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 might cause actual results to differ materially from our expectations, many of which may be more likely to impact us as a result of the ongoing COVID-19 pandemic, are set forth in the "Risk Factors" section of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Accordingly, 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 ofJune 30, 2021 andDecember 31, 2020 and for the three and six months endedJune 30, 2021 and 2020 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 six months endedJune 30, 2021 , we owned and managed properties within five segments: (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 segments, 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 the unconsolidated real 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, parking, 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. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it is impacting our tenants, employees, and business partners. Adverse changes in economic conditions, including the ongoing effects of the global COVID-19 pandemic, 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 2021 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. The ongoing COVID-19 pandemic has significantly slowed global economic activity, caused significant volatility in financial markets, and resulted in unprecedented job losses. In addition, the government responses to control the pandemic are creating disruption in the global economy and supply chains and adversely impacting many industries, including owners and developers of office and mixed-use buildings. These adverse conditions have impacted our 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 30 -------------------------------------------------------------------------------- Table of Contents 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. We continue to seek revenue growth throughout our portfolio by increasing occupancy and rental rates. Occupancy at ourCore Properties atJune 30, 2021 was 90.5% compared to 90.7% atJune 30, 2020 . The table below summarizes selected operating and leasing statistics of our wholly owned properties for the three and six months endedJune 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Leasing Activity Core Properties (1): Total net rentable square feet owned 12,949,078 14,365,532 12,949,078
14,365,532
Occupancy percentage (end of period) 90.5 % 90.7 % 90.5 % 90.7 % Average occupancy percentage 90.4 % 89.7 % 89.9 % 90.8 %
Total Portfolio, less properties in development (2): Tenant retention rate (3)
57.5 % 37.1 % 54.1 % 49.1 %
New leases and expansions commenced (square feet) 156,372 42,260 185,475 266,677
Leases renewed (square feet) 95,853 194,505 262,677 281,954
Net absorption (square feet) 19,798 (314,645) (145,328) (252,138)Percentage change in rental rates per square feet (4): New and expansion rental rates
32.7 % 29.8 % 29.8 % 21.7 %
Renewal rental rates 13.3 % 18.9 % 11.6 % 15.3 %
Combined rental rates 22.2 % 19.4 % 18.7 % 17.4 %
Capital Costs Committed (5):
Leasing commissions (per square feet) $ 12.61 $ 5.46 $ 10.15 $ 5.87
Tenant Improvements (per square feet) $ 35.01 $ 10.45 $ 27.87 $ 14.25
Weighted average lease term (years) 8.5 6.3 7.1 6.6
Total capital per square foot per lease year $ 4.29 $ 2.75 $ 3.83 (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 2.1% of our aggregate final annualized base rents as ofJune 30, 2021 (representing approximately 2.5% of the net rentable square feet of the properties) are scheduled to expire without penalty in the remainder of 2021. 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$5.0 million or 2.8 % of total receivables (including accrued rent receivable) as ofJune 30, 2021 compared to$5.1 million or 2.9% of total receivables (including accrued rent receivable) as ofDecember 31, 2020 . 31 -------------------------------------------------------------------------------- Table of Contents If economic conditions deteriorate, including as a result of the ongoing COVID-19 pandemic, we may experience increases in past due accounts, defaults, lower occupancy and reduced effective rents. This condition would negatively affect our future net income and cash flows and could have a material adverse effect on our financial condition. Development Risk Development projects are subject to a variety of risks, including construction delays, construction cost overruns, building moratoriums, inability to obtain financing on favorable terms, inability to lease space at projected rates, inability to enter into construction, development and other agreements on favorable terms, and unexpected environmental and other hazards. As ofJune 30, 2021 the following active development and redevelopment projects remain under construction in progress and we were proceeding on the following activity (dollars, in thousands): Estimated Property/Portfolio Name Location
