts of war, that generally are not insured. Some of our existing insurance policies expire in July 2003. We cannot be assured that we will be able to renew insurance coverage in an adequate amount or at reasonable prices. In addition, insurance companies may no longer offer coverage against certain types of losses, such as losses due to terrorist acts and mold, or, if offered, these types of insurance may be prohibitively expensive. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a Property, as well as the anticipated future revenue from the Property. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the Property. We cannot be assured that material losses in excess of insurance proceeds will not occur in the future. If any of our Properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the Property. Such events could adversely affect our cash flow and ability to make distributions to shareholders.

Because real estate is illiquid, we may not be able to sell Properties when appropriate.

Real estate investments generally cannot be sold quickly. We may not be able to vary our portfolio promptly in response to economic or other conditions. In addition, the Internal Revenue Code of 1986 (the “Code”) limits our ability to sell properties held for fewer than four years. Furthermore, Properties that we acquired in exchange for units in the Operating Partnership often have a low tax basis. If we were to dispose of any of these Properties in a taxable transaction, we may be required to distribute a significant amount of the taxable gain to our security holders under the requirements of the Internal Revenue Code of 1986 applicable to REITs and this could, in turn, impact our cash flow and ability to make distributions to shareholders. In addition, purchase options and rights of first refusal held by certain tenants or partners in Real Estate Ventures may also limit our ability to sell certain properties. Any of these factors could

 

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adversely affect our cash flow and ability to make distributions to shareholders as well as the ability of someone to purchase us, even if a purchase were in our shareholders’ best interests.

We have agreed not to sell certain of our Properties.

We have agreed with the former owners of 67 of our Properties aggregating approximately 4.5 million net rentable square feet not to sell these Properties for varying periods of time in transactions that would trigger taxable income to the former owners, subject to certain exceptions. Some of these agreements are with affiliates of current trustees of our company. In addition, we may enter into similar agreements with sellers of Properties acquired by us in the future. These agreements generally provide that we may dispose of the applicable Properties in transactions that qualify as tax-free exchanges under Section 1031 of the Code or in other tax deferred transactions. Such transactions can be difficult and result in the property acquired in exchange for the disposed of property inheriting the tax attributes (including tax protection covenants) of the disposed of property. Without suffering adverse financial consequences, we may be precluded from selling certain Properties other than in transactions that would qualify as tax-free exchanges for federal income tax purposes.

Our operating costs might rise, which might reduce our profitability and have an adverse effect on our cash flow and our ability to make distributions to shareholders.

We might face higher operating expenses as a result of rising costs generally and following the terrorist attacks in the U.S. on September 11, 2001 in particular. For example, it might cost more in the future than in the past for building security, property/casualty and liability insurance, and property maintenance. Following the September 11th attacks, we have increased the level of security at our Properties. We might not be able to pass along the increased costs associated with such increased building security to our tenants, which could reduce our profitability and cash flow. Some of our existing insurance policies expire in July 2003. As a result of the terrorist attacks and other market conditions, the cost of premiums for comparable coverage might be significantly higher when it is time to renew our coverage, which could increase our operating expenses and reduce our profitability and our cash flow. Because of rising costs in general, we might experience increases in our property maintenance costs, such as for cleaning, electricity, and heating, ventilation and air conditioning. In general, under our leases with tenants, we pass on a portion of these costs to them. We cannot be assured, however, that tenants will actually bear the full burden of these higher costs, or that such increased costs will not lead them, or other prospective tenants, to seek office space elsewhere. If operating expenses increase, the availability of other comparable office space in our specific geographic markets might limit our ability to increase rents, which could reduce our profitability (if operating expenses increase without a corresponding increase in revenues) and limit our ability to make distributions to shareholders.

We face significant competition from other real estate developers.

We compete with real estate developers, operators and institutions for tenants and acquisition and development opportunities. Some of these competitors have significantly greater financial resources than we do. Such competition may reduce the number of suitable investment opportunities offered to us, interfere with our ability to attract and retain tenants and may increase vacancies, which increases supply and lowers market rental rates, reduces our bargaining leverage and adversely affects our ability to improve our operating leverage. We cannot be assured that this competition will not adversely affect our cash flow and ability to make distributions to shareholders.

Our ability to make distributions is subject to various risks.

We have been paying quarterly distributions to our shareholders. Our ability to make distributions in the future will depend upon:

  •
the operational and financial performance of our Properties;

 

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  •
capital expenditures with respect to existing and newly acquired Properties;
     
  •
the amount of, and the interest rates on, our debt; and
     
  •
the absence of significant expenditures relating to environmental and other regulatory matters.

Certain of these matters are beyond our control and any significant difference between our expectations and actual results could have a material adverse effect on our cash flow and our ability to make distributions to shareholders.

Changes in the law may adversely affect our cash flow.

Because increases in income and service taxes are generally not passed through to tenants under leases, such increases may adversely affect our cash flow and ability to make expected distributions to shareholders. The Properties are also subject to various regulatory requirements, such as those relating to the environment, fire and safety. Our failure to comply with these requirements could result in the imposition of fines and damage awards. Also, the costs to comply with any new or different regulations could adversely affect our cash flow and our ability to make distributions. While we believe that the Properties are currently in material compliance with all such requirements, we cannot be assured that these requirements will not change or that newly imposed requirements will not require significant unanticipated expenditures.

Our indebtedness subjects us to additional risks.

Debt Financing and Existing Debt Maturities. Like other real estate companies, we are subject to risks normally associated with debt financing, such as the insufficiency of cash flow to meet required debt service payment obligations and the inability to refinance existing indebtedness. If our debt cannot be paid, refinanced or extended at maturity, in addition to our failure to repay our debt, we may not be able to make distributions to shareholders at expected levels or at all. Furthermore, an increase in our interest expense could adversely affect our cash flow and ability to make distributions to shareholders. If we do not meet our debt service obligations, any Properties securing such indebtedness could be foreclosed on, which would have a material adverse effect on our cash flow and ability to make distributions and, depending on the number of Properties foreclosed on, could threaten our continued viability.

Risk of Rising Interest Rates and Variable Rate Debt. Increases in interest rates on variable rate indebtedness would increase our interest expense, which could adversely affect our cash flow and ability to make distributions to shareholders. As of December 31, 2002, outstanding borrowings of approximately $264.6 million bear interest at variable rates.

No Limitation on Debt. Our organizational documents do not contain any limitation on our ability to incur additional debt. Accordingly, subject to limitations in our credit facilities, we could increase our outstanding debt without restriction. The increased debt service could adversely affect our cash flow and ability to make distributions and could increase the risk of default on our indebtedness.

Environmental problems at the Properties are possible and may be costly.

Federal, state and local laws, ordinances and regulations may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or releases at such property. The owner or operator may be forced to pay for property damage and for investigation and clean-up costs incurred by others in connection with environmental contamination. Such laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site. These costs may be substantial

 

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and the presence of such substances may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral.

Environmental laws that govern the presence, maintenance and removal of asbestos require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, notify and train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

Independent environmental consultants have conducted a standard Phase I or similar general environmental site assessment (“ESA”) of each of our Properties to identify potential sources of environmental contamination and assess environmental regulatory compliance. For a number of the Properties, the Phase I ESA either referenced a prior Phase II ESA obtained on such Property or prompted us to have a Phase II ESA of such Property conducted. A Phase II ESA generally involves invasive procedures, such as soil sampling and testing or the installation and monitoring of groundwater wells. While the ESAs conducted have identified environmental contamination on a few of the Properties, they have not revealed any environmental contamination, liability or compliance concern that we believe would have a material adverse effect on our cash flow or ability to make distributions to shareholders. It is possible that the existing ESAs relating to the Properties do not reveal all environmental contaminations, liabilities or compliance concerns which currently exist, and it is also possible that the cost of remediating identified contamination may exceed current estimates. In addition, future properties which we acquire may be subject to environmental conditions.

While we have an ongoing maintenance program in place to address indoor air quality, inquiries about indoor air quality may necessitate special investigation and, depending on the results, remediation. Indoor air quality issues can stem from inadequate ventilation, chemical contaminants from indoor or outdoor sources, and biological contaminants such as molds, pollen, viruses and bacteria. Indoor exposure to chemical or biological contaminants above certain levels can be alleged to be connected to allergic reactions or other health effects and symptoms in susceptible individuals. If these conditions occur at one of our Properties, we may need to undertake a targeted remediation program, including without limitation, steps to increase indoor ventilation rates and eliminate sources of contaminants. Such remediation programs are costly and could necessitate the temporary relocation of some or all of the property’s tenants or require rehabilitation of the affected property.

Americans with Disabilities Act compliance could be costly.

Under the Americans with Disabilities Act of 1990 (“ADA”), all public accommodations and commercial facilities must meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA requirements could involve removal of structural barriers from certain disabled persons’ entrances. Other federal, state and local laws may require modifications to or restrict further renovations of our Properties with respect to such accesses. Although we believe that our properties are substantially in compliance with present requirements, noncompliance with the ADA or related laws or regulations could result in the United States government imposing fines or private litigants being awarded damages against us. Such costs may adversely affect our cash flow and ability to make distributions.

By holding Properties through the Operating Partnership and various joint ventures, we are exposed to additional risks.

We own the Properties and interests in Real Estate Ventures through the Operating Partnership. In the future, we expect to continue to participate with other entities in property ownership through joint ventures or partnerships. Partnership or joint venture investments may involve risks not otherwise present in direct investments. Such risks include:

 

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  •
the potential bankruptcy of our partners or co-venturers;
     
  •
a conflict between our business goals and those of our partners or co-venturers; and
     
  •
actions taken by our partners or co-venturers contrary to our instructions or objectives.

There is no limitation under our organizational documents as to the amount of funds which we may invest in partnerships or joint ventures.

Our status as a REIT is dependent on compliance with federal income tax requirements.

Our failure to qualify as a REIT would have serious adverse consequences to our shareholders. We believe that since 1986, we have qualified for taxation as a REIT for federal income tax purposes. We plan to continue to meet the requirements for taxation as a REIT. Many of these requirements are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must come from certain sources that are itemized in the REIT tax laws. We are also required to distribute to shareholders at least 90% of our REIT taxable income (excluding net capital gains). The fact that we hold our assets through the Operating Partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the IRS might change the tax laws and regulations, and the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT. We do not believe, however, that any pending or proposed tax law changes would jeopardize our REIT status.

To maintain REIT status, a REIT may not own more than 10% of the stock of any corporation, except for a qualified REIT subsidiary (which must be wholly-owned by the REIT), taxable REIT subsidiary or another REIT.

If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates. Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first failed to qualify. If we failed to qualify as a REIT, we would be required to pay significant income taxes and would, therefore, have less money available for investments or for distributions to shareholders. This would likely have a material adverse effect on the value of our securities. In addition, we would no longer be required to make any distributions to shareholders.

In order to make the distributions required to maintain our REIT status, we may need to borrow funds. To obtain the favorable tax treatment associated with REIT qualification, we generally will be required to distribute to shareholders at least 90% of our annual REIT taxable income (excluding net capital gains). In addition, we will be subject to tax on our undistributed net taxable income and net capital gain and a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of 85% of ordinary income plus 95% of capital gain net income for the calendar year, plus certain undistributed amounts from prior years.

We intend to make distributions to shareholders to comply with the distribution provisions of the Code and to avoid income and other taxes. Our income will consist primarily of our share of the income of the Operating Partnership and our cash flow will consist primarily of our share of distributions from the Operating Partnership. Differences in timing between the receipt of income and the payment of expenses in arriving at taxable income (of the Company or the Operating Partnership) and the effect of required debt amortization payments could require us to borrow funds on a short-term basis or to liquidate funds on adverse terms to meet the REIT qualification distribution requirements.

Failure of the Operating Partnership (or a subsidiary partnership) to be treated as a partnership would have serious adverse consequences to our shareholders. If the IRS were to successfully challenge the tax status of the Operating Partnership or any of its subsidiary partnerships for federal income tax purposes, the

 

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Operating Partnership or the affected subsidiary partnership would be taxable as a corporation. In such event, we would cease to qualify as a REIT and the imposition of a corporate tax on the Operating Partnership or a subsidiary partnership would reduce the amount of cash available for distribution from such partnership to us and our shareholders.

We do pay some taxes. Even if we qualify as a REIT, we are required to pay certain federal, state and local taxes on our income and Properties. In addition, the Management Company is subject to federal, state and local income tax at regular corporate rates on its net taxable income derived from its management, leasing and related service business. If we have net income from a prohibited transaction, such income will be subject to a 100% tax.

We own a subsidiary REIT. One of our subsidiaries, Atlantic American Properties Trust (“AAPT”), that indirectly holds 22 of the Properties, elected to be taxed as a REIT for the year ended December 31, 1997. So long as we seek to maintain AAPT’s REIT status, AAPT will be subject to all the requirements and risks associated with maintaining REIT status summarized above, including the limitation on the ownership of more than 10% of the securities of any corporation (other than a qualified REIT subsidiary, taxable REIT subsidiary or another REIT).

We are dependent upon our key personnel.

We are dependent upon the efforts of our executive officers, particularly Gerard H. Sweeney. The loss of Mr. Sweeney’s services could have an adverse affect on our operations and would entitle the banks under our Credit Facility to accelerate the amounts due thereunder. Although we have an employment agreement with Mr. Sweeney for a term extending to May 7, 2005, this agreement does not restrict his ability to become employed by a competitor following the termination of his employment with us. We do not have keyman life insurance coverage for Mr. Sweeney.

Certain limitations exist with respect to a third party’s ability to acquire us or effectuate a change in control.

Limitations imposed to protect our REIT status. In order to protect us against loss of our REIT status, our Declaration of Trust limits any shareholder from owning more than 9.8% in value of our outstanding shares, subject to certain exceptions. The ownership limit may have the effect of precluding acquisition of control of the Company. If anyone acquires shares in excess of the ownership limit, we may:

  •
consider the transfer to be null and void;
     
  •
not reflect the transaction on our books;
     
  •
institute legal action to stop the transaction;
     
  •
not pay dividends or other distributions with respect to those shares;
     
  •
not recognize any voting rights for those shares; and
     
  •
consider the shares held in trust for the benefit of a person to whom such shares may be transferred.

Limitation due to our ability to issue preferred shares. Our Declaration of Trust authorizes the Board of Trustees to issue preferred shares. The Board of Trustees may establish the preferences and rights of any preferred shares issued which could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our shareholders’ best interests.

Limitations imposed by the Maryland Business Combination Law. The Maryland General Corporation Law, as applicable to Maryland real estate investment trusts, establishes special restrictions against

 

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“business combinations” between a Maryland real estate investment trust and “interested shareholders” or their affiliates unless an exemption is applicable. An interested shareholder includes a person who beneficially owns, and an affiliate or associate of the trust who, at any time within the two-year period prior to the date in question, was the beneficial owner of, ten percent or more of the voting power of our then-outstanding voting shares. Among other things, the law prohibits (for a period of five years) a merger and certain other transactions between the trust and an interested shareholder unless the Board of Trustees approved the transaction before the party became an interested shareholder. The five-year period runs from the most recent date on which the interested shareholder became an interested shareholder. Thereafter, any such business combination must be recommended by the Board of Trustees and approved by two super-majority shareholder votes unless, among other conditions, the trust’s common shareholders receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the interested shareholder for its shares or unless the Board of Trustees approved the transaction before the party in question became an interested shareholder. The business combination statute could have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating any such offers, even if our acquisition would be in our shareholders’ best interests. We have exempted any business combination involving Safeguard Scientifics, Inc., the Commonwealth of Pennsylvania State Employees’ Retirement System and a voting trust established for its benefit, Morgan Stanley Asset Management Inc. and two funds managed by it, Lazard Freres Real Estate Investors, L.L.C., Five Arrows Realty Securities III L.L.C., Gerard H. Sweeney (the Company’s President and Chief Executive Officer) and any of their respective affiliates or associates.

Maryland Control Share Acquisition Act. Maryland law provides that “control shares” of a real estate investment trust acquired in a “control share acquisition” shall have no voting rights except to the extent approved by a vote of two-thirds of the vote eligible to be cast on the matter under the Maryland Control Share Acquisition Act. “Control Shares” means shares that, if aggregated with all other shares previously acquired by the acquirer, would entitle the acquirer to exercise voting power in electing trustees within one of the following ranges of voting power: one-tenth or more but less than one-third, one-third or more but less than a majority or a majority or more of all voting power. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions. If voting rights or control shares acquired in a control share acquisition are not approved at a shareholder’s meeting, then subject to certain conditions and limitations the issuer may redeem any or all of the control shares for fair value. If voting rights of such control shares are approved at a shareholder’s meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other shareholders may exercise appraisal rights. Any control shares acquired in a control share acquisition which are not exempt under our bylaws will be subject to the Maryland Control Share Acquisition Act.

Many factors can have an adverse effect on the market value of our securities.

Like any publicly traded company, a number of factors might adversely affect the price of our securities, many of which are beyond our control. These factors include:

  •
Increases in market interest rates, relative to the dividend yield on our shares. If market interest rates go up, prospective purchasers of our securities may require a higher yield. Higher market interest rates would not, however, result in more funds for us to distribute and, to the contrary, would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common shares to go down.
     
  •
Anticipated benefit of an investment in our securities as compared to investment in securities of companies in other industries (including benefits associated with tax treatment of dividends and distributions).
     
  •
Perception by market professionals of REITs generally and REITs comparable to us in particular.

 

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  •
Perception by market participants of our potential for payment of cash distributions and for growth.
     
  •
Level of institutional investor interest in our securities.
     
  •
Relatively low trading volumes in securities of REITs.
     
  •
Our results of operations and financial condition.

The issuance of preferred securities may adversely affect the rights of holders of Common Shares.

Because the Board of Trustees has the power to establish the preferences and rights of each class or series of Preferred Shares, it may afford the holders in any series or class of preferred shares preferences, distributions, powers and rights, voting or otherwise, senior to the rights of holders of Common Shares. The Board of Trustees also has the power to establish the preferences and rights of each class or series of units in the Operating Partnership, and may afford the holders in any series or class of preferred units preferences, distributions, powers and rights, voting or otherwise, senior to the rights of holders of common units.

Item 2.      Properties

Operating Property Acquisitions

The Company acquired the following operating properties during the year ended December 31, 2002:

                    Net  
Month of
           # of   Rentable   Investment  
Acquisition
   Property/Portfolio Name   Location   Buildings   Square Feet   (in thousands)  
 
 
 
 
 
 
Office:
                                
                   
Mar-02
     Plymouth Meeting Exec. Campus     Plymouth Meeting, PA     4     360,250   $ 67,165  
May-02
     6802 Paragon Place     Richmond, VA     1     142,499     14,800  
Jul-02
     1000 Lenox Drive     Lawrenceville, NJ      1     52,264     5,275  
Sep-02
     980 Harvest Drive     Whitpain, PA      1     62,379     10,400  
               
 
 
 
      Total Office Property Acquisitions            7     617,392    $  97,640  
               
 
 
 
                                 

During 2002, the Company acquired one parcel of land, containing 9.0 acres, for $1.5 million. In addition, the Company purchased the remaining partnership interests held by third parties in three of the Company’s Real Estate Ventures which owned two office properties containing 222,000 net rentable square feet and one parcel of land containing 1.0 acres for $2.3 million.

Development Properties Placed in Service

The Company placed in service the following properties during the year ended December 31, 2002:

                    Net  
Date Placed
           # of   Rentable   Investment  
in Service
   Property/Portfolio Name   Location   Buildings   Square Feet   (in thousands)  
 
 
 
 
 
 
Office:
                                
                   
Feb-02
     Newtown Commons     Newtown, PA     1     102,000   $ 15,945  
Apr-02
     15 Campus Boulevard     Newtown Square, PA     1     50,000     8,231  
               
 
 
 
      Total Office Properties Placed in Service           2     152,000   $ 24,176  
               
 
 
 

The Company places properties under development in service once a property reaches 95% occupancy or one year after the completion of shell construction, whichever is earlier.

 

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Property Sales and Dispositions

The Company sold or disposed of the following properties during the year ended December 31, 2002:

                    Sales/Disposition  
Sale
           # of   Rentable   Price  
Date
   Property/Portfolio Name   Location   Bldgs.   Square Feet   (in 000’s)  
 
 
 
 
 
 
Office:
                                
                   
Feb-02
     Bucks County Portfolio     Bucks County, PA     6     179,131   $ 14,080  
Feb-02
     155 Rittenhouse Circle     Bucks County, PA     1     22,500     1,913  
Mar-02
     470 John Young Way     Exton, PA     1     15,085     2,850  
Mar-02
     Park 80     Saddlebrook, NJ     2     487,740     73,350  
Apr-02
     Harvest     Long Island, NY     3     195,649     17,906  
Apr-02
     16 Campus Boulevard     Newtown Square, PA     1     65,463     7,105  
Apr-02
     Jericho     Long Island, NY     2     103,091     8,084  
Jul-02
     University Plaza and Linden Hill     Newark, DE     7     288,049     22,748  
               
 
 
 
      Total Office Properties Sold           23     1,356,708     148,036  
               
 
 
 
Industrial:
                                
                   
Feb-02
      8 Engineers Lane     Farmingdale, NY     1     15,000     865  
Feb-02
      Bucks County Portfolio     Bucks County, PA     9     586,756     24,835  
Apr-02
      Harvest     Long Island, NY     2     79,152     5,690  
Jun-02
      Plainview     Long Island, NY     6     137,060     7,760  
Jun-02
      19 Engineers Lane     Long Island, NY     1     10,000     630  
Jun-02
      91 North Industry Court     Long Island, NY     1     71,000     2,272  
               
 
 
 
       Total Industrial Properties Sold           20     898,968     42,052  
               
 
 
 
       Total Properties Sold           43     2,255,676   $ 190,088  
               
 
 
 

During 2002, the Company sold two parcels of land, containing 12.8 acres, for $.7 million.

Properties

As of December 31, 2002, the Company owned 210 office properties, 27 industrial facilities and one mixed-use property that contained an aggregate of approximately 16.1 million net rentable square feet. The properties are located in the markets in and surrounding Philadelphia, Pennsylvania; New Jersey; and Richmond, Virginia. As of December 31, 2002, the Properties were approximately 91.0% leased to 1,143 tenants and had an average age of approximately 17.4 years. The office Properties are primarily one to three story suburban office buildings containing an average of approximately 67,450 net rentable square feet. The industrial Properties accommodate a variety of tenant uses, including light manufacturing, assembly, distribution and warehousing. The Company carries comprehensive liability, fire, extended coverage and rental loss insurance covering all of the Properties, with policy specifications and insured limits which the Company believes are adequate.

The Company currently has in development or redevelopment three sites aggregating 428,000 square feet. The total cost of these projects is estimated to be $83.7 million, of which $73.9 million was incurred as of December 31, 2002. As of December 31, 2002, the Company owned approximately 444 acres of undeveloped land and held options to purchase approximately 63 additional acres. The Company also holds an option to enter into a long-term ground lease of property adjacent to Amtrak’s 30th Street Station in Philadelphia and develop a high-rise office property on the leasehold interest.

The following table sets forth certain information with respect to the Properties at December 31, 2002:

 

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  Property Name   Location   State   Year
Built		   Net
Rentable
Square
Feet 		  Percentage
Leased as of
December 31,
2002 (a)		     Total Base Rent
for the Twelve
Months Ended
December 31,
2002 (b) (000’s)		   Average
Annualized
Rental Rate
as of
December 31,
2002 (c)
 
 
 
   
 
                                     
PENNSYLVANIA SEGMENT                                  
                                     
  100-300 Gundy Drive   Reading   PA   1970   439,167   97.9 %   $ 7,008   $ 15.29
                                     
  Philadelphia Marine Center (d) Philadelphia   PA   Various   181,900   100.0 %     1,228     3.30
                                     
  300 Corporate Center Drive   Camp Hill   PA   1989   175,280   100.0 %     3,391     20.03
                                     
  111 Presidential Boulevard   Bala Cynwyd   PA   1997   173,095   94.8 %     4,382     29.74
                                     
  751-761 Fifth Avenue   King of Prussia   PA   1967   158,000   100.0 %     492     3.12
                                     
  630 Allendale Road   King of Prussia   PA   2000   150,000   100.0 %     3,654     23.60
                                     
  640 Freedom Business Center (d) King of Prussia   PA   1991   132,000   72.5 %     2,001     26.53
                                     
  100 Katchel Blvd   Reading   PA   1970   131,082   100.0 %     2,935     21.63
                                     
  52 Swedesford Square   East Whiteland Twp.   PA   1988   131,017   100.0 %     2,862     22.65
                                     
  105 / 140 Terry Drive   Newtown   PA   1982   128,666   95.7 %     1,553     13.80
                                     
  7535 Windsor Drive   Allentown   PA   1988   128,061   52.7 %     949     15.25
                                     
  101 Lindenwood Drive   Malvern   PA   1988   118,121   96.3 %     2,646     24.42
                                     
  501 Office Center Drive   Fort Washington   PA   1974   114,805   73.6 %     1,910     20.55
                                     
  7130 Ambassador Drive   Allentown   PA   1991   114,049   100.0 %     559     6.16
                                     
  7350 Tilghman Street   Allentown   PA   1987   111,500   100.0 %     1,975     18.69
                                     
  300 Berwyn Park   Berwyn   PA   1989   109,919   100.0 %     2,105     23.69
                                     
  50 Swedesford Square   East Whiteland Twp.   PA   1986   109,800   100.0 %     1,928     17.59
                                     
  920 Harvest Drive   Blue Bell   PA   1990   104,505   100.0 %     1,888     19.50
                                     
  442 Creamery Way   Exton   PA   1991   104,500   100.0 %     580     6.79
                                     
  100 Brandywine Boulevard   Newtown   PA   2002   102,000   100.0 %     2,458     22.80
                                     
  500 Office Center Drive   Fort Washington   PA   1974   101,303   95.7 %     1,906     22.23
                                     
  7450 Tilghman Street   Allentown   PA   1986   100,000   100.0 %     1,723     18.71
                                     
  301 Lindenwood Drive   Malvern   PA   1984   97,624   68.2 %     1,621     24.41
                                     
  555 Croton Road   King of Prussia   PA   1999   96,909   100.0 %     2,875     31.12
                                     
  500 North Gulph Road   King of Prussia   PA   1979   93,082   59.9 %     1,212     20.38
                                     
  620 West Germantown Pike   Plymouth Meeting   PA   1990   90,169   91.9 %     1,838     26.92
                                     
  610 West Germantown Pike   Plymouth Meeting   PA   1987   90,152   95.6 %     1,878     28.37
                                     
  630 West Germantown Pike   Plymouth Meeting   PA   1988   89,925   92.9 %     1,756     25.67
                                     
  600 West Germantown Pike   Plymouth Meeting   PA   1986   89,681   92.9 %     1,865     26.55
                                     
  630 Freedom Business Center (d) King of Prussia   PA   1989   86,683   94.3 %     1,908     26.03
                                     
  620 Freedom Business Center (d) King of Prussia   PA   1986   86,559   20.5 %     671     28.39
                                     
  1200 Swedsford Road   Berwyn   PA   1994   86,000   100.0 %     1,589     21.32
                                     
  3331 Street Road -Greenwood Square   Bensalem   PA   1986   81,575   100.0 %     1,533     20.85
                                     
  1050 Westlakes Drive   Berwyn   PA   1984   81,500   88.5 %     2,275     29.10
                                     
  One Progress Avenue   Horsham   PA   1986   79,204   100.0 %     833     11.65
                                     
  323 Norristown Road   Lower Gwyned   PA   1988   79,083   10.5 %     851     -
                                     
  1060 First Avenue (d) King of Prussia   PA   1987   77,718   100.0 %     1,756     17.19
                                     
  741 First Avenue   King of Prussia   PA   1966   77,184   100.0 %     557     8.28
                                     
  1040 First Avenue (d) King of Prussia   PA   1985   75,488   100.0 %     1,959     29.58
                                     
  200 Berwyn Park   Berwyn   PA   1987   75,025   76.9 %     1,455     27.70
                                     
  1020 First Avenue (d) King of Prussia   PA   1984   74,556   100.0 %     1,412     21.02
                                     
  1000 First Avenue (d) King of Prussia   PA   1980   74,139   100.0 %     1,777     24.85
                                     
  160 - 180 West Germantown Pike   East Norriton   PA   1982   73,242   78.1 %     1,248     17.15
                                     
