-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TyZ9+QZawLd8BPWjDYVm9/WVkUF0UQjqSZt5uoecB0Y3WkFtJTrOdQsDZtD9i1c+ XCZc91ZHPHVD/zYoLuUN4g== 0000950116-03-003909.txt : 20030918 0000950116-03-003909.hdr.sgml : 20030918 20030918164420 ACCESSION NUMBER: 0000950116-03-003909 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030918 ITEM INFORMATION: Other events FILED AS OF DATE: 20030918 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRANDYWINE REALTY TRUST CENTRAL INDEX KEY: 0000790816 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 232413352 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09106 FILM NUMBER: 03901487 BUSINESS ADDRESS: STREET 1: 14 CAMPUS BLVD STREET 2: STE 100 CITY: NEWTOWN SQUARE STATE: PA ZIP: 19073 BUSINESS PHONE: 6103255600 MAIL ADDRESS: STREET 1: TWO GREENTREE CENTRE STREET 2: SUITE 100 CITY: MARLTON STATE: NJ ZIP: 08053 FORMER COMPANY: FORMER CONFORMED NAME: LINPRO SPECIFIED PROPERTIES DATE OF NAME CHANGE: 19920703 8-K 1 eightk.txt 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) September 18, 2003 BRANDYWINE REALTY TRUST (Exact name of registrant as specified in its charter) MARYLAND 1-9106 23-2413352 (State or Other Jurisdiction (Commission (I.R.S. Employer of Incorporation) file number) Identification Number) 401 Plymouth Road, Plymouth Meeting, Pennsylvania 19462 (Address of principal executive offices) (610) 325-5600 (Registrant's telephone number, including area code) Page 1 of 3 pages Item 5. Other Events. Brandywine Realty Trust (the "Company") is filing updated financial statements to reflect additional properties as discontinued operations under the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144") and to reflect the adoption of Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). During the six months ended June 30, 2003, the Company sold certain properties and in accordance with SFAS 144 has reported revenue, expenses and gain on sale from these properties as discontinued operations for the periods presented in its quarterly report on Form 10-Q filed on August 13, 2003 for the three- and six-month periods ended June 30, 2003. This reclassification has no effect on the Company's reported net income or net income per share. As of January 1, 2003, the Company adopted the provisions of SFAS 145 which requires the Company to reclassify an amount previously classified as an extraordinary item, related to the write-off of unamortized deferred financing costs in 2001, as interest expense. This reclassification has no effect on the Company's reported net income or net income per share. This Current Report on Form 8-K updates Items 6, 7 and 15(a)1 and 2 of the Company's Form 10-K for the year ended December 31, 2002 and reflects those properties sold and classified as held-for-sale during the six months ended June 30, 2003 as discontinued operations. All other Items of the Form 10-K remain unchanged. -2- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BRANDYWINE REALTY TRUST By: /s/ Gerard H. Sweeney ------------------------------------ Title: President and Chief Executive Officer Date: September 18, 2003 EXHIBIT INDEX EXHIBIT NO. DOCUMENT DESCRIPTION 23.1 Consent of Independent Accountants 99.1 Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Statements and Schedules -3- EX-23 3 ex23-1.txt EXHIBIT 23.1 Independent Auditors' Consent ----------------------------- The Board of Trustees Brandywine Realty Trust: We consent to the incorporation by reference in the registration statements (Nos. 333-52952, 333-69653, 333-56237, 333-53359, 333-46647, 333-20999) on Form S-3 and (Nos. 333-52957, 333-28427, 333-14243) on Form S-8 of Brandywine Realty Trust of our report dated February 26, 2003, except as to notes 9, 12, 13, and 21, which are as of June 30, 2003, with respect to 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, and the related financial statement schedules, which report is included in the Current Report on Form 8-K of Brandywine Realty Trust dated September 18, 2003. Our report refers to the fact that effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Also, our report refers to the fact that effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 145, "Rescission of No. 4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections." /s/ KPMG LLP Philadelphia, Pennsylvania September 18, 2003 EX-99 4 ex99-1.txt EXHIBIT 99.1 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 (a) Total revenue $ 292,661 $ 272,238 $ 251,059 $ 248,856 $ 167,377 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
(a) All years have been adjusted to reflect the impact of operating properties sold during the six months ended June 30, 2003 and the year ended December 31, 2002 and properties classified as held-for-sale as of June 30, 2003 which are reflected in discontinued operations in the Consolidated Statements of Operations. This reclassification has no effect on the Company's reported net income or net income per common share. 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 Current Report on Form 8-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 of Annual Report on Form 10-K. 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. 1 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 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. 2 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 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 Current Report on Form 8-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. Intangible Assets - ----------------- The Company allocates the purchase price of properties to net tangible and identified intangible assets (included in Other Assets) acquired based on fair values. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) the Company's estimate of the fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancellable term of the lease. Capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancellable terms of the respective leases. Capitalized below-market lease values amortized as an increase of rental income over the remaining non-cancellable terms of the respective leases, including any fixed-rate renewal periods. The aggregate value of other intangibles acquired is measured based on the difference between (i) the property valued with in-place leases adjusted to market rental rates and (ii) the property valued as if it was vacant. The Company allocates a portion of the purchase price to lease origination costs. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, and includes leasing commissions, legal and other related expenses. This intangible asset is amortized to expense over the remaining term of the respective leases. Company estimates of value are made using methods similar to those used by independent appraisers. Factors considered by the Company in their analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from three to twelve months. 3 The total amount of these other intangible assets is further allocated to tenant relationships and in-place leases based on the Company's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the respective tenant. Characteristics considered by the Company in allocating value to its tenant relationships include the nature and extent of the Company's business relationship with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors. The value of tenant relationship intangibles is amortized over the remaining initial lease term and renewals, but in no event longer than the remaining depreciable life of the building. The value of in-place leases is amortized over the remaining non-cancellable term of the respective leases and any fixed-rate renewal periods. In the event that a tenant terminates its lease, the unamortized portion of each intangible, including market rate adjustments, lease origination costs, in-place lease values and tenant relationship values, would be charged to expense. 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 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. 4 RESULTS OF OPERATIONS Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001
Year Ended December 31, ------------------------ Dollar Percent 2002 2001 Change Change --------- -------- ---------- -------- (amounts in thousands) --------------------------------------- Revenue: Rents $249,671 $229,788 $ 19,883 8.7% Tenant reimbursements 33,287 32,061 1,226 3.8% Other 9,703 10,389 (686) -6.6% -------- -------- ---------- -------- Total revenue 292,661 272,238 20,423 7.5% Operating Expenses: Property operating expenses 75,520 71,221 4,299 6.0% Real estate taxes 25,370 22,597 2,773 12.3% Interest 63,522 67,496 (3,974) -5.9% Depreciation and amortization 56,715 67,777 (11,062) -16.3% Administrative expenses 14,804 15,177 (373) -2.5% Non-recurring charges - 6,600 (6,600) - -------- -------- ---------- -------- Total operating expenses 235,931 250,868 (14,937) -6.0% -------- -------- ---------- -------- Income from continuing operations before equity in income of real estate ventures, net gain on sales and minority interest 56,730 21,370 35,360 165.5% 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 57,717 24,138 33,579 139.1% Net gain on sales of interest in real estate - 4,524 (4,524) -100.0% Minority interest (9,298) (7,842) (1,456) -18.6% -------- -------- ---------- -------- Income from continuing operations 48,419 20,820 27,599 132.6% Income from discontinued operations, net of minority interest 14,565 12,902 1,663 12.9% -------- -------- ---------- -------- Net income $ 62,984 $ 33,722 $29,262.00 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:
Year Ended December 31, ------------------------- Dollar Percent 2002 2001 Change Change -------- -------- ------- --------- (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 $292.7 million for 2002 as compared to $272.2 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 $5.4 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 $9.7 million in 2002 from $10.4 million in 2001 primarily due to reduced interest income earned in 2002 as compared to 2001. 5 Property operating expenses increased to $75.5 million in 2002 as compared to $71.2 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 $25.4 million in 2002 as compared to $22.6 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 $67.5 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 $51.2 million in 2002 as compared to $63.3 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 $5.5 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. 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 $7.8 million in 2001, primarily due to increased results of continuing operations in 2002 as compared to 2001. Discontinued operations increased from $14.6 million in 2002 as compared to $12.9 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. 6 Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000
Year Ended December 31, -------------------------- Dollar Percent 2001(a) 2000 Change Change --------- --------- -------- ------- (amounts in thousands) ----------------------------------------- Revenue: Rents $ 229,788 $ 214,661 $ 15,127 7.0% Tenant reimbursements 32,061 29,440 2,621 8.9% Other 10,389 11,394 (1,005) -8.8% --------- --------- -------- ----- Total revenue 272,238 255,495 16,743 6.6% Operating Expenses: Property operating expenses 71,221 62,592 8,629 13.8% Real estate taxes 22,597 21,283 1,314 6.2% Interest 67,496 64,783 2,713 4.2% Depreciation and amortization 67,777 58,551 9,226 15.8% Administrative expenses 15,177 14,194 983 6.9% Non-recurring charges 6,600 - 6,600 - --------- --------- -------- ----- Total operating expenses 250,868 221,403 29,465 13.3% --------- --------- -------- ----- Income from continuing operations before equity in income of real estate ventures, net gain on sales, and minority interest 21,370 34,092 (12,722) -37.3% Equity in income of real estate ventures 2,768 2,790 (22) -0.8% --------- --------- -------- ----- Income from continuing operations before net gain on sales and minority interest 24,138 36,882 (12,744) -34.6% Net gain on sales of interest in real estate 4,524 11,638 (7,114) -61.1% Minority interest (7,842) (8,846) 1,004 11.3% --------- --------- -------- ----- Income from continuing operations 20,820 39,674 (18,854) -47.5% Income from discontinued operations, net of minority interest 12,902 12,484 418 3.3% --------- --------- -------- ----- 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 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 Percent 2001 2000 Change Change --------- --------- ------- ------ (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% ========= ========= ======= =====
7 Revenue increased to $272.2 million for 2001 as compared to $255.5 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 $5.4 million in 2001 and $5.9 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 $10.4 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 $71.2 million in 2001 as compared to $62.6 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 $22.6 million in 2001 as compared to $21.3 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 $67.5 million in 2001 as compared to $64.7 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 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 $63.3 million in 2001 as compared to $55.8 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 $2.8 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 $7.8 million in 2001 as compared to $8.8 million in 2000, primarily due to the $6.6 million non-recurring charge in 2001and decreased gains on sales of interests in real estate. 8 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 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%. 9 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%. 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 $17.75 per share. Under the share repurchase program, the Company has the authority to repurchase an additional 762,000 shares. No time limit has been placed on the duration of the share repurchase program. The following table summarizes the share repurchases during the three years ended December 31, 2002:
Years Ended December 31, -------------------------------- 2002 2001 2000 -------- -------- -------- Repurchased amount (shares) 491,074 373,713 957,729 Repurchased amount ($, in thousands) $ 11,053 $ 7,294 $ 15,277 Average price per share $ 22.51 $ 19.52 $ 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 $ - 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. 10 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. 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 and minority interest: Continuing operations $ 57,717 $ 24,138 Discontinued operations 6,857 13,682 ----------- ----------- 64,574 37,820 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 Gain included in equity in income of real estate ventures - (785) ----------- ----------- Funds from operations before minority interest $ 125,760 $ 119,584 =========== =========== Weighted-average Common Shares (including Common Share equivalents) and Operating Partnership units 46,928,420 47,297,574 =========== ===========
11 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 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 the fair value of long term debt of $27.6 million and a 1% decrease in actual interest rates would result in an increase in the fair value of long term debt 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 $2.9 million in interest expense per year and a 1% decrease would reduce interest expense by $2.9 million per year. 12 Item 15. Financial Statements and Schedules (a) 1. and 2. Financial Statements and Schedules The financial statements and schedules listed below are filed as part of this current report on the pages indicated.
Index to Financial Statements and Schedules ------------------------------------------- Page ---- Report of Independent Auditors...................................................................F-1 Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001........................F-2 Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000..................................................................................F-3 Consolidated Statements of Beneficiaries' Equity and Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000...........................................F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000..................................................................................F-5 Notes to Consolidated Financial Statements.......................................................F-6 Schedule II - Valuation and Qualifying Accounts..................................................F-26 Schedule III - Real Estate and Accumulated Depreciation..........................................F-27
13 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. Also, as discussed in Note 21 to the consolidated financial statements, on January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. /s/ KPMG LLP Philadelphia, Pennsylvania February 26, 2003, except as to Notes 9, 12, 13 and 21 which are dated as of June 30, 2003 F-1 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. F-2 BRANDYWINE REALTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share information)