Expected Completion Activity Type Approximate Square Footage Costs Amount Funded 405 Colorado Street (a) Austin, TX Q2 2021 Development 205,803$ 122,000 $ 79,411 3000 Market Street (b) Philadelphia, PA Q3 2021 Redevelopment 64,070$ 35,000 $ 22,579 250 King of Prussia Road (c) Radnor, PA Q2 2022 Redevelopment 168,294$ 80,573 $ 22,457 (a)Estimated costs include$2.1 million of existing property basis through a ground lease. Project includes 520 parking spaces. (b)Estimated costs include$12.8 million of existing property basis. (c)Total project costs includes$20.6 million of existing property basis. In addition to the properties listed above, we have classified one office building inHerndon, Virginia and one parking facility inPhiladelphia, Pennsylvania as redevelopment, but we have yet to incur significant development costs on these projects. 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, 2020 contains a discussion of our critical accounting policies. There have been no significant changes in our critical accounting policies sinceDecember 31, 2020 . 32 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following discussion is based on our consolidated financial statements for the three and six months endedJune 30, 2021 and 2020. 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 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 EndedJune 30, 2021 andJune 30, 2020 The following comparison for the three months endedJune 30, 2021 to the three months endedJune 30, 2020 , makes reference to the effect of the following: (a)"Same Store Property Portfolio," which represents 73 properties containing an aggregate of approximately 12.5 million net rentable square feet, and represents properties that we owned and consolidated for the three-month periods endedJune 30, 2021 and 2020. The Same Store Property Portfolio includes properties acquired or placed in service on or prior toApril 1, 2020 and owned and consolidated throughJune 30, 2021 , excluding properties classified as held for sale, (b)"Total Portfolio," which represents all properties owned and consolidated by us during the three months endedJune 30, 2021 and 2020, (c)"Recently Completed/Acquired Properties ," which represents three properties placed into service or acquired on or subsequent toApril 1, 2020 , (d)"Development/Redevelopment Properties ," which represents five properties 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)"Q2 2020 through Q2 2021 Dispositions," which represents 14 properties disposed of fromApril 1, 2020 throughJune 30, 2021 . 33
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Table of Contents Comparison of three months endedJune 30, 2021 to the three months endedJune 30, 2020 Recently Completed/Acquired Same Store Property Portfolio PropertiesDevelopment/Redevelopment Properties Other (Eliminations) (a) Total Portfolio (dollars and square feet in millions except per share amounts) 2021 2020 $ Change % Change 2021 2020 2021 2020 2021 2020 2021 2020 $ Change % Change Revenue: Rents$ 105.0 $ 102.7 $ 2.3 2.2 %$4.1 $ 1.4 $ 0.2$ 2.6 $ 1.9 $ 25.5 $ 111.2 $ 132.2 $ (21.0) (15.9) % Third party management fees, labor reimbursement and leasing - - - - % - - - - 6.6 4.1 6.6 4.1 2.5 61.0 % Other 0.3 0.3 - - % - - - - 1.9 0.3 2.2 0.6 1.6 266.7 % Total revenue 105.3 103.0 2.3 2.2 % 4.1 1.4 0.2 2.6 10.4 29.9 120.0 136.9 (16.9) (12.3) % Property operating expenses 26.6 25.9 0.7 2.7 % 0.9 0.6 (0.7) 0.2 2.5 6.6 29.3 33.3 (4.0) (12.0) % Real estate taxes 13.1 12.6 0.5 4.0 % 0.2 0.2 0.8 0.5 0.5 3.5 14.6 16.8 (2.2) (13.1) % Third party management expenses - - - - % - - - - 3.6 2.4 3.6 2.4 1.2 50.0 % Net operating income 65.6 64.5 1.1 1.7 % 3.0 0.6 0.1 1.9 3.8 17.4 72.5 84.4 (11.9) (14.1) % Depreciation and amortization 38.2 36.4 1.8 4.9 % 1.8 1.0 - 1.7 2.7 10.7 42.7 49.8 (7.1) (14.3) % General & administrative expenses - - - - % - - - - 8.4 8.3 8.4 8.3 0.1 1.2 % Net gain on disposition of real estate (0.1) - (0.1) - % Net gain on sale of undepreciated real estate - (0.2) 0.2 (100.0) % Operating income (loss)$ 27.4 $ 28.1 $ (0.7) (2.5) %$1.2 $ (0.4) $ 0.1$ 0.2
(18.9) %
Number of properties 73 73 3 5 81
Square feet 12.5 12.5 0.5 0.7 13.9
Core Occupancy % (b) 90.3 % 90.7 % 94.6 %
Other Income (Expense):
Interest and investment income 1.7 0.4 1.3 325.0 %
Interest expense (15.5) (20.2) 4.7 (23.3) %
Interest expense - Deferred financing
costs (0.7) (0.7) - - %
Equity in loss of unconsolidated real
estate ventures (7.2) (2.2) (5.0) 227.3 %
Income tax benefit - 0.2 (0.2) (100.0) %
Net income (loss) $ (0.2) $ 4.0 $ (4.2) (105.0) %
Net income attributable to Common
Shareholders of Brandywine Realty
Trust $ - $ 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 Core Properties .