  436 Creamery Way   Exton   PA   1991   72,300   81.3 %     624     12.59
                                     
  14 Campus Boulevard   Newtown Square   PA   1998   69,400   80.6 %     847     23.79
                                     
  1105 Berkshire Boulevard   Reading   PA   1987   68,985   91.6 %     1,019     16.09

 

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  Property Name   Location   State   Year
Built		   Net
Rentable
Square
Feet 		  Percentage
Leased as of
December 31,
2002 (a)		     Total Base Rent
for the Twelve
Months Ended
December 31,
2002 (b) (000’s)		   Average
Annualized
Rental Rate
as of
December 31,
2002 (c)
 
 
 
   
 
                                     
  500 Enterprise Road   Horsham   PA   1990   66,751   100.0 %     935     19.13
                                     
  925 Harvest Drive   Blue Bell   PA   1990   63,663   96.7 %     1,225     19.97
                                     
  429 Creamery Way   Exton   PA   1996   63,420   100.0 %     736     13.74
                                     
  610 Freedom Business Center (d) King of Prussia   PA   1985   62,991   88.6 %     1,442     25.98
                                     
  980 Harvest Drive   Blue Bell   PA   1988   62,379   100.0 %     364     22.97
                                     
  426 Lancaster Avenue   Devon   PA   1990   61,102   100.0 %     1,126     19.81
                                     
  3329 Street Road -Greenwood Square   Bensalem   PA   1985   60,705   70.8 %     771     19.54
                                     
  1180 Swedesford Road   Berwyn   PA   1987   60,371   100.0 %     1,662     28.23
                                     
  1160 Swedesford Road   Berwyn   PA   1986   60,099   100.0 %     1,391     25.12
                                     
  200 Corporate Center Drive   Camp Hill   PA   1989   60,000   100.0 %     1,070     17.86
                                     
  321 Norristown Road   Lower Gwyned   PA   1988   59,994   68.2 %     1,049     20.02
                                     
  100 Berwyn Park   Berwyn   PA   1986   57,731   100.0 %     1,209     28.71
                                     
  440 Creamery Way   Exton   PA   1991   57,218   100.0 %     521     11.75
                                     
  640 Allendale Road   King of Prussia   PA   2000   56,034   100.0 %     355     8.38
                                     
  680 Allendale Road   King of Prussia   PA   1962   52,528   100.0 %     546     11.50
                                     
  2240/50 Butler Pike   Plymouth Meeting   PA   1984   52,229   100.0 %     844     20.22
                                     
  650 Park Avenue   King of Prussia   PA   1968   51,711   38.8 %     451     15.90
                                     
  1155 Business Center Drive   Horsham   PA   1990   51,388   86.4 %     568     19.02
                                     
  800 Business Center Drive   Horsham   PA   1986   51,236   100.0 %     580     12.02
                                     
  486 Thomas Jones Way   Exton   PA   1990   51,072   79.8 %     723     19.86
                                     
  855 Springdale Drive   Exton   PA   1986   50,750   100.0 %     878     17.50
                                     
  660 Allendale Road   King of Prussia   PA   1962   50,635   100.0 %     365     8.16
                                     
  15 Campus Boulevard   Newtown Square   PA   2002   50,000   100.0 %     1,003     24.50
                                     
  875 First Avenue   King of Prussia   PA   1966   50,000   -       219     -
                                     
  630 Clark Avenue   King of Prussia   PA   1960   50,000   100.0 %     288     6.78
                                     
  620 Allendale Road   King of Prussia   PA   1961   50,000   50.0 %     624     23.87
                                     
  7150 Windsor Drive   Allentown   PA   1988   49,420   100.0 %     643     15.65
                                     
  479 Thomas Jones Way   Exton   PA   1988   49,264   74.1 %     492     17.24
                                     
  17 Campus Boulevard   Newtown Square   PA   2001   48,565   100.0 %     1,225     25.04
                                     
  520 Virginia Drive   Fort Washington   PA   1987   48,122   100.0 %     904     18.75
                                     
  11 Campus Boulevard   Newtown Square   PA   1998   47,700   100.0 %     1,071     22.15
                                     
  456 Creamery Way   Exton   PA   1987   47,604   100.0 %     354     7.68
                                     
  6575 Snowdrift Road   Allentown   PA   1988   47,091   100.0 %     526     12.75
                                     
  220 Commerce Drive   Fort Washington   PA   1985   46,080   100.0 %     896     19.88
                                     
  7248 Tilghman Street   Allentown   PA   1987   43,782   82.2 %     505     16.90
                                     
  110 Summit Drive   Exton   PA   1985   43,660   100.0 %     397     11.13
                                     
  7360 Windsor Drive   Allentown   PA   2001   43,600   100.0 %     936     22.97
                                     
  1100 Cassett Road   Berwyn   PA   1997   43,480   100.0 %     1,106     24.38
                                     
  467 Creamery Way   Exton   PA   1988   42,000   100.0 %     530     16.48
                                     
  300 Welsh Road - Building I   Horsham   PA   1980   40,042   100.0 %     681     20.38
                                     
  7310 Tilghman Street   Allentown   PA   1985   40,000   82.3 %     450     16.64
                                     
  150 Corporate Center Drive   Camp Hill   PA   1987   39,401   80.1 %     585     18.38
                                     
  1336 Enterprise Drive   West Goshen   PA   1989   39,330   100.0 %     692     19.50
                                     
  600 Park Avenue   King of Prussia   PA   1964   39,000   100.0 %     506     14.86
                                     
  412 Creamery Way   Exton   PA   1999   38,098   100.0 %     759     20.33
                                     
  755 Business Center Drive   Horsham   PA   1998   38,050   100.0 %     576     22.62
                                     
  18 Campus Boulevard   Newtown Square   PA   1990   37,374   88.6 %     694     23.48
                                     
  457 Creamery Way   Exton   PA   1990   36,019   100.0 %     428     14.76

 

Back to Contents



  Property Name   Location   State   Year
Built		   Net
Rentable
Square
Feet 		  Percentage
Leased as of
December 31,
2002 (a)		     Total Base Rent
for the Twelve
Months Ended
December 31,
2002 (b) (000’s)		   Average
Annualized
Rental Rate
as of
December 31,
2002 (c)
 
 
 
   
 
                                     
  100 Arrandale Boulevard   Exton   PA   1997   34,931   100.0 %     480     18.36
                                     
  7010 Snowdrift Road   Allentown   PA   1991   33,029   100.0 %     417     18.05
                                     
  300 Lindenwood Drive   Allentown   PA   1991   33,000   100.0 %     671     20.69
                                     
  2260 Butler Pike   Plymouth Meeting   PA   1984   31,892   63.6 %     457     22.06
                                     
  700 Business Center Drive   Horsham   PA   1986   30,773   -       56     -
                                     
  120 West Germantown Pike   Plymouth Meeting   PA   1984   30,546   37.7 %     149     20.82
                                     
  650 Dresher Road   Horsham   PA   1984   30,071   100.0 %     627     21.25
                                     
  655 Business Center Drive   Horsham   PA   1997   29,849   77.8 %     407     21.52
                                     
  468 Thomas Jones Way   Exton   PA   1990   28,934   100.0 %     543     18.43
                                     
  630 Dresher Road   Horsham   PA   1987   28,894   100.0 %     429     23.10
                                     
  1700 Paoli Pike   Malvern   PA   2000   28,000   18.9 %     153     23.59
                                     
  1150 Berkshire Boulevard   Reading   PA   1979   26,781   89.0 %     415     17.29
                                     
  140 West Germantown Pike   Plymouth Meeting   PA   1984   25,357   100.0 %     506     22.89
                                     
  3333 Street Road -Greenwood Square   Bensalem   PA   1988   25,000   100.0 %     477     20.50
                                     
  800 Corporate Circle Drive   Harrisburg   PA   1979   24,862   100.0 %     349     15.40
                                     
  2490 Boulevard of the Generals   King of Prussia   PA   1975   20,600   100.0 %     416     20.40
                                     
  481 John Young Way   Exton   PA   1997   19,275   100.0 %     405     21.61
                                     
  100 Lindenwood Drive   Malvern   PA   1985   18,400   -       -     -
                                     
  500 Nationwide Drive   Harrisburg   PA   1977   18,027   100.0 %     322     18.13
                                     
  600 Corporate Circle Drive   Harrisburg   PA   1978   17,858   100.0 %     275     14.94
                                     
  300 Welsh Road - Building II   Horsham   PA   1980   17,750   100.0 %     350     20.49
                                     
  748 Springdale Drive   Exton   PA   1986   13,950   100.0 %     254     18.61
                                     
  200 Lindenwood Drive   Malvern   PA   1984   12,600   50.0 %     111     19.05
                                     
  2404 Park Drive   Harrisburg   PA   1983   11,000   100.0 %     165     15.55
                                     
  111 Arrandale Road   Exton   PA   1996   10,479   100.0 %     182     20.45
                                     
  2401 Park Drive   Harrisburg   PA   1984   10,074   90.1 %     144     16.29
                                     
  200 Nationwide Drive   Harrisburg   PA   1978   2,500   100.0 %     60     24.00
                                     
  George Kachel Farmhouse   Reading   PA   2000   1,664   100.0 %     33     20.03
                                     
  301 North Walnut Street   Wilmington   DE   1989   321,511   100.0 %     5,748     20.61
                                     
  201 North Walnut Street   Wilmington   DE   1988   311,286   100.0 %     5,245     20.93
                                     
  400 Commerce Drive   Newark   DE   1997   154,086   100.0 %     1,134     14.82
                                     
  One Righter Parkway (d) Wilmington   DE   1989   104,828   100.0 %     2,293     22.55
                                     
  Two Righter Parkway   Wilmington   DE   1987   95,514   100.0 %     1,919     20.73
                                     
  200 Commerce Drive   Newark   DE   1998   68,034   100.0 %     536     15.50
                                     
  100 Commerce Drive   Newark   DE   1989   63,218   39.4 %     380     17.39
                                     
  111/113 Pencader Drive   Newark   DE   1990   52,665   54.4 %     511     12.01
                                     
                                     
NEW JERSEY / NEW YORK SEGMENT                                  
                                     
  50 East State Street   Trenton   NJ   1989   305,884   91.6 %     5,066     24.62
                                     
  1009 Lenox Drive   Lawrenceville   NJ   1989   180,460   84.5 %     3,808     25.32
                                     
  10000 Midlantic Drive   Mt. Laurel   NJ   1990   178,605   98.7 %     3,102     23.00
                                     
  33 West State Street   Trenton   NJ   1988   167,774   100.0 %     2,969     26.25
                                     
  Main Street - Plaza 1000   Voorhees   NJ   1988   162,364   97.2 %     3,203     22.88
                                     
  55 U.S. Avenue   Gibbsboro   NJ   1982   138,982   25.5 %     723     9.00
                                     
  457 Haddonfield Road   Cherry Hill   NJ   1990   121,737   94.4 %     2,444     23.01
                                     
  2000 Midlantic Drive   Mt. Laurel   NJ   1989   121,658   97.3 %     1,759     20.21
                                     
  2000 Lenox Drive   Lawrenceville   NJ   2000   119,114   100.0 %     3,113     26.81
                                     
  700 East Gate Drive   Mt. Laurel   NJ   1984   118,899   100.0 %     2,325     21.72

 

Back to Contents



  Property Name   Location   State   Year
Built		   Net
Rentable
Square
Feet 		  Percentage
Leased as of
December 31,
2002 (a)		     Total Base Rent
for the Twelve
Months Ended
December 31,
2002 (b) (000’s)		   Average
Annualized
Rental Rate
as of
December 31,
2002 (c)
 
 
 
   
 
                                     
  993 Lenox Drive   Lawrenceville   NJ   1985   111,137   100.0 %     2,432     23.10
                                     
  1000 Howard Boulevard   Mt. Laurel   NJ   1988   105,312   100.0 %     2,170     21.65
                                     
  One South Union Place   Cherry Hill   NJ   1982   99,573   80.0 %     1,148     16.23
                                     
  997 Lenox Drive   Lawrenceville   NJ   1987   97,277   100.0 %     1,982     22.64
                                     
  1000 Atrium Way   Mt. Laurel   NJ   1989   97,158   90.9 %     1,882     20.61
                                     
  1120 Executive Boulevard   Marlton   NJ   1987   95,278   98.1 %     1,813     24.34
                                     
  15000 Midlantic Drive   Mt. Laurel   NJ   1991   84,056   88.9 %     1,384     22.56
                                     
  220 Lake Drive East   Cherry Hill   NJ   1988   78,509   100.0 %     1,744     22.91
                                     
  1007 Laurel Oak Road   Voorhees   NJ   1996   78,205   100.0 %     621     7.94
                                     
  10 Lake Center Drive   Marlton   NJ   1989   76,359   88.9 %     1,302     23.98
                                     
  200 Lake Drive East   Cherry Hill   NJ   1989   76,352   98.7 %     1,616     22.94
                                     
  Three Greentree Centre   Marlton   NJ   1984   69,300   100.0 %     1,369     20.27
                                     
  King & Harvard Avenue   Cherry Hill   NJ   1974   67,444   100.0 %     1,334     20.26
                                     
  9000 Midlantic Drive   Mt. Laurel   NJ   1989   67,299   100.0 %     875     21.40
                                     
  6 East Clementon Road   Gibbsboro   NJ   1980   66,236   87.8 %     983     17.04
                                     
  104 Windsor Center Drive   East Windsor   NJ   1987   65,980   100.0 %     1,126     19.57
                                     
  701 East Gate Drive   Mt. Laurel   NJ   1986   61,794   100.0 %     1,148     20.68
                                     
  210 Lake Drive East   Cherry Hill   NJ   1986   60,604   100.0 %     1,250     22.39
                                     
  4000/5000 West Lincoln Drive   Marlton   NJ   1982   60,091   91.3 %     692     16.52
                                     
  308 Harper Drive   Mt. Laurel   NJ   1976   59,500   100.0 %     1,199     22.51
                                     
  305 Fellowship Drive   Mt. Laurel   NJ   1980   56,824   100.0 %     1,190     21.87
                                     
  Two Greentree Centre   Marlton   NJ   1983   56,075   85.9 %     688     20.75
                                     
  309 Fellowship Drive   Mt. Laurel   NJ   1982   55,911   97.5 %     1,165     22.13
                                     
  One Greentree Centre   Marlton   NJ   1982   55,838   100.0 %     1,047     19.97
                                     
  8000 Lincoln Drive   Marlton   NJ   1997   54,923   100.0 %     1,018     19.85
                                     
  307 Fellowship Drive   Mt. Laurel   NJ   1981   54,485   95.7 %     1,090     21.91
                                     
  303 Fellowship Drive   Mt. Laurel   NJ   1979   53,848   61.0 %     751     20.33
                                     
  1000 Lenox Drive   Lawrenceville   NJ   1982   52,264   100.0 %     382     10.00
                                     
  2 Foster Avenue   Gibbsboro   NJ   1974   50,761   100.0 %     261     5.61
                                     
  4000 Midlantic Drive   Mt. Laurel   NJ   1998   46,945   100.0 %     904     20.09
                                     
  Five Eves Drive   Marlton   NJ   1986   45,564   92.4 %     699     17.38
                                     
  161 Gaither Drive   Mount Laurel   NJ   1987   44,739   100.0 %     784     20.58
                                     
  9000 West Lincoln Drive   Marlton   NJ   1983   43,719   91.7 %     651     16.40
                                     
  Main Street - Piazza   Voorhees   NJ   1990   41,408   100.0 %     681     16.64
                                     
  1000 East Lincoln Drive   Marlton   NJ   1981   40,600   100.0 %     175     6.38
                                     
  30 Lake Center Drive   Marlton   NJ   1986   40,287   100.0 %     792     20.43
                                     
  1000/2000 West Lincoln Drive   Marlton   NJ   1982   38,950   96.1 %     502     15.49
                                     
  20 East Clementon Road   Gibbsboro   NJ   1986   38,260   95.0 %     673     19.30
                                     
  Two Eves Drive   Marlton   NJ   1987   37,532   96.3 %     654     18.52
                                     
  1255 Broad Street   Bloomfield   NJ   1981   37,478   100.0 %     589     21.59
                                     
  3000 West Lincoln Drive   Marlton   NJ   1982   36,070   81.0 %     459     15.82
                                     
  304 Harper Drive   Mt. Laurel   NJ   1975   32,978   95.7 %     571     19.85
                                     
  Main Street - Promenade   Voorhees   NJ   1988   31,445   100.0 %     444     16.12
                                     
  Four B Eves Drive   Marlton   NJ   1987   27,011   100.0 %     283     16.95
                                     
  815 East Gate Drive   Mt. Laurel   NJ   1986   25,500   100.0 %     268     15.42
                                     
  817 East Gate Drive   Mt. Laurel   NJ   1986   25,351   100.0 %     356     15.18
                                     
  Four A Eves Drive   Marlton   NJ   1987   24,687   82.2 %     237     15.74

 

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  Property Name   Location   State   Year
Built		   Net
Rentable
Square
Feet 		  Percentage
Leased as of
December 31,
2002 (a)		     Total Base Rent
for the Twelve
Months Ended
December 31,
2002 (b) (000’s)		   Average
Annualized
Rental Rate
as of
December 31,
2002 (c)
 
 
 
   
 
                                     
  1 Foster Avenue   Gibbsboro   NJ   1972   24,255   100.0 %     117     6.26
                                     
  4 Foster Avenue   Gibbsboro   NJ   1974   23,372   61.9 %     158     5.42
                                     
  7 Foster Avenue   Gibbsboro   NJ   1983   22,158   82.2 %     218     17.21
                                     
  10 Foster Avenue   Gibbsboro   NJ   1983   18,651   100.0 %     299     17.15
                                     
  305 Harper Drive   Mt. Laurel   NJ   1979   14,980   100.0 %     113     8.96
                                     
  5 U.S. Avenue   Gibbsboro   NJ   1987   5,000   100.0 %     18     3.60
                                     
  50 East Clementon Road   Gibbsboro   NJ   1986   3,080   100.0 %     125     47.01
                                     
  5 Foster Avenue   Gibbsboro   NJ   1968   2,000   100.0 %     -     -
                                     
  55 Ames Court   Plainview   NY   1961   90,000   100.0 %     1,194     15.26
                                     
                                     
VIRGINIA SEGMENT                                  
                                     
  600 East Main Street   Richmond   VA   1986   424,199   77.9 %     6,239     20.64
                                     
  300 Arboretum Place   Richmond   VA   1988   212,339   98.9 %     3,602     17.26
                                     
  6802 Paragon Place   Richmond   VA   1989   143,273   99.5 %     1,515     18.71
                                     
  2511 Brittons Hill Road   Richmond   VA   1987   132,103   100.0 %     593     5.52
                                     
  2100-2116 West Laburnam Avenue   Richmond   VA   1976   127,300   83.9 %     1,552     15.37
                                     
  1957 Westmoreland Street   Richmond   VA   1975   121,815   100.0 %     534     4.85
                                     
  2201-2245 Tomlynn Street   Richmond   VA   1989   85,860   86.8 %     605     7.89
                                     
  100 Gateway Centre Parkway   Richmond   VA   2001   74,585   100.0 %     1,476     19.24
                                     
  9011 Arboretum Parkway   Richmond   VA   1991   72,851   100.0 %     1,271     18.08
                                     
  4805 Lake Brooke Drive   Glen Allen   VA   1996   61,657   100.0 %     1,062     16.07
                                     
  9100 Arboretum Parkway   Richmond   VA   1988   57,519   100.0 %     991     18.47
                                     
  2812 Emerywood Parkway   Henrico   VA   1980   56,076   -       46     0.00
                                     
  2277 Dabney Road   Richmond   VA   1986   50,400   100.0 %     248     6.12
                                     
  9200 Arboretum Parkway   Richmond   VA   1988   49,542   100.0 %     616     13.34
                                     
  9210 Arboretum Parkway   Richmond   VA   1988   47,943   53.0 %     386     14.68
                                     
  2212-2224 Tomlynn Street   Richmond   VA   1985   45,353   100.0 %     257     7.25
                                     
  2221-2245 Dabney Road   Richmond   VA   1994   45,250   84.1 %     269     7.53
                                     
  2201 Dabney Road   Richmond   VA   1962   45,000   100.0 %     164     2.91
                                     
  2251 Dabney Road   Richmond   VA   1983   42,000   71.0 %     204     6.78
                                     
  2161-2179 Tomlynn Street   Richmond   VA   1985   41,550   79.8 %     199     6.06
                                     
  2256 Dabney Road   Richmond   VA   1982   33,600   100.0 %     208     6.96
                                     
  2246 Dabney Road   Richmond   VA   1987   33,271   100.0 %     288     9.16
                                     
  2244 Dabney Road   Richmond   VA   1993   33,050   100.0 %     298     9.36
                                     
  9211 Arboretum Parkway   Richmond   VA   1991   30,791   100.0 %     308     12.34
                                     
  2248 Dabney Road   Richmond   VA   1989   30,184   78.6 %     207     8.80
                                     
  2130-2146 Tomlynn Street   Richmond   VA   1988   29,700   -       65     -
                                     
  2120 Tomlyn Street   Richmond   VA   1986   23,850   56.0 %     129     8.07
                                     
  2240 Dabney Road   Richmond   VA   1984   15,389   100.0 %     138     9.69
                                     
  4364 South Alston Avenue   Durham   NC   1985   56,601   100.0 %     1,110     18.66
                 
       
     
                                     
TOTAL ALL PROPERTIES / WEIGHTED AVG.              16,052,821   91.0 %   $ 248,730   $ 18.79
             
       
     

 

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(a)
Calculated by dividing net rentable square feet included in leases signed on or before December 31, 2002 at the property by the aggregate net rentable square feet of the Property.
   
(b)
“Total Base Rent” for the twelve months ended December 31, 2002 represents base rents received during such period, excluding tenant reimbursements, calculated in accordance with generally accepted accounting principles (GAAP) determined on a straight-line basis. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges.
   
(c)
“Average Annualized Rental Rate” is calculated as follows: (i) for office leases written on a triple net basis, the sum of the annualized contracted base rental rates payable for all space leased as of December 31, 2002 (without giving effect to free rent or scheduled rent increases that would be taken into account under GAAP) plus the 2002 budgeted operating expenses excluding tenant electricity; and (ii) for office leases written on a full service basis, the annualized contracted base rent payable for all space leased as of December 31, 2002. In both cases, the annualized rental rate is divided by the total square footage leased as of December 31, 2002 without giving effect to free rent or scheduled rent increases that would be taken into account under GAAP.
   
(d)
This Property is subject to a ground lease.

The following table shows certain information regarding rental rates and lease expirations for the Properties at December 31, 2002, assuming none of the tenants exercises renewal options or termination rights, if any, at or prior to scheduled expirations:

   
Year of
Lease
Expiration
December 31,
  
Number of
Leases
Expiring
Within the
Year		   Rentable
Square
Footage
Subject to
Expiring
Leases		   Final
Annualized
Base Rent
Under
Expiring
Leases (a)		   Final
Annualized
Base Rent
Per Square
Foot Under
Expiring
Leases		   Percentage
of Total Final
Annualized
Base Rent
Under
Expiring
Leases		   Cumulative
Total		  
             
             
             
             
             
             
 
 
 
 
 
 
 
2003
     288     1,835,963     32,301,449     17.59     11.7 %   11.7%  
2004
     286     2,395,459     42,808,907     17.87     15.5 %   27.1%  
2005
     257     2,353,616     44,407,410     18.87     16.0 %   43.2%  
2006
     155     1,764,095     30,837,369     17.48     11.1 %   54.3%  
2007
     133     1,545,005     28,273,071     18.30     10.2 %   64.5%  
2008
     42     705,482     15,443,243     21.89     5.6 %   70.1%  
2009
     34     621,244     13,207,971     21.26     4.8 %   74.9%  
2010
     27     978,236     21,133,218     21.60     7.6 %   82.5%  
2011
     15     486,354     8,644,106     17.77     3.1 %   85.6%  
2012
     15     560,451     14,447,469     25.78     5.2 %   90.8%  
2013 and thereafter
     27     1,354,999     25,396,568     18.74     9.2 %   100.0%  
   
 
 
 
 
       
      1,279     14,600,904   $ 276,900,781   $ 18.96     100.0 %      
   
 
 
 
 
       
   
(a)
“Final Annualized Base Rent” for each lease scheduled to expire represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to expiration multiplied by 12. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges.

 

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At December 31, 2002, the Properties were leased to 1,143 tenants that are engaged in a variety of businesses. The following table sets forth information regarding leases at the Properties with the 20 tenants with the largest amounts leased based upon Annualized Escalated Rent from the Properties as of December 31, 2002:

    
Tenant Name (a)
     Number
of
Leases
   Weighted
Average
Remaining
Lease Term
in Months		    Aggregate
Square
Feet
Leased		    Percentage
of Aggregate
Leased
Square Feet		    Annualized
Escalated
Rent (in
000) (b)		   Percentage of
Aggregate
Annualized
Escalated
Rent		  
             
             
             
             
 
 
 
 
 
 
 
First USA Bank
     6     148     612,282     4.2 % $ 13,886     4.6 %
State of New Jersey
     6     68     442,451     3.0 %   12,202     4.0 %
Computer Sciences Corporation
     7     44     345,284     2.4 %   6,816     2.2 %
Verizon
     5     26     257,468     1.8 %   6,502     2.1 %
Penske Truck Leasing
     1     216     308,205     2.1 %   5,292     1.7 %
Omnicare Clinical Research
     1     91     150,000     1.0 %   3,840     1.3 %
Hartford Life
     4     53     182,481     1.2 %   3,797     1.3 %
Lockheed Martin
     8     33     290,763     2.0 %   3,766     1.2 %
Parsons Corporation
     3     85     174,689     1.2 %   3,572     1.2 %
Aventis Behring
     1     58     143,025     1.0 %   3,290     1.1 %
American Business Financial Services
     1     7     99,994     0.7 %   3,175     1.0 %
Travelers
     4     27     149,249     1.0 %   2,833     0.9 %
Highmark Corporation
     4     18     135,298     0.9 %   2,817     0.9 %
ICT Group
     2     147     117,151     0.8 %   2,814     0.9 %
Keystone Health Plan Central
     1     20     122,101     0.8 %   2,663     0.9 %
General Electric
     2     35     100,371     0.7 %   2,456     0.8 %
Zeneca
     2     46     107,328     0.7 %   2,455     0.8 %
PPD Development
     5     91     134,222     0.9 %   2,439     0.8 %
Kimberly Clark Corporation (Scott Paper)
     1     36     93,014     0.6 %   2,289     0.8 %
Aetna Life Insurance
     1     30     104,505     0.7 %   2,247     0.7 %
   
 
 
 
 
 
 
   Consolidated Total/Weighted Average
     65     78     4,069,881     27.7 % $ 89,151     29.2 %
   
 
 
 
 
 
 
   
(a)
The identified tenant includes affiliates in certain circumstances.
   
