BRANDYWINE REALTY TRUST The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a "safe harbor" for forward-looking statements. This Quarterly Report on Form 10-Q and other materials filed by us with theSEC (as well as information included in oral or other written statements made by us) contain statements that are forward-looking, including statements relating to business and real estate development activities, acquisitions, dispositions, future capital expenditures, financing sources, governmental regulation (including environmental regulation) and competition. We intend such forward-looking statements to be covered by the safe-harbor provisions of the 1995 Act. The words "anticipate," "believe," "estimate," "expect," "intend," "will," "should" and similar expressions, as they relate to us, are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. As forward-looking statements, these statements involve important risks, uncertainties and other factors that could cause actual results to differ materially from the expected results and, accordingly, such results may differ from those expressed in any forward-looking statements made by us or on our behalf. Factors that could cause actual results to differ materially from our expectations are set forth under the heading "Forward-Looking Statements" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , many of which may be more likely to impact us as a result of the ongoing coronavirus (COVID-19) outbreak. Given these uncertainties, and the other risks identified in the "Risk Factors " section of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and in Part II, Item 1A of this Quarterly Report, we caution readers not to place undue reliance on forward-looking statements. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. The discussion that follows is based primarily on our consolidated financial statements as ofMarch 31, 2020 andDecember 31, 2019 and for the three months endedMarch 31, 2020 and 2019 and should be read along with the consolidated financial statements and related notes appearing elsewhere in this report. The ability to compare one period to another may be significantly affected by acquisitions completed, development properties placed in service and dispositions made during those periods. OVERVIEW During the three months endedMarch 31, 2020 , we owned and managed properties within five markets: (1)Philadelphia Central Business District ("Philadelphia CBD"), (2) Pennsylvania Suburbs, (3)Austin, Texas , (4)Metropolitan Washington , D.C., and (5) Other. The Philadelphia CBD segment includes properties located in theCity of Philadelphia inPennsylvania . The Pennsylvania Suburbs segment includes properties inChester ,Delaware andMontgomery counties in thePhiladelphia suburbs. TheAustin, Texas segment includes properties in theCity of Austin, Texas . The MetropolitanWashington, D.C. segment includes properties inNorthern Virginia ,Washington, D.C. andSouthern Maryland . The Other segment includes properties inCamden County, New Jersey andNew Castle County, Delaware . In addition to the five markets, our corporate group is responsible for cash and investment management, development of certain real estate properties during the construction period, and certain other general support functions. We generate cash and revenue from leases of space at our Properties and, to a lesser extent, from the management and development of properties owned by third parties and from investments in theReal Estate Ventures . Factors that we evaluate when leasing space include rental rates, costs of tenant improvements, tenant creditworthiness, current and expected operating costs, the length of the lease term, vacancy levels and demand for space. We also generate cash through sales of assets, including assets that we do not view as core to our business plan, either because of location or expected growth potential, and assets that are commanding premium prices from third party investors. Our financial and operating performance is dependent upon the demand for office, residential and retail space in our markets, our leasing results, our acquisition, disposition and development activity, our financing activity, our cash requirements and economic and market conditions, including prevailing interest rates. Adverse changes in economic conditions could result in a reduction of the availability of financing and potentially in higher borrowing costs. Vacancy rates may increase, and rental rates and rent collection rates may decline, during the remainder of 2020 and possibly beyond as the current economic climate may negatively impact tenants. Overall economic conditions, including but not limited to higher unemployment and deteriorating financial and credit markets, could have a dampening effect on the fundamentals of our business, including increases in past due accounts, tenant defaults, lower occupancy and reduced effective rents. These adverse conditions would negatively affect our future net income and cash flows and could have a material adverse effect on our financial condition. We believe that the quality of our assets and the strength of our balance sheet will enable us to raise debt capital, if necessary, in various forms and from different sources, including through secured or unsecured loans from banks, pension funds and life insurance companies. However, there can be no assurance that we will be able to borrow funds on terms that are economically attractive or at all. 31
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We continue to seek revenue growth throughout our portfolio by increasing occupancy and rental rates. Occupancy at ourCore Properties atMarch 31, 2020 was 93.3% compared to 92.1% atMarch 31, 2019 . The table below summarizes selected operating and leasing statistics of our wholly owned properties for the three months endedMarch 31, 2020 and 2019: Three Months EndedMarch 31, 2020 2019 Leasing ActivityCore Properties (1): Total net rentable square feet owned 15,978,965
16,379,261
Occupancy percentage (end of period) 93.3 % 92.1 % Average occupancy percentage 93.0 %
91.8 % Total Portfolio, less properties in development (2): Tenant retention rate (3)
75.6 % 66.2 %
New leases and expansions commenced (square feet) 224,417 404,925
Leases renewed (square feet) 87,449 412,123
Net absorption (square feet) 62,507 (65,796 ) Percentage change in rental rates per square feet (4): New and expansion rental rates
21.1 % 13.6 %
Renewal rental rates 8.6 % 14.9 %
Combined rental rates 15.7 % 14.6 %
Capital Costs Committed (5):
Leasing commissions (per square feet) $ 6.28 $ 7.87
Tenant Improvements (per square feet) $ 18.02 $ 22.33
Weighted average lease term (years) 6.7 7.7
Total capital per square foot per lease year $ 3.96 $ 4.81
(1) Does not include properties under development, redevelopment, held for
sale, or sold.