Year ended December 31, ------------------------------------------ 2002 2001 2000 -------- -------- -------- Revenue: Rents $249,671 $229,788 $214,661 Tenant reimbursements 33,287 32,061 29,440 Other 9,703 10,389 6,958 -------- -------- -------- Total revenue 292,661 272,238 251,059 Operating Expenses: Property operating expenses 75,520 71,221 58,291 Real estate taxes 25,370 22,597 21,283 Interest 63,522 67,496 64,746 Depreciation and amortization 56,715 67,777 57,917 Management fees - - 10,655 Administrative expenses 14,804 15,177 4,249 Non-recurring charges - 6,600 - -------- -------- -------- Total operating expenses 235,931 250,868 217,141 -------- -------- -------- 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 56,730 21,370 33,918 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 57,717 24,138 36,879 Net gains on sales of interests in real estate - 4,524 11,638 -------- -------- -------- Income before minority interest 57,717 28,662 48,517 Minority interest attributable to continuing operations (9,298) (7,842) (8,843) -------- -------- -------- Income from continuing operations 48,419 20,820 39,674 Discontinued operations: Income from discontinued operations 6,857 13,682 13,239 Net gain on disposition of discontinued operations 8,562 - - Minority interest (854) (780) (755) -------- -------- -------- Income from discontinued operations 14,565 12,902 12,484 -------- -------- -------- 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 $ 0.99 $ 0.21 $ 0.77 Discontinued operations 0.41 0.36 0.35 -------- -------- -------- $ 1.40 $ 0.57 $ 1.12 ======== ======== ======== Diluted earnings per Common Share: Continuing operations $ 0.98 $ 0.21 $ 0.77 Discontinued operations 0.41 0.36 0.35 -------- -------- -------- $ 1.39 $ 0.57 $ 1.12 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 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 Par Value of Number of Par Value of Number of Preferred A Preferred A Preferred B Preferred B Common Shares Shares Shares Shares Shares ----------- ------------ ----------- ------------ --------- BALANCE, January 1, 2000 750,000 $ 8 4,375,000 $ 44 36,372,590 Comprehensive income: Net income Other comprehensive income: Unrealized loss on available-for-sale securities Total other comprehensive income Total comprehensive income Vesting of Restricted Stock 106,453 Repurchase of Common Shares (957,729) Employee stock loans used to purchase Common Shares 160,000 Payment/forgiveness of employee stock loans Accretion of Preferred Share discount Preferred Share distributions Distributions ($1.62 per share) --------- --------- --------- --------- ---------- BALANCE, December 31, 2000 750,000 8 4,375,000 44 35,681,314 Comprehensive income: Net income Other comprehensive income: Cumulative effect of adopting SFAS 133 Unrealized loss on derivative financial instruments Unrealized gain on available-for-sale securities Total other comprehensive income Total comprehensive income Vesting of Restricted Stock 175,411 Repurchase of Common Shares (373,713) Employee stock loans used to purchase Common Shares 71,276 Payment/forgiveness of employee stock loans Accretion of Preferred Share discount Exercise of warrants/options 86,647 Preferred Share distributions Distributions ($1.70 per share) --------- --------- ---------- ------------ --------- BALANCE, December 31, 2001 750,000 8 4,375,000 44 35,640,935 Comprehensive income: Net income Other comprehensive income: Unrealized loss on derivative financial instruments Unrealized gain on available-for-sale securities Total other comprehensive income Total comprehensive income Vesting of Restricted Stock 76,454 Repurchase of Common Shares (491,074) Employee stock loans used to purchase Common Shares Payment/forgiveness of employee stock loans Accretion of Preferred Share discount Amortization of stock options Exercise of warrants/options Preferred Share distributions Distributions ($1.76 per share) --------- --------- --------- ------- ---------- BALANCE, December 31, 2002 750,000 $ 8 4,375,000 $ 44 35,226,315 ========= ========= ========= ======= ==========
[RESTUBBED]
Par Value of Common Additional Paid Employee Shares in Capital Stock Loans Share Warrants -------------- --------------- ----------- -------------- BALANCE, January 1, 2000 $ 364 $ 863,962 $ (4,640) $ 908 Comprehensive income: Net income Other comprehensive income: Unrealized loss on available-for-sale securities Total other comprehensive income Total comprehensive income Vesting of Restricted Stock 2,897 Repurchase of Common Shares (9) (15,268) Employee stock loans used to purchase Common Shares 2 2,498 (2,500) Payment/forgiveness of employee stock loans 303 Accretion of Preferred Share discount 286 Preferred Share distributions Distributions ($1.62 per share) ----------- -------------- ----------- ---------- BALANCE, December 31, 2000 357 854,375 (6,837) 908 Comprehensive income: Net income Other comprehensive income: Cumulative effect of adopting SFAS 133 Unrealized loss on derivative financial instruments Unrealized gain on available-for-sale securities Total other comprehensive income Total comprehensive income Vesting of Restricted Stock 2 3,983 Repurchase of Common Shares (4) (7,290) Employee stock loans used to purchase Common Shares 1 1,385 (1,386) Payment/forgiveness of employee stock loans 2,524 Accretion of Preferred Share discount 1,476 Exercise of warrants/options (17) (507) Preferred Share distributions Distributions ($1.70 per share) ----------- -------------- ----------- ---------- BALANCE, December 31, 2001 356 853,912 (5,699) 401 Comprehensive income: Net income Other comprehensive income: Unrealized loss on derivative financial instruments Unrealized gain on available-for-sale securities Total other comprehensive income Total comprehensive income Vesting of Restricted Stock 1 1,895 Repurchase of Common Shares (5) (11,048) Employee stock loans used to purchase Common Shares Payment/forgiveness of employee stock loans 1,658 Accretion of Preferred Share discount 1,476 Amortization of stock options 43 Exercise of warrants/options (578) Preferred Share distributions Distributions ($1.76 per share) --------- ------------ ---------- ---------- BALANCE, December 31, 2002 $ 352 $ 845,700 $ (4,041) $ 401 ========= ============ ========== ==========
[RESTUBBED]
Accumulated Other Cumulative Comprehensive Cumulative Earnings Income (Loss) Distributions Total ---------- ----------------- ------------- ---------- BALANCE, January 1, 2000 $ 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 2,897 Repurchase of Common Shares (15,277) Employee stock loans used to purchase Common Shares - Payment/forgiveness of employee stock loans 303 Accretion of Preferred Share discount (286) - Preferred Share distributions (11,906) (11,906) Distributions ($1.62 per share) (58,528) (58,528) ---------- -------- ----------- ---------- BALANCE, December 31, 2000 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 3,985 Repurchase of Common Shares (7,294) Employee stock loans used to purchase Common Shares - Payment/forgiveness of employee stock loans 2,524 Accretion of Preferred Share discount (1,476) - Exercise of warrants/options (524) Preferred Share distributions (11,906) (11,906) Distributions ($1.70 per share) (61,663) (61,663) ---------- -------- ----------- ---------- BALANCE, December 31, 2001 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 1,896 Repurchase of Common Shares (11,053) Employee stock loans used to purchase Common Shares - Payment/forgiveness of employee stock loans 1,658 Accretion of Preferred Share discount (1,476) - Amortization of stock options 43 Exercise of warrants/options (578) Preferred Share distributions (11,906) (11,906) Distributions ($1.76 per share) (62,942) (62,942) ---------- --------- ----------- ---------- BALANCE, December 31, 2002 $ 225,010 $ (6,402) $ (374,629) $ 686,443 ========== ========= =========== ==========
The accompanying notes are an intergral part of these consolidated financial statements. 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 3,790 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 - - 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 paid to shareholders (75,022) (72,534) (69,010) Distributions to minority interest holders in excess of income allocated (408) (2,045) (945) --------- --------- --------- 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 intergral part of these consolidated financial statements. F-5 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 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. F-6 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. 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. F-7 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 - ----------------- The Company allocates the purchase price of properties to net tangible and identified intangible assets (included in Other Assets) acquired based on fair values. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) the Company's estimate of the fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancellable term of the lease. Capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancellable terms of the respective leases. Capitalized below-market lease values are amortized as an increase of rental income over the remaining non-cancellable terms of the respective leases, including any fixed-rate renewal periods. The aggregate value of other intangibles acquired is measured based on the difference between (i) the property valued with in-place leases adjusted to market rental rates and (ii) the property valued as if it was vacant. The Company allocates a portion of the purchase price to lease origination costs. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, includes leasing commissions, legal and other related expenses. This intangible asset is amortized to expense over the remaining term of the respective leases. Company estimates of value are made using methods similar to those used by independent appraisers. Factors considered by the Company in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which primarily range from three to twelve months. F-8 The total amount of these other intangible assets is further allocated to tenant relationships and in-place leases based on the Company's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the respective tenant. Characteristics considered by the Company in allocating value to its tenant relationships include the nature and extent of the Company's business relationship with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors. The value of tenant relationship intangibles is amortized over the remaining initial lease term and renewals, but in no event longer than the remaining depreciable life of the building. The value of in-place leases is amortized over the remaining non-cancellable term of the respective leases and any fixed-rate renewal periods. In the event that a tenant terminates its lease, the unamortized portion of each intangible, including market rate adjustments, lease origination costs, in-place lease values and tenant relationship values, would be charged to expense. 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. F-9 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 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. F-10 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. 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 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 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 F-11 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 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 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. F-12 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 allocated to Common Shares 22,082 41,314 Pro forma net income per Common Share (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 for 2000 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. 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. F-13 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 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): F-14
1000 Christiana Christiana Christiana Chesterbrook Center Center Center Two Tower Boulevard Operating Operating Operating Bridge Partnership Company I, LLC Company II, LLC Company III, LLC Associates ------------ -------------- --------------- ---------------- ---------- (a) (a) (a) Assets Net property $ 31,588 $ - $ - $ - $ 9,805 Other assets 3,417 - - - 743 -------- -------- ------- ------- -------- Total assets $ 35,005 $ - $ - $ - $ 10,548 ======== ======== ======= ======= ======== Liabilities and Equity Other liabilities $ 269 $ - $ - $ - $ 51 Debt 28,178 - - - 7,855 -------- -------- ------- ------- -------- Total liabilities 28,447 - - - 7,906 Equity 6,558 - - - 2,642 -------- -------- ------- ------- -------- Total liabilities and equity $ 35,005 $ - $ - $ - $ 10,548 ======== ======== ======= ======= ======== Revenue Rents $ 5,086 $ 1,089 $ 511 $ - $ 1,857 Tenant reimbursements and other 470 48 24 - 469 -------- -------- ------- ------- -------- Total revenue 5,556 1,137 535 - 2,326 Operating Expenses Property operating expenses 1,128 290 111 - 796 Real estate taxes 383 27 31 - 160 Interest 1,949 459 257 - 550 Depreciation and amortization 897 222 107 - 368 Administrative expenses 7 - - - - -------- -------- ------- ------- -------- Total operating expenses 4,364 998 506 - 1,874 -------- -------- ------- ------- -------- Net Income $ 1,192 $ 139 $ 29 $ - $ 452 ======== ======== ======= ======= ========
[RESTUBBED]
Four Tower Five Tower Six Tower Eight Tower Tower Bridge Bridge Bridge Bridge Bridge Inn Associates Associates Associates Associates Associates ---------- ---------- ---------- ---------- ---------- Assets Net property $ 11,000 $ 41,373 $ 13,029 $ 56,732 $ 14,303 Other assets 3,453 4,314 3,991 832 2,105 -------- -------- -------- -------- -------- Total assets $ 14,453 $ 45,687 $ 17,020 $ 57,564 $ 16,408 ======== ======== ======== ======== ======== Liabilities and Equity Other liabilities $ 305 $ 441 $ 440 $ 1,244 $ 197 Debt 11,000 27,600 15,951 35,782 11,700 -------- -------- -------- -------- -------- Total liabilities 11,305 28,041 16,391 37,026 11,897 Equity 3,148 17,646 629 20,538 4,511 -------- -------- -------- -------- -------- Total liabilities and equity $ 14,453 $ 45,687 $ 17,020 $ 57,564 $ 16,408 ======== ======== ======== ======== ======== Revenue Rents $ 2,372 $ 5,238 $ 3,027 $ 277 $ 3,876 Tenant reimbursements and other 418 239 521 - 203 -------- -------- -------- -------- -------- Total revenue 2,790 5,477 3,548 277 4,079 Operating Expenses Property operating expenses 620 1,008 635 487 2,279 Real estate taxes 144 349 313 182 193 Interest 728 1,839 1,252 801 994 Depreciation and amortization 732 222 835 882 711 Administrative expenses 163 174 239 14 - -------- -------- -------- -------- -------- Total operating expenses 2,387 3,592 3,274 2,366 4,177 -------- -------- -------- -------- -------- Net Income $ 403 $ 1,885 $ 274 $ (2,089) $ (98) ======== ======== ======== ======== ========
[RESTUBBED]
TBFA PJP PJP Partners, Building Building LP Two, LC Five, LC Total --------- -------- -------- ---------- Assets Net property $ 3,334 $ 5,513 $ 6,875 $ 193,552 Other assets - 560 748 20,163 ------- ------- ------- --------- Total assets $ 3,334 $ 6,073 $ 7,623 $ 213,715 ======= ======= ======= ========= Liabilities and Equity Other liabilities $ - $ 93 $ 146 $ 3,186 Debt - 5,172 5,891 149,129 ------- ------- ------- --------- Total liabilities - 5,265 6,037 152,315 Equity 3,334 808 1,586 61,400 ------- ------- ------- --------- Total liabilities and equity $ 3,334 $ 6,073 $ 7,623 $ 213,715 ======= ======= ======= ========= Revenue Rents $ - $ 414 $ 750 $ 24,497 Tenant reimbursements and other - 116 214 2,722 ------- ------- ------- --------- Total revenue - 530 964 27,219 Operating Expenses Property operating expenses - 274 308 7,936 Real estate taxes - 41 50 1,873 Interest - 184 199 9,212 Depreciation and amortization - 338 217 5,531 Administrative expenses - - - 597 ------- ------- ------- --------- Total operating expenses - 837 774 25,149 ------- ------- ------- --------- Net Income $ - $ (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. F-15 As of December 31, 2002, the aggregate maturities of non-recourse debt payable to third-parties is as follows (in thousands): 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. 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. F-16 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. 9. DISCONTINUED OPERATIONS ----------------------- As of December 31, 2002, the Company has designated two properties containing 127,000 net rentable square feet as "held-for-sale" under the provision of SFAS No. 144. The following table summarizes the assets held-for-sale and liabilities related to those assets 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 ======= Tenant security deposits and deferred rents $ 20 ======= Income from discontinued operations in the accompanying statements of operations for the years ended December 31, 2002, 2001 and 2000 relates to 43 properties, containing 2.3 million net rentable square feet, sold during the year ended December 31, 2002 and the two properties held-for-sale at December 31, 2002. In addition, income from discontinued operations for the years ended December 31, 2002, 2001 and 2000 includes the 2002, 2001 and 2000 results of operations of one property, containing 31,000 net rentable square feet, sold during the six-month period ended June 30, 2003 and six properties, containing 257,000 net rentable square feet, identified as held-for-sale as of June 30, 2003. The following table summarizes the results of operations for the years ended December 31, 2002, 2001 and 2000 in the accompanying statements of operations (in thousands): F-17
Year Ended December 31, --------------------------------- 2002 2001 2000 ------- ------- ------- Revenue: Rents $12,970 $32,992 $30,799 Tenant reimbursements 2,120 5,190 5,066 Other 662 405 160 ------- ------- ------- Total revenue 15,752 38,587 36,025 Expenses: Property operating expenses 4,112 9,322 8,774 Real estate taxes 2,069 5,171 4,917 Depreciation and amortization 2,049 10,412 9,095 Impairment loss on assets held-for-sale 665 - - ------- ------- ------- Total operating expenses 8,895 24,905 22,786 Income from discontinued operations before net gain on sale of interests in real estate and minority interest 6,857 13,682 13,239 Net gain on sales of interest in real estate 8,562 - - Minority interest (854) (780) (755) ------- ------- ------- Income from discontinued operations $14,565 $12,902 $12,484 ======= ======= =======
