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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-03-02 · 197 added, 251 removed, 278 unchanged (62% of the section changed)

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The following discussion should be read in conjunction with the Consolidated Financial Statements appearing elsewhere herein and is based primarily on our Consolidated Financial Statements for the years ended December 31, 2020, 2019 and 2018.

This report including the following discussion, contains forward-looking statements, which we intend to be covered by the safe-harbor provisions of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.

Exchange Act of 1934, as amended.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements.

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“See “Forward-Looking Statements” immediately before Part I of this report.

During the twelve months ended December 31, 2019 , we owned and managed properties within five markets:

During the twelve months ended December 31, 2020, 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.

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The Other segment includes properties in Camden County, New Jersey and properties in New 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.

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 of properties owned by third parties and from investments in the 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 part of our Core Properties, either because of location or expected growth potential, and assets that are commanding premium prices from third party investors.

The following highlights our key financial results for the year ended December 31, 2019 :

Net income available to common shareholders decreased by $100.2 million to $33.9 million for the year ended December 31, 2019 , as compared to the corresponding period in 2018 .

FFO available to common share and unit holders, a non-GAAP financial measure, increased to $253.3 million or $1.43 per diluted share for the year ended December 31, 2019 , from $247.6 million or $1.37 per diluted share for the year ended December 31, 2018 (see additional disclosure in the “Funds From Operations (FFO)” section below).

Same Store net operating income, a non-GAAP financial measure, decreased 0.3% for the year ended December 31, 2019 , as compared to the corresponding period in 2018 (see additional disclosure on Same Store net operating income in “Results of Operations” section below).

Core Occupancy decreased from 93.3% at December 31, 2018 , to 93.0% at December 31, 2019 .

Factors that May Influence Future Results of Operations

Global Market and Economic Conditions

In the U.S., market and economic conditions have been improving, characterized by more availability to credit and modest growth.

While recent economic data reflects modest growth, the cost and availability of credit may be adversely affected by illiquid credit markets and wider credit spreads.

Volatility in the U.S.

and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our tenants.

Any adverse market conditions may limit our ability, as well as the ability of our tenants, to timely refinance maturing liabilities and access capital markets to meet liquidity needs.

Real Estate Asset Valuation

General economic conditions and the resulting impact on market conditions or a downturn in tenants’ businesses may adversely affect the value of our assets.

Challenging economic conditions in the U.S., declining demand for leased office, retail, or mixed-use properties and/or a decrease in market rental rates and/or market values of real estate assets in our submarkets could have a negative impact on the value of our Properties.

If we were required under GAAP to write down the carrying value of any of our Properties due to impairment, or if as a result of an early lease termination we were required to remove or dispose of material amounts of tenant improvements that are not reusable to another tenant, our financial condition and results of operations could be negatively affected.

Leasing Activity and Rental Rates

The amount of net rental income generated by our Properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties and space available from unscheduled lease terminations.

The amount of rental income we generate also depends on our ability to maintain or

increase rental rates in our submarkets.

Negative trends in one or more of these factors could adversely affect our rental income in future periods.

Equity Method Investment Valuation

Our equity method investments, consisting of our investments in unconsolidated real estate ventures, may be adversely affected by changes in the real estate markets in which they operate.

Under the equity method, unconsolidated real estate ventures are recorded initially at cost and subsequently adjusted for equity in earnings, cash contributions, less distributions and impairments.

As required under accounting rules, we evaluate and assess our equity method investments for other than temporary impairment at least quarterly.

In valuing our equity method investments, fair value is determined through various valuation techniques, including but not limited to, discounted cash flow models, quoted market values and third party appraisals.

However, such quoted data and other market information can vary, even for the same properties.

To the extent that the real estate markets deteriorate or we are unable to lease our development projects, it could result in declines in the fair value of our equity method investments that are other than temporary and, we may realize losses that never materialize or we may fail to recognize losses in the appropriate period.

Rapidly changing conditions in the real estate markets in which we operate increase the complexity of valuing our equity method investments.

Our judgments and methodologies materially impact the valuation of the investments as reported in our financial statements.

Development and Redevelopment Programs

Historically, a significant portion of our growth has come from our development and redevelopment efforts.

We have a proactive planning process by which we continually evaluate the size, timing, costs, and scope of our development and redevelopment programs and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our strategic submarkets.

We are currently proceeding with certain development and redevelopment projects, and we take a cautious and selective approach when determining if a certain development or redevelopment project will benefit our portfolio.

In addition, we may be unable to lease committed development or redevelopment properties at underwritten rental rates or within projected timeframes or complete development or redevelopment properties on schedule or within budgeted amounts, which could adversely affect our financial condition, results of operations and cash flow.

Financial and Operating Performance

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 may decline, during 2020 and possibly beyond as the current economic climate may negatively impact tenants.