(2) Includes leasing related to completed developments and redevelopments, as
well as sold properties.
(3) Calculated as percentage of total square feet.
(4) Includes base rent plus reimbursement for operating expenses and real
estate taxes.
(5) Calculated on a weighted average basis.
In seeking to increase revenue through our operating, financing and investment activities, we also seek to minimize operating risks, including (i) tenant rollover risk, (ii) tenant credit risk and (iii) development risk. Tenant Rollover Risk We are subject to the risk that tenant leases, upon expiration, will not be renewed, that space may not be relet, or that the terms of renewal or reletting (including the cost of renovations) may be less favorable to us than the current lease terms. Leases that accounted for approximately 5.5% of our aggregate final annualized base rents as ofMarch 31, 2020 (representing approximately 5.7% of the net rentable square feet of the properties) are scheduled to expire without penalty in 2020. We maintain an active dialogue with our tenants in an effort to maximize lease renewals. If we are unable to renew leases or relet space under expiring leases, at anticipated rental rates, or if tenants terminate their leases early, our cash flow would be adversely impacted. Tenant Credit Risk In the event of a tenant default, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. Our management evaluates our accounts receivable reserve policy in light of our tenant base and general and local economic conditions. Our accounts receivable allowance was$7.8 million or 3.9% of total receivables (including accrued rent receivable) as ofMarch 31, 2020 compared to$8.0 million or 4.0% of total receivables (including accrued rent receivable) as ofDecember 31, 2019 . 32
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If economic conditions deteriorate, including as a result of the recent COVID-19 outbreak, we may experience increases in past due accounts, defaults, lower occupancy and reduced effective rents. This condition would negatively affect our future net income and cash flows and could have a material adverse effect on our financial condition. Development Risk Development projects are subject to a variety of risks, including construction delays, construction cost overruns, building moratoriums, inability to obtain financing on favorable terms, inability to lease space at projected rates, inability to enter into construction, development and other agreements on favorable terms, and unexpected environmental and other hazards. As ofMarch 31, 2020 the following development and redevelopment projects remain under construction in progress and we were proceeding on the following activity (dollars, in thousands): Approximate Expected Square Amount Property/Portfolio Name Location Completion Activity Type Footage Estimated Costs Funded The Bulletin Building (a) Philadelphia, PA Q3 2020 Redevelopment 283,000 $ 84,800$ 67,300 405 Colorado Street (b) Austin, TX Q1 2021 Development 204,000 116,000 38,800 426 W. Lancaster Avenue (c) Devon, PA Q1 2019 Redevelopment 56,000 14,900 13,100 3000 Market Street (d) Philadelphia, PA Q1 2021 Redevelopment 64,000 38,000 13,000
(a) Estimated costs include
acquisition cost.
(b) Estimated costs include
ground lease. Project includes 520 parking spaces.
(c) The property was vacated during the third quarter of 2017. Total project
costs include
the base building was substantially completed during the first quarter of
2019 and remaining costs as of
improvements.