(b)
Annualized Escalated Rent represents the monthly Escalated Rent for each lease in effect at December 31, 2002 multiplied by 12. Escalated Rent represents fixed base rental amounts plus tenant reimbursements which include payment of real estate taxes, operating expenses and common area maintenance and utility charges. The Company estimates operating expense reimbursements based on historical amounts and comparable market data.

The following table sets forth the year-end occupancy percentages of the Company’s Properties for the last five years:

 
Year ended December 31,
   Occupancy %  
 
 
 
 
2002
     91.0 %
 
2001
     92.2 %
 
2000
     95.6 %
 
1999
     94.1 %
 
1998
     93.6 %

Real Estate Ventures

As of December 31, 2002, the Company had invested approximately $14.8 million in ten unconsolidated Real Estate Ventures (net of returns of investment received by the Company). The Company, through subsidiaries, formed these ventures with unaffiliated third parties to develop office properties or to acquire land in anticipation of possible development of office properties. Eight of the Real Estate Ventures own eight office buildings that contain an aggregate of approximately 1.1 million net rentable square feet; one Real Estate Venture developed a hotel property that contains 137 rooms; and one Real Estate Venture holds approximately three acres of land for future development. At December 31, 2002, the operating properties owned by the Real Estate Ventures were approximately 57% leased to 56 tenants.

 

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The Company’s investment in Real Estate Ventures is as follows (in thousands):

     Ownership
Percentage (1)		    Carrying
Amount		   Real Estate
Venture
Debt at 100%		   Company’s Share
of Real Estate
Venture Income (Loss)		  
           
           
   
 
 
 
 
Two Tower Bridge Associates
     35 % $ 2,642   $ 7,855   $ 281  
Four Tower Bridge Associates
     65 %   3,322     11,000     184  
Five Tower Bridge Associates
     15 %   —     27,600     —  
Six Tower Bridge Associates
     65 %   725     15,951     106  
Eight Tower Bridge Associates
     6 %   1,176     35,782     (116 )
Tower Bridge Inn Associates
     50 %   2,577     11,700     (200 )
1000 Chesterbrook Boulevard Partnership
     50 %   3,708     28,178     579  
PJP Building Two, LC
     30 %   13     5,172     (63 )
PJP Building Five, LC
     25 %   179     5,891     56  
Florig, LP
     30 %   500     —     —  
Christiana Center Operating Company I, LLC (2)
     50 %   —     —     147  
Christiana Center Operating Company II, LLC (2)
     50 %   —     —     13  
Christiana Center Operating Company III, LLC (2)
     50 %   —     —     —  
         
 
 
 
            $ 14,842   $ 149,129   $ 987  
         
 
 
 
                           
   
(1)
Ownership percentage represents the Company’s entitlement to residual distributions after payment by the applicable venture of priority returns.
   
(2)
During 2002, the Company purchased the remaining partnership interests in these Real Estate Ventures. The results of operations of these Real Estate Ventures are consolidated from the date of purchase of the remaining interests.

Item 3.      Legal Proceedings

The Company is involved from time to time in litigation on various matters, which include disputes with tenants and disputes arising out of agreements to purchase or sell properties. Given the nature of the Company’s business activities, these lawsuits are considered routine to the conduct of its business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system.

The Company is a defendant in a case in which the plaintiffs allege that the Company breached its obligation to purchase a portfolio of properties for approximately $83.0 million. On July 9, 1999, the Superior Court of New Jersey, Camden County, dismissed the complaint against the Company with prejudice. The plaintiffs subsequently filed a motion for reconsideration, which motion the Superior Court denied. Plaintiffs then appealed to the Appellate Division, which is the intermediate appellate level court in New Jersey. In December 2000, the Appellate Division affirmed in part and reversed in part the Chancery Division’s earlier dismissal of the entire action. The Appellate Division affirmed the dismissal of the fraud and other non-contractual counts in the Complaint, but reversed the contract and reformation counts and remanded these to the lower court for further proceedings. The Company sought review of this decision by the Supreme Court of New Jersey, but in March 2001 that Court declined to consider the appeal. The case thereafter returned to the Chancery Division, where written and oral discovery was conducted in 2002 and in the first quarter of 2003. Discovery terminated on February 14, 2003. The Company filed a motion for summary judgment on all counts, seeking dismissal of all counts against it, and judgment for the Company on its counterclaim. The Chancery Division granted the Company’s summary judgment motion on March 25, 2003. At this time, the Company does not know whether plaintiffs will appeal, or if they appeal, whether plaintiffs will be successful in the appeal.

There have been recent reports of lawsuits against owners and managers of multifamily and office properties asserting claims of personal injury and property damage caused by the presence of mold in residential units or office space. The Company has been named as a defendant in two lawsuits that allege personal injury as a result of the presence of mold. Unspecified damages are sought. The Company has referred these lawsuits to its environmental insurance carrier and, as of the date of this Form 10-K, the insurance carrier is evaluating coverage.

 

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Item 4.      Submission of Matters to a Vote of Security Holders

The Company did not submit any matters to a vote of security holders in the fourth quarter of the fiscal year ended December 31, 2002.

PART II

Item 5.      Market for Registrant’s Common Equity and Related Shareholder Matters

The Common Shares are traded on the New York Stock Exchange (“NYSE”) under the symbol “BDN.” On March 24, 2003, there were approximately 377 holders of record of the Common Shares. On March 24, 2003, the last reported sales price of the Common Shares on the NYSE was $21.50. The following table sets forth the quarterly high and low closing sales price per share reported on the NYSE for the indicated periods and the distributions paid by the Company with respect to each such period.

    Share Price
High		   Share Price
Low		   Distributions
Declared For Quarter		  
         
   
 
 
 
First Quarter 2001
   $ 21.75   $ 18.56   $ 0.41  
Second Quarter 2001
   $ 22.44   $ 18.81   $ 0.41  
Third Quarter 2001
   $ 22.75   $ 18.81   $ 0.44  
Fourth Quarter 2001
   $ 21.63   $ 18.44   $ 0.44  
                     
First Quarter 2002
   $ 23.90   $ 20.24   $ 0.44  
Second Quarter 2002
   $ 26.00   $ 22.91   $ 0.44  
Third Quarter 2002
   $ 24.96   $ 20.20   $ 0.44  
Fourth Quarter 2002
   $ 22.57   $ 19.08   $ 0.44  

Future distributions by the Company will be declared at the discretion of the Board of Trustees and will depend on the actual cash flow of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986 and such other factors as the Board of Trustees deems relevant.

During 2002 and through the date of this Annual Report on Form 10-K, the Company did not issue any securities that were not registered under the Securities Act of 1933.

The following table provides information as of December 31, 2002 with respect to compensation plans under which equity securities of the Company are authorized for issuance:

 

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Equity Compensation Plan Information as of December 31, 2002

  
                     
    (a)   (b)   (c)  
 
Plan category
   Number of securities to be issued upon exercise of outstanding options, warrants and rights   Weighted-average exercise price of outstanding options, warrants and rights   Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))  
 
Equity compensation plans approved by security holders (1)
     2,876,521   $ 26.70 (2)   1,391,436  
 
Equity compensation plans not approved by security holders
     —     —     —  
 
Total
     2,876,521   $ 26.70 (2)   1,391,436  
 

(1)
Relates to the Company’s 1997 Long-Term Incentive Plan.
   
(2)
Weighted-average exercise price of outstanding options, excludes restricted Common Shares.

 

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Item 6.      Selected Financial Data

(in thousands, except per Common Share data and number of properties)

Year Ended December 31,
   2002   2001   2000   1999   1998  
   
 
 
 
 
 
Operating Results
                                
Total revenue
   $ 296,730   $ 276,546   $ 259,816   $ 253,190   $ 170,197  
Net income
     62,984     33,722     52,158     34,606     33,025  
Income allocated to Common Shares
     51,078     21,816     40,252     29,816     32,323  
Earnings per Common Share
                                
   Basic
   $ 1.40   $ 0.57   $ 1.12   $ 0.80   $ 0.90  
   Diluted
   $ 1.39   $ 0.57   $ 1.12   $ 0.80   $ 0.89  
Cash distributions declared per Common Share
   $ 1.76   $ 1.70   $ 1.62   $ 1.57   $ 1.52  
     
                                
Balance Sheet Data
                                
   Real estate investments, net of accumulated depreciation
   $ 1,745,981   $ 1,812,909   $ 1,674,341   $ 1,702,353   $ 1,840,618  
Total assets
     1,919,288     1,960,203     1,821,103     1,825,276     1,909,100  
Total indebtedness
     1,004,729     1,009,165     866,202     839,634     1,000,560  
Total liabilities
     1,097,793     1,108,213     923,961     895,083     1,040,828  
Minority interest
     135,052     143,834     144,974     145,941     127,198  
Beneficiaries’ equity
     686,443     708,156     752,168     784,252     741,074  
     
                                
Other Data
                                
Cash flows from:
                                
   Operating activities
     118,684     143,318     103,123     81,495     73,116  
   Investing activities
     5,038     (123,682 )   (32,372 )   69,195     (903,193 )
   Financing activities
     (110,380 )   (22,317 )   (60,403 )   (158,073 )   813,710  
     
                                
Property Data
                                
Number of properties owned at year end
     238     270     250     251     272  
Net rentable square feet owned at year end
     16,052     17,312     16,471     16,607     18,834  

Item 7.      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. The results of operations, liquidity and capital resources and cash flows of the Company include the historical results of operations of the Properties held by the Company during the years ended December 31, 2002, 2001 and 2000. This Annual Report on Form 10-K 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. See Item 1. Business – Risk Factors.

OVERVIEW

The Company currently manages its portfolio within three geographic segments: (1) Pennsylvania, (2) New Jersey and (3) Virginia. The Company believes it has established an effective platform in these office and industrial markets that provides a foundation for achieving its goals of maximizing market penetration and optimizing operating economies of scale.

During 2002, the Company sold 23 office and 20 industrial properties, containing 2.3 million net rentable square feet, and two parcels of land, containing 12.8 acres, for $190.8 million. The Company also acquired

 

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seven office properties, containing 617,000 net rentable square feet, and one parcel of land, containing 9.0 acres, for $99.1 million.

The Company receives income primarily from rental revenue (including tenant reimbursements) from the Properties and, to a lesser extent, from the management of properties owned by third parties and from investments in the Real Estate Ventures.

The Company’s financial performance is dependent upon the demand for office and other commercial space in its markets. Current economic conditions, including recessionary pressures and capital market volatility, have enhanced the challenges facing the Company.

In the current economic climate, the Company continues to seek revenue growth through an increase in occupancy of its portfolio (91.0% at December 31, 2002). However, with a downturn in general leasing activity, owners of commercial real estate, including the Company, are experiencing longer periods in which to lease unoccupied space, and may face higher capital costs and leasing commissions to achieve targeted tenancies.

As the Company seeks to increase revenue, management also focuses on strategies to minimize operating risks, including (i) tenant rollover risk, (ii) tenant credit risk and (iii) development risk.

Tenant Rollover Risk:

The Company is subject to the risk that, upon expiration, leases may not be renewed, the space may not be relet, or the terms of renewal or reletting (including the cost of renovations) may be less favorable than the current lease terms. Leases accounting for approximately 11.7% of the aggregate annualized base rents from the Properties as of December 31, 2002 (representing approximately 11.4% of the net rentable square feet of the Properties) expire without penalty through the end of 2003. The Company maintains an active dialogue with its tenants in an effort to achieve a high level of lease renewals. The Company’s retention rate for leases that were scheduled to expire in the year ended December 31, 2002 was 78.0%. If the Company is unable to renew leases for a substantial portion of the space under expiring leases, or to promptly relet this space, at anticipated rental rates, the Company’s cash flow could be adversely impacted.

Tenant Credit Risk:

In the event of a tenant default, the Company may experience delays in enforcing its rights as a landlord and may incur substantial costs in protecting its investment. Management regularly evaluates its accounts receivable reserve policy in light of its tenant base and general and local economic conditions. The accounts receivable allowances were $4.6 million or 12.5% of total receivables (including accrued rent receivable) as of December 31, 2002 compared to $4.5 million or 12.5% of total receivables (including accrued rent receivable) as of December 31, 2001.

Development Risk:

The Company currently has in development or redevelopment three sites aggregating 428,000 square feet. The total cost of these projects is estimated to be $83.7 million, of which $73.9 million was incurred as of December 31, 2002. As of December 31, 2002, these projects were approximately 43% leased. While the Company is actively marketing space at these projects to prospective tenants, management cannot provide assurance as to the timing or terms of any leases of such space. As of December 31, 2002, the Company owned approximately 444 acres of undeveloped land and held options to purchase approximately 63 additional acres. Risks associated with development of this land include construction cost overruns and construction delays, insufficient occupancy rates and inability to obtain necessary zoning, land-use, building, occupancy and other required governmental approvals.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting

 

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principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included this Annual Report on Form 10-K. While the estimates and judgments associated with the application of these accounting policies may be affected by different assumptions or conditions, the Company believes the estimates and judgments associated with the reported amounts are appropriate in the circumstances. The following explains several of the Company’s critical accounting policies that are used in preparing the Company’s consolidated financial statements which require the Company’s management to use significant judgment and estimates:

Revenue Recognition

Rental revenue is recognized on a straight-line basis over the lease term regardless of when payments are due. Certain lease agreements contain provisions that require tenants to reimburse a pro rata share of real estate taxes and certain common area maintenance costs.

Real Estate Investments

Real estate investments are carried at cost. The Company records acquisition of real estate investments under the purchase method of accounting and allocates the purchase price to land, buildings and intangible assets on a relative fair value basis. Depreciation is computed using the straight-line method over the useful lives of buildings and capital improvements (25 to 40 years) and over the shorter of the lease term or the life of the asset for tenant improvements. Direct construction costs related to the development of certain Properties and land holdings are capitalized as incurred. The Company expenses routine repair and maintenance expenditures.

Impairment of Long-Lived Assets

Management reviews investments in real estate and real estate ventures for impairment if facts and circumstances indicate that the carrying value of such assets may not be recoverable. Measurement of any impairment loss will be based on the fair value of the asset determined using customary valuation techniques, such as the present value of expected future cash flows.

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as real estate investments and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts that represents an estimate of losses that may be incurred from the inability of tenants to make required payments. The allowance is an estimate based on two calculations that are combined to determine the total amount reserved. First, the Company evaluates specific accounts where it has been determined that a tenant may have an inability to meet its financial obligations. In these situations, the Company uses its judgment, based on the facts and circumstances, and records a specific reserve for that tenant against amounts due to reduce the receivable to the amount that the Company expects to collect. These reserves are reevaluated and adjusted as additional information becomes available. Second, a reserve is established for all tenants based on a range of

 

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percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If the financial condition of the Company’s tenants were to deteriorate, additional allowances may be required.

Deferred Costs

The Company incurs direct costs related to the financing and leasing of the Properties. Management is required to use professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed. Capitalized financing fees are amortized over the related loan term and capitalized leasing costs are amortized over the related lease term. Management re-evaluates the remaining useful lives of leasing costs as the creditworthiness of the Company’s tenants and economic and market conditions change.

RESULTS OF OPERATIONS

Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001

    Year Ended December 31,   Dollar
Change		   Percent
Change		  
   
     
    2002   2001      
   
 
 
 
 
    (amounts in thousands)        
   
       
Revenue:
                          
   Rents
   $ 253,338   $ 233,612   $ 19,726     8.4 %
   Tenant reimbursements
     33,624     32,470     1,154     3.6 %
   Other
     9,768     10,464     (696 )   -6.7 %
   
 
 
 
 
      Total revenue
     296,730     276,546     20,184     7.3 %
     
                          
Operating Expenses:
                          
   Property operating expenses
     76,746     72,492     4,254     5.9 %
   Real estate taxes
     25,854     23,077     2,777     12.0 %
   Interest
     63,522     66,385     (2,863 )   -4.3 %
   Depreciation and amortization
     57,599     69,047     (11,448 )   -16.6 %
   Administrative expenses
     14,804     15,177     (373 )   -2.5 %
   Non-recurring charges
     —     6,600     (6,600 )   —  
   
 
 
 
 
   Total operating expenses
     238,525     252,778     (14,253 )   -5.6 %
   
 
 
 
 
Income from continuing operations before equity in
                          
   income of real estate ventures, net gain on sales
                          
   and minority interest
     58,205     23,768     34,437     144.9 %
Equity in income of real estate ventures
     987     2,768     (1,781 )   -64.3 %
   
 
 
 
 
Income from continuing operations before net gain
                          
   on sales and minority interest
     59,192     26,536     32,656     123.1 %
Net gain on sales of interest in real estate
     —     4,524     (4,524 )   -100.0 %
Minority interest
     (9,375 )   (7,915 )   (1,460 )   -18.4 %
   
 
 
 
 
Income from continuing operations
     49,817     23,145     26,672     115.2 %
Income from discontinued operations, net of minority interest
     13,167     11,688     1,479     12.7 %
   
 
 
 
 
Income before extraordinary item
     62,984     34,833     28,151     80.8 %
Extraordinary item
     —     (1,111 )   1,111     0.0 %
   
 
 
 
 
   Net income
   $ 62,984   $ 33,722   $ 29,262     86.8 %
   
 
 
 
 

The results of operations for the years ended December 31, 2002 and 2001 include the respective operations of the Properties. Of the 238 Properties owned by the Company as of December 31, 2002, a total of 194 Properties containing an aggregate of 13.2 million net rentable square feet (“Same Store Properties”) were owned for the entire twelve-month periods ended December 31, 2002 and 2001. The following table set forth revenue and expense information as to these Same Store Properties for the twelve-month periods ended December 31, 2002 and 2001:

 

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    Year Ended December 31,      Dollar
Change		      Percent
Change		  
   
     
    2002   2001      
   
 
 
 
 
    (amounts in thousands)        
   
       
Revenue:
                          
   Rents
   $ 203,365   $ 207,071   $ (3,706 )   -1.8  
   Tenant reimbursements
     29,324     29,143     181     0.6  
   Other
     615     427     188     44.0 %
   
 
 
 
 
      Total revenue
     233,304     236,641     (3,337 )   -1.4 %
     
                          
Operating Expenses:
                          
   Property operating expenses
     71,246     69,876     1,370     2.0 %
   Real estate taxes
     21,909     20,779     1,130     5.4 %
   
 
 
 
 
      Total operating expenses
     93,155     90,655     2,500     2.8 %
   
 
 
 
 
Property NOI
   $ 140,149   $ 145,986   $ (5,837 )   -4.0 %
   
 
 
 
 

Revenue increased to $296.7 million for 2002 as compared to $276.5 million for 2001, primarily due to increased rental rates and additional properties in 2002, offset by decreased occupancy. The straight-line rent adjustment increased revenues by $ 5.9 million in 2002 and $6.2 million in 2001. Revenue for Same Store Properties decreased to $233.3 million in 2002 from $236.6 million in 2001. This decrease was the result of decrease occupancy in 2002 as compared to 2001. Average occupancy for the Same Store Properties decreased to 90.4% in 2002 from 94.5% in 2001. Other revenue represents lease termination fees, leasing commissions, third-party management fees and interest income. Other revenue decreased to $9.8 million in 2002 from $10.5 million in 2001 primarily due to reduced interest income earned in 2002 as compared to 2001.

Property operating expenses increased to $76.7 million in 2002 as compared to $72.5 million in 2001, primarily due to increased insurance and security costs and additional properties in 2002. Property operating expenses included a provision for doubtful accounts of $.9 million in 2002 and $2.9 million in 2001 to provide for increased tenant credit risk. Property operating expenses for the Same Store Properties increased to $71.2 million in 2002 as compared to $69.9 million in 2002 as a result of higher insurance and security costs.

Real estate taxes increased to $25.9 million in 2002 as compared to $23.1 million in 2001, primarily due to increased real estate tax assessments in 2002 and additional properties in 2002. Real estate taxes for the Same Store Properties increased to $21.9 million in 2002 as compared to $20.8 million in 2001 as a result of higher tax rates and property assessments.

Interest expense decreased to $63.5 million in 2002 as compared to $66.4 million in 2001, primarily due to decreased interest rates offset by increased average borrowings during 2002. Average outstanding debt balances for 2002 were $1.0 billion as compared to $949.5 million for 2001. The Company’s weighted- average interest rate from its unsecured credit facilities after giving effect to hedging activities on the unsecured credit facilities decreased to 5.41% in 2002 from 6.48% in 2001 and on mortgage notes payable decreased to 7.27% in 2002 from 7.39% in 2001.

Depreciation decreased to $51.9 million in 2002 as compared to $64.5 million in 2001 primarily due to a change made by the Company in the estimated useful lives of buildings from 25 to 40 years. The impact of this change in useful lives was $19.0 million or $.53 per share for the year ended December 31, 2002. Management determined that the longer period better reflected the useful lives of the buildings. Amortization, related to deferred leasing costs, increased to $5.7 million in 2002 as compared to $4.5 million in 2001, primarily due to increased leasing activity and additional properties in 2002.

Administrative expenses decreased to $14.8 million in 2002 as compared to $15.2 million in 2001, primarily due to decreased amortization of restricted stock.

 

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Equity in income of Real Estate Ventures decreased to $1.0 million in 2002 as compared to $2.8 million in 2001. The 2001 results include a $785,000 gain on the sale of the Company’s interests in a Real Estate Venture. In addition, the Company acquired the remaining partnership interests in three Real Estate Ventures, and, accordingly, the results attributable to these properties are now consolidated from the date of acquisition.

During 2002, the Company sold 23 office properties containing an aggregate of 1.4 million net rentable square feet, 20 industrial properties containing an aggregate of .9 million net rentable square feet and two land parcels containing of 12.8 acres for $190.8 million, realizing a net gain of $8.6 million. During 2001, the Company sold three office properties, eight industrial properties and four land parcels for $31.3 million, realizing a net gain of $4.5 million.

Minority interest from continuing operations represents the equity in income attributable to the portion of the Operating Partnership not owned by the Company. Minority interest from continuing operations increased to $9.3 million in 2002 as compared to $7.9 million in 2001, primarily due to increased results of continuing operations in 2002 as compared to 2001.

Discontinued operations increased from $13.2 million in 2002 as compared to $11.7 million in 2001 primarily due to net gain on sales of real estate investments of $8.6 million in 2002. During 2002, the Company recorded an impairment loss of $665,000 related to one property held-for-sale for which the anticipated net sales price is less than the book value of the asset.

Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000
    Year Ended December 31,      Dollar
Change		      Percent
Change		  
   
     
           2001 (a)   2000      
   
 
 
 
 
    (amounts in thousands)        
   
       
Revenue
                          
   Rents
   $ 233,612   $ 218,520   $ 15,092     6.9 %
   Tenant reimbursements
     32,470     29,898     2,572     8.6 %
   Other
     10,464     11,398     (934 )   -8.2 %
   
 
 
 
 
      Total revenue
     276,546     259,816     16,730     6.4 %
                           
Operating Expenses:
                          
   Property operating expenses
     72,492     63,995     8,497     13.3 %
      Real estate taxes
     23,077     21,731     1,346     6.2 %
   Interest
     66,385     64,783     1,602     2.5 %
   Depreciation and amortization
     69,047     59,950     9,097     15.2 %
   Administrative expenses
     15,177     14,194     983     6.9 %
   Non-recurring charges
     6,600     —     6,600     —  
   
 
 
 
 
      Total operating expenses
     252,778     224,653     28,125     12.5 %
   
 
 
 
 
Income from continuing operations before equity in income of real estate ventures, net gain on sales, minority interest and extraordinary item
     23,768     35,163     (11,395 )   -32.4 %
Equity in income of real estate ventures
     2,768     2,790     (22 )   -0.8 %
   
 
 
 
 
Income from continuing operations before net gain on sales, minority interest and extraordinary item
     26,536     37,953     (11,417 )   -30.1 %
Net gain on sales of interest in real estate
     4,524     11,638     (7,114 )   -61.1 %
Minority interest
     (7,915 )   (8,908 )   993     11.1 %
   
 
 
 
 
Income from continuing operations before extraordinary item
     23,145     40,683     (17,538 )   -43.1 %
Income from discontinued operations, net of minority interest
     11,688     11,475     213     1.9 %
   
 
 
 
 
Income before extraordinary item
     34,833     52,158     (17,325 )   -33.2 %
Extraordinary item
     (1,111 )   —     (1,111 )   -33.2 %
   
 
 
 
 
   Net income
   $ 33,722   $ 52,158   $ (18,436 )   -35.3 %
   
 
 
 
 
   
(a)
In 2000, the Operating Partnership held 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

 

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and 5% of its voting common stock. Effective January 1, 2001, the Company converted its non-voting equity interest in the Management Company to a voting interest. Accordingly, the Company owns 95% of the equity of and has voting control over the Management Company. Therefore, the 2002 and 2001 financial results of the Management Company have been consolidated. For purposes of the Management’s Discussion and Analysis of Financial Condition and Results of Operations, the 2000 results of operations presented below have been restated to reflect this presentation.