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 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. F-18 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 Weighted- of Shares Average Grant Price Range Under Exercise ----------------- Option Price 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 =========
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. F-19 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. Segment information for the three years ended December 31, 2002, 2001 and 2000, excluding properties classified as discontinued operations, is as follows (in thousands):
Pennsylvania New Jersey Virginia Corporate Total ------------ ---------- ---------- ---------- ---------- 2002: Real estate investments, at cost: Operating properties $1,169,919 $ 506,818 $ 213,272 $ - $1,890,009 Construction-in-progress 51,469 3,619 3,039 - 58,127 Land held for development 25,051 10,023 8,001 - 43,075 ---------- ---------- ---------- ---------- ---------- $1,246,439 $ 520,460 $ 224,312 $ - $1,991,211 ========== ========== ========== ========== ========== Assets held for sale $ - $ 7,666 $ - $ - $ 7,666 Total revenue $ 179,646 $ 84,229 $ 26,834 $ 1,952 $ 292,661 Property operating expenses and real estate taxes 60,689 30,634 9,567 - 100,890 ---------- ---------- ---------- ---------- ---------- Net operating income $ 118,957 $ 53,595 $ 17,267 $ 1,952 $ 191,771 ========== ========== ========== ========== ========== 2001: Real estate investments, at cost: Operating properties $1,075,786 $ 627,919 $ 189,334 $ - $1,893,039 Construction-in-progress 94,662 6,835 9,881 - 111,378 Land held for development 23,628 7,892 7,765 - 39,285 ---------- ---------- ---------- ---------- ---------- $1,194,076 $ 642,646 $ 206,980 $ - $2,043,702 ========== ========== ========== ========== ========== Total revenue $ 161,278 $ 80,927 $ 27,503 $ 2,530 $ 272,238 Property operating expenses and real estate taxes 53,669 30,177 9,972 - 93,818 ---------- ---------- ---------- ---------- ---------- Net operating income $ 107,609 $ 50,750 $ 17,531 $ 2,530 $ 178,420 ========== ========== ========== ========== ========== 2000: Real estate investments, at cost: Operating properties $ 867,634 $ 588,630 $ 298,631 $ - $1,754,895 Construction-in-progress 42,630 9,339 2,342 - 54,311 Land held for development 28,338 7,552 8,803 - 44,693 ---------- ---------- ---------- ---------- ---------- $ 938,602 $ 605,521 $ 309,776 $ - $1,853,899 ========== ========== ========== ========== ========== Total revenue $ 135,986 $ 72,572 $ 40,151 $ 2,350 $ 251,059 Property operating expenses and real estate taxes 44,251 22,568 12,755 - 79,574 ---------- ---------- ---------- ---------- ---------- Net operating income $ 91,735 $ 50,004 $ 27,396 $ 2,350 $ 171,485 ========== ========== ========== ========== ==========
F-20 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 $ 191,771 $ 178,420 $ 171,485 Less: Interest expense 63,522 67,496 64,746 Depreciation and amortization 56,715 67,777 57,917 Management fees - - 10,655 Administrative expenses 14,804 15,177 4,249 Non-recurring charges - 6,600 - Minority interest attributable to continuing operations 9,298 7,842 8,843 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 $ 48,419 $ 20,820 $ 39,674 ========= ========= =========
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):
For the year ended December 31, --------------------------------------------------------------------------------------- 2002 2001 2000 --------------------------- --------------------------- --------------------------- Basic Diluted Basic Diluted Basic Diluted ------------ ------------ ------------ ------------ ------------ ------------ Income from continuing operations $ 48,419 $ 48,419 $ 20,820 $ 20,820 $ 39,674 $ 39,674 Income from discontinued operations 14,565 14,565 12,902 12,902 12,484 12,484 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 $ 0.99 $ 0.98 $ 0.21 $ 0.21 $ 0.77 $ 0.77 Discontinued operations 0.41 0.41 0.36 0.36 0.35 0.35 ------------ ------------ ------------ ------------ ------------ ------------ $ 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. F-21 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. 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. 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, excluding properties included in discontinued operations, are as follows (in thousands): F-22 Year Minimum Rent ------------------- ------------ 2003 $ 250,587 2004 217,292 2005 177,390 2006 141,421 2007 113,500 2008 and thereafter 417,027 ----------- $ 1,317,217 =========== 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):
1st 2nd 3rd 4th Quarter(a) Quarter Quarter Quarter(b) ----------- --------- -------- ----------- 2002: - ---- Total revenue $ 69,445 $ 72,914 $ 74,787 $ 75,515 Net income 23,469 12,800 13,968 12,747 Income allocated to Common Shares 20,492 9,823 10,992 9,771 Earnings per Common Share Basic $ 0.56 $ 0.26 $ 0.30 $ 0.27 Diluted $ 0.56 $ 0.26 $ 0.30 $ 0.27 2001: - ---- Total revenue $ 65,536 $ 69,547 $ 69,688 $ 67,467 Net income 9,140 7,423 10,271 6,888 Income allocated to Common Shares 6,163 4,446 7,294 3,913 Earnings per Common Share Basic $ 0.16 $ 0.14 $ 0.19 $ 0.10 Diluted $ 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. The summation of quarterly earnings per share amounts do not necessarily equal year to date amounts. F-23 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 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. F-24 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 Accumulatged 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) ======= ======= =======
21. SUBSEQUENT EVENTS ----------------- The accompanying financial statements and related notes for each of the years in the three-year period ended December 31, 2002 have been revised to reflect certain subsequent events that have occurred through June 30, 2003 as follows: During the six-month period ended June 30, 2003, the Company identified six additional properties as held for sale and sold one property. The operating results related to these properties have been reclassified from continuing operations to discontinued operations for each of the years in the three-year period ended December 31, 2002 to comply with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The following notes have been revised to reflect these reclassifications: Note 9, Discontinued Operations; Note 12, Segment Information; Note 13, Net Income Per Common Share; Note 16, Operating Leases; and Note 18, Summary of Interim Results (Unaudited). As of January 1, 2003, the Company adopted SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. In adopting SFAS 145, the Company has reclassified an extraordinary item recorded during 2001 relating to the write-off of $1.1 million of unamortized deferred financing costs as interest expense. The Company, under SFAS No. 141, Business Combinations, has clarified its accounting policies in Note 2 regarding the accounting for intangible assets. F-25 Brandywine Realty Trust Schedule II Valuation and Qualifying Accounts (in thousands)
Additions Balance at ---------- Balance Beginning Charged to at End Description of Period expense Deductions of Period - --------------------------------- ---------- ---------- ---------- --------- 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 ======= ======= ======= =======
F-26 Brandywine Realty Trust Schedule III Real Estate and Accumulated Depreciation (in thousands)