(d) Estimated costs include
In addition to the properties listed above, we have classified one parking facility inPhiladelphia, Pennsylvania as redevelopment. As ofMarch 31, 2020 , there has been no material construction spend on this project. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discuss our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America (GAAP). The preparation of these financial statements in conformity with GAAP 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 revenue and expenses during the reporting period. Certain accounting policies are considered to be critical accounting policies, as they require management to make assumptions about matters that are highly uncertain at the time the estimate is made and changes in accounting estimate are reasonably likely to occur from period to period. Management bases its estimates and assumptions on historical experience and current economic conditions. Our Annual Report on Form 10-K for the year endedDecember 31, 2019 contains a discussion of our critical accounting policies. There have been no significant changes in our critical accounting policies sinceDecember 31, 2019 . RESULTS OF OPERATIONS The following discussion is based on our consolidated financial statements for the three months endedMarch 31, 2020 and 2019. We believe that presentation of our consolidated financial information, without a breakdown by segment, will effectively present important information useful to our investors. Net operating income ("NOI") as presented in the comparative analysis below is a non-GAAP financial measure defined as total revenue less property operating expenses, real estate taxes and third party management expenses. Property operating expenses that are included in determining NOI consist of costs that are necessary and allocable to our operating properties such as utilities, property-level salaries, repairs and maintenance, property insurance, and management fees. General and administrative expenses that are not reflected in NOI primarily consist of corporate-level salaries, amortization of share awards and professional fees that are incurred as part of corporate office management. NOI is a non-GAAP financial measure that we use internally to evaluate the operating performance of our real estate assets by segment, as presented in Note 14, ''Segment Information," to our consolidated financial statements, and of our business as a whole. We believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property 33
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level. While NOI is a relevant and widely used measure of operating performance of real estate investment trusts, it does not represent cash flow from operations or net income as defined by GAAP and should not be considered as an alternative to those measures in evaluating our liquidity or operating performance. NOI does not reflect interest expenses, real estate impairment losses, depreciation and amortization costs, capital expenditures and leasing costs. We believe that net income, as defined by GAAP, is the most appropriate earnings measure. See Note 14, ''Segment Information" to our Consolidated Financial Statements for a reconciliation of NOI to our consolidated net income as defined by GAAP. Comparison of the Three Months EndedMarch 31, 2020 andMarch 31, 2019 The following comparison for the three months endedMarch 31, 2020 to the three months endedMarch 31, 2019 , makes reference to the effect of the following: (a) "Same Store Property Portfolio," which represents 88 properties containing
an aggregate of approximately 15.8 million net rentable square feet, and
represents properties that we owned for the three-month periods ended
properties acquired or placed in service on or prior to
and owned through
(b) "Total Portfolio," which represents all properties owned by us during the
three months ended
(c) "Recently Completed/Acquired Properties," which represents 1 property
placed into service or acquired on or subsequent to
(d) "
currently in development/redevelopment. A property is excluded from our
Same Store Property Portfolio and moved into Development/Redevelopment in
the period that we determine to proceed with development/redevelopment for
a future development strategy, and
(e) "Q1 2019 through Q1 2020 Dispositions," which represents 2 properties
disposed of from the three months ended March 31, 2019 through the three
months ended March 31, 2020 .