The results of operations for the year ended December 31, 2001 and 2000 include the respective operations of the Properties. Of the 270 Properties owned by the Company as of December 31, 2001, a total of 224 Properties containing an aggregate of 14.8 million net rentable square feet (“Same Store Properties”) were owned for the entire twelve-month periods ended December 31, 2001 and 2000. The following table set forth revenue and expense information as to these Same Store Properties for the twelve-month periods ended December 31, 2001 and 2000:

    Year Ended December 31,   Dollar
Change		   Percent
Change		  
   
     
    2001   2000      
   
 
 
 
 
    (amounts in thousands)        
   
       
Revenue:
                          
   Rents
   $ 221,258   $ 215,990   $ 5,268     2.4 %
   Tenant reimbursements
     32,751     30,689     2,062     6.7 %
   Other
     567     659     (92 )   -14.0 %
   
 
 
 
 
                           
      Total revenue
     254,576     247,338     7,238     2.9 %
     
                          
Operating Expenses:
                          
   Property operating expenses
     73,510     69,436     4,074     5.9 %
   Real estate taxes
     23,933     23,186     747     3.2 %
   
 
 
 
 
      Total operating expenses
     97,443     92,622     4,821     5.2 %
   
 
 
 
 
                           
Property NOI
   $ 157,133   $ 154,716   $ 2,417     1.6 %
   
 
 
 
 

Revenue increased to $276.5 million for 2001 as compared to $259.8 million for 2000, primarily due to increased rental rates and additional properties in 2001, offset by decreased occupancy. The straight-line rent adjustment increased revenues by $6.2 million in 2001 and $6.4 million in 2000. Average occupancy decreased to 94.5% in 2001 as compared to 95.0% for 2000. Revenue for the Same Store Properties increased to $254.6 million in 2001 from $247.3 million in 2000. This increase was the result of increased rental rates offset by a slight decrease in occupancy in 2001 as compared to 2000. Average occupancy for the Same Store Properties decreased to 95.1% in 2001 from 95.3% in 2000. Other revenue represents lease termination fees, leasing commissions, third-party management fees and interest income. Other revenue decreased to $10.5 million in 2001 from $11.4 million in 2000 primarily due to additional interest income earned in 2000 on deposits made to acquire properties.

Property operating expenses increased to $72.5 million in 2001 as compared to $64.0 million in 2000, primarily due to increased utilities expense, increased provision for doubtful accounts and additional properties in 2001. Property operating expenses included a provision for doubtful accounts of $2.9 million in 2001 and $332,000 in 2000 to provide for credit risk related to certain tenants. Property operating expenses for the Same Store Properties increased to $73.5 million in 2001 as compared to $69.4 million in 2000 as a result of higher utility expenses, increased repairs and maintenance costs and increased property management charges.

Real estate taxes increased to $23.1 million in 2001 as compared to $21.7 million in 2000, primarily due to increased real estate tax assessments in 2001 and additional properties in 2001. Real estate taxes for the Same Store Properties increased to $23.9 million in 2001 as compared to $23.2 million in 2000 as a result of higher tax rates and property assessments.

Interest expense increased to $66.4 million in 2001 as compared to $64.8 million in 2000, primarily due to increased average borrowings resulting from the Prentiss Properties transaction in 2001, partially offset by decreased interest rates. Average outstanding debt balances for 2001 were $949.5 million as compared to $871.3 million for 2000. The Company’s weighted-average interest rate after giving effect to hedging

 

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activities on unsecured credit facilities decreased to 6.48% in 2001 from 7.84% in 2000 and on mortgage notes payable decreased to 7.39% in 2001 from 7.92% in 2000.

Depreciation increased to $64.5 million in 2001 as compared to $56.5 million in 2000 primarily due to additional properties in 2001. Amortization, related to deferred leasing costs, increased to $4.5 million in 2001 as compared to $3.5 million in 2000, primarily due to increased leasing activity and additional properties in 2001.

Administrative expenses increased to $15.2 million in 2001 as compared to $14.2 million in 2000, primarily due to amortization of deferred compensation costs related to additional restricted Common Shares awarded in 2001.

During the fourth quarter of 2001, the Company recorded a $6.6 million non-recurring charge related to the change in employment status of the Company’s Chairman to a non-executive, non-managerial status and the write-down of the Company’s $2.5 million investment in a telecommunications company that was deemed to be other than temporary. The $4.1 million charge related to the Company’s Chairman reflects an accrual on account of payment obligations of the Company under its employment agreement with the Chairman, accelerated vesting of his restricted shares and restructuring of his executive stock loan.

Equity in income of Real Estate Ventures was $2.8 million in 2001 and 2000. The income attributable to two ventures sold in 2001 was offset by four ventures commencing operations in 2001.

During 2001, the Company sold three office properties, eight industrial properties and four land parcels for $31.3 million, realizing a net gain of $4.5 million. During 2000, the Company sold seven office properties and two land parcels for $101.1 million, realizing a net gain of $11.6 million.

Minority interest decreased to $7.9 million in 2001 as compared to $8.9 million in 2000, primarily due to the $6.6 million non-recurring charge in 2001and decreased gains on sales of interests in real estate.

LIQUIDITY AND CAPITAL RESOURCES
Cash Flows

During 2002, the Company generated $118.7 million in cash flow from operating activities. Other sources of cash in-flows consisted of: (i) $115.0 million of proceeds from the Term Loan and draws on the Credit Facility , (ii) $78.0 million of net proceeds from property sales, (iii) proceeds from $20.2 million of additional mortgage notes payable, (iv) $2.5 million of escrowed cash, (v) $2.0 million of cash distributions from Real Estate Ventures and (vi) $1.7 million from payments on employee loans. During 2002, cash out-flows consisted of: (i) $102.3 million of Credit Facility repayments, (ii) $75.0 million of distributions to shareholders, (iii) $48.6 million of mortgage note repayments, (iv) $38.8 million to fund capital expenditures, (v) $25.1 million for property acquisitions, (vi) $20.2 million to repurchase Common Shares and minority interest units in the Operating Partnership, (vii) $13.1 million of leasing costs, (viii) $.7 million of debt costs, (ix) $.4 million of additional investment in Real Estate Ventures and (x) $.4 million of distributions to minority interest holders in excess of income allocated.

During 2001, the Company generated $143.4 million in cash flow from operating activities. Other sources of cash in-flows consisted of: (i) proceeds from $135.2 million of additional mortgage notes payable, (ii) $91.0 million of proceeds from draws on the Credit Facility, (iii) $31.3 million of net proceeds from property sales, (iv) $5.5 million of cash distributions from Real Estate Ventures and (v) $1.0 million from payments on employee loans. During 2001, cash out-flows consisted of: (i) $127.9 million of mortgage note repayments, (ii) $107.4 million to fund capital expenditures, (iii) $72.5 million of distributions to shareholders, (iv) $40.4 million for property acquisitions, (v) $35.0 million to repay borrowings under the Credit Facility, (vi) $9.2 million of leasing costs, (vii) $6.5 million to repurchase Common Shares and minority interest units in the Operating Partnership, (viii) $5.6 million of debt costs, (ix) $2.5 million of

 

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additional investment in Real Estate Ventures, (x) $2.0 million of distributions to minority interest holders in excess of income allocated and (xi) $1.0 million of escrowed cash.

During 2000, the Company generated $103.1 million in cash flow from operating activities. Other sources of cash in-flows consisted of: (i) $107.4 million of additional mortgage notes payable, (ii) $101.1 million of net proceeds from property sales and (iii) $71.0 million of proceeds from draws on the Credit Facility. During 2000, cash out-flows consisted of: (i) $113.1 million to fund capital expenditures, (ii) $109.5 million to repay borrowings under the Credit Facility, (iii) $69.0 million of distributions to shareholders, (iv) $42.4 million of mortgage note repayments, (v) $15.3 million to repurchase Common Shares, (vi) $7.0 million for property acquisitions, (vii) $6.6 million of leasing costs, , (viii) $4.0 million of escrowed cash, (ix) $2.7 million of additional investment in Real Estate Ventures, (x) $1.7 million of debt costs and (xi) $.9 million of distributions to minority interest holders in excess of income allocated.

Capitalization

At December 31, 2002, the Company maintained a $500.0 million Credit Facility. (See Item 1. Business-Credit Facility)

As of December 31, 2002, the Company had approximately $1 billion of debt outstanding, consisting of $307.0 million of borrowings under the Credit Facility, $100.0 million of borrowings under the Term Loan and $597.7 million of mortgage notes payable. The mortgage notes payable consists of $537.1 million of fixed rate loans and $60.6 million of variable rate loans. Additionally, the Company has entered into interest rate swap and cap agreements to fix the interest rate on $203.0 million of the Credit Facility and variable rate loans. The mortgage loans mature between March 2003 and July 2027. As of December 31, 2002, the Company also had $13.6 million of letters of credit outstanding under the Credit Facility and $179.4 million of unused availability under the Credit Facility. For the year ended December 31, 2002, the weighted-average interest rate under the Credit Facility and the related swap agreements was 5.41%, the weighted- average interest rate for the Term Loan was 3.39% and the weighted-average interest rate for borrowings under mortgage notes payable and the related cap agreements was 7.27%.

The following table outlines the timing of payment requirements related to the Company’s commitments as of December 31, 2002:

    Payments by Period (in thousands)  
   
 
        Less than           More than  
    Total   1 Year   1-3 Years   3-5 Years   5 Years  
   
 
 
 
 
 
Mortgage notes payable:
                                
   Fixed rate
   $ 537,093   $ 77,934   $ 74,412   $ 38,041   $ 346,706  
   Variable rate
     25,113     154     364     767     23,828  
   Construction loans
     35,523     35,523     —     —     —  
   
 
 
 
 
 
      597,729     113,611     74,776     38,808     370,534  
     
                                
Revolving credit facility
     307,000     —     307,000     —     —  
Unsecured debt
     100,000     —     100,000     —     —  
Other liabilities
     13,239     2,277     10,962     —     —  
   
 
 
 
 
 
    $ 1,017,968   $ 115,888   $ 492,738   $ 38,808   $ 370,534  
   
 
 
 
 
 

The Company intends to refinance its mortgage notes payable as they become due or repay those that are secured by properties being sold. The Company expects to renegotiate its Credit Facility and Term Loan prior to maturity or extend their terms.

As of December 31, 2002, the Company’s debt-to-market capitalization ratio was 49.8%. As a general policy, the Company intends, but is not obligated, to adhere to a policy of maintaining a long-term average debt-to-market capitalization ratio of no more than 50%.

 

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The Company’s Board of Trustees approved a share repurchase program authorizing the Company to repurchase up to 4,000,000 of its outstanding Common Shares. Through December 31, 2002, the Company had repurchased 3.2 million of its Common Shares at an average price of $17.71 per share. Under the share repurchase program, the Company has the authority to repurchase an additional 834,000 shares. No time limit has been placed on the duration of the share repurchase program. The following table summarizes the share repurchases during the three years ended December 31, 2002:

 

    Years Ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
Repurchased amount (shares)
     491,074     302,437     957,729  
Repurchased amount ($, in thousands)
   $ 11,053   $ 5,908   $ 15,277  
Average price per share
   $ 22.51   $ 19.54   $ 15.95  

The following table summarized the Class A Units tendered for redemption during the three years ended December 31, 2002:

    Years Ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
Repurchased amount (units)
     364,222     3,247             —  
Repurchased amount ($, in thousands)
   $ 8,536   $ 64,031   $ —  
Average price per share
   $ 23.44   $ 19.72   $ —  

Short- and Long-Term Liquidity

The Company believes that cash flow from operations and current financing alternatives are adequate to fund its short-term liquidity requirements for 2003. Cash flow from operations is generated primarily from rental revenues, operating expense reimbursements from tenants, and by providing of management services to third parties. The Company intends to use these funds to meet its principal short-term liquidity needs, which are to fund operating expenses, debt service requirements, recurring capital expenditures, tenant allowances, leasing commissions and the minimum distributions required to maintain the Company’s REIT qualifications under the Internal Revenue Code.

On December 20, 2002, the Board of Trustees declared a quarterly dividend distribution of $0.44 per share, paid on January 15, 2003 to shareholders of record as of December 31, 2002. Distributions declared in 2002 totaled $1.76 per share as compared to $1.70 per share in 2001, representing an increase of approximately 3.5%.

The Company expects to meet its long-term liquidity requirements, such as for property acquisitions, development, investments in real estate ventures, scheduled debt maturities, major renovations, expansions and other significant capital improvements, through borrowings under its Credit Facility, long-term secured and unsecured indebtedness, the issuance of equity securities and the disposition of certain properties.

Non-GAAP Supplemental Financial Measure: Funds from Operations

Industry analysts generally consider Funds From Operations an alternative measure of performance for an equity REIT. The Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in its March 1995 White Paper (as clarified by the November 2000 NAREIT National Policy Bulletin which became effective on January 1, 2000) defines Funds From Operations to mean net income (loss) before minority interests of common unitholders (computed in accordance with GAAP), excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures.

 

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The Company considers Funds From Operations an appropriate alternative measure of performance for an equity REIT because it is predicated on cash flow analyses. While Funds From Operations is a relevant and widely used measure of operating performance of equity REITs, other equity REITs may use different methodologies for calculating Funds From Operations and, accordingly, Funds From Operations as disclosed by such other REITs may not be comparable to Funds From Operations published by the Company in this report. Therefore, the Company believes that in order to facilitate a clear understanding of the historical operating results of the Company, Funds From Operations should be examined in conjunction with net income as presented in the financial statements included elsewhere in this report. Funds From Operations should not be considered as a substitute to net income (loss) (computed in accordance with GAAP) as an indicator of the Company’s financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of the Company’s liquidity, nor is it indicative of funds available to fund the Company’s cash needs, including the Company’s ability to pay dividends or make distributions.

The following table summarizes FFO for the years ended December 31, 2002 and 2001 (in thousands, except share data):

    2002   2001  
   
 
 
Income before net gains on sale, minority interest and
              
   extraordinary item:
              
      Continuing operations
   $ 59,192   $ 26,536  
      Discontinued operations
     5,382     12,395  
   
 
 
      64,574     38,931  
Add (deduct):
              
   Depreciation:
              
      Attributable to real property
     52,944     73,031  
      Attributable to real estate ventures
     2,422     3,479  
   Amortization attributable to leasing costs
     5,820     5,158  
   Gain on sale of land interests
     –     881  
   Impairment loss on assets held-for-sale
     665     –  
   Gain included in equity in income of real estate ventures
     –     (785 )
   
 
 
Funds from operations before minority interest
   $ 126,425   $ 120,695  
   
 
 
Weighted-average Common Shares (including Common Share
              
   equivalents) and Operating Partnership units
     46,928,420     47,297,574  
   
 
 

Inflation

A majority of the Company’s leases provide for 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. The Company believes that inflationary increases in expenses will be significantly offset by expense reimbursement and contractual rent increases.

Interest Rate Risk and Sensitivity Analysis

The analysis below presents the sensitivity of the market value of the Company’s financial instruments to selected changes in market rates. The range of changes chosen reflects the Company’s view of changes which are reasonably possible over a one-year period. Market values are the present value of projected future cash flows based on the market rates chosen.

The Company’s financial instruments consist of both fixed and variable rate debt. As of December 31, 2002, the Company’s consolidated debt consisted of $537.1 million in fixed rate mortgages and $60.6 million in variable rate mortgage notes, $307.0 million borrowed under its Credit Facility and $100.0 million under its Term Loan. All financial instruments were entered into for other than trading purposes and the net market value of these financial instruments is referred to as the net financial position. Changes in interest rates have different impacts on the fixed and variable rate portions of the Company’s debt

 

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portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position.

The Company has entered into interest rate swap and rate cap agreements designed to reduce the impact of interest rate changes on its variable rate debt. At December 31, 2002, the Company had interest rate swap agreements for notional principal amounts aggregating $175 million. The swap agreements effectively fix the LIBOR interest rate on $100 million of Credit Facility borrowings at 4.230% and on $75 million of Credit Facility borrowings at 4.215%, in each case until June 2004. The interest rate cap agreement effectively limits the interest rate on a mortgage with a notional value of $28 million at 8.7% until July 2004. The impact of the cap agreement is recorded as a component of interest expense.

The sensitivity analysis related to the fixed portion of the Company’s debt portfolio assumes an instantaneous 1% move in interest rates from their actual levels at December 31, 2002 with all other variables held constant. As of December 31, 2002, a 1% increase in actual interest rates would result in a decrease in beneficiaries’ equity of $27.6 million and a 1% decrease in actual interest rates would result in an increase in beneficiaries’ equity of $30.5 million.

Based on the Company’s variable rate debt as of December 31, 2002, a 1% increase in interest rates would result in an additional $2.6 million in interest expense per year and a 1% decrease would reduce interest expense by $2.6 million per year.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

See discussion in Management’s Discussion and Analysis included in Item 7 herein.

Item 8.      Financial Statements and Supplementary Data

The financial statements and supplementary financial data are listed under Item 15(a) and filed as part of this Annual Report on Form 10-K. See Item 15.

KPMG LLP is the company’s independent public auditors and also provides the Company with tax compliance and advisory services. The Audit Committee of the Board of Trustees of the Company has approved the provision of services by KPMG to the Company.

Report of Management

The management of the Company is responsible for the preparation of the financial statements and related financial information included in this annual report. The statements were prepared in conformity with accounting principles generally accepted in the United States of America and, accordingly, include amounts that are based on informed estimates and judgments.

Management maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and that transactions are properly authorized and accurately recorded. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal accounting control and that the costs of such systems should not exceed the benefits expected to be derived. The Company continually reviews and modifies these systems, where appropriate, to maintain such assurance. The system of internal controls includes careful selection, training and development of operating and financial personnel, well-defined organizational responsibilities and communication of Company policies and procedures throughout the organization.

The selection of the Company’s independent auditors, KPMG LLP, has been approved by the Board of Trustees. The Audit Committee of the Board of Trustees, comprised solely of outside Trustees, meets

 

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periodically with the Company’s independent auditors and management to review the financial statements and related information and to confirm that they are properly discharging their responsibilities. In addition, the independent auditors meet with the Audit Committee, without the presence of management, to discuss their findings and their observations on other relevant matters. Recommendations made by KPMG LLP are considered and appropriate action is taken to respond to these recommendations.

Gerard H. Sweeney, President and Chief Executive Officer
Christopher P. Marr, Senior Vice President and Chief Financial Officer
Bradley W. Harris, Vice President and Chief Accounting Officer

Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On May 23, 2002, the Company dismissed Arthur Andersen LLP as its independent public accountants and appointed KPMG LLP as its new independent public auditors. The decision to dismiss Arthur Andersen and to retain KPMG was approved by the Audit Committee of the Company’s Board of Trustees. Arthur Andersen’s reports on the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer or opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

During the Company’s two most recent fiscal years ended December 31, 2001 and the subsequent interim period through May 30, 2002, there were no disagreements between the Company and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their reports.

None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the Company’s two most recent fiscal years ended December 31, 2001, and the subsequent interim period through May 30, 2002.

The Company provided Arthur Andersen with a copy of the foregoing disclosures. A copy of Arthur Andersen’s letter, dated May 30, 2002, stating their agreement with these statements is attached as Exhibit 16 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 30, 2002. During the Company’s two most recent fiscal years ended December 31, 2001, and the subsequent interim period through May 30, 2002, neither the Company nor anyone acting on behalf of the Company consulted with KPMG regarding any of the matters or events set forth in Item 304(a)(2) of Regulation S-K.

PART III

Item 10.      Trustees and Executive Officers of the Company

Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders expected to be held on May 5, 2003.

Item 11.      Executive Compensation

Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders expected to be held on May 5, 2003.

Item 12.      Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders expected to be held on May 5, 2003.

 

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Item 13.      Certain Relationships and Related Transactions

Incorporated herein by reference to the Company’s definitive proxy statement to be filed with respect to its Annual Meeting of Shareholders expected to be held on May 5, 2003.

Item 14.      Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Within 90 days prior to the date of this report, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13(a)- 14(c). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the date of that evaluation. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.

PART IV

Item 15.      Exhibits, Financial Statements, Schedules and Reports on Form 8-K

  (a)
1. and 2.   Financial Statements and Schedules

The financial statements and schedules listed below are filed as part of this annual report on the pages indicated.

Index to Financial Statements and Schedules

    Page  
   
 
    F-1  
     
        
    F-2  
     
        
    F-3  
     
        
    F-4  
     
        
    F-5  
     
        
    F-6  
     
        
    F-25  
     
        
    F-26  

 

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3.      Exhibits

Exhibits No.
  
Description
  
(1) 3.1.1
     Amended and Restated Declaration of Trust of the Company (amended and restated as of May 12, 1997).  
(2) 3.1.2
     Articles of Amendment to Declaration of Trust of the Company (September 4, 1997).  
(3) 3.1.3
     Articles of Amendment to Declaration of Trust of the Company (No. 2).  
(4) 3.1.4
     Articles Supplementary to Declaration of Trust of the Company (September 28, 1998).  
(5) 3.1.5
     Articles of Amendment to Declaration of Trust of the Company (March 19, 1999)  
(6) 3.2
     Amended and Restated Bylaws of the Company.  
(7) 10.01
     Second Amended and Restated Partnership Agreement of Brandywine Realty Services Partnership.  
(8) 10.02
     Form of Warrant issued to Executive Officers. **  
10.03
     Amended and Restated Articles of Incorporation of Brandywine Realty Services Corporation.  
(9) 10.04
     Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L.P. (the “Operating Partnership”).  
(9) 10.05
     Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of the Operating Partnership.  
(9) 10.06
     First Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership  
(9) 10.07
     Tax Indemnification Agreement – PWCC  
(9) 10.08
     Tax Indemnification Agreement – Laurel Oak  
(9) 10.09
     Tax Indemnification Agreement – English Creek  
(10) 10.10
     Second Amendment, dated March 31, 1998, to the Amended and Restated Agreement of Limited Partnership Agreement of Brandywine Operating Partnership, L.P.  
(10) 10.11
     Tax Indemnification Agreement, dated March 31, 1998, by and between Brandywine Operating Partnership, L.P. and Brookstone Investors, L.L.C.  
         
(10) 10.12
     Tax Indemnification Agreement, dated March 31, 1998, by and between Brandywine Operating Partnership, L.P. and Brookstone Holdings of Del. -4, L.L.C.  
(10) 10.13
     Tax Indemnification Agreement, dated March 31, 1998, by and between Brandywine Operating Partnership, L.P. and Brookstone Holdings of Del. -5, L.L.C.  
(10) 10.14
     Tax Indemnification Agreement, dated March 31, 1998, by and between Brandywine Operating Partnership, L.P. and Brookstone Holdings of Del. -6, L.L.C.  
(11) 10.15
     Contribution Agreement, dated April 7, 1998, by and between the entities listed on Schedule thereto and Brandywine Operating Partnership, L.P.  
(11) 10.16
     First Amendment to Contribution Agreement dated May 8, 1998.  
(11) 10.17
     Third Amendment, dated May 8, 1998, to the Amended and Restated Agreement of Limited Partnership of Brandywine Operating Partnership, L. P.  
(11) 10.18
     Tax Indemnification Agreement dated May 8, 1998, by and between Brandywine Operating Partnership, L.P. and the parties identified on the signature page.  
(12) 10.19
     Contribution Agreement dated as of July 10, 1998 (Axinn)  
(12) 10.20
     Form of Donald E. Axinn Options **  
(12) 10.21
     Form of Mark Hamer Options **  
(4) 10.22
     Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of the Operating Partnership creating the Series A Preferred Mirror Units.  
(4) 10.23
     Fifth Amendment to the Amended and Restated Agreement of Limited Partnership of the Operating Partnership creating the Series B Preferred Units.  
(4) 10.24
     Sixth Amendment to the Amended and Restated Agreement of Limited Partnership of the Operating Partnership  
(4) 10.25
     First Amendment to Contribution Agreement (Axinn)  

 

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(13) 10.26
     Form of Board of Trustees Designation Letter (Lazard)  
(14) 10.27
     Amended and Restated Employment Agreement dated as of December 8, 2000 of Anthony A. Nichols, Sr.**  
(6) 10.28
     Agreement dated as of December 31, 2001 with Anthony A. Nichols, Sr. replacing December 8, 2000 Employment Agreement**  
(14) 10.29
     Amended and Restated Employment Agreement dated as of May 7, 2002 of Gerard H. Sweeney**  
(5) 10.30
     Amended and Restated Non-Qualified Stock Option Award to Anthony A. Nichols, Sr. **  
(5) 10.31
     Amended and Restated Non-Qualified Stock Option Award to Gerard H. Sweeney **  
(16) 10.32
     Restricted Share Awards to Anthony A. Nichols, Sr. **  
(16) 10.33
     Restricted Share Awards to Gerard H. Sweeney **  
(5) 10.34
     Long-Term Performance Award for Anthony A. Nichols, Sr. **  
(5) 10.35
     Long-Term Performance Award for Gerard H. Sweeney**  
(5) 10.36
     Long-Term Performance Award for Anthony S. Rimikis **  
(6) 10.37
     Separation Agreement (Jeffrey F. Rogatz)  
(5) 10.38
     Severance Agreement (Anthony S. Rimikis) **  
(5) 10.39
     Third Amendment to Restricted Share Award to Anthony A. Nichols, Sr.**  
(5) 10.40
     Third Amendment to Restricted Share Award to Gerard H. Sweeney.**  
(5) 10.41
     Restricted Share Award to Anthony S. Rimikis.**  
(5) 10.42
     Loan Agreement with Gerard H. Sweeney.**  
(5) 10.43
     Loan Agreement with Anthony A. Nichols, Sr.**  
(14) 10.44
     Fourth Amendment to Restricted Share Award to Anthony A. Nichols, Sr.**  
(14) 10.45
     Fourth Amendment to Restricted Share Award to Gerard H. Sweeney**  
(14) 10.46
     Severance Agreement (Barbara L. Yamarick)**  
(14) 10.47
     Severance Agreement (Anthony A. Nichols, Jr.)**  
(14) 10.48
     Severance Agreement (H. Jeffrey De Vuono)**  
(14) 10.49
     Severance Agreement (George Sowa)**  
(14) 10.50
     Severance Agreement (Bradley W. Harris)**  
(14) 10.51
     Restricted Share Award to Anthony A. Nichols, Sr.**  
(14) 10.52
     Restricted Share Award to Gerard H. Sweeney**  
(14) 10.53
     Restricted Share Award to Anthony S. Rimikis**  
(14) 10.54
     Restricted Share Award to Barbara L. Yamarick  
(14) 10.55
     Restricted Share Award to Anthony A. Nichols, Jr.**  
(14) 10.56
     Restricted Share Award to H. Jeffrey De Vuono**  
(14) 10.57
     Restricted Share Award to George Sowa**  
(14) 10.58
     Restricted Share Award to Bradley W. Harris**  
(17) 10.59
     Exchange Agreement (Virginia properties) – Prentiss Transaction  
(17) 10.60
     Exchange Agreement (Pennsylvania/New Jersey properties) – Prentiss Transaction  
(17) 10.61
     Agreement of Purchase and Sale (Fee Transfer properties) – Prentiss Transaction  
(17) 10.62
     Agreement of Purchase and Sale (Entity Transfer properties) – Prentiss Transaction  
(17) 10.63
     Contribution Agreement (Joint Venture Interest) – Prentiss Transaction  
(17) 10.64
     Agreement of Purchase and Sale (935) First Avenue) – Prentiss Transaction  
(18) 10.65
     Fourteenth Amendment to Second Amended and Restated Agreement of Limited Partnership of Prentiss – Prentiss Transaction  
(19) 10.66
     Third Amended and Restated Credit Agreement  
(15) 10.67
     2002 Restricted Share Award for Gerard H. Sweeney**  
(15) 10.68
     2002 Form of Restricted Share Award for Executive Officers**  
(20) 10.69
     Term Credit Agreement  
(20) 10.70
     Consent and First Amendment to Third Amended and Restated Credit Agreement  
(20) 10.71
     Second Amendment to Third Amended and Restated Credit Agreement  
(21) 10.72
     2002 Restricted Share Award to Christopher P. Marr**  
(21) 10.73
     Severance Agreement to Christopher P. Marr  
(22) 10.74
     2002 Non-Qualified Option to Gerard H. Sweeney**  
10.75
     Letter to Cohen & Steers  

 

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10.76
     Executive Deferred Compensation Plan  
10.77
     2003 Restricted Share Award to Gerard H. Sweeney**  
10.78
     2003 Restricted Share Award to Anthony S. Rimikis**  
10.79
     2003 Restricted Share Award to Barbara L. Yamarick**  
10.80
     2003 Restricted Share Award to Anthony A. Nichols, Jr.**  
10.81
     2003 Restricted Share Award to H. Jeffrey DeVuono**  
10.82
     2003 Restricted Share Award to George D. Sowa**  
10.83
     2003 Restricted Share Award to Bradley W. Harris**  
10.84
     2003 Restricted Share Award to Brad A. Molotsky**  
10.85
     2003 Restricted Share Award to Christopher P. Marr**  
14.1
     Code of Business Conduct and Ethics  
21.1
     List of Subsidiaries of the Company  
23.1
     Consent of KPMG LLP  
99.1
     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  
99.2
     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  

1.
     Previously filed as an exhibit to the Company’s Form 8-K dated June 9, 1997 and incorporated herein by reference.  
2.
     Previously filed as an exhibit to the Company’s Form 8-K dated September 10, 1997 and incorporated herein by reference.  
3.
     Previously filed as an exhibit to the Company’s Form 8-K dated June 3, 1998 and incorporated herein by reference.  
4.
     Previously filed as an exhibit to the Company’s Form 8-K dated October 13, 1998 and incorporated herein by reference.  
5.
     Previously filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference.  
6.
     Previously filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference.  
7.
     Previously filed as an exhibit to the Company’s Registration statement of Form S-11 (File No. 33-4175) and incorporated herein by reference.  
8.
     Previously filed as an exhibit to the Company’s Form 8-K dated August 22, 1996 and incorporated herein by reference.  
9.
     Previously filed as an exhibit to the Company’s Form 8-K dated December 17, 1997 and incorporated herein by reference.  
10.
     Previously filed as an exhibit to the Company’s Form 8-K dated April 13, 1998 and incorporated herein by reference.  
11.
     Previously filed as an exhibit to the Company’s Form 8-K dated May 14, 1998 and incorporated herein by reference.  
12.
     Previously filed as an exhibit to the Company’s Form 8-K dated July 30, 1998 and incorporated herein by reference.  
13.
     Previously filed as an exhibit to the Company’s Form 8-K dated August 13, 1998 and incorporated herein by reference.  