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 are closely monitoring 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, beyond 2020 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 our strong balance sheet will enable us to raise debt capital, if necessary, in various forms and from different sources, including a traditional term or secured loans from banks, pension funds and life insurance companies.

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 building.

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 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.

The table below summarizes selected operating and leasing statistics of our wholly owned operating properties for the year ended December 31, 2019 :

We continue to seek revenue growth throughout our portfolio by increasing occupancy and rental rates.

Occupancy at our Core Properties at December 31, 2020 was 91.9% compared to 93.0% at December 31, 2019.

The table below summarizes selected operating and leasing statistics of our wholly owned operating properties for the years ended December 31, 2020 and 2019:

Year Ended December 31,

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Our accounts receivable allowance was $5.1 million or 2.9% of total receivables (including accrued rent receivable) as of December 31, 2020 compared to $8.0 million or 4.0% of total receivables (including accrued rent receivable) as of December 31, 2019.

If economic conditions deteriorate, we may experience increases in past due accounts, defaults, lower occupancy and reduced effective rents.

The decrease in the accounts receivable allowance as a percentage of the total receivables is primarily due to the write-off of the accrued rent receivable for certain retail tenants where revenue is now being recognized on a cash basis due to collectability concerns arising from the economic conditions resulting from the COVID-19 pandemic.

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, 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.

See Item 1A., “ Risk Factors.

As of December 31, 2019 the following development and redevelopment projects remain under construction in progress and we were proceeding on the following activity (dollars, in thousands):

Property/Portfolio Name

Expected Completion

Activity Type

Approximate Square Footage/ Units

Estimated Costs

Amount Funded

The Bulletin Building (a)

Philadelphia, PA

Redevelopment

405 Colorado Street (b)

Lancaster Avenue (c)

Redevelopment

Estimated costs include $37.8 million of building basis, representing the acquisition cost.

Estimated costs includes $2.1 million of existing property basis through a ground lease.

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.

During the second quarter of 2020, certain development projects were impacted by building moratoriums imposed by local governments as a result of the COVID-19 pandemic.

These moratoriums have since been lifted in all geographies in which we have active development projects, but could be reinstated in the event of a significant increase in COVID-19 cases.

The construction delays did not materially impact the development projects.

As of December 31, 2020 the following active development and redevelopment projects remain under construction in progress and we were proceeding on the following activity (dollars, in thousands):

Property/Portfolio Name Location Expected Completion Activity Type Approximate Square Footage/ Units Estimated Costs Amount Funded

405 Colorado Street (a) Austin, TX Q1 2021 Development 205,803 $ 122,000 $ 67,000

3000 Market Street (b) Philadelphia, PA Q3 2021 Redevelopment 64,070 $ 35,000 $ 16,900

(a) Estimated costs includes $2.1 million of existing property basis through a ground lease.

Project includes 520 parking spaces.

The property was vacated during the third quarter of 2017.

Total project costs include $4.9 million of existing property basis.

The renovation of the base building was substantially completed during the first quarter of 2019 and remaining costs as of December 31, 2019 primarily represent tenant improvements.

In addition to the properties listed above, we have classified two properties in Philadelphia, Pennsylvania as redevelopment.

As of December 31, 2019, there has not been material construction spend on these projects.

Although we continue to evaluate opportunities to acquire assets, the abundance of capital and demand for assets has resulted in increasing prices.

As a result, in the current environment, we are able to develop properties at a cost per square foot that is generally less than the cost at which we can acquire existing properties, thereby generating relatively better returns with lower annual maintenance expenses and capital costs.

Accordingly, we believe that successful lease-up and completion of our development pipeline will enhance our long-term return on equity and earnings growth as these developments are placed in-service.

(b) Estimated costs include $12.8 million of existing property basis.

In addition to the properties listed above, we have classified one office building in Radnor, Pennsylvania (acquired during the fourth quarter of 2020) and one parking facility in Philadelphia, Pennsylvania as redevelopment.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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If we believe there is a significant possibility that we might dispose of the assets earlier, we assess the recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over the various possible holding periods.

If the recoverability assessment indicates that the carrying value of a tested real estate investment is not recoverable from estimated undiscounted future cash flows, it is written down to its estimated

fair value and an impairment is recognized.

If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of each asset using holding periods that are consistent with our revised plans.

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The estimation of future cash flows is subjective and is based on various assumptions, including but not limited to market rental rates, capitalization rates, and recent sales data for comparable real estate investments.

Estimated future cash flows are discounted when determining fair value of an asset.

Estimated future cash flows are discounted

when determining fair value of an asset.

Most of these assumptions are influenced by our direct experience with the real estate investments and their markets as well as market data obtained from real estate leasing and brokerage firms.