Initial Cost ------------------------------------- Net Improvements (Retirements) Encumberances at Building and Since City State December 31, 2002 Land Improvements Acquisition ---------------- ----- ----------------- -------- ------------ ------------- One Greentree Centre Marlton NJ - 345 4,440 269 Three Greentree Centre Marlton NJ - 323 6,024 24 Two Greentree Centre Marlton NJ - 264 4,693 (23) 110 Summit Drive Exton PA - 403 1,647 157 1155 Business Center Drive Horsham PA 2,541 1,029 4,124 (191) 120 West Germantown Pike Plymouth Meeting PA - 685 2,773 263 1336 Enterprise Drive West Goshen PA - 731 2,946 39 140 West Germantown Pike Plymouth Meeting PA - 481 1,976 235 18 Campus Boulevard Newtown Square PA 3,429 786 3,312 38 2240/50 Butler Pike Plymouth Meeting PA - 1,104 4,627 586 2260 Butler Pike Plymouth Meeting PA - 661 2,727 149 33 Street Road - Greenwood Square I Bensalem PA - 851 3,407 300 33 Street Road - Greenwood Square II Bensalem PA - 1,126 4,511 995 33 Street Road - Greenwood Square III Bensalem PA - 350 1,401 37 456 Creamery Way Exton PA - 635 2,548 - 457 Haddonfield Road Cherry Hill NJ 11,135 2,142 9,120 69 468 Creamery Way Exton PA - 527 2,112 (37) 486 Thomas Jones Way Exton PA - 806 3,256 243 500 Enterprise Road Horsham PA - 1,303 5,188 (790) 500 North Gulph Road King of Prussia PA - 1,303 5,201 591 650 Dresher Road Horsham PA 1,767 636 2,501 314 6575 Snowdrift Road Allentown PA - 601 2,411 473 700 Business Center Drive Horsham PA 1,509 550 2,201 195 7248 Tilghman Street Allentown PA - 731 2,969 210 7310 Tilghman Street Allentown PA - 553 2,246 787 800 Business Center Drive Horsham PA 2,304 896 3,585 19 8000 Lincoln Drive Marlton NJ - 606 2,887 260 One Progress Avenue Horsham PA - 1,399 5,629 144 One Righter Parkway Talleyville DE 10,925 2,545 10,195 282 1 Foster Avenue Gibbsboro NJ - 93 364 35 10 Foster Avenue Gibbsboro NJ - 244 971 69 100 Berwyn Park Berwyn PA 7,161 1,180 7,290 168 100 Commerce Drive Newark DE - 1,160 4,633 354 100 Katchel Blvd Reading PA - 1,881 7,423 242 1000 Atrium Way Mt. Laurel NJ - 2,061 8,180 384 1000 East Lincoln Drive Marlton NJ - 264 1,059 108 1000 Howard Boulevard Mt. Laurel NJ 4,090 2,298 9,288 395 1000/2000 West Lincoln Drive Marlton NJ - 575 3,568 65) 10000 Midlantic Drive Mt. Laurel NJ 7,415 3,206 12,857 408 100-300 Gundy Drive Reading PA - 6,495 25,180 5,633 1007 Laurel Oak Road Voorhees NJ - 1,563 6,241 17 105/140 Terry Drive Newtown PA - 2,299 8,238 2,089 111 Presidential Boulevard Bala Cynwyd PA - 5,419 21,612 625 1120 Executive Boulevard Mt. Laurel NJ - 2,074 8,415 517 15000 Midlantic Drive Mr. Laurel NJ 6,898 3,061 12,254 8 2 Foster Avenue Gibbsboro NJ - 185 730 23 20 East Clementon Road Gibbsboro NJ - 769 3,055 222 200 Berwyn Park Berwyn PA 9,414 1,533 9,460 362 2000 Midlantic Drive Mt. Laurel NJ 9,585 2,202 8,823 400 220 Commerce Drive Fort Washington PA - 1,086 4,338 544 300 Berwyn Park Berwyn PA 13,151 2,206 13,422 234 300 Welsh Road - Building I Horsham PA 2,513 894 3,572 441 300 Welsh Road - Building II Horsham PA 1,067 396 1,585 102 3000 West Lincoln Drive Marlton NJ - 569 2,293 119 321 Norristown Road Lower Gwyned PA - 1,289 5,176 753 323 Norristown Road Lower Gwyned PA - 1,685 6,751 365 4 Foster Avenue Gibbsboro NJ - 183 726 17 4000 Midlantic Drive Mt. Laurel NJ 3,205 714 5,085 (1,979) 4000/5000 West Lincoln Drive Marlton NJ - 877 3,526 382 5 Foster Avenue Gibbsboro NJ - 8 32 25 5 U.S. Avenue Gibbsboro NJ - 21 81 2 50 East Clementon Road Gibbsboro NJ - 114 964 4
F-27 [RESTUBBED]
Gross Amount at Which Carried December 31, 2002 ---------------------------------------------------- Accumulated Depreciation at Building and December 31, Date of Date Depreciable Land Improvements Total(a) 2002(b) Construction Acquired Life ------- ------------ --------- --------------- ------------ -------- ----------- One Greentree Centre 345 4,709 5,054 2,519 1982 1986 40 Three Greentree Centre 323 6,048 6,371 3,707 1984 1986 40 Two Greentree Centre 264 4,670 4,934 2,830 1983 1986 40 110 Summit Drive 403 1,804 2,207 403 1985 1996 40 1155 Business Center Drive 1,029 3,933 4,962 1,141 1990 1996 40 120 West Germantown Pike 685 3,036 3,721 690 1984 1996 40 1336 Enterprise Drive 731 2,985 3,716 642 1990 1996 40 140 West Germantown Pike 481 2,211 2,692 614 1984 1996 40 18 Campus Boulevard 786 3,350 4,136 941 1990 1996 40 2240/50 Butler Pike 1,104 5,213 6,317 1,580 1984 1996 40 2260 Butler Pike 661 2,876 3,537 717 1984 1996 40 33 Street Road - Greenwood Square I 851 3,707 4,558 862 1985 1996 40 33 Street Road - Greenwood Square II 1,126 5,506 6,632 1,532 1985 1996 40 33 Street Road - Greenwood Square III 350 1,438 1,788 332 1985 1996 40 456 Creamery Way 635 2,550 3,185 694 1987 1996 40 457 Haddonfield Road 2,142 11,289 13,431 3,455 1990 1996 40 468 Creamery Way 527 2,075 2,602 501 1990 1996 40 486 Thomas Jones Way 806 3,499 4,305 1,122 1990 1996 40 500 Enterprise Road 1,303 4,398 5,701 1,092 1990 1996 40 500 North Gulph Road 1,303 5,792 7,095 1,395 1979 1996 40 650 Dresher Road 636 2,815 3,451 611 1984 1996 40 6575 Snowdrift Road 601 2,884 3,485 870 1988 1996 40 700 Business Center Drive 550 2,396 2,946 534 1986 1996 40 7248 Tilghman Street 731 3,179 3,910 839 1987 1996 40 7310 Tilghman Street 553 3,033 3,586 920 1985 1996 40 800 Business Center Drive 896 3,604 4,500 815 1986 1996 40 8000 Lincoln Drive 606 3,147 3,753 883 1983 1996 40 One Progress Avenue 1,399 5,773 7,172 1,368 1986 1996 40 One Righter Parkway 2,545 10,477 13,022 2,375 1989 1996 40 1 Foster Avenue 93 399 492 72 1972 1997 40 10 Foster Avenue 244 1,040 1,284 202 1983 1997 40 100 Berwyn Park 1,180 7,458 8,638 1,560 1986 1997 40 100 Commerce Drive 1,160 4,987 6,147 955 1989 1997 40 100 Katchel Blvd 1,881 7,665 9,546 1,650 1970 1997 40 1000 Atrium Way 2,061 8,564 10,625 1,714 1989 1997 40 1000 East Lincoln Drive 264 1,167 1,431 245 1981 1997 40 1000 Howard Boulevard 2,298 9,683 11,981 2,219 1988 1997 40 1000/2000 West Lincoln Drive 575 2,603 3,178 671 1982 1997 40 10000 Midlantic Drive 3,206 13,265 16,471 2,890 1990 1997 40 100-300 Gundy Drive 6,495 30,813 37,308 5,957 1970 1997 40 1007 Laurel Oak Road 1,563 6,258 7,821 1,166 1996 1997 40 105/140 Terry Drive 2,299 10,327 12,626 2,249 1974 1997 40 111 Presidential Boulevard 5,419 22,237 27,656 4,161 1974 1997 40 1120 Executive Boulevard 2,074 8,932 11,006 1,883 1987 1997 40 15000 Midlantic Drive 3,061 12,262 15,323 2,527 1991 1997 40 2 Foster Avenue 185 753 938 140 1974 1997 40 20 East Clementon Road 769 3,277 4,046 673 1986 1997 40 200 Berwyn Park 1,533 9,822 11,355 1,983 1987 1997 40 2000 Midlantic Drive 2,202 9,223 11,425 1,942 1989 1997 40 220 Commerce Drive 1,086 4,882 5,968 966 1974 1997 40 300 Berwyn Park 2,206 13,656 15,862 2,743 1989 1997 40 300 Welsh Road - Building I 894 4,013 4,907 991 1985 1997 40 300 Welsh Road - Building II 396 1,687 2,083 324 1985 1997 40 3000 West Lincoln Drive 569 2,412 2,981 519 1982 1997 40 321 Norristown Road 1,289 5,929 7,218 1,191 1972 1997 40 323 Norristown Road 1,685 7,116 8,801 1,429 1988 1997 40 4 Foster Avenue 183 743 926 138 1974 1997 40 4000 Midlantic Drive 714 3,106 3,820 638 1981 1997 40 4000/5000 West Lincoln Drive 877 3,908 4,785 845 1982 1997 40 5 Foster Avenue 8 57 65 7 1968 1997 40 5 U.S. Avenue 21 83 104 16 1987 1997 40 50 East Clementon Road 114 968 1,082 180 1986 1997 40
F-28 Brandywine Realty Trust Schedule III Real Estate and Accumulated Depreciation (in thousands)
Initial Cost ------------------------------------- Net Improvements (Retirements) Encumberances at Building and Since City State December 31, 2002 Land Improvements Acquisition ---------------- ----- ----------------- -------- ------------ ------------- 500 Office Center Drive Ft. Washington PA - 1,617 6,480 1,393 501 Office Center Drive Ft. Washington PA - 1,796 7,192 1,146 55 U.S. Avenue Gibbsboro NJ - 1,116 4,435 51 6 East Clementon Road Gibbsboro NJ - 1,345 5,366 269 655 Business Center Drive Horsham PA 1,808 544 2,529 458 7 Foster Avenue Gibbsboro NJ - 231 921 110 748 Springdale Drive Exton PA - 236 931 142 855 Springdale Drive Exton PA - 838 3,370 134 9000 Midlantic Drive Mt. Laurel NJ 6,200 1,472 5,895 23 9000 West Lincoln Drive Marlton NJ - 610 2,422 272 Five Eves Drive Marlton NJ - 703 2,819 649 Four A Eves Drive Marlton NJ - 539 2,168 198 Four B Eves Drive Marlton NJ - 588 2,369 86 King & Harvard Cherry Hill NJ - 1,726 1,069 2,193 Main Street - Piazza Voorhees NJ - 696 2,802 80 Main Street - Plaza 1000 Voorhees NJ - 2,729 10,931 2,219 Main Street - Promenade Voorhees NJ - 531 2,052 226 Main Street- CAM Voorhees NJ - 3 11 98 One South Union Place Cherry Hill NJ - 771 8,047 369 Two Eves Drive Marlton NJ - 818 3,461 124 1000 First Avenue King of Prussia PA 4,629 2,772 10,936 310 1009 Lenox Drive Lawrenceville NJ 13,728 4,876 19,284 2,526 1020 First Avenue King of Prussia PA 3,692 2,168 8,576 435 104 Windsor Center Drive East Windsor NJ - 977 3,918 1,006 1040 First Avenue King of Prussia PA 5,032 2,861 11,282 1,094 1060 First Avenue King of Prussia PA 4,515 2,712 10,953 6 1105 Berkshire Boulevard Reading PA - 1,115 4,510 451 1150 Berkshire Boulevard Reading PA - 435 1,748 257 14 Campus Boulevard Newtown Square PA 5,754 2,243 4,217 480 150 Corporate Center Drive Camp Hill PA - 964 3,871 161 160-180 West Germantown Pike East Norriton PA 5,409 1,603 6,418 546 1957 Westmoreland Street Richmond VA 2,861 1,062 4,241 284 200 Corporate Center Drive Camp Hill PA - 1,647 6,606 60 200 Nationwide Drive Harrisburg PA - 100 403 - 201 North Walnut Street Wilmington DE 23,557 10,359 41,509 462 2100-2108 West Laburnum Richmond VA 1,285 2,482 8,846 1.557 2120 Tomlynn Street Richmond VA 767 280 1,125 93 2130-2146 Tomlynn Street Richmond VA 906 353 1,416 1 2169-79 Tomlynn Street Richmond VA 1,123 422 1,695 75 2201 Dabney Street Richmond VA - 367 1,470 181 2201-2245 Tomlynn Street Richmond VA 2,811 1,020 4,067 402 2212-2224 Tomlynn Street Richmond VA 1,325 502 2,014 71 2221-2245 Dabney Road Richmond VA 1,372 530 2,123 27 2240 Dabney Road Richmond VA 682 264 1,059 8 2244 Dabney Road Richmond VA 1,411 551 2,203 1 2246 Dabney Road Richmond VA 1,167 455 1,822 1 2248 Dabney Road Richmond VA 1,382 511 2,049 139 2251 Dabney Road Richmond VA 1,036 387 1,552 84 2256 Dabney Road Richmond VA 936 356 1,427 44 2277 Dabney Road Richmond VA 1,302 507 2,034 1 2401 Park Drive Harrisburg PA - 182 728 75 2404 Park Drive Harrisburg PA - 167 668 129 2490 Boulevard of the Generals King of Prussia PA - 348 1,394 36 2511 Brittons Hill Road Richmond VA 3,131 1,201 4,820 93 2812 Emerywood Parkway Henrico VA 2,779 1,069 4,281 77 300 Arboretum Place Richmond VA 15,092 5,450 21,892 1,997 300 Corporate Center Drive Camp Hill PA - 4,823 19,301 316 301 North Walnut Street Wilmington DE 19,740 8,495 34,016 1,340 303 Fellowship Drive Mt. Laurel NJ 2,612 1,493 6,055 361 304 Harper Drive Mt. Laurel NJ 1,244 657 2,674 437 305 Fellowship Drive Mt. Laurel NJ 2,643 1,422 5,768 813 305 Harper Drive Mt. Laurel NJ 375 222 913 1