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Comparison of three months ended
Recently Completed/Acquired
Same Store Property Portfolio Properties Development/Redevelopment Properties Other (Eliminations) (a) Total Portfolio
(dollars and square feet in
millions except per share 2020 2019 $ Change 2020 2019 2020 2019 2020 2019 2020 2019 $ Change
amounts) % Change % Change
Revenue:
Rents $ 132.8 $ 129.6 $ 3.2 2.5 % $ 1.8 $ 1.0 $ 1.5 $ 2.7 $ 3.1 $ 4.8 $ 139.2 $ 138.1 $ 1.1 0.8 %
Third party management
fees, labor reimbursement
and leasing - - - - % - - - - 5.0 4.0 5.0 4.0 1.0 25.0 %
Other 0.3 0.4 (0.1 ) (25.0 )% - - - - 0.6 1.4 0.9 1.8 (0.9 ) (50.0 )%
Total revenue 133.1 130.0 3.1 2.4 % 1.8 1.0 1.5 2.7 8.7 10.2 145.1 143.9 1.2 0.8 %
Property operating expenses 35.4 36.2 (0.8 ) (2.1 )% 0.3 - 0.6 1.1 1.1 2.2 37.4 39.5 (2.1 ) (5.2 )%
Real estate taxes 15.5 14.8 0.7 4.7 % 0.4 0.2 0.4 0.3 0.5 0.4 16.8 15.7 1.1 7.0 %
Third party management
expenses - - - - % - - - - 2.7 2.1 2.7 2.1 0.6 28.6 %
Net operating income 82.2 79.0 3.2 4.0 % 1.1 0.8 0.5 1.3 4.4 5.5 88.2 86.6 1.6 1.8 %
Depreciation and
amortization 48.2 46.3 1.9 4.1 % 0.5 0.2 1.0 1.4 2.3 3.6 52.0 51.5 0.5 1.0 %
General & administrative
expenses - - - - % - - - - 8.6 9.8 8.6 9.8 (1.2 ) (12.2 )%
Net gain on disposition of
real estate (2.6 ) - (2.6 ) - %
Net gain on sale of
undepreciated real estate - (1.0 ) 1.0 (100.0 )%
Operating income (loss) $ 34.0 $ 32.7 $ 1.3 3.9 % $ 0.6 $ 0.6 $ (0.5 ) $ (0.1 ) $ (6.5 ) $ (7.9 ) $ 30.2 $ 26.3 $ 3.9 14.6 %
Number of properties 88 88 1 5 94
Square feet 15.8 15.8 0.2 0.6 16.6
Core Occupancy % (b) 93.3 % 92.2 % 100.0 %
Other Income (Expense):
Interest income 0.6 0.5 0.1 20.0 %
Interest expense (20.0 ) (20.4 ) 0.4 (2.0 )%
Interest expense - Deferred
financing costs (0.7 ) (0.7 ) - - %
Equity in loss of Real
Estate Ventures (1.9 ) (1.4 ) (0.5 ) 35.7 %
Net gain on real estate
venture transactions - 0.3 (0.3 ) (100.0 )%
Net income $ 8.2 $ 4.6 $ 3.6 77.2 %
Net income attributable to
Common Shareholders of
Brandywine Realty Trust $ 0.04 $ 0.02 $ 0.02 100.0 %
(a) Represents certain revenues and expenses at the corporate level as well as
various intercompany costs that are eliminated in consolidation,
third-party management fees, provisions for impairment, and changes in the
accrued rent receivable allowance. Other/(Eliminations) also includes
properties sold and properties classified as held for sale.
(b) Pertains to
Total Revenue Rents from the Total Portfolio increased by$1.1 million during the first quarter of 2020 compared to the first quarter of 2019. The increase in Rents is primarily driven by a$3.2 million increase across the Same Store Portfolio due to increased occupancy at several properties within the Philadelphia CBD Segment and a$1.3 million increase in termination fee income, as well as a$0.8 million increase related to leasing activity at theRecently Completion/Acquired Properties . These increases are partially offset by a decrease of$1.6 million related to the Q1 2019 through Q1 2020 Dispositions and a decrease of$1.2 million related to redevelopments included inDevelopment/Redevelopment Properties . Third party management fees, labor reimbursement, and leasing income increased by$1.0 million during the first quarter of 2020 compared to the first quarter of 2019 primarily due to an increase general contractor management services provided to MAP Venture. 35
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Property Operating Expenses Property operating expenses across our Total Portfolio decreased$2.1 million for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , of which$0.8 million relates to decreases across our Same Store Property Portfolio,$0.5 million relates to decreases due to vacancies at ourDevelopment/Redevelopment Properties in advance of beginning redevelopment activities, and$0.4 million relates to the Q1 2019 through Q1 2020 Dispositions. Real Estate Taxes Real estate taxes increased$1.1 million for the first quarter of 2020 compared to the first quarter of 2019, of which$0.7 million related to our Same Store Property Portfolio and$0.2 million relates to ourRecently Completed/Acquired Properties . Depreciation and Amortization Depreciation and amortization expense increased by$0.5 million for the first quarter of 2020 compared to the first quarter of 2019, of which$1.9 million relates to the Same Store Property Portfolio, primarily due to the write off of assets for a terminated tenant in the Philadelphia CBD Segment and$0.3 million relates to ourRecently Completed/Acquired Properties . This increase was offset by a decrease of$0.8 million related to650 Park Avenue , which was demolished inJuly 2019 ,$0.6 million related to the Q1 2019 through Q1 2020 Dispositions and$0.4 million related to theDevelopment/Redevelopment Properties . General and