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When we are required to provide improvements under the terms of a lease, we need to determine whether the improvements constitute landlord assets or tenant assets.

If the improvements are landlord assets, we capitalize the cost of the improvements and recognize depreciation expense associated with such improvements over shorter of the estimated useful life or the term of the lease .

If the improvements are landlord assets, we capitalize the cost of the improvements and recognize depreciation expense associated with such improvements over the shorter of the estimated useful life or the term of the lease.

If the improvements are tenant assets, we defer the cost of improvements funded by us as a lease incentive asset and amortize it as a reduction of rental revenue over the term of the lease.

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The following comparison for the year ended December 31, 2020 to the year ended December 31, 2019, makes reference to the effect of the following:

“Same Store Property Portfolio,” which represents 73 properties containing an aggregate of approximately 13.9 million net rentable square feet, and represents properties that we owned for the twelve-month periods ended December 31,

2019 and 2018 .

The Same Store Property Portfolio includes properties acquired or placed in service on or prior to January 1, 2018 and owned through December 31, 2019 ,

“Total Portfolio,” which represents all properties owned by us during 2019 and 2018 ,

"Recently Completed/Acquired Properties," which represents 17 properties placed into service or acquired on or subsequent to January 1, 2018,

"Development/Redevelopment Properties," which represents 5 properties currently in development/redevelopment.

(a) “Same Store Property Portfolio,” which represents 74 properties containing an aggregate of approximately 12.8 million net rentable square feet, and represents properties that we owned for the twelve-month periods ended December 31, 2020 and 2019.

The Same Store Property Portfolio includes properties acquired or placed in service on or prior to January 1, 2019 and owned through December 31, 2020, excluding properties classified as held for sale,

(b) “Total Portfolio,” which represents all properties owned by us during 2020 and 2019,

(c) "Recently Completed/Acquired Properties," which represents four properties placed into service or acquired on or subsequent to January 1, 2019,

(d) "Development/Redevelopment Properties," which represents four 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

"2018 and 2019 Dispositions," which represents 11 properties disposed of during 2018 and 2019 .

(e) "2019 and 2020 Dispositions," which represents 16 properties disposed of or contributed to unconsolidated joint ventures during 2019 and 2020.

Comparison of Year Ended December 31, 2020 to the Year Ended December 31, 2019

Same Store Property Portfolio

Recently Completed/Acquired Properties

Development/Redevelopment Properties

Other (Eliminations) (a)

Total Portfolio

(dollars and square feet in millions except per share amounts)

Same Store Property Portfolio Recently Completed/Acquired Properties Development/Redevelopment Properties Other (Eliminations) (a) Total Portfolio

(dollars and square feet in millions except per share amounts) 2020 2019 $ Change % Change 2020 2019 2020 2019 2020 2019 2020 2019 $ Change % Change

Rents $ 425.4 $ 428.4 $ (3.0) (0.7) % $ 17.0 $ 13.4 $ 0.3 $ 1.7 $ 70.8 $ 111.2 $ 513.5 $ 554.7 $ (41.2) (7.4) %

Third party management fees, labor reimbursement and leasing — — — — % — — — — 18.6 19.6 18.6 19.6 (1.0) (5.1) %

Other 0.9 1.6 (0.7) (43.8) % — — — 0.1 1.9 4.4 2.8 6.1 (3.3) (54.1) %

Total revenue 426.3 430.0 (3.7) (0.9) % 17.0 13.4 0.3 1.8 91.3 135.2 534.9 580.4 (45.5) (7.8) %

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General & administrative expenses — — — — % — — — — 30.3 32.2 30.3 32.2 (1.9) (5.9) %

Provision for impairment

Net gain on disposition of real estate (289.5) (0.4) (289.1) 72,275.0 %

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Number of properties 74 74 4 4 82

Square feet 12.8 12.8 0.6 0.4 13.9

Core Occupancy % (b) 91.7 % 92.4 % 95.4 %

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Net gain on real estate venture transactions 0.1 11.6 (11.5) (99.1) %

Gain on promoted interest in unconsolidated real estate venture

Loss on early extinguishment of debt

Income tax provision

Income tax benefit 0.2 — 0.2 — %

Net income $ 307.3 $ 34.5 $ 272.8 790.7 %

Net income attributable to Common Shareholders of Brandywine Realty Trust $ 1.77 $ 0.19 $ 1.58 831.6 %

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.

(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.

Pertains to Core Properties (i.e.

not under development or redevelopment).

(b) Pertains to Core Properties.

Total Revenue

Rents from the Total Portfolio increased by $39.6 million from 2018 to 2019, of which $74.4 million relates to Recently Completed/Acquired Properties, primarily the DRA Austin and Quarry Lake II acquisitions.