Total Revenue
Rents from the Total Portfolio decreased primarily as a result of the following:
•$22.7 million decrease related to the Q2 2020 through Q2 2021 Dispositions;
•$2.5 million decrease related to a property that has been vacated and placed
into redevelopment in our Metropolitan Washington D.C . segment;
•$1.3 million decrease related to a property that has been vacated and taken out
of service for future demolition in our Austin, Texas segment;
•$2.7 million increase related to the Recently Completed/Acquired Properties ;
and,
•$2.3 million increase across our Same Store Property Portfolio primarily due to
increased occupancy at certain properties as well as an increased use of our
properties by the tenants related to the lifting of COVID-19 pandemic
restrictions.
Third party management fees, labor reimbursement, and leasing income increased
primarily due to $1.0 million of fees earned from the Mid-Atlantic Office
Venture formed in the fourth quarter of 2020, $0.9 million of fees earned from
the Commerce Square Venture formed in the third quarter of 2020, and a $0.6
million increase in fees earned from our MAP Venture primarily related to
increases in leasing commissions and construction management fees.
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Other income increased primarily due to excess insurance proceeds of $0.7
million related to a property in our Austin, Texas segment, $0.4 million in
proceeds related to a legal settlement during the second quarter of 2021, as
well as an increase of $0.3 million in income from the restaurant component of
FMC Tower as a result of the lifting of COVID-19 pandemic restrictions.
Property Operating Expenses
Property operating expenses across our Total Portfolio decreased primarily as a
result of the following:
•$7.0 million decrease related to the Q2 2020 through Q2 2021 Dispositions;
•$0.7 million increase across our Same Store Property Portfolio primarily due to
increased use of our properties by the tenants as a result of the lifting of
COVID-19 pandemic restrictions; and,
•$0.6 million increase at the hotel and restaurant components of FMC Tower
primarily as a result of the lifting of COVID-19 pandemic restrictions.
The remaining offsetting increase of $1.7 million is related to miscellaneous
increases in property operating expenses across our Total Portfolio, primarily
driven by increases in property-related employee compensation expenses,
marketing expenses, and repairs and maintenance.
Real Estate Taxes
The decrease in Real estate taxes is primarily driven by a $2.7 million decrease
related to the Q2 2020 through Q2 2021 Dispositions. The offsetting $0.5 million
increase is primarily the result of miscellaneous increases in tax assessments
across our Total Portfolio.
Depreciation and Amortization
Depreciation and amortization expense decreased primarily as a result of the
following:
•$8.4 million decrease related to the Q2 2020 through Q2 2021 Dispositions;
•$1.7 million decrease primarily related to two properties placed into
redevelopment; and,
•$3.3 million increase due to the reassessment of the estimated useful life of
seven properties in our Austin, Texas segment pursuant to future demolition
plans as part of our Broadmoor master development plan beginning in the second
quarter of 2021.
Interest and Investment Income
Interest and investment income increased primarily due to $1.2 million of
preferred return earned during the second quarter of 2021 from our Austin
Preferred Equity Investment , which closed on December 31, 2020 .
Interest Expense
The decrease in interest expense is primarily driven by the following:
•$2.2 million decrease due to deconsolidation of One Commerce Square and Two
Commerce Square and the associated mortgage loans on July 21, 2020 ;
•$1.2 million decrease due to an increase in capitalized interest on our various
development projects as well as capitalized interest on our investment in 3025
JFK Venture; and,
•$0.8 million decrease due to the purchase of the Two Logan Square mortgage in
the third quarter of 2020.
The remaining decrease is primarily related to lower interest rates during the
three months ended June 30, 2021 compared to the three months ended June 30,
2020 .