Administrative The$1.2 million decrease for the first quarter of 2020 compared to the first quarter of 2019 is primarily related to a$1.8 million decrease in compensation related expenses, which is driven by changes to the vesting period of retirement eligible officers for the 2020 Restricted Performance Share Unit awards compared to the 2019 Restricted Performance Share Unit awards. This was partially offset by a$0.3 million increase due to an increase in capitalized general and administrative costs.Net Gain on Disposition of Real Estate The gain of$2.6 million recognized during the three months endedMarch 31, 2020 is primarily related to the disposition of52 East Swedesford Road , an office property in our Pennsylvania Suburbs Segment.Net Gain on Sale ofUndepreciated Real Estate The gain of$1.0 million recognized during the first quarter of 2019 was primarily related to the a$0.8 million gain from the disposition of9 Presidential Boulevard . Net Income Net income increased by$3.6 million for the first quarter of 2020 compared to the first quarter of 2019 as a result of the factors described above. Net Income per Common Share - fully diluted Net income per share was$0.04 for the first quarter of 2020 as compared to net income per share of$0.02 for the first quarter of 2019 as a result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES General Our principal liquidity funding needs for the next twelve months are as follows: • normal recurring expenses; • capital expenditures, including capital and tenant improvements and leasing costs;
• debt service and principal repayment obligations;
• current development and redevelopment costs;
• commitments to unconsolidated real estate ventures;
• distributions to shareholders to maintain our Parent Company's REIT status;
• possible acquisitions of properties, either directly or indirectly
through the acquisition of equity interest therein; and
• possible common share repurchases.
We expect to satisfy these needs using one or more of the following: • cash flows from operations;
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• distributions of cash from our unconsolidated real estate ventures;
• cash and cash equivalent balances;
• availability under our unsecured Credit Facility;
• secured construction loans and long-term unsecured indebtedness;
• issuances of Parent Company equity securities and/or units of the
Operating Partnership ; and
• sales of real estate.
As ofMarch 31, 2020 , the Parent Company owned a 99.4% interest in theOperating Partnership . The remaining interest of approximately 0.6% pertains to common limited partnership interests owned by non-affiliated investors who contributed property to theOperating Partnership in exchange for their interests. As the sole general partner of theOperating Partnership , the Parent Company has full and complete responsibility for theOperating Partnership's day-to-day operations and management.The Parent Company's source of funding for its dividend payments and other obligations is the distributions it receives from theOperating Partnership . As summarized above, we believe that our liquidity needs will be satisfied through available cash balances and cash flows from operations, financing activities and real estate sales. Rental revenue and other income from operations are our principal sources of cash to pay operating expenses, debt service, recurring capital expenditures and the minimum distributions required to maintain our REIT qualification. We seek to increase cash flows from our properties by maintaining quality standards for our properties that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. Our revenue also includes third-party fees generated by our property management, leasing, development and construction businesses. We believe that our revenue, together with proceeds from property sales and debt financings, will continue to provide funds for our short-term liquidity needs. However, material changes in our operating or financing activities may adversely affect our net cash flows. With uncertain economic conditions, vacancy rates may increase, effective rental rates on new and renewed leases may decrease and tenant installation costs, including concessions, may increase in most or all of our markets during 2020 and possibly beyond. As a result, our revenues and cash flows could be insufficient to cover operating expenses, including increased tenant installation costs, pay debt service or make distributions to shareholders over the short-term. If this situation were to occur, we expect that we would finance cash deficits through borrowings under our unsecured revolving credit facility and other sources of debt and equity financings. In addition, a material adverse change in cash provided by operations could adversely affect our compliance with