 

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14.
     Previously filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference.  
15.
     Previously filed as an exhibit to the Company’s Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference.  
16.
     Previously filed as an exhibit to the Company’s Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference.  
17.
     Previously filed as an exhibit to the Company’s Form 8-K dated March 23, 2001 and incorporated herein by reference.  
18.
     Previously filed as an exhibit to the Company’s Form 8-K dated April 23, 2001 and incorporated herein by reference.  
19.
     Previously filed as an exhibit to the Company’s Form 8-K dated July 12, 2001 and incorporated herein by reference.  
20.
     Previously filed as an exhibit to the Company’s Form 8-K dated July 16, 2002 and incorporated herein by reference.  
21.
     Previously filed as an exhibit to the Company’s Form 8-K dated August 27, 2002 and incorporated herein by reference.  
22
     Previously filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference.  
   
**
Management contract or compensatory plan or arrangement.
     
  (b)
Reports on Form 8-K
   
 
During the three months ended December 31, 2002 and through March 27, 2003, the Company filed the following:
     
  (i)
Current Report on Form 8-K filed February 28, 2003 (reporting under Item 7 and 12).

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

     BRANDYWINE REALTY TRUST  
    By: /s/ Gerard H. Sweeney  
   
 
            Gerard H. Sweeney  
              President and Chief Executive Officer  

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature
   Title   Date  
   
   
 
/s/ Anthony A. Nichols, Sr.
     Chairman of the Board and Trustee     March 27, 2003  
             
Anthony A. Nichols, Sr.
              
     
              
/s/ Gerard H. Sweeney
     President, Chief Executive Officer and Trustee     March 27, 2003  
             
Gerard H. Sweeney
     (Principal Executive Officer)        
     
              
/s/ Christopher P. Marr
     Senior Vice President and Chief Financial     March 27, 2003  
             
Christopher P. Marr
     Officer (Principal Financial Officer)        
     
              
/s/ Bradley W. Harris
     Vice President and Chief Accounting Officer     March 27, 2003  
    (Principal Accounting Officer)        
Bradley W. Harris
              
     
              
/s/ Walter D’Alessio
     Trustee     March 27, 2003  
             
Walter D’Alessio
              
     
              
/s/ Charles P. Pizzi
     Trustee     March 27, 2003  
             
Charles P. Pizzi
              
     
              
/s/ Donald E. Axinn
     Trustee     March 27, 2003  
             
Donald E. Axinn
              
     
              
/s/ Robert C. Larson
     Trustee     March 27, 2003  
             
Robert C. Larson
              
     
              
/s/ D. Pike Aloian
     Trustee     March 27, 2003  
             
D. Pike Aloian
              

 

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CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Gerard H. Sweeney, certify that:

  1.
I have reviewed this annual report on Form 10-K of Brandywine Realty Trust.
     
  2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
     
  3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
     
  4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
       
    a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
       
    b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
       
    c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
     
  5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
       
    a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
       
    b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
     
  6.
The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

March 27, 2003
     /s/ Gerard H. Sweeney  
   
 
Date
     Gerard H. Sweeney  
      President and Chief Executive Officer  

 

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CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Christopher P. Marr, certify that:

  1.
I have reviewed this annual report on Form 10-K of Brandywine Realty Trust.
     
  2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
     
  3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
     
  4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
       
    a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
       
    b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
       
    c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
     
  5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
       
    a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
       
    b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
     
  6.
The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

March 27, 2003
     /s/ Christopher P. Marr  
   
 
Date
     Christopher P. Marr  
      Senior Vice President and Chief Financial Officer  

 

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REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Trustees of Brandywine Realty Trust:

We have audited the consolidated balance sheets of Brandywine Realty Trust and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, beneficiaries’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2002. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brandywine Realty Trust and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

     /s/ KPMG LLP  

Philadelphia, Pennsylvania
February 26, 2003

 

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BRANDYWINE REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except number of shares)

    December 31,  
   
 
    2002   2001  
   
 
 
ASSETS
              
Real estate investments:
              
   Operating properties
   $ 1,890,009   $ 1,893,039  
   Accumulated depreciation
     (245,230 )   (230,793 )
   
 
 
      1,644,779     1,662,246  
   Construction-in-progress
     58,127     111,378  
   Land held for development
     43,075     39,285  
   
 
 
      1,745,981     1,812,909  
     
              
Cash and cash equivalents
     26,801     13,459  
Escrowed cash
     16,318     16,311  
Accounts receivable, net
     3,657     6,394  
Accrued rent receivable, net
     28,333     25,222  
Marketable securities
     11,872     10,735  
Assets held for sale
     7,666     —  
Investment in real estate ventures, at equity
     14,842     19,067  
Deferred costs, net
     29,271     24,261  
Other assets
     34,547     31,845  
   
 
 
   Total assets
   $ 1,919,288   $ 1,960,203  
     
              
LIABILITIES AND BENEFICIARIES’ EQUITY
              
Mortgage notes payable
   $ 597,729   $ 614,840  
Borrowings under Credit Facility
     307,000     394,325  
Unsecured term loan
     100,000     —  
Accounts payable and accrued expenses
     27,576     35,054  
Distributions payable
     21,186     21,525  
Tenant security deposits and deferred rents
     22,276     22,290  
Other liabilities
     22,006     20,179  
Liabilities related to assets held for sale
     20     —  
   
 
 
   Total liabilities
     1,097,793     1,108,213  
Minority interest
     135,052     143,834  
     
              
Commitments and contingencies
              
     
              
Beneficiaries’ equity:
              
   Preferred Shares (shares authorized-10,000,000):
              
      7.25% Series A Preferred Shares, $0.01 par value;
              
         issued and outstanding-750,000
              
         in 2002 and 2001
     8     8  
      8.75% Series B Preferred Shares, $0.01 par value;
              
         issued and outstanding-4,375,000
              
         in 2002 and 2001
     44     44  
   Common Shares of beneficial interest, $0.01 par value;
              
      shares authorized-100,000,000; issued and outstanding-
              
      35,226,315 in 2002 and 35,640,935 in 2001
     352     356  
Additional paid-in capital
     841,659     848,213  
Share warrants
     401     401  
Cumulative earnings
     225,010     163,502  
Accumulated other comprehensive loss
     (6,402 )   (4,587 )
Cumulative distributions
     (374,629 )   (299,781 )
   
 
 
   Total beneficiaries’ equity
     686,443     708,156  
   
 
 
Total liabilities and beneficiaries’ equity
   $ 1,919,288   $ 1,960,203  
   
 
 

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

 

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BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)

    Year ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
Revenue:
                    
   Rents
   $ 253,338   $ 233,612   $ 218,520  
   Tenant reimbursements
     33,624     32,470     29,898  
   Other
     9,768     10,464     6,962  
   
 
 
 
      Total revenue
     296,730     276,546     255,380  
Operating Expenses:
                    
   Property operating expenses
     76,746     72,492     59,483  
   Real estate taxes
     25,854     23,077     21,731  
   Interest
     63,522     66,385     64,746  
   Depreciation and amortization
     57,599     69,047     59,316  
   Management fees
     —     —     10,867  
   Administrative expenses
     14,804     15,177     4,249  
   Non-recurring charges
     —     6,600     —  
   
 
 
 
Total operating expenses
     238,525     252,778     220,392  
   
 
 
 
Income from continuing operations before equity in income of management
                    
   company, equity in income of real estate ventures, net gains on sales
                    
   and minority interest
     58,205     23,768     34,988  
Equity in income of management company
     —     —     164  
Equity in income of real estate ventures
     987     2,768     2,797  
   
 
 
 
Income from continuing operations before net gains on sales and
                    
   minority interest
     59,192     26,536     37,949  
Net gains on sales of interests in real estate
     —     4,524     11,638  
   
 
 
 
Income before minority interest and extraordinary items
     59,192     31,060     49,587  
Minority interest attributable to continuing operations
     (9,375 )   (7,915 )   (8,904 )
   
 
 
 
Income from continuing operations
     49,817     23,145     40,683  
Discontinued operations:
                    
   Income from discontinued operations
     5,382     12,395     12,169  
   Net gain on disposition of discontinued operations
     8,562     —     —  
   Minority interest
     (777 )   (707 )   (694 )
   
 
 
 
Income from discontinued operations
     13,167     11,688     11,475  
   
 
 
 
Income before extraordinary item
     62,984     34,833     52,158  
Extraordinary item
     —     (1,111 )   —  
   
 
 
 
Net income
     62,984     33,722     52,158  
                     
Income allocated to Preferred Shares
     (11,906 )   (11,906 )   (11,906 )
   
 
 
 
Income allocated to Common Shares
   $ 51,078   $ 21,816   $ 40,252  
   
 
 
 
Basic earnings per Common Share:
                    
   Continuing operations
   $ 1.03   $ 0.27   $ 0.80  
   Discontinued operations
     0.37     0.33     0.32  
   Extraordinary item
     —     (0.03 )   —  
   
 
 
 
    $ 1.40   $ 0.57   $ 1.12  
   
 
 
 
Diluted earnings per Common Share:
                    
   Continuing operations
   $ 1.02   $ 0.27   $ 0.80  
   Discontinued operations
     0.37     0.33     0.32  
   Extraordinary item
     —     (0.03 )   —  
   
 
 
 
    $ 1.39   $ 0.57   $ 1.12  
   
 
 
 

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

 

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BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF BENEFICIARIES’ EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2002, 2001 and 2000
(in thousands, except number of shares)

    Number of Preferred A Shares   Par Value of Preferred A Shares   Number of Preferred B Shares   Par Value of Preferred B Shares   Number of Common Shares   Par Value of Common Shares   Additional Paid- in Capital   Employee Stock Loans   Share Warrants   Cumulative Earnings   Accumulated Other Comprehensive Income (Loss)   Cumulative Distributions   Total  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, January 1, 2000
     750,000   $ 8     4,375,000   $ 44     36,372,590   $ 364   $ 863,962   $ (4,640 ) $ 908   $ 79,384   $ —   $ (155,778 ) $ 784,252  
   Comprehensive income:
                                                                                
      Net income
                                                           52,158                 52,158  
      Other comprehensive income:
                                                                                
         Unrealized loss on available-for-sale securities
                                                                 (1,731 )            
                                                               
             
            Total other comprehensive income
                                                                 (1,731 )         (1,731 )
                                                                           
 
   Total comprehensive income
                                                                             50,427  
Vesting of Restricted Stock
                             106,453           2,897                                   2,897  
Repurchase of Common Shares
                             (957,729 )   (9 )   (15,268 )                                 (15,277)  
Employee stock loans used to purchase Common Shares
                             160,000     2     2,498     (2,500 )                           —  
Payment/forgiveness of employee stock loans
                                               303                             303  
Accretion of Preferred Share discount
                                         286                 (286 )               —  
Preferred Share distributions
                                                                       (11,906 )   (11,906 )
Distributions ($1.62 per share)
                                                                       (58,528 )   (58,528 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, December 31, 2000
     750,000     8     4,375,000     44     35,681,314     357     854,375     (6,837 )   908     131,256     (1,731 )   (226,212 )   752,168  
   Comprehensive income:
                                                                                
      Net income
                                                           33,722                 33,722  
      Other comprehensive income:
                                                                                
         Cumulative effect of adopting SFAS 133
                                                                 (1,300 )            
         Unrealized loss on derivative financial instruments
                                                                 (3,371 )            
         Unrealized gain on available-for-sale securities
                                                                 1,815              
                                                               
             
            Total other comprehensive income
                                                                 (2,856 )         (2,856)  
                                                                           
 
   Total comprehensive income
     30,866                                                                          
   Vesting of Restricted Stock
                             175,411     2     3,983                                   3,985  
   Repurchase of Common Shares
                             (373,713 )   (4 )   (7,290 )                                 (7,294 )
   Employee stock loans used to purchase Common Shares
                             71,276     1     1,385     (1,386 )                           —  
   Payment/forgiveness of employee stock loans
                                               2,524                             2,524  
   Accretion of Preferred Share discount
                                         1,476                 (1,476 )               —  
   Exercise of warrants/options
                             86,647           (17 )         (507 )                     (524 )
   Preferred Share distributions
                                                                       (11,906 )   (11,906 )
   Distributions ($1.70 per share)
                                                                       (61,663 )   (61,663 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, December 31, 2001
     750,000     8     4,375,000     44     35,640,935     356     853,912     (5,699 )   401     163,502     (4,587 )   (299,781 )   708,156  
   Comprehensive income:
                                                                                
      Net income
                                                           62,984                 62,984  
      Other comprehensive income:
                                                                                
         Unrealized loss on derivative financial instruments
                                                                 (2,548 )            
         Unrealized gain on available-for-sale securities
                                                                 733              
                                                               
             
            Total other comprehensive income
                                                                 (1,815 )         (1,815 )
                                                                           
 
   Total comprehensive income
                                                                             61,169  
   Vesting of Restricted Stock
                             76,454     1     1,895                                   1,896  
   Repurchase of Common Shares
                             (491,074 )   (5 )   (11,048 )                                 (11,053 )
   Employee stock loans used to purchase Common Shares
                                                                             —  
Payment/forgiveness of employee stock loans
                                               1,658                             1,658  
Accretion of Preferred Share discount
                                         1,476                 (1,476 )               —  
Amortization of stock options
                                         43                                   43  
Exercise of warrants/options
                                         (578 )                                 (578 )
Preferred Share distributions
                                                                       (11,906 )   (11,906 )
Distributions ($1.76 per share)
                                                                       (62,942 )   (62,942 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, December 31, 2002
     750,000   $ 8     4,375,000   $ 44     35,226,315   $ 352   $ 845,700   $ (4,041 ) $ 401   $ 225,010   $ (6,402 ) $ (374,629 ) $ 686,443  
   
 
 
 
 
 
 
 
 
 
 
 
 
 

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

 

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BRANDYWINE REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

    Year ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
Cash flows from operating activities:
                    
   Net income
   $ 62,984   $ 33,722   $ 52,158  
   Adjustments to reconcile net income to net cash from operating activities:
                    
      Depreciation
     52,944     73,031     64,041  
      Amortization:
                    
         Deferred financing costs
     1,795     2,679     3,478  
         Deferred leasing costs
     5,820     5,158     2,971  
         Deferred compensation costs
     3,182     3,710     2,685  
      Straight-line rental income
     (5,930 )   (6,206 )   (6,396 )
      Provision for doubtful accounts
     894     2,867     332  
      Equity in income of management company
     —     —     (164 )
      Equity in income of real estate ventures in excess of cash distributions received
     —     —     (354 )
      Net gain on sales of interests in real estate
     (8,562 )   (4,524 )   (11,638 )
      Non-recurring charge
     —     6,600     —  
      Impairment loss on assets held-for-sale
     665     —     —  
      Extraordinary items
     —     1,111     —  
      Changes in assets and liabilities:
                    
         Accounts receivable
     2,582     (212 )   3,414  
         Other assets
     11,029     17,464     (8,480 )
         Accounts payable and accrued expenses
     (6,040 )   4,292     2,715  
         Tenant security deposits and deferred rents
     (521 )   5,058     (1,639 )
         Other liabilities
     (2,158 )   (1,332 )   —  
   
 
 
 
      Net cash from operating activities
     118,684     143,418     103,123  
Cash flows from investing activities:
                    
   Acquisition of properties
     (25,146 )   (40,359 )   (7,010 )
   Sales of properties
     78,019     31,335     101,075  
   Capital expenditures
     (38,787 )   (107,405 )   (113,137 )
   Investment in real estate ventures
     (446 )   (2,495 )   (2,748 )
   Increase in escrowed cash
     2,553     (1,016 )   (3,974 )
   Cash distributions from real estate ventures in excess of income
     1,969     5,492     —  
   Leasing costs
     (13,124 )   (9,234 )   (6,578 )
   
 
 
 
      Net cash from investing activities
     5,038     (123,682 )   (32,372 )
Cash flows from financing activites:
                    
   Proceeds from notes payable, Credit Facility
     15,000     91,000     71,000  
   Repayment of notes payable, Credit Facility
     (102,325 )   (35,000 )   (109,500 )
   Proceeds from Term Loan
     100,000     —     —  
   Proceeds from mortgage notes payable
     20,186     135,165     107,397  
   Repayment of mortgage notes payable
     (48,646 )   (127,876 )   (42,412 )
   Debt financing costs
     (658 )   (5,557 )   (1,656 )
   Repayments on employee stock loans
     1,658     1,024     —  
   Repurchases of Common Shares and minority interest units
     (20,165 )   (6,494 )   (15,277 )
   Distributions to minority interest holders in excess of income allocated
     (408 )   (2,045 )   (945 )
   Distributions paid to shareholders
     (75,022 )   (72,534 )   (69,010 )
   
 
 
 
      Net cash from financing activities
     (110,380 )   (22,317 )   (60,403 )
   
 
 
 
(Decrease) increase in cash and cash equivalents
     13,342     (2,581 )   10,348  
Cash and cash equivalents at beginning of year
     13,459     16,040     5,692  
   
 
 
 
Cash and cash equivalents at end of year
   $ 26,801   $ 13,459   $ 16,040  
   
 
 
 

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

 

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BRANDYWINE REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000

1. ORGANIZATION AND NATURE OF OPERATIONS

Brandywine Realty Trust, a Maryland Real Estate Investment Trust (collectively with its subsidiaries, the “Company”), is a self-administered and self-managed real estate investment trust (a “REIT”) active in acquiring, developing, redeveloping, leasing and managing office and industrial properties. As of December 31, 2002, the Company’s portfolio included 210 office properties, 27 industrial facilities and one mixed-use property (collectively, the “Properties”) that contained an aggregate of 16.1 million net rentable square feet. The Properties are located in the office and industrial markets in and surrounding Philadelphia, Pennsylvania, New Jersey and Richmond, Virginia. As of December 31, 2002, the Company also held economic interests in ten unconsolidated real estate ventures (the “Real Estate Ventures”) formed with third parties to develop commercial properties.

The Company’s interest in its assets is held through Brandywine Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership and, as of December 31, 2002, was entitled to approximately 94.9% of the Operating Partnership’s distributions after distributions to holders of Series B Preferred Units (as defined in Note 3 below). The Operating Partnership owns a 95% interest in a taxable REIT subsidiary, Brandywine Realty Services Corporation, a Pennsylvania corporation (the “Management Company”), that, as of December 31, 2002, was performing management and leasing services for properties containing an aggregate of approximately 19.0 million net rentable square feet, of which 15.9 million net rentable square feet related to properties owned by the Company and approximately 3.1 million net rentable square feet related to properties owned by unaffiliated third parties. The remaining 5% of the Management Company is owned by a partnership comprised of two executives of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and the Operating Partnership. The portion of the Operating Partnership not owned by the Company is presented as minority interest. All intercompany accounts and transactions have been eliminated in consolidation. Certain amounts reported in prior years have been reclassified for comparative purposes.

Management Company

The Management Company, a taxable REIT subsidiary, provides management, leasing, construction, development, redevelopment and other real estate related services for the Company’s properties and for third parties. Prior to December 31, 2000, the Company owned 100% of the Management Company’s non- voting preferred stock and 5% of its voting common stock and accounted for its investment using the equity method. Effective January 1, 2001, the Company converted its non-voting interest in the Management Company to a voting interest. As a result, the Company owns 95% of the Management Company’s equity, has voting control and, therefore, has consolidated the Management Company since January 1, 2001.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Operating Properties

Operating properties are carried at the lower of historical cost less accumulated depreciation and impairment losses. The cost of operating properties includes the purchase price or development costs of the properties. Costs incurred for

 

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the acquisition, renovation and betterment of the operating properties are capitalized to the Company’s investment in that property. Maintenance and repairs are charged to expense as incurred.

Depreciation and Amortization

The costs of buildings and improvements are depreciated using the straight-line method based on the following useful lives: buildings and improvements (5 to 40 years) and tenant improvements over the shorter of the lease term or the life of the asset.

Effective January 1, 2002, the Company changed the estimated useful lives of various buildings from 25 to 40 years. This change resulted in an increase of net income of $19.0 million or $.53 per share for the year ended December 31, 2002. Management determined the longer period to be a better estimate of the useful lives of the buildings.

Construction in Progress

Project costs clearly associated with the development and construction of a real estate project are capitalized as construction in progress. In addition, interest, real estate taxes and general and administrative expenses that are directly associated with and incremental to the Company’s development activities are capitalized during the period in which activities necessary to get the property ready for its intended use are in progress. Once the development and construction of the building shell of a real estate project is completed, the costs capitalized to construction in progress are transferred to land and buildings. Direct construction costs totaling $2.2 million in 2002, $2.7 million in 2001 and $1.8 million in 2000 and interest totaling $2.9 million in 2002, $5.2 million in 2001 and $8.2 million in 2000 were capitalized related to development of certain Properties and land holdings.

Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 144 (“SFAS 144”), Accounting for the Impairment or Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets as held-for-sale, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS 144 on January 1, 2002.

In accordance with SFAS 144, long-lived assets, such as real estate investments and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The other assets and liabilities related to assets classified as held-for-sale are presented separately in the consolidated balance sheet.

Prior to adoption of SFAS 144, the Company accounted for the impairment of long-lived assets in accordance with SFAS 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.

The Company recorded impairment losses of $665,000 for the year ended December 31, 2002 relating to assets held-for-sale. The Company recorded no impairment losses for the years ended December 31, 2001 and 2000.

Cash and Cash Equivalents

Cash equivalents are highly-liquid investments with original maturities of three months or less. The Company maintains cash equivalents in financial institutions in excess of insured limits.

Restricted Cash

Restricted cash consists of cash held as collateral to provide credit enhancement for the Company’s mortgage debt, cash for property taxes, capital expenditures and tenant improvements.

 

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Accounts Receivable

Leases with tenants are accounted for as operating leases. Minimum annual rentals under tenant leases are recognized on a straight-line basis over the term of the related lease. Accrued rent receivable represents the amount that straight-line rental income exceeds rents currently due under the lease agreements. Included in current tenant receivables are tenant reimbursements which are comprised of amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred. As of December 31, 2002 and 2001, no tenant represents more than 10% of accounts receivable.

Tenant receivables and accrued rent receivables are carried net of the allowances for doubtful accounts of $2.3 million and $2.3 million in 2002 and $2.5 million and $2.0 million in 2001. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables and current economic conditions.

Deferred Costs

Costs incurred in connection with property leasing are capitalized as deferred leasing costs. Deferred leasing costs consist primarily of leasing commissions that are amortized on the straight-line method over the life of the respective lease which generally ranges from one to 15 years. Management re-evaluates the remaining useful lives of leasing costs as economic and market conditions change. Internal direct leasing costs deferred totaled $3.6 million in 2002, $3.1 million in 2001 and $2.5 million in 2000.

Costs incurred in connection with debt financing are capitalized as deferred financing costs. Deferred financing costs consist primarily of loan fees which are amortized over the related loan term. Total accumulated amortization related to these costs was $14.9 million in 2002 and $11.8 million in 2001.

Other Assets

As of December 31, 2002, other assets included a direct financing lease of $16.0 million, prepaid real estate taxes of $5.6 million, promissory notes of $4.0 million, furniture, fixtures and equipment of $2.1 million and $6.8 million of other assets. As of December 31, 2001, other assets included a direct financing lease of $16.0 million, prepaid real estate taxes of $5.5 million, deposits on properties to be purchased in 2002 totaling $4.0 million, furniture, fixtures and equipment of $2.7 million and $3.6 million of other assets.

Marketable Securities

The Company accounts for its investments in equity securities according to the provisions of SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, which requires securities classified as “available-for-sale” to be stated at fair value. Adjustments to fair value of available-for-sale securities are recorded as a component of other comprehensive income (loss). A decline in the market value of equity securities below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.

Intangible Assets

On January 1, 2002, the Company adopted the provisions of SFAS 141, Business Combinations. This statement makes significant changes to the accounting for business combinations, goodwill, and intangible assets. Among other provisions, SFAS 141 requires that a portion of the purchase price of real estate acquisitions be assigned to the fair value of an intangible asset for above market operating leases or a liability for below market operating leases. Such intangible assets or liabilities are then required to be amortized into revenue over the remaining life of the related leases. Accordingly, during 2002, the Company recorded an intangible asset related to the origination value of acquired leases of $1.2 million (included in deferred costs), an acquired lease asset of $.7 million for above market leases (included in other assets) and an acquired lease liability of $2.1 million for below market leases (included in other liabilities). Amortization expense recorded during 2002 for the origination value of acquired leases totaled $256,000. The amortization of acquired leases resulted in a net increase in rental revenue of $459,000 during 2002. Management reviews the carrying value of intangible assets for impairment on an annual basis.