Equity in loss of unconsolidated real estate ventures
Equity in loss of unconsolidated real estate ventures increased primarily due to
the following:
•$4.7 million in net losses associated with our Commerce Square Venture formed
on July 21, 2020 ; and
•$0.3 million increase related to our MAP Venture due to lower revenues driven
by lower occupancy during the second quarter of 2021 than 2020.
Comparison of the Six Months Ended June 30, 2021 and June 30, 2020
The following comparison for the six months ended June 30, 2021 to the six
months ended June 30, 2020 , makes reference to the effect of the following:
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(a)"Same Store Property Portfolio," which represents 73 properties containing an
aggregate of approximately 12.5 million net rentable square feet, and represents
properties that we owned and consolidated for the six-month periods ended
June 30, 2021 and 2020. The Same Store Property Portfolio includes properties
acquired or placed in service on or prior to January 1, 2020 and owned and
consolidated through June 30, 2021 excluding properties classified as held for
sale,
(b)"Total Portfolio," which represents all properties owned and consolidated by
us during the six months ended June 30, 2021 and 2020,
(c)"Recently Completed/Acquired Properties," which represents three properties
placed into service or acquired on or subsequent to January 1, 2020 ,
(d)"Development/Redevelopment Properties ," which represents five properties
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)"YTD 2020 and 2021 Dispositions," which represents 15 properties disposed of
from January 1, 2020 through June 30, 2021 .
Comparison of the six months ended June 30, 2021 to the six months ended June
30, 2020
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 amounts) 2021 2020 $ Change % Change 2021 2020 2021 2020 2021 2020 2021 2020 $ Change % Change
Revenue:
Rents $ 211.8 $ 210.0 $ 1.8 0.9 % $ 8.2 $ 2.9 $ 0.3 $ 5.2 $ 4.4 $ 53.3 $ 224.7 $ 271.4 $ (46.7) (17.2) %
Third party management fees, labor
reimbursement and leasing - - - - % - - - - 13.3 9.0 13.3 9.0 4.3 47.8 %
Other 0.5 0.5 - - % - - - - 2.4 1.0 2.9 1.5 1.4 93.3 %
Total revenue 212.3 210.5 1.8 0.9 % 8.2 2.9 0.3 5.2 20.1 63.3 240.9 281.9 (41.0) (14.5) %
Property operating expenses 53.5 54.0 (0.5) (0.9) % 2.2 1.3 (1.2) 0.4 3.7 15.1 58.2 70.8 (12.6) (17.8) %
Real estate taxes 26.0 25.3 0.7 2.8 % 0.4 0.4 1.7 1.0 1.3 6.9 29.4 33.6 (4.2) (12.5) %
Third party management expenses - - - - % - - - - 6.5 5.0 6.5 5.0 1.5 30.0 %
Net operating income 132.8 131.2 1.6 1.2 % 5.6 1.2 (0.2) 3.8 8.6 36.3 146.8 172.5 (25.7) (14.9) %
Depreciation and amortization 74.0 75.8 (1.8) (2.4) % 3.6 1.7 0.4 2.4 5.2 21.8 83.2 101.7 (18.5) (18.2) %
General & administrative expenses - - - - % - - - - 14.9 16.9 14.9 16.9 (2.0) (11.8) %
Net gain on disposition of real
estate (0.1) (2.6) 2.5 (96.2) %
Net gain on sale of undepreciated
real estate (2.0) (0.2) (1.8) 900.0 %
Operating income (loss) $ 58.8 $ 55.4 $ 3.4 6.1 % $ 2.0 $ (0.5) $ (0.6) $ 1.4 $ (11.5) $ (2.4) $ 50.8 $ 56.7 $ (5.9) (10.4) %
Number of properties 73 73 3 5 81
Square feet 12.5 12.5 0.5 0.7 13.9
Core Occupancy % (b) 90.3 % 90.7 % 94.6 %
Other Income (Expense):
Interest and investment income 3.4 1.0 2.4 240.0 %
Interest expense (31.8) (40.2) 8.4 (20.9) %
Interest expense - Deferred
financing costs (1.4) (1.5) 0.1 (6.7) %
Equity in loss of unconsolidated
real estate ventures (14.2) (4.1) (10.1) 246.3 %
Income tax benefit - 0.2 (0.2) (100.0) %
Net income $ 6.8 $ 12.1 $ (5.3) (43.8) %
Net income attributable to Common
Shareholders of Brandywine Realty
Trust $ 0.04 $ 0.07 $ (0.03) (42.9) %
(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 Core Properties .