[RESTUBBED] F-29
Gross Amount at Which Carried December 31, 2002 --------------------------------------------------- Accumulated Depreciation at Building and December 31, Date of Date Depreciabl Land Improvements Total(a) 2002(b) Construction Acquired Life ------- ------------ --------- --------------- ------------ -------- ---------- 500 Office Center Drive 1,617 7,873 9,490 2,054 1985 1997 40 501 Office Center Drive 1,796 8,338 10,134 2,024 1985 1997 40 55 U.S. Avenue 1,116 4,486 5,602 836 1982 1997 40 6 East Clementon Road 1,345 5,635 6,980 1,132 1980 1997 40 655 Business Center Drive 544 2,987 3,531 741 1997 1997 40 7 Foster Avenue 231 1,031 1,262 194 1983 1997 40 748 Springdale Drive 236 1,073 1,309 262 1986 1997 40 855 Springdale Drive 838 3,504 4,342 756 1986 1997 40 9000 Midlantic Drive 1,472 5,918 7,390 1,222 1989 1997 40 9000 West Lincoln Drive 610 2,694 3,304 622 1983 1997 40 Five Eves Drive 703 3,468 4,171 898 1986 1997 40 Four A Eves Drive 539 2,366 2,905 621 1987 1997 40 Four B Eves Drive 588 2,455 3,043 556 1987 1997 40 King & Harvard 1,726 3,262 4,988 746 1997 40 Main Street - Piazza 696 2,882 3,578 635 1990 1997 40 Main Street - Plaza 1000 2,729 13,150 15,879 2,792 1988 1997 40 Main Street - Promenade 531 2,278 2,809 518 1988 1997 40 Main Street- CAM 3 109 112 21 1997 40 One South Union Place 771 8,416 9,187 2,039 1997 40 Two Eves Drive 818 3,585 4,403 853 1987 1997 40 1000 First Avenue 2,772 11,246 14,018 1,747 1980 1998 40 1009 Lenox Drive 4,876 21,810 26,686 4,034 1989 1998 40 1020 First Avenue 2,168 9,011 11,179 1,357 1984 1998 40 104 Windsor Center Drive 977 4,924 5,901 1,433 1987 1998 40 1040 First Avenue 2,861 12,376 15,237 2,252 1985 1998 40 1060 First Avenue 2,712 10,959 13,671 1,680 1987 1998 40 1105 Berkshire Boulevard 1,115 4,961 6,076 934 1987 1998 40 1150 Berkshire Boulevard 435 2,005 2,440 385 1979 1998 40 14 Campus Boulevard 2,243 4,697 6,940 1,452 1998 1998 40 150 Corporate Center Drive 964 4,032 4,996 710 1987 1998 40 160-180 West Germantown Pike 1,603 6,964 8,567 1,260 1982 1998 40 1957 Westmoreland Street 1,062 4,525 5,587 775 1975 1998 40 200 Corporate Center Drive 1,647 6,666 8,313 1,136 1989 1998 40 200 Nationwide Drive 100 403 503 69 1978 1998 40 201 North Walnut Street 10,359 41,971 52,330 7,493 1988 1998 40 2100-2108 West Laburnum 2,482 10,403 12,885 1,612 1976 1998 40 2120 Tomlynn Street 280 1,218 1,498 198 1986 1998 40 2130-2146 Tomlynn Street 353 1,417 1,770 217 1988 1998 40 2169-79 Tomlynn Street 422 1,770 2,192 301 1985 1998 40 2201 Dabney Street 367 1,651 2,018 292 1962 1998 40 2201-2245 Tomlynn Street 1,020 4,469 5,489 809 1989 1998 40 2212-2224 Tomlynn Street 502 2,085 2,587 318 1985 1998 40 2221-2245 Dabney Road 530 2,150 2,680 328 1994 1998 40 2240 Dabney Road 264 1,067 1,331 167 1984 1998 40 2244 Dabney Road 551 2,204 2,755 338 1993 1998 40 2246 Dabney Road 455 1,823 2,278 279 1987 1998 40 2248 Dabney Road 511 2,188 2,699 361 1989 1998 40 2251 Dabney Road 387 1,636 2,023 265 1983 1998 40 2256 Dabney Road 356 1,471 1,827 237 1982 1998 40 2277 Dabney Road 507 2,035 2,542 312 1986 1998 40 2401 Park Drive 182 803 985 169 1984 1998 40 2404 Park Drive 167 797 964 203 1983 1998 40 2490 Boulevard of the Generals 348 1,430 1,778 264 1975 1998 40 2511 Brittons Hill Road 1,201 4,913 6,114 775 1987 1998 40 2812 Emerywood Parkway 1,069 4,358 5,427 657 1980 1998 40 300 Arboretum Place 5,450 23,889 29,339 4,312 1988 1998 40 300 Corporate Center Drive 4,823 19,617 24,440 3,435 1989 1998 40 301 North Walnut Street 8,495 35,356 43,851 6,145 1989 1998 40 303 Fellowship Drive 1,493 6,416 7,909 1,113 1979 1998 40 304 Harper Drive 657 3,111 3,768 584 1975 1998 40 305 Fellowship Drive 1,422 6,581 8,003 1,344 1980 1998 40 305 Harper Drive 222 914 1,136 140 1979 1998 40
[RESTUBBED] F-30 Brandywine Realty Trust Schedule III Real Estate and Accumulated Depreciation (in thousands)
Initial Cost ------------------------------------- Net Improvements (Retirements) Encumberances at Building and Since City State December 31, 2002 Land Improvements Acquisition ---------------- ----- ----------------- -------- ------------ ------------- 307 Fellowship Drive Mt. Laurel NJ 2,710 1,564 6,342 301 308 Harper Drive Mt. Laurel NJ - 1,643 6,663 200 309 Fellowship Drive Mt. Laurel NJ 2,840 1,518 6,154 929 33 West State Street Trenton NJ - 6,016 24,091 105 426 Lancaster Avenue Devon PA - 1,689 6,756 4 4364 South Alston Avenue Durham NC 2,910 1,622 6,419 771 4805 Lake Brooke Drive Glen Allen VA 4,233 1,640 6,567 60 50 East State Street Trenton NJ - 8,926 35,735 375 50 Swedesford Square Frazer PA 6,447 3,902 15,254 365 500 Nationwide Drive Harrisburg PA - 173 850 787 52 Swedesford Square Frazer PA 7,108 4,242 16,579 702 520 Virginia Drive Ft. Washington PA - 845 3,455 380 600 Corporate Circle Drive Harrisburg PA - 363 1,452 61 600 East Main Street Richmond VA 16,619 9,809 38,255 2,259 600 Park Avenue King of Prussia PA - 1,012 4,048 3 610 Freedom Business Center King of Prussia PA 5,503 2,017 8,070 660 620 Allendale Road King of Prussia PA - 1,020 3,839 635 620 Freedom Business Center King of Prussia PA 7,254 2,770 11,014 382 630 Clark Avenue King of Prussia PA - 547 2,190 1 630 Freedom Business Center King of Prussia PA 7,362 2,773 11,144 460 640 Allendale Road King of Prussia PA - - 432 208 640 Freedom Business Center King of Prussia PA 11,222 4,222 16,891 800 650 Park Avenue King of Prussia PA - 1,917 4,378 1,077 660 Allendale Road King of Prussia PA - 835 3,343 186 680 Allendale Road King of Prussia PA - 689 2,756 678 700 East Gate Drive Mt. Laurel NJ 6,174 3,569 14,436 690 701 East Gate Drive Mt. Laurel NJ 2,932 1,736 6,877 266 7010 Snowdrift Way Allentown PA 1,379 817 3,324 35 7150 Windsor Drive Allentown PA 1,826 1,034 4,219 275 7350 Tilghman Street Allentown PA - 3,414 13,716 1,087 741 First Avenue King of Prussia PA - 1,287 5,151 3 7450 Tilghman Street Allentown PA 5,219 2,867 11,631 1,306 751-761 Fifth Avenue King of Prussia PA - 1,097 4,391 3 7535 Windsor Drive Allentown PA 5,762 3,376 13,400 673 755 Business Center Drive Horsham PA 2,224 1,363 2,334 646 800 Corporate Circle Drive Harrisburg PA - 414 1,653 109 815 East Gate Drive Mt. Laurel NJ 1,103 637 2,584 119 817 East Gate Drive Mt. Laurel NJ 1,022 611 2,426 59 875 First Avenue King of Prussia PA - 618 2,473 2,417 9011 Arboretum Parkway Richmond VA 5,014 1,856 7,702 233 9100 Arboretum Parkway Richmond VA 3,802 1,363 5,489 540 920 Harvest Drive Blue Bell PA - 2,433 9,738 482 9200 Arboretum Parkway Richmond VA 2,694 984 3,973 280 9210 Arboretum Parkway Richmond VA 2,909 1,110 4,474 72 9211 Arboretum Parkway Richmond VA 1,591 581 2,433 93 922 Swedesford Road Frazer PA - 218 1 (1) 925 Harvest Drive Blue Bell PA - 1,671 6,606 235 993 Lenox Drive Lawrenceville NJ 11,906 2,811 17,996 (6,615) 997 Lenox Drive Lawrenceville NJ 10,464 2,410 9,700 363 East Gate Land Mt. Laurel NJ 0 1 1 (1) Marine Center - Pier #12 Philadelphia PA - - - 151 Marine Center - Pier #24 Philadelphia PA - - - 59 Marine Center Pier #13-15 Philadelphia PA - - - 25 Philadelphia Marine Center Philadelphia PA - 533 2,196 37 11 Campus Boulevard Newtown Square PA 4,787 1,112 4,067 595 2000 Lenox Drive Lawrenceville NJ 14,678 2,291 12,221 2,984 630 Allendale Road King of Prussia PA 19,797 2,836 4,028 15,945 630 Dresher Road Horsham PA - 771 3,083 796 7130 Ambassador Drive Allentown PA - 761 3,046 10 1050 Westlakes Drive Berwyn PA - - 13,056 1,754 1700 Paoli Pike East Goshen PA - 458 559 3,326
[RESTUBBED] F-31