financial performance covenants under our unsecured revolving credit facility, including unsecured term loans and unsecured notes. As ofMarch 31, 2020 we were in compliance with all of our debt covenants and requirement obligations. In addition, we are continuing to monitor the outbreak of the novel coronavirus ("COVID-19") and the related economic impacts, market volatility, and business disruption, and its impact on our tenants. The severity and duration of the pandemic and its impact on our operations and liquidity is uncertain as this continues to evolve globally. However, if the outbreak continues, there will likely be continued negative economic impacts, market volatility, and business disruption which could negatively impact our tenants' ability to pay rent, our ability to lease vacant space, and our ability to complete development and redevelopment projects, and these consequences, in turn, could materially impact our results of operations. Approximately 96% of April total cash-based rent has been received from our tenants which reflects a 97% collection rate from our office tenants. We have received rent relief requests primarily from our co-working and retail tenants, who represent approximately 2.1% and 1.6% of April billings, respectively. The relief requests have substantially all been in the form of rent deferral for varying lengths of time and we are currently assessing the merits of each request. For those tenants we believe require rent relief, we expect to grant deferrals and, in some instances, seek extended lease terms through favorable lease extensions. We can give no assurances on the outcomes of these ongoing negotiations, the amount and nature of the rent relief packages and ultimate recovery of the amounts deferred. We use multiple financing sources to fund our long-term capital needs. When needed, we use borrowings under our unsecured revolving credit facility for general business purposes, including to meet debt maturities and to fund distributions to shareholders as well as development and acquisition costs and other expenses. In light of the volatility in financial markets and economic uncertainties, it is possible, that one or more lenders under our unsecured revolving credit facility could fail to fund a borrowing request. Such an event could adversely affect our ability to access funds under our unsecured credit facility when needed to fund distributions or pay expenses. Our ability to incur additional debt is dependent upon a number of factors, including our credit ratings, the value of our unencumbered assets, our degree of leverage and borrowing restrictions imposed by our lenders. If one or more rating agencies were to downgrade our unsecured credit rating, our access to the unsecured debt market would be more limited and the interest rate under our unsecured credit facility and unsecured term loans would increase.The Parent Company unconditionally guarantees theOperating Partnership's secured and unsecured obligations, which, as ofMarch 31, 2020 , amounted to$313.5 million and$1,878.6 million , respectively. 37
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Capital MarketsThe Parent Company issues equity from time to time, the proceeds of which it contributes to theOperating Partnership in exchange for additional interests in theOperating Partnership , and guarantees debt obligations of theOperating Partnership .The Parent Company's ability to sell common shares and preferred shares is dependent on, among other things, general market conditions for REITs, market perceptions about the Company as a whole and the current trading price of the Parent Company's shares.The Parent Company generally maintains a shelf registration statement that covers the offering and sale of common shares, preferred shares, depositary shares, warrants and unsecured debt securities. Subject to our ongoing compliance with securities laws, and if warranted by market conditions, we may offer and sell equity and debt securities from time to time under the shelf registration statement or in transactions exempt from registration. See Note 11, ''Beneficiaries' Equity of the Parent Company" to our Consolidated Financial Statements for further information related to our share repurchase program during the three months endedMarch 31, 2020 . We expect to fund any additional share repurchases with a combination of available cash balances and availability under our unsecured revolving credit facility. The timing and amounts of any repurchases will depend on a variety of factors, including market conditions, regulatory requirements, share prices, capital availability and other factors as determined by our management team. The repurchase program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time without notice.Capital Recycling The Operating Partnership