As of December 31, 2002, intangible assets and acquired lease liabilities consist of the following (in thousands):

 

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Intangible assets:
        
   Acquired lease asset, net of accumulated amortization of $99
   $ 607  
   Origination value, net of accumulated amortization of $256
     959  
   
 
      Net intangible assets
   $ 1,566  
   
 
Acquired lease liability, net of accumulated amortization of $558
   $ 1,547  
   
 

Fair Value of Financial Instruments

Carrying amounts reported in the balance sheet for cash, accounts receivable, other assets, accounts payable and accrued expenses, and borrowings under the Credit Facility approximate fair value due to the nature of these instruments. Accordingly, these items have been excluded from the fair value disclosures.

Revenue Recognition

Rental revenue is recognized on a straight-line basis over the lease term regardless of when payments are due. Deferred rental revenue represents rental revenue received from tenants prior to their due dates. The straight-line rent adjustment increased revenue by approximately $5.9 million in 2002, $6.2 million in 2001 and $6.4 million in 2000. Certain lease agreements contain provisions that require tenants to reimburse a pro rata share of real estate taxes and certain common area maintenance costs.

No tenant represented greater than 10% of the Company’s rental revenue in 2002, 2001 or 2000.

Income Taxes

The Company elects to be taxed as a real estate investment trust under Sections 856-860 of the Internal Revenue Code. In management’s opinion, the requirements to maintain this election are being met. Accordingly, no provision for Federal income taxes has been reflected in the financial statements.

Earnings and profits, which determine the taxability of distributions to shareholders, differ from net income reported for financial reporting purposes due to differences in cost basis, the estimated useful lives used to compute depreciation, and the allocation of net income and loss for financial versus tax reporting purposes. The tax basis in the Company’s assets was $1.3 billion as of December 31, 2002.

The Company is subject to a 4% Federal excise tax, if sufficient taxable income is not distributed within prescribed time limits. The excise tax equals 4% of the annual amount, if any, by which the sum of (a) 85% of the Company’s ordinary income and (b) 95% of the Company’s net capital gain exceeds cash distributions and certain taxes paid by the Company. No excise tax was incurred in 2002, 2001, or 2000.

The Management Company is subject to Federal and state income taxes. The operating results of the Management Company include a provision for income taxes of $115,000 in 2000. There was no provision required for income taxes in 2002 and 2001.

Earnings Per Share

Basic earnings per share is calculated by dividing income applicable to Common Shares by the weighted-average number of shares outstanding during the period. Diluted earnings per share includes the effect of common share equivalents outstanding during the period.

Stock-Based Compensation Plans

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily adopts the fair value recognition method of recording stock option expense. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock options on reported net income and earnings per share in annual and interim financial statements.

At December 31, 2002, the Company had one stock option and incentive plan, which is described more fully in Note 11. Effective January 1, 2002, the Company voluntarily adopted the fair value recognition provisions of SFAS 123

 

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prospectively for all employee stock option awards granted or modified after January 1, 2002. Under the fair value recognition provisions of SFAS 123, total compensation expense related to stock options is determined using the fair value of the stock options on the date of grant. Total compensation expense is then recognized on a straight-line basis over the option vesting period

Prior to 2002, the Company accounted for stock options issued under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations. As a result, no stock option expense is reflected in 2001 or 2000 net income, as all stock options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period (in thousands, except per share amounts):

    Year ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
Net income available to Common Shares, as reported
   $ 51,078   $ 21,816   $ 40,252  
     
                    
Add: Stock based compensation expense included in reported net income
     2,553     2,828     1,931  
Deduct: Total stock based compensation expense determined under fair value
                    
   recognition method for all awards
     (3,231 )   (3,506 )   (2,609 )
   
 
 
 
     
                    
Pro forma net income available to Common Shares
   $ 50,400   $ 21,138   $ 39,574  
   
 
 
 
Earnings per Common Share
                    
   Basic — as reported
   $ 1.40   $ 0.57   $ 1.12  
   
 
 
 
   Basic — pro forma
   $ 1.38   $ 0.55   $ 1.10  
   
 
 
 
   Diluted — as reported
   $ 1.39   $ 0.57   $ 1.12  
   
 
 
 
   Diluted — pro forma
   $ 1.37   $ 0.55   $ 1.10  
   
 
 
 

Comprehensive Income

Comprehensive income or loss is recorded in accordance with the provisions of SFAS 130, Reporting Comprehensive Income. SFAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income includes unrealized gains and losses on available-for-sale securities and the effective portions of changes in the fair value of derivatives.

Accounting for Derivative Instruments and Hedging Activities

Effective January 1, 2001, the Company adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and its corresponding amendments under SFAS 138. SFAS 133 requires the Company to measure every derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record them in the balance sheet as either an asset or liability. For derivatives designated as fair value hedges, the changes in fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivative are reported in other comprehensive income. These amounts are subsequently reclassified to interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings. The ineffective portions of cash flow hedges are recognized in earnings in the current period. For the years ended December 31, 2002 and 2001, the Company was not party to any derivative contract designated as a fair value hedge.

Upon adoption of this new standard as of January 1, 2001, the Company recorded a charge of $1.3 million to comprehensive loss for the cumulative effect of an accounting change to recognize at fair value all derivatives that are designated as cash flow hedging instruments. Over time, the unrealized gains/losses and the transition adjustment held in accumulated other comprehensive income will be reclassified into earnings as the underlying hedged items affect earnings, such as when the forecasted interest payments occur. It is expected that $5.0 million of net losses will be reclassified into earnings over the next twelve months.

The Company formally assesses, both at inception of the hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in fair values of cash flows of the hedged item. If it is determined that a derivative is not highly-effective as a hedge or if a derivative ceases to be a highly- effective hedge, the Company will discontinue hedge accounting prospectively.

 

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The Company manages its ratio of fixed-to-floating rate debt with the objective of achieving a mix that management believes is appropriate. To manage this mix in a cost-effective manner, the Company, from time-to-time, enters into interest rate swap agreements, in which it agrees to exchange various combinations of amounts based on fixed and/or variable interest rates applied to notional amounts. As of December 31, 2002, the maximum length of time which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is through June 2004. There was no gain or loss reclassified from accumulated other comprehensive loss into earnings during 2002 as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring.

New Pronouncements

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The most significant provisions of this statement relate to the rescission of Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified. The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002. Management expects that the adoption of this statement in 2003 will not have a material effect on the Company’s results of operations or financial condition.

In June 2002, FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Management expects that the adoption of this statement will not have a material effect on the Company’s results of operations or financial condition.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 significantly changes the current practice in the accounting for, and disclosure of, guarantees. Guarantees and indemnification agreements meeting the characteristics described in FIN 45 are required to be initially recorded as a liability at fair value. FIN 45 also requires a guarantor to make significant new disclosures for virtually all guarantees even if the likelihood of the guarantor having to make payment under the guarantee is remote. The disclosure requirements within FIN 45 are effective for financial statements for annual or interim periods ending after December 15, 2002. The initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted the disclosure provisions of FIN 45 as of December 31, 2002. Management does not expect the adoption of the initial recognition and measurement provisions will have a material effect on the Company’s results of operations or financial condition.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements and provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. The provisions of this interpretation are immediately effective for VIEs formed after January 31, 2003. For VIEs formed prior to January 31, 2003, the provisions of this interpretation apply to the first fiscal year or interim period beginning after June 15, 2003. Management does not expect that the adoption of this standard will have a material effect on the Company’s results of operations or beneficiaries’ equity and comprehensive income.

3. MINORITY INTEREST

Minority interest is comprised of Class A Units of limited partnership interest (“Class A Units”) and Series B Preferred Units of limited partnership interest (“Series B Preferred Units”). The Operating Partnership issued these interests to

 

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persons that contributed assets to the Operating Partnership. The Operating Partnership is obligated to redeem, at the request of a holder, each Class A Unit for cash or one Common Share, at the option of the Company. Each Series B 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 declines 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 less. The Series B 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. Income allocated to minority interest includes the amount of the Series B Preferred Unit distribution and the prorata share of net income of the Operating Partnership allocated to the Class A Units. The Company declared distributions of $7.1 million in 2002, 2001 and 2000 to the holders of Series B Preferred Units and $3.3 million in 2002, $3.7 million in 2001 and $3.5 million in 2000 to holders of Class A Units. As of December 31, 2002 and 2001, respectively, there were 1,787,436 and 2,151,658 Class A Units and 1,950,000 Series B Preferred Units held by third party investors.

4. REAL ESTATE INVESTMENTS

As of December 31, 2002 and 2001, the carrying value of the Company’s Operating Properties is as follows:

    December 31,   December 31,  
    2002   2001  
   
 
 
    (amounts in thousands)  
Land
   $ 353,111   $ 353,678  
Building and improvements
     1,442,819     1,460,165  
Tenant improvements
     94,079     79,196  
   
 
 
    $ 1,890,009   $ 1,893,039  
   
 
 

5. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS

The Company’s acquisitions were accounted for by the purchase method. The results of each acquired property are included in the Company’s results of operations from their respective purchase dates.

2002

During 2002, the Company sold 23 office properties containing an aggregate of 1.4 million net rentable square feet, 20 industrial properties containing an aggregate of .9 million net rentable square feet and two parcels of land containing an aggregate of 12.8 acres for an aggregate of $190.8 million, realizing a net gain of $8.6 million before minority interest. The Company also purchased seven office properties containing 617,000 net rentable square feet and one parcel of land containing 9.0 acres for an aggregate of $99.1 million.

2001

During 2001, the Company sold three office and eight industrial properties, containing 440,000 net rentable square feet, and four parcels of land, containing 15.8 acres, for $31.3 million, realizing a net gain of $4.5 million. Seven of the properties were sold for $21.6 million realizing an aggregate gain of $4.3 million, four of the properties were sold for $7.1 million, realizing an aggregate loss of $.7 million and four land parcels were sold for $2.6 million realizing an aggregate gain of $.9 million. The Company also acquired two office properties, containing 146,000 net rentable square feet, and three parcels of land, containing 30.0 acres, for $31.5 million, of which $4.2 million was satisfied with an exchange of property.

In addition to the sales and acquisitions above, the Company consummated an exchange of properties with Prentiss Properties Acquisition Partners, L.P. (“Prentiss”) during 2001. The Company acquired from Prentiss 30 properties (29 office and 1 industrial) containing 1.6 million net rentable square feet and 6.9 acres of developable land for total consideration of $215.2 million. The Company conveyed to Prentiss four office properties located in Northern Virginia that contain an aggregate of 657,000 net rentable square feet, assumed $79.7 million of mortgage debt secured by certain of the Prentiss properties, issued a $7.8 million promissory note, paid $15.9 million at closing and agreed to make additional payments totaling $7.0 million (including $5.4 million of payments discounted at 7.5%) over a three-year period subsequent to closing. The Company also contributed to Prentiss its interest in a real estate venture that

 

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owns two additional office properties that contain an aggregate of 452,000 net rentable square feet and received a combination of preferred and common units of limited partnership interest in Prentiss having a value of $10.7 million, as of the closing. In addition as part of the Prentiss transaction in June 2001, the Company purchased a 103,000 square foot building then under construction for $4.2 million and six acres of related developable land for $5.7 million.

Proforma

The following unaudited pro forma financial information for the year ended December 31, 2001 and 2000 gives effect to the exchange of properties with Prentiss as if the transaction occurred on January 1, 2000. The proforma financial information presented below is not necessarily indicative of the results which actually would have occurred if the transaction had been consummated on January 1, 2000, nor does the pro forma information purport to represent the results of operations for future periods.

    Year Ended December 31,  
    2001   2000  
   
 
 
    (unaudited and in thousands,  
    except per share data)  
               
Pro forma total revenue
   $ 314,630   $ 302,305  
Pro forma net income before extraordinary items allocated to Common Shares
     23,193     41,314  
Pro forma net income after extraordinary items allocated to Common Shares
     22,082     41,314  
Pro forma net income per Common Share before extraordinary items (diluted)
   $ 0.65   $ 1.15  
Pro forma net income per Common Share after extraordinary items (diluted)
   $ 0.62   $ 1.15  

2000

During 2000, the Company sold seven office properties, containing 630,000 net rentable square feet, and two parcels of land, containing 5.0 acres, for $101.1 million, realizing a net gain of $11.6 million. Four of the properties were sold for $72.1 million realizing an aggregate gain of $15.8 million, three of the properties were sold for $27.8 million realizing an aggregate loss of $5.1 million, and two land parcels were sold for $1.2 million realizing an aggregate gain of $.9 million. In addition, the Company purchased 36.0 acres of land for $7.0 million.

The results of operations on a pro forma basis on the above acquisitions and dispositions are not material.

6. MANAGEMENT COMPANY

Management fees paid by the Properties to the Management Company amounted to $11.9 million in 2000. The Management Company also receives reimbursement of certain costs attributable to the operations of the Properties. These costs, included in property operating expenses, amounted to $9.2 million in 2000. Summarized unaudited financial information for the Management Company as of and for the year ended December 31, 2000 is as follows:

    2000  
   
 
    (unaudited and in thousands)  
Total assets
   $ 3,248  
Total revenue
     26,190  
Net income
     173  
Company’s share of net income
     164  

7. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES

As of December 31, 2002, the Company had invested approximately $14.8 million in ten Real Estate Ventures (net of returns of investment received by the Company). The Company, through subsidiaries, formed these ventures with unaffiliated third parties to develop office properties or to acquire land in anticipation of possible development of office properties. Eight of the Real Estate Ventures own eight office buildings that contain an aggregate of a .8 million net rentable square feet; one Real Estate Venture developed a hotel property that contains 137 rooms; and one Real Estate Venture holds 3.0 acres of land for future development.

 

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During 2002, the Company purchased the remaining partnership interests held by third parties in three Real Estate Ventures which owned two office properties containing 222,000 net rentable square feet and one parcel of land containing 1.0 acres for $2.3 million. The results of operations of these Real Estate Ventures are consolidated from the date the Company acquired the remaining partnership interests.

The Company accounts for its non-controlling interests in Real Estate Ventures using the equity method. Non-controlling ownership interests generally range from 6% to 65%, subject to specified priority allocations in certain Real Estate Ventures. These investments, initially recorded at cost, are subsequently adjusted for the Company’s net equity in the ventures’ income or loss and cash contributions and distributions.

The following is a summary of the financial position of the unconsolidated Real Estate Ventures in which the Company had investment interests as of December 31, 2002 and 2001 (in thousands):

    December 31,   December 31,  
    2002   2001  
   
 
 
Net property
   $ 193,552   $ 180,497  
Other assets
     20,163     17,038  
Liabilities
    3,186     1,593  
Third-party debt
     149,129     145,463  
Equity
     61,400     50,479  
Company’s share of equity
     14,842     19,067  
    For the year ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
Revenues
   $ 27,219   $ 24,117   $ 30,538  
Operating expenses
     10,406     8,237     8,826  
Depreciation and amortization
     5,531     3,211     6,250  
Interest expense, net
     9,212     7,495     10,914  
Net income
     2,070     5,174     4,368  
Company’s share of income
     987     2,768     2,797  

 

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The following is a summary of the financial position as of December 31, 2002 and the results of operations for the year ended December 31, 2002 for each of the unconsolidated Real Estate Ventures in which the Company had interests as of December 31, 2002 (in thousands):

    1000   Christiana   Christiana   Christiana                                                              
    Chesterbrook   Center   Center   Center   Two Tower   Four Tower   Five Tower   Six Tower   Eight Tower   Tower   TBFA   PJP   PJP        
    Boulevard   Operating   Operating   Operating   Bridge   Bridge   Bridge   Bridge   Bridge   Bridge Inn   Partners,   Building   Building        
    Partnership   Company I, LLC   Company II, LLC   Company III, LLC   Associates   Associates   Associates   Associates   Associates   Associates   LP   Two, LC   Five, LC   Total  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        (a)   (a)   (a)                                                              
Assets
                                                                                      
Net property
   $ 31,588   $ —   $ —   $ —   $ 9,805   $ 11,000   $ 41,373   $ 13,029   $ 56,732   $ 14,303   $ 3,334   $ 5,513   $ 6,875   $ 193,552  
Other assets
     3,417     —     —     —     743     3,453     4,314     3,991     832     2,105     —     560     748     20,163  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
   $ 35,005   $ —   $ —   $ —   $ 10,548   $ 14,453   $ 45,687   $ 17,020   $ 57,564   $ 16,408   $ 3,334   $ 6,073   $ 7,623   $ 213,715  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Equity
                                                                                      
Other liabilities
   $ 269   $ —   $ —   $ —   $ 51   $ 305   $ 441   $ 440   $ 1,244   $ 197   $ —   $ 93   $ 146   $ 3,186  
Debt
     28,178     —     —     —     7,855     11,000     27,600     15,951     35,782     11,700     —     5,172     5,891     149,129  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
     28,447     —     —     —     7,906     11,305     28,041     16,391     37,026     11,897     —     5,265     6,037     152,315  
Equity
     6,558     —     —     —     2,642     3,148     17,646     629     20,538     4,511     3,334     808     1,586     61,400  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilies and equity
   $ 35,005   $ —   $ —   $ —   $ 10,548   $ 14,453   $ 45,687   $ 17,020   $ 57,564   $ 16,408   $ 3,334   $ 6,073   $ 7,623   $ 213,715  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
                                                                                      
Rents
   $ 5,086   $ 1,089   $ 511   $ —   $ 1,857   $ 2,372   $ 5,238   $ 3,027   $ 277   $ 3,876   $ -   $ 414   $ 750   $ 24,497  
Tenant reimbursements and other
     470     48     24     —     469     418     239     521     —     203     —     116     214     2,722  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenue
     5,556     1,137     535     —     2,326     2,790     5,477     3,548     277     4,079     —     530     964     27,219  
Operating Expenses
                                                                                      
Property operating expenses
     1,128     290     111     —     796     620     1,008     635     487     2,279     —     274     308     7,936  
Real estate taxes
     383     27     31     —     160     144     349     313     182     193     —     41     50     1,873  
Interest
     1,949     459     257     —     550     728     1,839     1,252     801     994     —     184     199     9,212  
Depreciation and amortization
     897     222     107     —     368     732     222     835     882     711     —     338     217     5,531  
Administrative expenses
     7     —     —     —     —     163     174     239     14     —     —     —     —     597  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses
     4,364     998     506     —     1,874     2,387     3,592     3,274     2,366     4,177     —     837     774     25,149  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
   $ 1,192   $ 139   $ 29   $ —   $ 452   $ 403   $ 1,885   $ 274   $ (2,089)   $ (98)   $ —   $ (307)   $ 190   $ 2,070  
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a)
In July 2002, the Company purchased the remaining interests in these Real Estate Ventures for an aggregate of $2.3 million.

As of December 31, 2002, the aggregate maturities of non-recourse debt payable to third-parties is as follows (in thoudands):

2003
   $ 6,113  
2004
     1,485  
2005
     37,406  
2006
     8,452  
2007 and thereafter
     95,673  
   
 
    $ 149,129  

As of December 31, 2002, the Company had guaranteed repayment of approximately $2.0 million of loans on behalf of the Real Estate Ventures. See Item 2. Properties — Real Estate Ventures. The Company also guaranteed a $16.2 million loan on behalf of a former Real Estate Venture. Payment under the guaranty, which expires in January 2004, would be required only in the event of a default on the loan and if and to the extent the collateral for the loan were insufficient to provide for payment in full of the loan. The Company also provides customary environmental indemnities in connection with construction and permanent financing both for its own account and on behalf of its Real Estate Ventures.

The Company has assessed the investments in Real Estate Ventures using the guidelines established in FIN 46 to determine whether using the equity method of accounting is still appropriate. These Real Estate Ventures have sufficient total investment equity at risk to permit these entities to finance their activities without additional subordinated financial support from other parties, including the Company. Further, the equity investment at risk is not greater than the expected losses of the entity, if any, as of December 31, 2002.

 

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In addition, these entities are not considered variable interest entities because, in each case, the equity investors as a group, have (i) the ability to make decisions through voting rights or the terms of the partnership or operating agreements; (ii) the obligation to absorb the expected losses of the entity, if any; and (iii) the right to receive the expected residual returns of the entity, if they occur.

8. INDEBTEDNESS

The Company utilizes credit facility borrowings for general business purposes, including the acquisition of properties and the repayment of debt. The Company maintains a $500 million unsecured credit facility (the “Credit Facility”) that matures in June 2004. Borrowings under the Credit Facility bear interest at LIBOR (LIBOR was 1.38% at December 31, 2002) plus 1.5%, with the spread over LIBOR subject to reductions from .10% to .25% or increases of .25% based on the Company’s leverage. As of December 31, 2002, the Company had $307 million of borrowings and $13.6 million of letters-of-credit outstanding under the Credit Facility, leaving $179.4 million of unused availability. The weighted-average interest rate on the Company’s unsecured credit facilities was 5.41% in 2002, 6.48% in 2001, and 7.84% in 2000.

During 2002, the Company obtained a $100 million term loan. The Company used proceeds of the term loan to repay indebtedness, including indebtedness under its Credit Facility. The term loan is unsecured and matures on July 15, 2005, subject to two extensions of one year each upon payment by the Company of an extension fee and the absence of any defaults at the time of each extension. There are no scheduled principal payments prior to maturity. The term loan bears interest at a spread over the one, two, three or six month LIBOR that varies between 1.05% and 1.90% (1.65% as of December 31, 2002), based on the Company’s leverage ratio.

As of December 31, 2002, the Company had $597.7 million of mortgage notes payable secured by 111 of the Properties and certain land holdings. Fixed rate mortgages, totaling $537.1 million, require payments of principal and/or interest (or imputed interest) at rates ranging from 6.80% to 9.25% and mature at various dates from July 2003 through July 2027. Variable rate mortgages, totaling $60.6 million, require payments of principal and/or interest at rates ranging from LIBOR plus .76% to 1.75% or 75% of prime (the prime rate was 4.25% at December 31, 2002) and mature at various dates from March 2003 through July 2027. The weighted-average interest rate on the Company’s mortgages was 7.27% in 2002, 7.39% in 2001, and 7.92% in 2000.

The Company has entered into interest rate swap and rate cap agreements designed to reduce the impact of interest rate changes on certain variable rate debt. At December 31, 2002, the Company had interest rate swap agreements for notional principal amounts aggregating $175 million. The swap agreements effectively fix the LIBOR portion of the Company’s interest rate on $100 million of Credit Facility borrowings at 4.230% and $75 million of Credit Facility borrowings at 4.215%, in each case until June 2004. The interest rate cap agreement effectively limits the interest rate on a mortgage of $28 million to 8.7% until July 2004. As of December 31, 2002, the fair value of the interest rate swap agreements was $7.2 million, which represents the estimated amount that the Company would pay if the contracts were terminated.

Aggregate principal payments on mortgage notes payable at December 31, 2002 are due as follows (in thousands):

2003
   $ 113,611  
2004
     67,286  
2005
     7,490  
2006
     17,676  
2007
     21,132  
2008 and thereafter
     370,534  
   
 
    $ 597,729  
   
 

The Credit Facility and Term Loan require the maintenance of certain ratios related to minimum net worth, debt-to-total capitalization and fixed charge coverage and various non-financial covenants. As of December 31, 2002, the Company was in compliance with all debt covenants. The Company paid interest (net of capitalized interest) totaling $61.8 million in 2002, $74.2 million in 2001 and $67.7 million in 2000. As of December 31, 2002, the carrying value of the Company’s debt was below fair market value by approximately $99.9 million, as determined by using year-end interest rates and market conditions.

 

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9. DISCONTINUED OPERATIONS

For the years ended December 31, 2002, 2001 and 2000, income from discontinued operations relates to 43 properties containing 2.3 million net rentable square feet that the Company sold during the year ended December 31, 2002 and two properties containing 127,000 net rentable square feet that the Company has designated as “held-for-sale” as of December 31, 2002. The following table summarizes information for the two properties designated as held-for-sale as of December 31, 2002 (in thousands):

Real Estate Investments:
        
   Operating Properties
   $ 8,729  
   Accumulated depreciation
     (1,235 )
   
 
      7,494  
   Construction-in-progress
     55  
   
 
      7,549  
         
Accrued rent receivable
     87  
Deferred costs, net
     2  
Other assets
     28  
   
 
    $ 7,666  
   
 
Tennant security deposits and deferred rents
   $ 20  
   
 

The following table summarizes revenue and expense information for the above properties sold or held-for-sale in 2002:

    Year Ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
    (amounts in thousands)  
Revenue:
                    
   Rents
   $ 9,303   $ 29,168   $ 26,940  
   Tenant reimbursements
     1,783     4,781     4,608  
   Other
     597     330     156  
   
 
 
 
      Total revenue
     11,683     34,279     31,704  
                     
Expenses:
                    
   Property operating expenses
     2,886     8,051     7,370  
   Real estate taxes
     1,585     4,691     4,469  
   Depreciation and amortization
     1,165     9,142     7,696  
   Impairment loss on assets held-for-sale
     665     —     —  
   
 
 
 
      Total operating expenses
     6,301     21,884     19,535  
                     
Income from discontinued operations before net gain on sale of interests in real estate and minority interest
     5,382     12,395     12,169  
Net gain on sales of inteest in real estate
     8,562     —     —  
Minority interest
     (777 )   (707 )   (694 )
   
 
 
 
Income from discontinued operations
   $ 13,167   $ 11,688   $ 11,475  
   
 
 
 

As of December 31, 2002, the Company recorded an impairment charge of $665,000 in its consolidated statements of operations related to one of the assets held-for-sale.

Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective data in the Consolidated Statements of Operations.

10. PREFERRED SHARES AND BENEFICIARIES’ EQUITY

In 1998, the Company issued $37.5 million of convertible preferred securities with a 7.25% coupon rate (the Series A Preferred Shares). The Series A Preferred Shares, with a stated value of $50.00, are convertible into Common Shares, at the option of the holder, at a conversion price of $28.00. The conversion price declines to $26.50, if the trading price of the Common Shares during the 60-day period ending December 31, 2003 is $23.00 or less. The Series A Preferred

 

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Shares distribution is subject to an increase, if quarterly distributions paid to Common Share holders exceeds $0.51 per share. The Series A Preferred Shares are perpetual and may be redeemed, at the Company’s option, at par beginning in January 2004 or earlier, if the market price of the Common Shares exceeds specified levels.

In 1999, the Company issued $105.0 million of convertible preferred securities (the Series B Preferred Shares) with an 8.75% coupon rate for net proceeds of $94.8 million. The Company is accreting the discount as a charge to cumulative earnings through the redemption date in 2007. The unamortized discount was $6.4 million as of December 31, 2002 and $7.9 million as of December 31, 2001. The Series B Preferred Shares, convertible into Common Shares at a conversion price of $24.00 per share, are entitled to quarterly dividends equal to the greater of $0.525 per share or the quarterly dividend on the number of Common Shares into which a Series B Preferred Share is convertible. The Series B Preferred Shares are perpetual and may be redeemed, at the Company’s option, at par, beginning in April 2007. In addition, the Company may require the conversion of the Series B Preferred Shares into Common Shares starting in April 2004, 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, the holder may require the Company to redeem its Series B Preferred Shares. However, the Company has the ability and intent to cause the Series B Preferred Shares to be converted into Common Shares rather than redeemed in such circumstances. In addition, as part of the transaction, the Company issued the holder seven-year warrants exercisable for 500,000 Common Shares at an exercise price of $24.00 per share.