Gross Amount at Which Carried December 31, 2002 ------------------------------------------------------- Accumulated Depreciation at Building and December 31, Date of Date Depreciabl Land Improvements Total(a) 2002(b) Construction Acquired Life ------- ------------ --------- --------------- ------------ -------- ---------- 307 Fellowship Drive 1,564 6,643 8,207 1,152 1981 1998 40 308 Harper Drive 1,643 6,863 8,506 1,079 1976 1998 40 309 Fellowship Drive 1,518 7,083 8,601 1,173 1982 1998 40 33 West State Street 6,016 24,196 30,212 4,231 1988 1998 40 426 Lancaster Avenue 1,689 6,760 8,449 1,238 1990 1998 40 4364 South Alston Avenue 1,622 7,190 8,812 1,071 1985 1998 40 4805 Lake Brooke Drive 1,640 6,627 8,267 1,019 1996 1998 40 50 East State Street 8,926 36,110 45,036 6,349 1989 1998 40 50 Swedesford Square 3,902 15,619 19,521 2,397 1988 1998 40 500 Nationwide Drive 173 1,637 1,810 280 1977 1998 40 52 Swedesford Square 4,242 17,281 21,523 2,829 1986 1998 40 520 Virginia Drive 845 3,835 4,680 817 1987 1998 40 600 Corporate Circle Drive 363 1,513 1,876 261 1978 1998 40 600 East Main Street 9,809 40,514 50,323 6,523 1986 1998 40 600 Park Avenue 1,012 4,051 5,063 715 1964 1998 40 610 Freedom Business Center 2,017 8,730 10,747 1,700 1985 1998 40 620 Allendale Road 1,020 4,474 5,494 799 1961 1998 40 620 Freedom Business Center 2,770 11,396 14,166 2,110 1986 1998 40 630 Clark Avenue 547 2,191 2,738 387 1960 1998 40 630 Freedom Business Center 2,773 11,604 14,377 2,223 1989 1998 40 640 Allendale Road - 640 640 484 2001 1998 40 640 Freedom Business Center 4,222 17,691 21,913 3,198 1991 1998 40 650 Park Avenue 1,917 5,455 7,372 966 1968 1998 40 660 Allendale Road 835 3,529 4,364 652 1962 1998 40 680 Allendale Road 689 3,434 4,123 663 1962 1998 40 700 East Gate Drive 3,569 15,126 18,695 2,422 1984 1998 40 701 East Gate Drive 1,736 7,143 8,879 1,124 1986 1998 40 7010 Snowdrift Way 817 3,359 4,176 520 1991 1998 40 7150 Windsor Drive 1,034 4,494 5,528 825 1988 1998 40 7350 Tilghman Street 3,414 14,803 18,217 2,602 1987 1998 40 741 First Avenue 1,287 5,154 6,441 909 1966 1998 40 7450 Tilghman Street 2,867 12,937 15,804 2,342 1986 1998 40 751-761 Fifth Avenue 1,097 4,394 5,491 775 1967 1998 40 7535 Windsor Drive 3,376 14,073 17,449 2,230 1988 1998 40 755 Business Center Drive 1,363 2,980 4,343 773 1998 1998 40 800 Corporate Circle Drive 414 1,762 2,176 310 1979 1998 40 815 East Gate Drive 637 2,703 3,340 485 1986 1998 40 817 East Gate Drive 611 2,485 3,096 381 1986 1998 40 875 First Avenue 618 4,890 5,508 646 1966 1998 40 9011 Arboretum Parkway 1,856 7,935 9,791 1,311 1991 1998 40 9100 Arboretum Parkway 1,363 6,029 7,392 1,022 1988 1998 40 920 Harvest Drive 2,433 10,220 12,653 1,765 1990 1998 40 9200 Arboretum Parkway 984 4,253 5,237 677 1988 1998 40 9210 Arboretum Parkway 1,110 4,546 5,656 698 1988 1998 40 9211 Arboretum Parkway 581 2,526 3,107 386 1991 1998 40 922 Swedesford Road 218 - 218 - 1986 1998 40 925 Harvest Drive 1,671 6,841 8,512 1,168 1990 1998 40 993 Lenox Drive 2,811 11,381 14,192 1,987 1985 1998 40 997 Lenox Drive 2,410 10,063 12,473 1,921 1987 1998 40 East Gate Land 1 - 1 - 1998 40 Marine Center - Pier #12 - 151 151 18 1998 40 Marine Center - Pier #24 - 59 59 3 1998 40 Marine Center Pier #13-15 - 25 25 10 1998 40 Philadelphia Marine Center 533 2,233 2,766 341 1998 40 11 Campus Boulevard 1,112 4,662 5,774 582 1999 1999 40 2000 Lenox Drive 2,291 15,205 17,496 1,799 1999 1999 40 630 Allendale Road 2,836 19,973 22,809 1,825 1999 40 630 Dresher Road 771 3,879 4,650 441 1987 1999 40 7130 Ambassador Drive 761 3,056 3,817 371 1991 1999 40 1050 Westlakes Drive - 14,810 14,810 1,264 2000 40 1700 Paoli Pike 458 3,885 4,343 445 2000 2000 40
[RESTUBBED] F-32 Brandywine Realty Trust Schedule III Real Estate and Accumulated Depreciation (in thousands)
Initial Cost ------------------------------------- Net Improvements (Retirements) Encumberances at Building and Since City State December 31, 2002 Land Improvements Acquisition ---------------- ----- ----------------- -------- ------------ ------------- 10 Lake Center Drive Marlton NJ 8,793 1,880 7,521 107 100 Arrandale Boulevard Exton PA - 970 3,878 2 100 Gateway Centre Parkway Richmond VA - 391 5,410 1,225 100 Lindenwood Drive Malvern PA 2,214 473 1,892 29 101 Lindenwood Drive Malvern PA - 4,152 16,606 77 1100 Cassett Road Berwyn PA - 1,695 6,779 4 111 Arrandale Boulevard Exton PA 1,200 262 1,048 1 111/113 Pencader Drive Newark DE - 1,092 4,366 3 1160 Swedesford Road Berwyn PA 8,633 1,781 7,124 430 1180 Swedesford Road Berwyn PA 9,814 2,086 8,342 184 161 Gaither Drive Mt. Laurel NJ - 1,016 4,064 295 17 Campus Boulevard Newtown Square PA 5,211 1,108 5,155 22 200 Lake Drive East Cherry Hill NJ 9,686 2,069 8,275 130 200 Lindenwood Drive Malvern PA 1,499 324 1,295 2 210 Lake Drive East Cherry Hill NJ 7,652 1,645 6,579 50 220 Lake Drive East Cherry Hill NJ - 2,144 8,798 54 30 Lake Center Drive Marlton NJ 4,837 1,043 4,171 16 300 Lindenwood Drive Malvern PA 3,925 848 3,394 2 301 Lindenwood Drive Malvern PA - 2,729 10,915 264 412 Creamery Way Exton PA - 1,195 4,779 436 429 Creamery Way Exton PA 3,371 1,368 5,471 3 436 Creamery Way Exton PA - 994 3,978 14 440 Creamery Way Exton PA 3,134 982 3,927 4 442 Creamery Way Exton PA 2,852 894 3,576 2 457 Creamery Way Exton PA - 777 3,107 2 467 Creamery Way Exton PA - 906 3,623 2 479 Thomas Jones Way Exton PA - 1,075 4,299 65 481 John Young Way Exton PA 2,526 496 1,983 2 555 Croton Road King of Prussia PA 6,309 4,486 17,943 69 7360 Windsor Drive Allentown PA - 1,451 3,618 2,039 Katchel Farmhouse Reading PA - - - 111 Two Righter Parkway Wilmington DE - 2,802 11,217 7 100 Brandywine Boulevard Newtown PA - 1,784 9,811 2,971 1000 Lenox Drive Lawrenceville NJ - 1,174 4,696 3 15 Campus Boulevard West Goshen PA 5,958 1,164 3,896 2,127 200 Commerce Drive Newark DE 6,272 911 4,414 1,552 400 Berwyn Park Berwyn PA 15,726 2,657 4,462 2,264 400 Commerce Drive Newark DE 12,507 2,528 9,220 4,459 401 Plymouth Road Plymouth Meeting PA - 7,241 16,131 4,689 600 West Germantown Pike Plymouth Meeting PA 12,633 3,652 15,288 47 980 Harvest Drive Blue Bell PA - 2,079 7,821 5 630 West Germantown Pike Plymouth Meeting PA 12,009 3,572 14,435 43 620 West Germantown Pike Plymouth Meeting PA 12,220 3,558 14,743 65 6802 Paragon Place Richmond VA - 2,917 11,454 251 610 West Germantown Pike Plymouth Meeting PA 12,170 3,651 14,514 126 --------- -------- ---------- -------- $ 591,055 $353,111 $1,424,682 $112,214 ========= ======== ========== ========
F-33 [RESTUBBED]
Gross Amount at Which Carried December 31, 2002 ------------------------------------------------------- Accumulated Depreciation at Building and December 31, Date of Date Depreciable Land Improvements Total(a) 2002(b) Construction Acquired Life ------- ------------ --------- --------------- ------------ -------- ----------- 10 Lake Center Drive 1,880 7,628 9,508 342 1989 2001 40 100 Arrandale Boulevard 970 3,880 4,850 170 1997 2001 40 100 Gateway Centre Parkway 391 6,635 7,026 357 2001 2001 40 100 Lindenwood Drive 473 1,921 2,394 85 1985 2001 40 101 Lindenwood Drive 4,152 16,683 20,835 735 1988 2001 40 1100 Cassett Road 1,695 6,783 8,478 297 1997 2001 40 111 Arrandale Boulevard 262 1,049 1,311 46 1996 2001 40 111/113 Pencader Drive 1,092 4,369 5,461 191 1990 2001 40 1160 Swedesford Road 1,781 7,554 9,335 390 1986 2001 40 1180 Swedesford Road 2,086 8,526 10,612 400 1987 2001 40 161 Gaither Drive 1,016 4,359 5,375 200 1987 2001 40 17 Campus Boulevard 1,108 5,177 6,285 384 2001 2001 40 200 Lake Drive East 2,069 8,405 10,474 368 1989 2001 40 200 Lindenwood Drive 324 1,297 1,621 57 1984 2001 40 210 Lake Drive East 1,645 6,629 8,274 291 1986 2001 40 220 Lake Drive East 2,144 8,852 10,996 466 1988 2001 40 30 Lake Center Drive 1,043 4,187 5,230 189 1986 2001 40 300 Lindenwood Drive 848 3,396 4,244 148 1984 2001 40 301 Lindenwood Drive 2,729 11,179 13,908 533 1986 2001 40 412 Creamery Way 1,195 5,215 6,410 255 1999 2001 40 429 Creamery Way 1,368 5,474 6,842 239 1996 2001 40 436 Creamery Way 994 3,992 4,986 178 1991 2001 40 440 Creamery Way 982 3,931 4,913 172 1991 2001 40 442 Creamery Way 894 3,578 4,472 156 1991 2001 40 457 Creamery Way 777 3,109 3,886 136 1990 2001 40 467 Creamery Way 906 3,625 4,531 159 1988 2001 40 479 Thomas Jones Way 1,075 4,364 5,439 196 1988 2001 40 481 John Young Way 496 1,985 2,481 87 1997 2001 40 555 Croton Road 4,486 18,012 22,498 804 1999 2001 40 7360 Windsor Drive 1,451 5,657 7,108 414 2001 2001 40 Katchel Farmhouse - 111 111 74 2001 2001 40 Two Righter Parkway 2,802 11,224 14,026 724 1987 2001 40 100 Brandywine Boulevard 1,784 12,782 14,566 324 2002 2002 40 1000 Lenox Drive 1,174 4,699 5,873 59 1982 2002 40 15 Campus Boulevard 1,164 6,023 7,187 223 2002 2002 40 200 Commerce Drive 911 5,966 6,877 452 1998 2002 40 400 Berwyn Park 2,657 6,726 9,383 440 2002 2002 40 400 Commerce Drive 2,528 13,679 16,207 1,241 1997 2002 40 401 Plymouth Road 7,241 20,820 28,061 830 2002 2002 40 600 West Germantown Pike 3,652 15,335 18,987 320 1986 2002 40 980 Harvest Drive 2,079 7,826 9,905 66 1988 2002 40 630 West Germantown Pike 3,572 14,478 18,050 302 1990 2002 40 620 West Germantown Pike 3,558 14,808 18,366 309 1988 2002 40 6802 Paragon Place 2,917 11,705 14,622 168 1989 2002 40 610 West Germantown Pike 3,651 14,640 18,291 315 1987 2002 40 -------- ---------- ---------- -------- $353,111 $1,536,898 $1,890,009 $245,230 ======== ========== ========== ========
F-34
(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 46,647 60,160 55,091 Depreciation expense - discontinued operations 2,054 9,335 8,849 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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