Total Revenue
Rents from the Total Portfolio decreased primarily as a result of the following:
•$46.9 million decrease related to the YTD 2020 and 2021 Dispositions;
•$4.9 million decrease related to a property that has been vacated and placed
into redevelopment in our Metropolitan Washington D.C . segment;
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•$1.3 million decrease related to a property that has been vacated and taken out
of service for future demolition in our Austin, Texas segment;
•$0.5 million decrease related to reduced parking income;
•$5.3 million increase related to the Recently Completed/Acquired Properties ;
and,
•$1.8 million increase across our Same Store Property Portfolio due to increased
occupancy at certain properties as well as an increased use of our properties by
the tenants related to the lifting of COVID-19 pandemic restrictions.
Third party management fees, labor reimbursement, and leasing income increased
primarily due to $2.0 million of fees earned from the Mid-Atlantic Office
Venture formed in the fourth quarter of 2020, $1.6 million of fees earned from
the Commerce Square Venture formed in the third quarter of 2020, and a $1.0
million increase in fees earned from our MAP Venture primarily related to
increases in leasing commissions and construction management fees.
Other income increased primarily due to $0.7 million in excess insurance
proceeds related to a property in our Austin, Texas segment as well as $0.4
million in proceeds related to a legal settlement during the second quarter of
2021.
Property Operating Expenses
Property operating expenses across our Total Portfolio decreased primarily as a
result of the following:
•$14.4 million decrease related to the YTD 2020 and 2021 Dispositions;
•$1.6 million decrease related to the Development/Redevelopment properties
primarily related to a property in our Metropolitan Washington D.C . segment
segment that was taken out of service for redevelopment; and,
•$0.9 million increase related to the Recently Completed/Acquired Properties .
The remaining offsetting increase of $2.5 million is related to miscellaneous
increases in property operating expenses across our Total Portfolio, primarily
driven by increases in property-related employee compensation expenses,
marketing expenses, and repairs and maintenance.
Real Estate Taxes
The decrease in real estate taxes is primarily driven by a $5.4 million decrease
related to the YTD 2020 and 2021 Dispositions. The offsetting $1.2 million
increase is primarily the result of acquisition of 250 King of Prussia Road in
our Pennsylvania Suburbs Segment and miscellaneous increases in tax assessments
across our Total Portfolio.
Depreciation and Amortization
Depreciation and amortization expense decreased primarily as a result of the
following:
•$17.4 million decrease due to the YTD 2020 and 2021 Dispositions;
•$2.5 million decrease at various properties in our Same Store Property
Portfolio, largely due to the completion of amortization of acquired in-place
lease intangibles;
•$2.0 million decrease related to our Development/Redevelopment Properties
primarily due to a property placed into redevelopment in our Philadelphia CBD
segment; and,
•$3.3 million increase due to the reassessment of the estimated useful life of
seven properties in our Austin, Texas segment pursuant to future demolition
plans as part of our Broadmoor master development plan beginning in the second
quarter of 2021.
General and Administrative
General and administrative expenses decreased primarily as a result of a $2.4
million recovery of previously expensed legal fees incurred in pursuit of a
settlement that was received in the first quarter of 2021. The offsetting $0.4
million is primarily related to increased employee medical benefit costs.
Net Gain on disposition of Real Estate
The gain of $2.6 million recognized during the six months ended June 30, 2020 is
primarily related to the disposition of 52 East Swedesford Road , an office
property in our Pennsylvania Suburbs segment.
Net Gain on Sale of Undepreciated Real Estate
The gain of $2.0 million recognized during the six months ended June 30, 2021 is
due to the formation of the 3025 JFK Venture, which resulted in deconsolidation
of the project and recognition of our investment in the real estate venture at
fair value.
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The gain of $0.2 million recognized during the six months ended June 30, 2020
resulted from the sale of Keith Valley , a land parcel in our Pennsylvania
Suburbs Segment.