also considers net sales of selected properties and recapitalization of unconsolidated real estate ventures as additional sources of managing its liquidity. During the three months endedMarch 31, 2020 , we sold one office property for net cash proceeds of$17.5 million . We expect that our primary uses of capital during the remainder of 2020 will be to fund our current development and redevelopment projects and also to repay$80.5 million in principal due upon maturity of the mortgage note forTwo Logan Square , inPhiladelphia, Pennsylvania , inAugust 2020 , if not refinanced or extended. As ofMarch 31, 2020 , we had$52.7 million of cash and cash equivalents and$548.3 million of available borrowings under our Credit Facility, net of$1.7 million in letters of credit outstanding. Based on the foregoing, as well as cash flows from operations net of dividend requirements, we believe we have sufficient capital to fund our remaining capital requirements on existing development and redevelopment projects and pursue additional attractive investment opportunities. Cash Flows The following discussion of our cash flows is based on the consolidated statement of cash flows and is not meant to be a comprehensive discussion of the changes in our cash flows for the periods presented. As ofMarch 31, 2020 andDecember 31, 2019 , we maintained cash and cash equivalents and restricted cash of$53.4 million and$91.2 million , respectively. We report and analyze our cash flows based on operating activities, investing activities, and financing activities. The following table summarizes changes in our cash flows (in thousands): Three Months Ended March 31, Activity 2020 2019 (Decrease) Increase Operating$ 45,058 $ 17,766 $ 27,292 Investing (42,568 ) (41,343 ) (1,225 ) Financing (40,286 ) 15,169 (55,455 ) Net cash flows$ (37,796 ) $ (8,408 ) $ (29,388 ) Our principal source of cash flows is from the operation of our Properties. Our Properties provide a relatively consistent stream of cash flows that provides us with the resources to fund operating expenses, debt service and quarterly dividends. 38
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Cash is used in investing activities to fund acquisitions, development, or redevelopment projects and recurring and nonrecurring capital expenditures. We selectively invest in new projects that enable us to take advantage of our development, leasing, financing, and property management skills and invest in existing buildings that meet our investment criteria. During the three months endedMarch 31, 2020 , when compared to the three months endedMarch 31, 2019 , the change in investing cash flows was due to the following activities (in thousands): Acquisitions of real estate$ (11,432 ) Capital expenditures and capitalized interest 1,294
Capital improvements/acquisition deposits/leasing costs (1,582 ) Joint venture investments
(77 )
Distributions from joint ventures (1,851 )
Proceeds from the sale of properties 12,438
Proceeds from notes receivable (15 )
Increase in net cash used in investing activities
We generally fund our investment activity through the sale of real estate, property-level financing, credit facilities, senior unsecured notes, convertible or exchangeable securities, and construction loans. From time to time, we may issue common or preferred shares of beneficial interest, or theOperating Partnership may issue common or preferred units of limited partnership interest. During the three months endedMarch 31, 2020 , when compared to the three months endedMarch 31, 2019 , the change in financing cash flows was due to the following activities (in thousands): Proceeds from debt obligations$ (132,000 ) Repayments of debt obligations 113,926 Proceeds from the exercise of stock options (753 ) Repurchase and retirement of common shares (36,575 ) Other financing activities 485 Dividends and distributions paid (538 )
Increase in net cash used in financing activities
Off-Balance Sheet Arrangements As ofMarch 31, 2020 , we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 39
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Capitalization
Indebtedness
The table below summarizes indebtedness under our mortgage notes payable and our
unsecured debt at
March 31, 2020 December 31, 2019
(dollars in thousands)
Balance: (a)
Fixed rate $ 2,089,266 $ 2,091,211
Variable rate - unhedged 102,836 52,836
Total $ 2,192,102 $ 2,144,047
Percent of Total Debt:
Fixed rate 95.3 % 97.5 %
Variable rate - unhedged 4.7 % 2.5 %
Total 100.0 % 100.0 %
Weighted-average interest rate at period end:
Fixed rate 3.9 % 3.9 %
Variable rate - unhedged 2.6 % 3.2 %
Total 3.8 % 3.8 %
Weighted-average maturity in years:
Fixed rate 5.3 5.6
Variable rate - unhedged 9.0 15.6
Total 5.5 5.9
(a) Consists of unpaid principal and does not reflect premium/discount or
deferred financing costs.