The Company’s Board of Trustees approved a share repurchase program authorizing the Company to repurchase its outstanding Common Shares. During 2001, the Board of Trustees increased the number of shares authorized to be repurchased from three million shares to four million shares. Through December 31, 2002, the Company has repurchased 3.2 million of its Common Shares at an average price of $17.71 per share. The Company repurchased 491,074 Common Shares for $11.1 million (average price of $22.51 per share) in 2002; 302,437 Common Shares for $5.9 million (average price of $19.54 per share) in 2001 and 957,729 Common Shares for $15.3 million (average price of $15.95 per share) in 2000. Under the share repurchase program, the Company has authority to repurchase an additional 834,000 shares. No time limit has been placed on the duration of the share repurchase program.

At December 31, 2002, 355,813 unvested restricted Common Shares were held by employees of the Company. The restricted shares, valued at $18.4 million at issuance, are amortized over their respective vesting periods of three to eight years. The Company recorded compensation expense of $2.5 million in 2002, $2.8 million in 2001 and $2.0 million in 2000 related to these shares.

11. SHARE PURCHASE OPTIONS AND WARRANTS

The Company maintains a plan that authorizes the issuance of various equity-based awards including incentive stock options. The terms and conditions of option awards are determined by the Board of Trustees. Incentive stock options may not be granted at exercise prices less than fair value of the stock at the time of grant. Options granted by the Company generally vest over two to five years. All options awarded by the Company to date are non-qualified stock options. As of December 31, 2002, the Company is authorized to issue five million equity-based awards of which 1.4 million shares remain available for future issuance under the plan.

The following table summarizes option activity for the three years ended December 31, 2002:

    Number
of Share
Under
Option		   Weighted—
Average
Exercise
Price		              
                   
        Grant Price Range  
       
 
        From   To  
   
 
 
 
 
Balance at January 1, 2000
     2,721,858   $ 26.38   $ 6.21   $ 29.04  
   Exercised
     (5,000 )   19.50     19.50     19.50  
   Canceled
     (93,144 )   27.51     25.25     29.04  
   
                   
Balance at December 31, 2000
     2,623,714     26.36     6.21     29.04  
   Exercised
     (83,333 )   19.50     19.50     19.50  
   Canceled
     (61,582 )   27.53     25.25     29.04  
   
                   
Balance at December 31, 2001
     2,478,799     26.56     6.21     29.04  
   Granted
     100,000     19.50     19.50     19.50  
   Exercised
     (55,000 )   19.50     19.50     19.50  
   Canceled
     (151,172 )   22.22     19.50     29.04  
   
                   
Balance at December 31, 2002
     2,372,627     26.70     6.21     29.04  

 

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The following table summarizes stock options outstanding as of December 31, 2002:

        Weighted-                    
        Average   Weighted-       Weighted-  
Range of
   Number of   Remaining   Average   Number of   Average  
Exercise
   Options   Contractual   Exercise   Options   Exercise  
Prices
   Outstanding   Life   Price   Exercisable   Price  
   
 
 
 
 
 
$6.21 to $14.31
     46,667     1.6 years   $ 12.00     46,667   $ 12.00  
$19.50
    100,000     2.6     19.50     0     0.00  
$24.00 to $29.04
     2,225,960     5.1     27.33     1,589,418     27.26  
   
             
       
$6.21 to $29.04
     2,372,627     4.9     26.70     1,636,085     26.83  
   
             
       

Using the Black-Scholes option pricing model, the estimated weighted-average fair value of stock options granted was $2.51 in 2002. Assumptions made in determining estimates of fair value include: risk-free interest rate of 2.7% in 2002, a volatility factor of .280 in 2002, a dividend yield of 8.4% in 2002, and a weighted-average life expectancy of 3 years in 2002.

As of December 31, 2002, there are 500,000 warrants outstanding to purchase Common Shares of the Company at an exercise price of $24.00.

Effective January 1, 2002, the Company voluntarily adopted the fair value recognition provisions of SFAS 123, prospectively for all employee awards granted, modified, or settled after January 1, 2002 (see Note 2). Accordingly, the Company recorded approximately $43,000 of compensation expense for the year ended December 31, 2002. This compensation expense relates to the Company’s grant of 100,000 stock options during 2002.

12. SEGMENT INFORMATION

The Company currently manages its portfolio within three segments: (1) Pennsylvania, (2) New Jersey and (3) Virginia. Corporate is responsible for cash and investment management and certain other general support functions.

 

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Segment information for the three years ended December 31, 2002, 2001 and 2000 is as follows (in thousands):

    Pennsylvania   New Jersey   Virginia   Corporate   Total  
   
 
 
 
 
 
2002:
                                
Real estate investments, at cost
   $ 1,246,439   $ 520,460   $ 224,312   $ —   $ 1,991,211  
Assets held for sale
     —     7,666     —     —     7,666  
                                 
Total revenue
   $ 179,646   $ 88,298   $ 26,834   $ 1,952   $ 296,730  
Property operating expenses and real estate taxes
     60,689     32,344     9,567     —     102,600  
   
 
 
 
 
 
Net operating income
   $ 118,957   $ 55,954   $ 17,267   $ 1,952   $ 194,130  
   
 
 
 
 
 
                                 
2001:
                                
Real estate investments, at cost
   $ 1,194,076   $ 642,646   $ 206,980   $ —   $ 2,043,702  
                                 
Total revenue
   $ 161,278   $ 85,235   $ 27,503   $ 2,530   $ 276,546  
Property operating expenses and real estate taxes
     53,669     31,928     9,972     —     95,569  
   
 
 
 
 
 
Net operating income
   $ 107,609   $ 53,307   $ 17,531   $ 2,530   $ 180,977  
   
 
 
 
 
 
2000:
                                
Real estate investments, at cost
   $ 938,602   $ 605,521   $ 309,776   $ —   $ 1,853,899  
                                 
Total revenue
   $ 135,986   $ 76,893   $ 40,151   $ 2,350   $ 255,380  
Property operating expenses and real estate taxes
     44,251     24,208     12,755     —     81,214  
   
 
 
 
 
 
Net operating income
   $ 91,735   $ 52,685   $ 27,396   $ 2,350   $ 174,166  
   
 
 
 
 
 

Net operating income is defined as total revenue less property operating expenses and real estate taxes. Below is a reconciliation of consolidated net operating income to consolidated income from continuing operations:

    Year Ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
    (amounts in thousands)  
Consolidated net operating income
   $ 194,130   $ 180,977   $ 174,166  
Less:
                    
   Interest expense
     63,522     66,385     64,746  
   Depreciation and amortization
     57,599     69,047     59,316  
   Management fees
     —     —     10,867  
   Administrative expenses
     14,804     15,177     4,249  
   Non-recurring charges
     —     6,600     —  
   Minority interest attributable to continuing operations
     9,375     7,915     8,904  
Plus:
                    
   Equity in income of management company
     —     —     164  
   Equity in income of real estate ventures
     987     2,768     2,797  
   Net gains on sales of interests in real estate
     —     4,524     11,638  
   
 
 
 
Consolidated income from continuing operations
   $ 49,817   $ 23,145   $ 40,683  
   
 
 
 

13. NET INCOME PER COMMON SHARE

The following table details the number of shares and net income used to calculate basic and diluted earnings per share for the three years ended December 31, 2002 (in thousands, except per share amounts):

 

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    For the year ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
    Basic   Diluted   Basic   Diluted   Basic   Diluted  
   
 
 
 
 
 
 
Income from continuing operations
   $ 49,817   $ 49,817   $ 23,145   $ 23,145   $ 40,683   $ 40,683  
Income from discontinued operations
     13,167     13,167     11,688     11,688     11,475     11,475  
Extraordinary item
     —     —     (1,111 )   (1,111 )   —     —  
Income allocated to Preferred Shares
     (11,906 )   (11,906 )   (11,906 )   (11,906 )   (11,906 )   (11,906 )
   
 
 
 
 
 
 
      51,078     51,078     21,816     21,816     40,252     40,252  
Preferred Share discount amortization
     (1,476 )   (1,476 )   (1,476 )   (1,476 )   (286 )   (286 )
   
 
 
 
 
 
 
Income available to common shareholders
   $ 49,602   $ 49,602   $ 20,340   $ 20,340   $ 39,966   $ 39,966  
   
 
 
 
 
 
 
Weighted-average shares outstanding
     35,513,813     35,513,813     35,646,842     35,646,842     35,807,598     35,807,598  
Options, warrants and unvested restricted stock
     —     131,997     —     27,809     —     16,576  
   
 
 
 
 
 
 
Total weighted-average shares outstanding
     35,513,813     35,645,810     35,646,842     35,674,651     35,807,598     35,824,174  
   
 
 
 
 
 
 
Earnings per Common Share:
                                      
   Continuing operations
   $ 1.03   $ 1.02   $ 0.27   $ 0.27   $ 0.80   $ 0.80  
   Discontinued operations
     0.37     0.37     0.33     0.33     0.32     0.32  
   Extraordinary item
     —     —     (0.03 )   (0.03 )   —     —  
   
 
 
 
 
 
 
    $ 1.40   $ 1.39   $ 0.57   $ 0.57   $ 1.12   $ 1.12  
   
 
 
 
 
 
 

Securities totaling 11,256,776 in 2002, 11,622,922 in 2001 and 11,625,490 in 2000 were excluded from the earnings per share computations above as their effect would have been antidilutive.

14. DISTRIBUTIONS (UNAUDITED):

    Year ended December 31,  
   
 
    2002   2001   2000  
   
 
 
 
Common Share Distributions:
                    
   Ordinary income
   $ 1.65   $ 1.60   $ 1.38  
   Capital gain
     0.11     0.10     0.24  
   Return of capital
     —     —     —  
   
 
 
 
   Total distributions per share
   $ 1.76   $ 1.70   $ 1.62  
   
 
 
 
   Percentage classified as ordinary income
     93.8 %   94.1 %   85.2 %
   Percentage classified as capital gain
     6.2 %   5.9 %   14.8 %
   Percentage classified as return of capital
     0.0 %   0.0 %   0.0 %
                     
Preferred Share Distributions:
                    
   Total distributions declared
   $ 11,906,000   $ 11,906,000   $ 11,906,000  

15. RELATED-PARTY TRANSACTIONS

In 1998, the Board authorized the Company to make loans totaling up to $5.0 million to enable employees of the Company to purchase Common Shares at fair market value. The loans have five-year terms, are full recourse, and are secured by the Common Shares purchased. Interest, payable quarterly, accrues on the loans at the lower of the interest rate borne on borrowings under the Company’s Credit Facility or a rate based on the dividend payments on the Common Shares. As of December 31, 2002, the interest rate was 2.92% per annum. The loans are payable at the earlier of the stated maturity date or 90 days following the employee’s termination. As of December 31, 2002, the Company had funded loans of $4.0 million to employees secured by an aggregate of 194,748 Common Shares.

The Company owns 384,615 shares of US Realtel, Inc. (“USR”) Common Stock and holds warrants exercisable for 600,000 additional shares. The warrants have an exercise price of $8.00 per share and expire on December 31, 2004. As of December 31, 2002, the Company’s investment in USR was $.4 million. An officer of the Company holds a position on USR’s Board of Directors.

 

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In February 2000, the Company loaned an aggregate of $2.5 million to two executive officers to enable them to purchase Common Shares of the Company. One loan has a four-year term and bears interest at the lower of the Company’s cost of funds or a rate based on the dividend payable on the Common Shares, but not to exceed 10% annum. This loan is subject to forgiveness over a three-year period, with the amount of forgiveness tied to the Company’s total shareholder return compared to the total shareholder return of peer group companies. This loan is also subject to forgiveness in the event of a change of control of the Company. The executive may repay the loan at maturity by surrendering Common Shares valued at the executive’s initial per share purchase price of $15.625. The Company recorded compensation expense of $877,000 in 2002, $881,000 in 2001 and $683,000 in 2000 relating to these executive stock loans. This loan is reflected as a reduction in beneficiaries equity. Effective December 31, 2001, the Company recorded a $4.1 million charge to restructure the other loan in connection with the executive’s transition to a non-executive, non-managerial status, which will be forgiven in equal installments in April 2002 and April 2003. Principal and interest totaling $.9 million was forgiven related to these loans in 2002 and 2001.

16. OPERATING LEASES

The Company leases properties to tenants under operating leases with various expiration dates extending to 2020. As of December 31, 2002, leases covering approximately 1.8 million square feet or 11.4% of the net rentable square footage are scheduled to expire during 2003. Minimum future rentals on noncancelable leases at December 31, 2002 are as follows (in thousands):

Year
   Minimum Rent  
 
 
2003
   $ 254,631  
2004
     220,625  
2005
     180,190  
2006
     142,930  
2007
     114,628  
2008 and thereafter
     417,997  
   
 
    $ 1,331,001  
   
 

Total minimum future rentals presented above do not include amounts to be received as tenant reimbursements for increases in certain operating costs.

17. EMPLOYEE BENEFIT PLAN

The Company sponsors a 401(k) defined contribution plan for its employees. Each employee may contribute up to 18% of annual compensation. At its discretion, the Company can make matching contributions equal to a percentage of the employee’s elective contribution and profit sharing contributions. Employees vest in employer contributions over a five year service period. The Company contributions were $816,000 in 2002, $669,000 in 2001 and $690,000 in 2000.

18. SUMMARY OF INTERIM RESULTS (UNAUDITED)

The following is a summary of interim financial information as of and for the years ended December 31, 2002 and 2001 (in thousands, except per share data):

 

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    1st   2nd   3rd   4th  
    Quarter (a)   Quarter   Quarter   Quarter (b)  
   
 
 
 
 
2002:
                          
Total revenue   $ 70,431   $ 73,927   $ 75,788   $ 76,584  
Income before extraordinary item
     23,469     12,800     13,968     12,747  
Net income
     23,469     12,800     13,968     12,747  
Income allocated to Common Shares
     20,492     9,823     10,992     9,771  
                           
Basic earnings per Common Share
                          
   Before extraordinary item
   $ 0.56   $ 0.26   $ 0.30   $ 0.27  
   After extraordinary item
   $ 0.56   $ 0.26   $ 0.30   $ 0.27  
Diluted earnings per Common Share
                          
   Before extraordinary item
   $ 0.55   $ 0.26   $ 0.30   $ 0.27  
   After extraordinary item
   $ 0.55   $ 0.26   $ 0.30   $ 0.27  
                           
2001:
                          
Total revenue   $ 66,613   $ 70,624   $ 70,765   $ 68,544  
Income before extraordinary item
     9,140     8,534     10,271     6,888  
Net income
     9,140     7,423     10,271     6,888  
Income allocated to Common Shares
     6,163     4,446     7,294     3,913  
                           
Basic earnings per Common Share
                          
   Before extraordinary item
   $ 0.16   $ 0.14   $ 0.19   $ 0.10  
   After extraordinary item
   $ 0.16   $ 0.11   $ 0.19   $ 0.10  
                           
Diluted earnings per Common Share
                          
   Before extraordinary item
   $ 0.16   $ 0.14   $ 0.19   $ 0.10  
   After extraordinary item
   $ 0.16   $ 0.11   $ 0.19   $ 0.10  
   
(a)
The Company recorded gains on sales of properties of $8.4 million during the 1st quarter of 2002.
   
(b)
During the fourth quarter of 2001, the Company recorded a $6.6 million non-recurring charge related to the conversion of the Company’s Chairman to a non-executive, non-managerial status and the write-down due to the impairment of the Company’s $2.5 million investment in a telecommunications company that was deemed to be other than temporary. The $4.1 million charge related to the Company’s Chairman reflects an accrual on account of payment obligations of the Company under its employment agreement with the Chairman, accelerated vesting of his restricted shares and restructuring of his executive stock loan.(c) (d)

The summation of quarterly earnings per share amounts do not necessarily equal year to date amounts.

19. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is involved from time to time in litigation on various matters, including disputes with tenants and disputes arising out of agreements to purchase or sell properties. Given the nature of the Company’s business activities, these lawsuits are considered routine to the conduct of its business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system.

The Company is a defendant in a case in which the plaintiffs allege that the Company breached its obligation to purchase a portfolio of properties for approximately $83.0 million. On July 9, 1999, the Superior Court of New Jersey, Camden County, dismissed the complaint against the Company with prejudice. The plaintiffs subsequently filed a motion for reconsideration, which motion the Superior Court denied. Plaintiffs then appealed to the Appellate Division, which is the intermediate appellate level court in New Jersey. In December 2000, the Appellate Division affirmed in part and reversed in part the Chancery Division’s earlier dismissal of the entire action. The Appellate Division affirmed the dismissal of the fraud and other non-contractual counts in the Complaint, but reversed the contract and reformation counts and remanded these to the lower court for further proceedings. The Company sought review of this decision by the Supreme Court of New Jersey, but in March 2001 that Court declined to consider the appeal. The case thereafter returned to the Chancery Division, where written and oral discovery was

 

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conducted in 2002 and in the first quarter of 2003. Discovery terminated on February 14, 2003. The Company filed a motion for summary judgment on all counts, seeking dismissal of all counts against it, and judgment for the Company on its counterclaim. The Chancery Division granted the Company’s summary judgment motion on March 25, 2003. At this time, the Company does not know whether plaintiffs will appeal, or if they appeal, whether plaintiffs will be successful in the appeal.

There have been recent reports of lawsuits against owners and managers of multifamily and office properties asserting claims of personal injury and property damage caused by the presence of mold in residential units or office space. The Company has been named as a defendant in two lawsuits that allege personal injury as a result of the presence of mold. Unspecified damages are sought. The Company has referred these lawsuits to its insurance carrier and, as of the date of this Form 10-K, the insurance carrier is evaluating coverage.

Letters-of-Credit

In connection with certain mortgages, the Company is required to maintain leasing and capital reserve accounts with the mortgage lenders through letters-of-credit which totaled $13.6 million at December 31, 2002. The Company is also required to maintain escrow accounts for taxes, insurance and tenant security deposits that amounted to $16.3 million at December 31, 2002. The related tenant rents are deposited into the loan servicer’s depository accounts, which are used to fund debt service, operating expenses, capital expenditures and the escrow and reserve accounts, as necessary. Any excess cash is included in cash and cash equivalents.

Other Commitments

As of December 31, 2002, the Company owned 444 acres of land for future development and held options to purchase 63 additional acres. The Company also holds an option to enter into a long-term ground lease of property adjacent to Amtrak’s 30th Street Station in Philadelphia and develop a high-rise office property on the leasehold interest.

20. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table details the components of accumulated other comprehensive income (loss) as of and for the three years ended December 31, 2002 (in thousands):

    Unrealized Gains   Cash Flow   Accumulated Other  
    (Losses) on Securities   Hedges   Comprehensive Loss  
   
 
 
 
Beginning balance at January 1, 2000
   $ —   $ —   $ —  
   Change during year
     (1,731 )   —     (1,731 )
   
 
 
 
Balance at December 31, 2000
     (1,731 )   —     (1,731 )
   
 
 
 
   Change during year
     1,816     (7,921 )   (6,105 )
   Reclassification adjustments for losses
                    
      reclassified into operations
     —     3,249     3,249  
   
 
 
 
Balance at December 31, 2001
     85     (4,672 )   (4,587 )
   Change during year
     733     (7,954 )   (7,221 )
   Reclassification adjustments for losses
                    
      reclassified into operations
     —     5,406     5,406  
   
 
 
 
Balance at December 31, 2002
   $ 818   $ (7,220 ) $ (6,402 )
   
 
 
 

 

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Brandywine Realty Trust
Schedule II
Valuation and Qualifying Accounts
(in thousands)

    Balance at
Beginning
of Period		   Additions         Balance
at End
of Period
     
       
Description     Charged to
expense		   Deductions  
 
 
 
 
Allowance for doubtful accounts:                        
                         
Year ended December 31, 2002   $ 4,532   $ 894   $ 850   $ 4,576
   
 
 
 
Year ended December 31, 2001   $ 2,427   $ 2,867   $ 762   $ 4,532
   
 
 
 
Year ended December 31, 2000   $ 3,358   $ 332   $ 1,263   $ 2,427
   
 
 
 

 

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(a) Reconciliation of Real Estate:                     
                           
  The following table reconciles the real estate investments from January 1, 2002 to                 
  December 31, 2002 (in thousands):                     
       2002     2001     2000  
     
   
   
 
  Balance at beginning of year   $  1,893,039     $  1,754,895     $  1,771,475  
                           
  Additions:                        
 
Acquisitions
     120,627       217,212       13,056  
 
Capital expenditures
     94,086       65,210       34,905  
                           
  Less:                        
 
Dispositions
     (209,014 )      (144,278 )      (64,541 ) 
 
Assets transferred to held-for-sale
     (8,729 )      -       -  
       
     
     
 
  Balance at end of year   $ 1,890,009     $  1,893,039     $  1,754,895  
       
     
     
 
                           
(b) Reconciliation of Accumulated Depreciation:                     
                           
  The following table reconciles the accumulated depreciation on real estate investments from                 
  January 1, 2002 to December 31, 2002 (in thousands):                 
       2002     2001     2000  
     
   
   
 
  Balance at beginning of year   $ 230,793     $ 179,558     $ 125,744  
                           
  Additions:                        
 
Depreciation expense - continued operations
     47,668       60,963       56,402  
 
Depreciation expense - discontinued operations
     1,033       8,532       7,538  
                           
  Less:                        
 
Dispositions
     (33,029 )     (18,260 )     (10,126 )
 
Assets transferred to held-for-sale
     (1,235 )     -       -  
       
     
     
 
  Balance at end of year   $ 245,230     $ 230,793     $ 179,558  
     
   
   
 

 

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                Initial Cost     Gross Amount at Which Carried
December 31, 2002		            
               
   
           
                        Net
Improvements
(Retirements)
Since
Acquisition		                 Accumulated
Depreciation at
December 31,
2002 (b)		            
                                                   
            Encumberances at
December 31, 2002 		      Building and
Improvements		           Building and
Improvements		         Date of
Construction		   Date
Acquired		   Depreciable
Life
    City   State     Land         Land     Total (a)        
 
 
 
 
 
 
   
 
 
 
 
 
 
                                                       
One Greentree Centre   Marlton   NJ   -   345   4,440   269     345   4,709   5,054   2,519   1982   1986   40
Three Greentree Centre   Marlton   NJ   -   323   6,024   24     323   6,048   6,371   3,707   1984   1986   40
Two Greentree Centre   Marlton   NJ   -   264   4,693   (23 )   264   4,670   4,934   2,830   1983   1986   40
110 Summit Drive   Exton   PA   -   403   1,647   157     403   1,804   2,207   403   1985   1996   40
1155 Business Center Drive   Horsham   PA   2,541   1,029   4,124   (191 )   1,029   3,933   4,962   1,141   1990   1996   40
120 West Germantown Pike   Plymouth Meeting   PA   -   685   2,773   263     685   3,036   3,721   690   1984   1996   40
1336 Enterprise Drive   West Goshen   PA   -   731   2,946   39     731   2,985   3,716   642   1990   1996   40
140 West Germantown Pike   Plymouth Meeting   PA   -   481   1,976   235     481   2,211   2,692   614   1984   1996   40
18 Campus Boulevard   Newtown Square   PA   3,429   786   3,312   38     786   3,350   4,136   941   1990   1996   40
2240/50 Butler Pike   Plymouth Meeting   PA   -   1,104   4,627   586     1,104   5,213   6,317   1,580   1984   1996   40
2260 Butler Pike   Plymouth Meeting   PA   -   661   2,727   149     661   2,876   3,537   717   1984   1996   40
33 Street Road - Greenwood Square I   Bensalem   PA   -   851   3,407   300     851   3,707   4,558   862   1985   1996   40
33 Street Road - Greenwood Square II   Bensalem   PA   -   1,126   4,511   995     1,126   5,506   6,632   1,532   1985   1996   40
33 Street Road - Greenwood Square III   Bensalem   PA   -   350   1,401   37     350   1,438   1,788   332   1985   1996   40
456 Creamery Way   Exton   PA   -   635   2,548   -     635   2,550   3,185   694   1987   1996   40
457 Haddonfield Road   Cherry Hill   NJ   11,135   2,142   9,120   2,169     2,142   11,289   13,431   3,455   1990   1996   40
468 Creamery Way   Exton   PA   -   527   2,112   (37 )   527   2,075   2,602   501   1990   1996   40
486 Thomas Jones Way   Exton   PA   -   806   3,256   243     806   3,499   4,305   1,122   1990   1996   40
500 Enterprise Road   Horsham   PA   -   1,303   5,188   (790 )   1,303   4,398   5,701   1,092   1990   1996   40
500 North Gulph Road   King of Prussia   PA   -   1,303   5,201   591     1,303   5,792   7,095   1,395   1979   1996   40
650 Dresher Road   Horsham   PA   1,767   636   2,501   314     636   2,815   3,451   611   1984   1996   40
6575 Snowdrift Road   Allentown   PA   -   601   2,411   473     601   2,884   3,485   870   1988   1996   40
700 Business Center Drive   Horsham   PA   1,509   550   2,201   195     550   2,396   2,946   534   1986   1996   40
7248 Tilghman Street   Allentown   PA   -   731   2,969   210     731   3,179   3,910   839   1987   1996   40
7310 Tilghman Street   Allentown   PA   -   553   2,246   787     553   3,033   3,586   920   1985   1996   40
800 Business Center Drive   Horsham   PA   2,304   896   3,585   19     896   3,604   4,500   815   1986   1996   40
8000 Lincoln Drive   Marlton   NJ   -   606   2,887   260     606   3,147   3,753   883   1983   1996   40
One Progress Avenue   Horsham   PA   -   1,399   5,629   144     1,399   5,773   7,172   1,368   1986   1996   40
One Righter Parkway   Talleyville   DE   10,925   2,545   10,195   282     2,545   10,477   13,022   2,375   1989   1996   40
1 Foster Avenue   Gibbsboro   NJ   -   93   364   35     93   399   492   72   1972   1997   40
10 Foster Avenue   Gibbsboro   NJ   -   244   971   69     244   1,040   1,284   202   1983   1997   40
100 Berwyn Park   Berwyn   PA   7,161   1,180   7,290   168     1,180   7,458   8,638   1,560   1986   1997   40
100 Commerce Drive   Newark   DE   -   1,160   4,633   354     1,160   4,987   6,147   955   1989   1997   40
100 Katchel Blvd   Reading   PA   -   1,881   7,423   242     1,881   7,665   9,546   1,650   1970   1997   40
1000 Atrium Way   Mt. Laurel   NJ   -   2,061   8,180   384     2,061   8,564   10,625   1,714   1989   1997   40
1000 East Lincoln Drive   Marlton   NJ   -   264   1,059   108     264   1,167   1,431   245   1981   1997   40
1000 Howard Boulevard   Mt. Laurel   NJ   4,090   2,298   9,288   395     2,298   9,683   11,981   2,219   1988   1997   40
1000/2000 West Lincoln Drive   Marlton   NJ   -   575   3,568   (965 )   575   2,603   3,178   671   1982   1997   40
10000 Midlantic Drive   Mt. Laurel   NJ   7,415   3,206   12,857   408     3,206   13,265   16,471   2,890   1990   1997   40
100-300 Gundy Drive   Reading   PA   -   6,495   25,180   5,633     6,495   30,813   37,308   5,957   1970   1997   40
1007 Laurel Oak Road   Voorhees   NJ   -   1,563   6,241   17     1,563   6,258   7,821   1,166   1996   1997   40
105/140 Terry Drive   Newtown   PA   -   2,299   8,238   2,089     2,299   10,327   12,626   2,249   1974   1997   40
111 Presidential Boulevard   Bala Cynwyd   PA   -   5,419   21,612   625     5,419   22,237   27,656   4,161   1974   1997   40
1120 Executive Boulevard   Mt. Laurel   NJ   -   2,074   8,415   517     2,074   8,932   11,006   1,883   1987   1997   40
15000 Midlantic Drive   Mt. Laurel   NJ   6,898   3,061   12,254   8     3,061   12,262   15,323   2,527   1991   1997   40
2 Foster Avenue   Gibbsboro   NJ   -   185   730   23     185   753   938   140   1974   1997   40
20 East Clementon Road   Gibbsboro   NJ   -   769   3,055   222     769   3,277   4,046   673   1986   1997   40
200 Berwyn Park   Berwyn   PA   9,414   1,533   9,460   362     1,533   9,822   11,355   1,983   1987   1997   40
2000 Midlantic Drive   Mt. Laurel   NJ   9,585   2,202   8,823   400     2,202   9,223   11,425   1,942   1989   1997   40
220 Commerce Drive   Fort Washington   PA   -   1,086   4,338   544     1,086   4,882   5,968   966   1974   1997   40
300 Berwyn Park   Berwyn   PA   13,151   2,206   13,422   234     2,206   13,656   15,862   2,743   1989   1997   40
300 Welsh Road - Building I   Horsham   PA   2,513   894   3,572   441     894   4,013   4,907   991   1985   1997   40
300 Welsh Road - Building II   Horsham   PA   1,067   396   1,585   102     396   1,687   2,083   324   1985   1997   40
3000 West Lincoln Drive   Marlton   NJ   -   569   2,293   119     569   2,412   2,981   519   1982   1997   40
321 Norristown Road   Lower Gwyned   PA   -   1,289   5,176   753     1,289   5,929   7,218   1,191   1972   1997   40
323 Norristown Road   Lower Gwyned   PA   -   1,685   6,751   365     1,685   7,116   8,801   1,429   1988   1997   40
4 Foster Avenue   Gibbsboro   NJ   -   183   726   17     183   743   926   138   1974   1997   40
4000 Midlantic Drive   Mt. Laurel   NJ   3,205   714   5,085   (1,979 )   714   3,106   3,820   638   1981   1997   40
4000/5000 West Lincoln Drive   Marlton   NJ   -   877   3,526   382     877   3,908   4,785   845   1982   1997   40
5 Foster Avenue   Gibbsboro   NJ   -   8   32   25     8   57   65   7   1968   1997   40
5 U.S. Avenue   Gibbsboro   NJ   -   21   81   2     21   83   104   16   1987   1997   40
50 East Clementon Road   Gibbsboro   NJ   -   114   964   4     114   968   1,082   180   1986   1997   40