Interest and Investment Income
Interest and investment income increased primarily due to $2.5 million of
preferred return earned during the six months ended June 30, 2021 from our
Austin Preferred Equity Investment , which closed on December 31, 2020 .
Interest Expense
Interest expense decreased primarily due to the following:
•$4.4 million decrease due to deconsolidation of One Commerce Square and Two
Commerce Square and the associated mortgage loans on July 21, 2020 ;
•$1.6 million decrease due to the purchase of the Two Logan Square mortgage in
the fourth quarter of 2020; and,
•$1.4 million decrease due to an increase in capitalized interest on our various
development projects as well as capitalized interest on our investment in 3025
JFK Venture.
The remaining decrease is primarily related to lower interest rates during the
six months ended June 30, 2021 compared to the six months ended June 30, 2020 .
Equity in Loss of unconsolidated real estate ventures
Equity in loss of unconsolidated real estate ventures increased primarily due to
the following:
•$9.0 million in net losses associated with our Commerce Square Venture formed
on July 21, 2020 ; and,
•$1.2 million increase related to our MAP Venture due to lower revenues driven
by lower occupancy during the six months ended June 30, 2021 than the six months
ended June 30, 2020 .
These increases were partially offset by $0.3 million in net income associated
with our Mid-Atlantic Office Venture formed on December 21, 2020 .
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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 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;
•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;
•sales of real estate or contributions of interests in real estate to joint
ventures; and
•issuances of Parent Company equity securities and/or units of the Operating
Partnership .
As of June 30, 2021 , the Parent Company owned a 99.5% interest in the Operating
Partnership . The remaining interest of approximately 0.5% pertains to common
limited partnership interests owned by non-affiliated investors who contributed
property to the Operating Partnership in exchange for their interests. As the
sole general partner of the Operating Partnership , the Parent Company has full
and complete responsibility for the Operating 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
the Operating 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 2021 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 of June 30, 2021 we were in
compliance with all of our debt covenants and requirement obligations.
In addition, we are continuing to monitor the ongoing COVID-19 pandemic 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 and continues to evolve globally.
However, if the pandemic 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.
We collected 99.3% of total cash-based rent due from tenants during the second
quarter of 2021, which reflects a 99.8% collection rate from our office tenants.
We have granted rent relief requests primarily to our co-working and retail
tenants. The relief requests have substantially all been in the form of rent
deferral for varying lengths of time, but were/are primarily being repaid in
2020 and 2021. For those tenants we believe require rent relief, we have granted
deferrals and, in some instances, rent abatements while receiving extended lease
terms through favorable lease extensions. To date, we have provided $4.9 million
of rent relief to 66 tenants approximating 0.9 million square feet. The
deferrals represent approximately 1.1% of annualized revenue. We continue to
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assess the merits of rent deferral requests and 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 loan would increase.
The Parent Company unconditionally guarantees the Operating Partnership's
unsecured obligations, which, as of June 30, 2021 , amounted to $1,886.6 million .
We did not have any secured debt obligations as of June 30, 2021 .
Capital Markets
The Parent Company issues equity from time to time, the proceeds of which it
contributes to the Operating Partnership in exchange for additional interests in
the Operating Partnership , and guarantees debt obligations of the Operating
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 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 12, ''Beneficiaries' Equity of the Parent Company" to our Consolidated
Financial Statements for further information related to our share repurchase
program. 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 six months ended June 30, 2021 , we did not
have any property dispositions with the exception of our contribution of an
investment in a 99-year prepaid leasehold interest in a one-acre land parcel
held for development to 3025 JFK Venture. In addition, we closed on the sale of
the two parcels of land on July 6, 2021 for net cash proceeds of of $8.3
million .
As of June 30, 2021 , we had $47.7 million of cash and cash equivalents and
$540.7 million of available borrowings under our unsecured revolving credit
facility, net of $1.3 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. We expect that our primary uses of capital
during the remainder of 2021 will be to fund our current development and
redevelopment projects.