Scheduled principal payments and related weighted average annual effective interest rates for our debt as ofMarch 31, 2020 were as follows (in thousands): Weighted Average Interest Rate of Scheduled Principal Maturing Period amortization maturities Total Debt
2020 (nine months remaining) $ 4,760
85,281 3.98 % 2021 6,142 9,001 15,143 4.28 % 2022 6,332 300,000 306,332 2.76 % 2023 1,620 555,116 556,736 3.94 % 2024 - 350,000 350,000 3.78 % 2025 - - - - % 2026 - - - - % 2027 - 450,000 450,000 4.03 % 2028 - - - - % 2029 - 350,000 350,000 4.30 % Thereafter - 78,610 78,610 3.18 % Totals $ 18,854$ 2,173,248 $ 2,192,102 3.80 % The indenture under which theOperating Partnership issued its unsecured notes contains financial covenants, including: (i) a leverage ratio not to exceed 60%; (ii) a secured debt leverage ratio not to exceed 40%; (iii) a debt service coverage ratio of greater than 1.5 to 1.0; and (iv) an unencumbered asset value of not less than 150% of unsecured debt.The Operating Partnership is in compliance with all covenants as ofMarch 31, 2020 .The Operating Partnership has mortgage loans that are collateralized by certain of its Properties. Payments on mortgage loans are generally due in monthly installments of principal and interest, or interest only.The Operating Partnership intends to refinance or 40
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repay its indebtedness as it matures, subject to tax guarantees, through the use of proceeds from selective property sales and secured or unsecured borrowings. However, in the current and expected future economic environment one or more of these sources may not be available on attractive terms or at all. Equity In order to maintain its qualification as a REIT, the Parent Company is required to, among other things, pay dividends to its shareholders of at least 90% of its REIT taxable income. See Note 11, ''Beneficiaries' Equity of the Parent Company," to our Consolidated Financial Statements for further information related to our dividends declared for the first quarter of 2020. Contractual Obligations Refer to our 2019 Annual Report on Form 10-K for a discussion of our contractual obligations. There have been no material changes, outside the ordinary course of business, to these contractual obligations during the three months endedMarch 31, 2020 . Funds from Operations (FFO) Pursuant to the revised definition of FFO adopted by theBoard of Governors of theNational Association of Real Estate Investment Trusts ("NAREIT"), we calculate FFO by adjusting net income/(loss) attributable to common unit holders (computed in accordance with GAAP) for gains (or losses) from sales of properties, impairment losses on depreciable consolidated real estate, impairment losses on investments in unconsolidated real estate ventures driven by a measurable decrease in the fair value of depreciable real estate held by the unconsolidatedReal Estate Ventures , real estate related depreciation and amortization, and after similar adjustments for unconsolidatedReal Estate Ventures . FFO is a non-GAAP financial measure. We believe that the use of FFO combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of REITs among the investing public and making comparisons of REITs' operating results more meaningful. We consider FFO to be a useful measure for reviewing comparative operating and financial performance because, by excluding gains or losses related to sales of previously depreciated operating real estate assets and real estate depreciation and amortization, FFO can help the investing public compare the operating performance of a company's real estate between periods or as compared to other companies. Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. We consider net income, as defined by GAAP, to be the most comparable earnings measure to FFO. While FFO and FFO per unit are relevant and widely used measures of operating performance of REITs, FFO does not represent cash flow from operations or net income as defined by GAAP and should not be considered as alternatives to those measures in evaluating our liquidity or operating performance. We believe that to further understand our performance, FFO should be compared with our reported net income/ (loss) attributable to common unit holders and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements. 41
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The following table presents a reconciliation of net income attributable to common unit holders to FFO for the three months endedMarch 31, 2020 and 2019: Three Months EndedMarch 31, 2020 2019 (amounts in thousands, except share information)
Net income attributable to common unitholders $ 7,944
$ 4,430
Add (deduct):
Amount allocated to unvested restricted unitholders 131 119
Net gain on real estate venture transactions - (259 )
Net gain on disposition of real estate (2,586 ) -
Depreciation and amortization:
Real property 38,353 35,606
Leasing costs including acquired intangibles 13,199 15,406
Company's share of unconsolidated real estate 4,599 5,041
ventures
Partners' share of consolidated real estate ventures (60 ) (53 ) Funds from operations $ 61,580 $ 60,290 Funds from operations allocable to unvested (190 ) (214 ) restricted shareholders Funds from operations available to common share and $ 61,390 $ 60,076 unit holders (FFO) Weighted-average shares/units outstanding - basic (a) 177,051,602
176,840,229
Weighted-average shares/units outstanding - fully 177,635,093
177,447,089
diluted (a)
(a) Includes common share and partnership units outstanding through the three
months ended
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