 

Back to Index



                Initial Cost     Gross Amount at Which Carried
December 31, 2002		            
               
   
           
                        Net
Improvements
(Retirements)
Since
Acquisition		                 Accumulated
Depreciation at
December 31,
2002 (b)		            
                                                   
            Encumberances at
December 31, 2002 		      Building and
Improvements		           Building and
Improvements		         Date of
Construction		   Date
Acquired		   Depreciable
Life
    City   State     Land         Land     Total (a)        
 
 
 
 
 
 
   
 
 
 
 
 
 
                                                       
500 Office Center Drive   Ft. Washington   PA   -   1,617   6,480   1,393     1,617   7,873   9,490   2,054   1985   1997   40
501 Office Center Drive   Ft. Washington   PA   -   1,796   7,192   1,146     1,796   8,338   10,134   2,024   1985   1997   40
55 U.S. Avenue   Gibbsboro   NJ   -   1,116   4,435   51     1,116   4,486   5,602   836   1982   1997   40
6 East Clementon Road   Gibbsboro   NJ   -   1,345   5,366   269     1,345   5,635   6,980   1,132   1980   1997   40
655 Business Center Drive   Horsham   PA   1,808   544   2,529   458     544   2,987   3,531   741   1997   1997   40
7 Foster Avenue   Gibbsboro   NJ   -   231   921   110     231   1,031   1,262   194   1983   1997   40
748 Springdale Drive   Exton   PA   -   236   931   142     236   1,073   1,309   262   1986   1997   40
855 Springdale Drive   Exton   PA   -   838   3,370   134     838   3,504   4,342   756   1986   1997   40
9000 Midlantic Drive   Mt. Laurel   NJ   6,200   1,472   5,895   23     1,472   5,918   7,390   1,222   1989   1997   40
9000 West Lincoln Drive   Marlton   NJ   -   610   2,422   272     610   2,694   3,304   622   1983   1997   40
Five Eves Drive   Marlton   NJ   -   703   2,819   649     703   3,468   4,171   898   1986   1997   40
Four A Eves Drive   Marlton   NJ   -   539   2,168   198     539   2,366   2,905   621   1987   1997   40
Four B Eves Drive   Marlton   NJ   -   588   2,369   86     588   2,455   3,043   556   1987   1997   40
King & Harvard   Cherry Hill   NJ   -   1,726   1,069   2,193     1,726   3,262   4,988   746       1997   40
Main Street - Piazza   Voorhees   NJ   -   696   2,802   80     696   2,882   3,578   635   1990   1997   40
Main Street - Plaza 1000   Voorhees   NJ   -   2,729   10,931   2,219     2,729   13,150   15,879   2,792   1988   1997   40
Main Street - Promenade   Voorhees   NJ   -   531   2,052   226     531   2,278   2,809   518   1988   1997   40
Main Street- CAM   Voorhees   NJ   -   3   11   98     3   109   112   21       1997   40
One South Union Place   Cherry Hill   NJ   -   771   8,047   369     771   8,416   9,187   2,039       1997   40
Two Eves Drive   Marlton   NJ   -   818   3,461   124     818   3,585   4,403   853   1987   1997   40
1000 First Avenue   King of Prussia   PA   4,629   2,772   10,936   310     2,772   11,246   14,018   1,747   1980   1998   40
1009 Lenox Drive   Lawrenceville   NJ   13,728   4,876   19,284   2,526     4,876   21,810   26,686   4,034   1989   1998   40
1020 First Avenue   King of Prussia   PA   3,692   2,168   8,576   435     2,168   9,011   11,179   1,357   1984   1998   40
104 Windsor Center Drive   East Windsor   NJ   -   977   3,918   1,006     977   4,924   5,901   1,433   1987   1998   40
1040 First Avenue   King of Prussia   PA   5,032   2,861   11,282   1,094     2,861   12,376   15,237   2,252   1985   1998   40
1060 First Avenue   King of Prussia   PA   4,515   2,712   10,953   6     2,712   10,959   13,671   1,680   1987   1998   40
1105 Berkshire Boulevard   Reading   PA   -   1,115   4,510   451     1,115   4,961   6,076   934   1987   1998   40
1150 Berkshire Boulevard   Reading   PA   -   435   1,748   257     435   2,005   2,440   385   1979   1998   40
14 Campus Boulevard   Newtown Square   PA   5,754   2,243   4,217   480     2,243   4,697   6,940   1,452   1998   1998   40
150 Corporate Center Drive   Camp Hill   PA   -   964   3,871   161     964   4,032   4,996   710   1987   1998   40
160-180 West Germantown Pike   East Norriton   PA   5,409   1,603   6,418   546     1,603   6,964   8,567   1,260   1982   1998   40
1957 Westmoreland Street   Richmond   VA   2,861   1,062   4,241   284     1,062   4,525   5,587   775   1975   1998   40
200 Corporate Center Drive   Camp Hill   PA   -   1,647   6,606   60     1,647   6,666   8,313   1,136   1989   1998   40
200 Nationwide Drive   Harrisburg   PA   -   100   403   -     100   403   503   69   1978   1998   40
201 North Walnut Street   Wilmington   DE   23,557   10,359   41,509   462     10,359   41,971   52,330   7,493   1988   1998   40
2100-2108 West Laburnum   Richmond   VA   1,285   2,482   8,846   1,557     2,482   10,403   12,885   1,612   1976   1998   40
2120 Tomlynn Street   Richmond   VA   767   280   1,125   93     280   1,218   1,498   198   1986   1998   40
2130-2146 Tomlynn Street   Richmond   VA   906   353   1,416   1     353   1,417   1,770   217   1988   1998   40
2169-79 Tomlynn Street   Richmond   VA   1,123   422   1,695   75     422   1,770   2,192   301   1985   1998   40
2201 Dabney Street   Richmond   VA   -   367   1,470   181     367   1,651   2,018   292   1962   1998   40
2201-2245 Tomlynn Street   Richmond   VA   2,811   1,020   4,067   402     1,020   4,469   5,489   809   1989   1998   40
2212-2224 Tomlynn Street   Richmond   VA   1,325   502   2,014   71     502   2,085   2,587   318   1985   1998   40
2221-2245 Dabney Road   Richmond   VA   1,372   530   2,123   27     530   2,150   2,680   328   1994   1998   40
2240 Dabney Road   Richmond   VA   682   264   1,059   8     264   1,067   1,331   167   1984   1998   40
2244 Dabney Road   Richmond   VA   1,411   551   2,203   1     551   2,204   2,755   338   1993   1998   40
2246 Dabney Road   Richmond   VA   1,167   455   1,822   1     455   1,823   2,278   279   1987   1998   40
2248 Dabney Road   Richmond   VA   1,382   511   2,049   139     511   2,188   2,699   361   1989   1998   40
2251 Dabney Road   Richmond   VA   1,036   387   1,552   84     387   1,636   2,023   265   1983   1998   40
2256 Dabney Road   Richmond   VA   936   356   1,427   44     356   1,471   1,827   237   1982   1998   40
2277 Dabney Road   Richmond   VA   1,302   507   2,034   1     507   2,035   2,542   312   1986   1998   40
2401 Park Drive   Harrisburg   PA   -   182   728   75     182   803   985   169   1984   1998   40
2404 Park Drive   Harrisburg   PA   -   167   668   129     167   797   964   203   1983   1998   40
2490 Boulevard of the Generals   King of Prussia   PA   -   348   1,394   36     348   1,430   1,778   264   1975   1998   40
2511 Brittons Hill Road   Richmond   VA   3,131   1,201   4,820   93     1,201   4,913   6,114   775   1987   1998   40
2812 Emerywood Parkway   Henrico   VA   2,779   1,069   4,281   77     1,069   4,358   5,427   657   1980   1998   40
300 Arboretum Place   Richmond   VA   15,092   5,450   21,892   1,997     5,450   23,889   29,339   4,312   1988   1998   40
300 Corporate Center Drive   Camp Hill   PA   -   4,823   19,301   316     4,823   19,617   24,440   3,435   1989   1998   40
301 North Walnut Street   Wilmington   DE   19,740   8,495   34,016   1,340     8,495   35,356   43,851   6,145   1989   1998   40
303 Fellowship Drive   Mt. Laurel   NJ   2,612   1,493   6,055   361     1,493   6,416   7,909   1,113   1979   1998   40
304 Harper Drive   Mt. Laurel   NJ   1,244   657   2,674   437     657   3,111   3,768   584   1975   1998   40
305 Fellowship Drive   Mt. Laurel   NJ   2,643   1,422   5,768   813     1,422   6,581   8,003   1,344   1980   1998   40
305 Harper Drive   Mt. Laurel   NJ   375   222   913   1     222   914   1,136   140   1979   1998   40

 

Back to Index



                Initial Cost     Gross Amount at Which Carried
December 31, 2002		            
               
   
           
                        Net
Improvements
(Retirements)
Since
Acquisition		                 Accumulated
Depreciation at
December 31,
2002 (b)		            
                                                   
            Encumberances at
December 31, 2002 		      Building and
Improvements		           Building and
Improvements		         Date of
Construction		   Date
Acquired		   Depreciable
Life
    City   State     Land         Land     Total (a)        
 
 
 
 
 
 
   
 
 
 
 
 
 
                                                       
307 Fellowship Drive   Mt. Laurel   NJ   2,710   1,564   6,342   301     1,564   6,643   8,207   1,152   1981   1998   40
308 Harper Drive   Mt. Laurel   NJ   -   1,643   6,663   200     1,643   6,863   8,506   1,079   1976   1998   40
309 Fellowship Drive   Mt. Laurel   NJ   2,840   1,518   6,154   929     1,518   7,083   8,601   1,173   1982   1998   40
33 West State Street   Trenton   NJ   -   6,016   24,091   105     6,016   24,196   30,212   4,231   1988   1998   40
426 Lancaster Avenue   Devon   PA   -   1,689   6,756   4     1,689   6,760   8,449   1,238   1990   1998   40
4364 South Alston Avenue   Durham   NC   2,910   1,622   6,419   771     1,622   7,190   8,812   1,071   1985   1998   40
4805 Lake Brooke Drive   Glen Allen   VA   4,233   1,640   6,567   60     1,640   6,627   8,267   1,019   1996   1998   40
50 East State Street   Trenton   NJ   -   8,926   35,735   375     8,926   36,110   45,036   6,349   1989   1998   40
50 Swedesford Square   Frazer   PA   6,447   3,902   15,254   365     3,902   15,619   19,521   2,397   1988   1998   40
500 Nationwide Drive   Harrisburg   PA   -   173   850   787     173   1,637   1,810   280   1977   1998   40
52 Swedesford Square   Frazer   PA   7,108   4,242   16,579   702     4,242   17,281   21,523   2,829   1986   1998   40
520 Virginia Drive   Ft. Washington   PA   -   845   3,455   380     845   3,835   4,680   817   1987   1998   40
600 Corporate Circle Drive   Harrisburg   PA   -   363   1,452   61     363   1,513   1,876   261   1978   1998   40
600 East Main Street   Richmond   VA   16,619   9,809   38,255   2,259     9,809   40,514   50,323   6,523   1986   1998   40
600 Park Avenue   King of Prussia   PA   -   1,012   4,048   3     1,012   4,051   5,063   715   1964   1998   40
610 Freedom Business Center   King of Prussia   PA   5,503   2,017   8,070   660     2,017   8,730   10,747   1,700   1985   1998   40
620 Allendale Road   King of Prussia   PA   -   1,020   3,839   635     1,020   4,474   5,494   799   1961   1998   40
620 Freedom Business Center   King of Prussia   PA   7,254   2,770   11,014   382     2,770   11,396   14,166   2,110   1986   1998   40
630 Clark Avenue   King of Prussia   PA   -   547   2,190   1     547   2,191   2,738   387   1960   1998   40
630 Freedom Business Center   King of Prussia   PA   7,362   2,773   11,144   460     2,773   11,604   14,377   2,223   1989   1998   40
640 Allendale Road   King of Prussia   PA   -   -   432   208     -   640   640   484   2001   1998   40
640 Freedom Business Center   King of Prussia   PA   11,222   4,222   16,891   800     4,222   17,691   21,913   3,198   1991   1998   40
650 Park Avenue   King of Prussia   PA   -   1,917   4,378   1,077     1,917   5,455   7,372   966   1968   1998   40
660 Allendale Road   King of Prussia   PA   -   835   3,343   186     835   3,529   4,364   652   1962   1998   40
680 Allendale Road   King of Prussia   PA   -   689   2,756   678     689   3,434   4,123   663   1962   1998   40
700 East Gate Drive   Mt. Laurel   NJ   6,174   3,569   14,436   690     3,569   15,126   18,695   2,422   1984   1998   40
701 East Gate Drive   Mt. Laurel   NJ   2,932   1,736   6,877   266     1,736   7,143   8,879   1,124   1986   1998   40
7010 Snowdrift Way   Allentown   PA   1,379   817   3,324   35     817   3,359   4,176   520   1991   1998   40
7150 Windsor Drive   Allentown   PA   1,826   1,034   4,219   275     1,034   4,494   5,528   825   1988   1998   40
7350 Tilghman Street   Allentown   PA   -   3,414   13,716   1,087     3,414   14,803   18,217   2,602   1987   1998   40
741 First Avenue   King of Prussia   PA   -   1,287   5,151   3     1,287   5,154   6,441   909   1966   1998   40
7450 Tilghman Street   Allentown   PA   5,219   2,867   11,631   1,306     2,867   12,937   15,804   2,342   1986   1998   40
751-761 Fifth Avenue   King of Prussia   PA   -   1,097   4,391   3     1,097   4,394   5,491   775   1967   1998   40
7535 Windsor Drive   Allentown   PA   5,762   3,376   13,400   673     3,376   14,073   17,449   2,230   1988   1998   40
755 Business Center Drive   Horsham   PA   2,224   1,363   2,334   646     1,363   2,980   4,343   773   1998   1998   40
800 Corporate Circle Drive   Harrisburg   PA   -   414   1,653   109     414   1,762   2,176   310   1979   1998   40
815 East Gate Drive   Mt. Laurel   NJ   1,103   637   2,584   119     637   2,703   3,340   485   1986   1998   40
817 East Gate Drive   Mt. Laurel   NJ   1,022   611   2,426   59     611   2,485   3,096   381   1986   1998   40
875 First Avenue   King of Prussia   PA   -   618   2,473   2,417     618   4,890   5,508   646   1966   1998   40
9011 Arboretum Parkway   Richmond   VA   5,014   1,856   7,702   233     1,856   7,935   9,791   1,311   1991   1998   40
9100 Arboretum Parkway   Richmond   VA   3,802   1,363   5,489   540     1,363   6,029   7,392   1,022   1988   1998   40
920 Harvest Drive   Blue Bell   PA   -   2,433   9,738   482     2,433   10,220   12,653   1,765   1990   1998   40
9200 Arboretum Parkway   Richmond   VA   2,694   984   3,973   280     984   4,253   5,237   677   1988   1998   40
9210 Arboretum Parkway   Richmond   VA   2,909   1,110   4,474   72     1,110   4,546   5,656   698   1988   1998   40
9211 Arboretum Parkway   Richmond   VA   1,591   581   2,433   93     581   2,526   3,107   386   1991   1998   40
922 Swedesford Road   Frazer   PA   -   218   1   (1 )   218   -   218   -   1986   1998   40
925 Harvest Drive   Blue Bell   PA   -   1,671   6,606   235     1,671   6,841   8,512   1,168   1990   1998   40
993 Lenox Drive   Lawrenceville   NJ   11,906   2,811   17,996   (6,615 )   2,811   11,381   14,192   1,987   1985   1998   40
997 Lenox Drive   Lawrenceville   NJ   10,464   2,410   9,700   363     2,410   10,063   12,473   1,921   1987   1998   40
East Gate Land   Mt. Laurel   NJ   0   1   1   (1 )   1   -   1   -       1998   40
Marine Center - Pier #12   Philadelphia   PA   -   -   -   151     -   151   151   18       1998   40
Marine Center - Pier #24   Philadelphia   PA   -   -   -   59     -   59   59   3       1998   40
Marine Center Pier #13-15   Philadelphia   PA   -   -   -   25     -   25   25   10       1998   40
Philadelphia Marine Center   Philadelphia   PA   -   533   2,196   37     533   2,233   2,766   341       1998   40
11 Campus Boulevard   Newtown Square   PA   4,787   1,112   4,067   595     1,112   4,662   5,774   582   1999   1999   40
2000 Lenox Drive   Lawrenceville   NJ   14,678   2,291   12,221   2,984     2,291   15,205   17,496   1,799   1999   1999   40
630 Allendale Road   King of Prussia   PA   19,797   2,836   4,028   15,945     2,836   19,973   22,809   1,825       1999   40
630 Dresher Road   Horsham   PA   -   771   3,083   796     771   3,879   4,650   441   1987   1999   40
7130 Ambassador Drive   Allentown   PA   -   761   3,046   10     761   3,056   3,817   371   1991   1999   40
1050 Westlakes Drive   Berwyn   PA   -   -   13,056   1,754     -   14,810   14,810   1,264       2000   40
1700 Paoli Pike   East Goshen   PA   -   458   559   3,326     458   3,885   4,343   445   2000   2000   40

 

Back to Index



                  Initial Cost   Gross Amount at Which Carried
December 31, 2002   		            
                 
 
           
                            Net
Improvements
(Retirements)
Since
Acquisition   		                     Accumulated
Depreciation at
December 31,
2002 (b)  		            
                                                           
            Encumberances at
December 31, 2002 		        Building and
Improvements		           Building and
Improvements		           Date of
Construction 		   Date
Acquired 		   Depreciable
Life 
    City   State     Land   Land     Total (a)      
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                     
10 Lake Center Drive   Marlton   NJ     8,793     1,880     7,521     107     1,880     7,628     9,508     342   1989   2001   40
100 Arrandale Boulevard   Exton   PA     -     970     3,878     2     970     3,880     4,850     170   1997   2001   40
100 Gateway Centre Parkway   Richmond   VA     -     391     5,410     1,225     391     6,635     7,026     357   2001   2001   40
100 Lindenwood Drive   Malvern   PA     2,214     473     1,892     29     473     1,921     2,394     85   1985   2001   40
101 Lindenwood Drive   Malvern   PA     -     4,152     16,606     77     4,152     16,683     20,835     735   1988   2001   40
1100 Cassett Road   Berwyn   PA     -     1,695     6,779     4     1,695     6,783     8,478     297   1997   2001   40
111 Arrandale Boulevard   Exton   PA     1,200     262     1,048     1     262     1,049     1,311     46   1996   2001   40
111/113 Pencader Drive   Newark   DE     -     1,092     4,366     3     1,092     4,369     5,461     191   1990   2001   40
1160 Swedesford Road   Berwyn   PA     8,633     1,781     7,124     430     1,781     7,554     9,335     390   1986   2001   40
1180 Swedesford Road   Berwyn   PA     9,814     2,086     8,342     184     2,086     8,526     10,612     400   1987   2001   40
161 Gaither Drive   Mt. Laurel   NJ     -     1,016     4,064     295     1,016     4,359     5,375     200   1987   2001   40
17 Campus Boulevard   Newtown Square   PA     5,211     1,108     5,155     22     1,108     5,177     6,285     384   2001   2001   40
200 Lake Drive East   Cherry Hill   NJ     9,686     2,069     8,275     130     2,069     8,405     10,474     368   1989   2001   40
200 Lindenwood Drive   Malvern   PA     1,499     324     1,295     2     324     1,297     1,621     57   1984   2001   40
210 Lake Drive East   Cherry Hill   NJ     7,652     1,645     6,579     50     1,645     6,629     8,274     291   1986   2001   40
220 Lake Drive East   Cherry Hill   NJ     -     2,144     8,798     54     2,144     8,852     10,996     466   1988   2001   40
30 Lake Center Drive   Marlton   NJ     4,837     1,043     4,171     16     1,043     4,187     5,230     189   1986   2001   40
300 Lindenwood Drive   Malvern   PA     3,925     848     3,394     2     848     3,396     4,244     148   1984   2001   40
301 Lindenwood Drive   Malvern   PA     -     2,729     10,915     264     2,729     11,179     13,908     533   1986   2001   40
412 Creamery Way   Exton   PA     -     1,195     4,779     436     1,195     5,215     6,410     255   1999   2001   40
429 Creamery Way   Exton   PA     3,371     1,368     5,471     3     1,368     5,474     6,842     239   1996   2001   40
436 Creamery Way   Exton   PA     -     994     3,978     14     994     3,992     4,986     178   1991   2001   40
440 Creamery Way   Exton   PA     3,134     982     3,927     4     982     3,931     4,913     172   1991   2001   40
442 Creamery Way   Exton   PA     2,852     894     3,576     2     894     3,578     4,472     156   1991   2001   40
457 Creamery Way   Exton   PA     -     777     3,107     2     777     3,109     3,886     136   1990   2001   40
467 Creamery Way   Exton   PA     -     906     3,623     2     906     3,625     4,531     159   1988   2001   40
479 Thomas Jones Way   Exton   PA     -     1,075     4,299     65     1,075     4,364     5,439     196   1988   2001   40
481 John Young Way   Exton   PA     2,526     496     1,983     2     496     1,985     2,481     87   1997   2001   40
555 Croton Road   King of Prussia   PA     6,309     4,486     17,943     69     4,486     18,012     22,498     804   1999   2001   40
7360 Windsor Drive   Allentown   PA     -     1,451     3,618     2,039     1,451     5,657     7,108     414   2001   2001   40
Katchel Farmhouse   Reading   PA     -     -     -     111     -     111     111     74   2001   2001   40
Two Righter Parkway   Wilmington   DE     -     2,802     11,217     7     2,802     11,224     14,026     724   1987   2001   40
100 Brandywine Boulevard   Newtown   PA     -     1,784     9,811     2,971     1,784     12,782     14,566     324   2002   2002   40
1000 Lenox Drive   Lawrenceville   NJ     -     1,174     4,696     3     1,174     4,699     5,873     59   1982   2002   40
15 Campus Boulevard   West Goshen   PA     5,958     1,164     3,896     2,127     1,164     6,023     7,187     223   2002   2002   40
200 Commerce Drive   Newark   DE     6,272     911     4,414     1,552     911     5,966     6,877     452   1998   2002   40
400 Berwyn Park   Berwyn   PA     15,726     2,657     4,462     2,264     2,657     6,726     9,383     440   2002   2002   40
400 Commerce Drive   Newark   DE     12,507     2,528     9,220     4,459     2,528     13,679     16,207     1,241   1997   2002   40
401 Plymouth Road   Plymouth Meeting   PA     -     7,241     16,131     4,689     7,241     20,820     28,061     830   2002   2002   40
600 West Germantown Pike   Plymouth Meeting   PA     12,633     3,652     15,288     47     3,652     15,335     18,987     320   1986   2002   40
980 Harvest Drive   Blue Bell   PA     -     2,079     7,821     5     2,079     7,826     9,905     66   1988   2002   40
630 West Germantown Pike   Plymouth Meeting   PA     12,009     3,572     14,435     43     3,572     14,478     18,050     302   1990   2002   40
620 West Germantown Pike   Plymouth Meeting   PA     12,220     3,558     14,743     65     3,558     14,808     18,366     309   1988   2002   40
6802 Paragon Place   Richmond   VA     -     2,917     11,454     251     2,917     11,705     14,622     168   1989   2002   40
610 West Germantown Pike   Plymouth Meeting   PA     12,170     3,651     14,514     126     3,651     14,640     18,291     315   1987   2002   40
           
 
 
 
 
 
 
 
           
                                                                     
            $ 591,055   $ 353,111   $ 1,424,682   $ 112,214   $ 353,111   $ 1,536,898   $ 1,890,009   $ 245,230            
           
 
 
 
 
 
 
 
           

 

F-27