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 of June 30, 2021 and December 31, 2020 , we maintained cash and cash
equivalents and restricted cash of $48.5 million and $47.1 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):
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Six Months Ended June 30,
Activity 2021 2020 (Decrease) Increase
Operating $ 79,126 $ 100,320 $ (21,194)
Investing (68,403) (75,327) 6,924
Financing (9,288) (70,689) 61,401
Net cash flows $ 1,435 $ (45,696) $ 47,131
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. 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
six months ended June 30, 2021 , when compared to the six months ended June 30,
2020 , the change in investing cash flows was due to the following activities (in
thousands):
(Decrease) Increase
Acquisitions of real estate $
11,432
Capital expenditures and capitalized interest
26,762
Capital improvements/acquisition deposits/leasing costs 3,538 Joint venture investments (16,463) Proceeds from insurance 1,250 Distributions from joint ventures
1,576
Proceeds from the sale of properties
(21,171)
Decrease in net cash used in investing activities $
6,924
We generally fund our investment activity through the sale of real estate, property-level financing, credit facilities, senior unsecured notes, 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 six months endedJune 30, 2021 , when compared to the six months endedJune 30, 2020 , the change in financing cash flows was due to the following activities (in thousands): (Decrease)
Increase
Proceeds from debt obligations $ (36,500)
Repayments of debt obligations 37,409
Redemption of limited partnership units (2,234)
Proceeds from the exercise of stock options, net (110)
Repurchase and retirement of common shares 60,000
Other financing activities 1,812
Dividends and distributions paid 1,024
Decrease in net cash used in financing activities $ 61,401
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Capitalization
Indebtedness
The table below summarizes indebtedness under our unsecured debt at June 30,
2021 and December 31, 2020 :
June 30, 2021 December 31, 2020
(dollars in thousands)
Balance: (a)
Fixed rate $ 1,750,000 $ 1,775,774
Variable rate - unhedged 136,610 52,836
Total $ 1,886,610 $ 1,828,610
Percent of Total Debt:
Fixed rate 92.8 % 97.1 %
Variable rate - unhedged 7.2 % 2.9 %
Total 100.0 % 100.0 %
Weighted-average interest rate at period end:
Fixed rate 3.8 % 3.8 %
Variable rate - unhedged 1.8 % 1.5 %
Total 3.7 % 3.8 %
Weighted-average maturity in years:
Fixed rate 4.5 5.2
Variable rate - unhedged 8.6 14.6
Total 4.8 5.4
(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 of June 30, 2021 were as follows (dollars in
thousands):
Weighted Average
Principal Interest Rate of
Period maturities Maturing Debt
2021 (six months remaining) $ - - %
2022 308,000 2.76 %
2023 350,000 3.87 %
2024 350,000 3.78 %
2025 - - %
2026 - - %
2027 450,000 4.03 %
2028 - - %
2029 350,000 4.30 %
2030 - - %
Thereafter 78,610 1.44 %
Totals $ 1,886,610 3.69 %
The indenture under which the Operating 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 of June 30, 2021 .
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 12, ''Beneficiaries' Equity of the Parent
Company," to our Consolidated Financial Statements for further information
related to our dividends declared for the second quarter of 2021.
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Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended December 31, 2020 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 ended June 30, 2021 .
Funds from Operations (FFO)
Pursuant to the revised definition of FFO adopted by the Board of Governors of
the National 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 unconsolidated real estate ventures, real estate related depreciation and
amortization, and after similar adjustments for unconsolidated real 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.
The following table presents a reconciliation of net income attributable to
common unit holders to FFO for the three and six months ended June 30, 2021 and
2020:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(amounts in thousands, except share information)
Net income (loss) attributable to common $ (268) $ 3,917 $ 6,551 $ 11,861
unitholders
Add (deduct):
Amount allocated to unvested restricted 94 93 240 224
unitholders
Net gain on disposition of real estate (68) - (142) (2,586) Depreciation and amortization: Real property 34,294 37,194 65,828 75,547 Leasing costs including acquired intangibles 7,954 12,045 16,234 25,244 Company's share of unconsolidated real estate 14,060 4,630 27,791 9,229
ventures
Partners' share of consolidated real estate (5) (59) (10) (119)
ventures
Funds from operations$ 56,061 $
57,820
(150) (167) (363) (357)
restricted shareholders
Funds from operations available to common share $ 55,911 $
57,653
171,499,729 171,699,909 174,275,665
basic (a)
Weighted-average shares/units outstanding - 173,289,294 171,751,712 172,958,591 174,587,582
fully diluted (a)
(a)Includes common share and partnership units outstanding through the three and
six months ended
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