This increase was largely offset by a $34.9 million decrease relating to the 2018 and 2019 Dispositions.

Third party management fees, labor reimbursement, and leasing income decreased $3.0 million from 2018 to 2019, due primarily to decreases in third party management and development fees.

The decrease includes $3.5 million of third party management fees related to the sale of twelve office properties by the DRA Austin Venture in the fourth quarter of 2018, $2.4 million related to the sale of three office properties held by our BDN – AI Venture in the fourth quarter of 2018, and a decrease of $2.5 million related to general contractor management services provided primarily to the MAP Venture.

These decreases were primarily offset by a $3.2 million increase in third party management fees from our Herndon Innovation Center Venture, which was formed during the fourth quarter of 2018, $1.2 million increase in third party developer fees related to the development of a medical facility located in Radnor, Pennsylvania that commenced during the second quarter of 2019, and $0.5 million related to the fee received for our involvement in facilitating the disposition of the PJP II, PJP VI and PJP VII Ventures.

Rents from the Total Portfolio decreased by $41.2 million from 2019 to 2020.

The decrease in rents is primarily driven by the following:

• $34.7 million decrease related to the 2019 and 2020 Dispositions;

• $4.5 million decrease related to the October 2019 early termination of a large tenant at 1676 International Drive in the Metropolitan Washington D.C.

• $3.5 million decrease related to reduced parking income due to the COVID-19 pandemic;

• $1.4 million decrease related to properties placed into redevelopment.

The remaining change was primarily attributable to a $2.9 million increase in rents, which was driven by increases in occupancy at certain properties in the Philadelphia suburbs and Philadelphia CBD segments as well increases related to the Recently Completed/Acquired Properties for 2020 compared to 2019.

Third party management fees, labor reimbursement, and leasing income decreased $1.0 million from 2019 to 2020, primarily due to a decrease in construction management fees for a third party building that was completed in the first quarter of 2020.

Other income at our Total Portfolio decreased by $3.3 million from 2019 to 2020, which was primarily related to a decrease in income from the restaurant component of FMC Tower, as well as decreases in various fees from third parties due to the COVID-19 pandemic and associated store and building closures.

Property Operating Expenses

The $0.6 million decrease in property operating expenses is primarily driven by the following:

Property operating expenses decreased $22.2 million from 2019 to 2020 primarily driven by the following:

• $11.3 million decrease related to 2019 and 2020 Dispositions;

$2.1 million decrease related to the reduction in the accrued rent receivable allowance during the fourth quarter of 2019 (included in "Other/Eliminations");

$1.8 million decrease related to Same Store Property Portfolio;

$1.3 million decrease related to Development/Redevelopment Properties;

$15.1 million increase due to Recently Completed/Acquired Properties.

Real Estate Taxes

Real estate taxes across our Total Portfolio increased by $11.0 million from 2018 to 2019, primarily related to $3.4 million in increased real estate tax assessments at the Same Store Property Portfolio, primarily in the Philadelphia CBD segment, and $12.4 million related to Recently Completed/Acquired Properties, primarily the DRA Austin and Quarry Lake II acquisitions.

These increases were partially offset by a decrease of $4.2 million from the 2018 and 2019 Dispositions.

• $5.7 million decrease across our Same Store Property Portfolio, most significantly driven by the termination of a large tenant (and resulting vacancy) at 1676 International Drive in our Metropolitan Washington, D.C.

segment and decreased use of properties by tenants during the COVID-19 pandemic;

• $3.0 million decrease at the hotel and restaurant components of FMC Tower due to the COVID-19 pandemic

The remaining $2.2 million decrease is related to miscellaneous decreases across our portfolio, including a decrease in payroll and salary expense related to operating the properties.

Depreciation and Amortization

Depreciation and amortization expense increased by $34.0 million from 2018 to 2019, of which $42.5 million relates to an increase in depreciation expense from Recently Completed/Acquired Properties, primarily the DRA Austin and Quarry Lake II acquisitions in December 2018, 500 North Gulph Road being placed into service in December 2018, and Broadmoor 6 being placed into service in October 2018.

$2.2 million of the increase relates to properties within our Same Store Portfolio and $1.3 million increase in properties within Development/Redevelopment.

These increases were partially offset by a $13.7 million decrease relating to the 2018 and 2019 Dispositions.

Depreciation and amortization expense decreased by $21.7 million from 2019 to 2020 primarily driven by the following:

• $12.4 million decrease related to the 2019 and 2020 Dispositions;

• $7.7 million decrease related to our Same Store Property Portfolio, largely due to the completion of amortization of acquired in-place lease intangibles and the write-off of lease intangibles in connection with an early lease termination at 1676 International Drive in our Metropolitan Washington, D.C.

segment in 2019;

• $1.5 million decrease related to our Development/Redevelopment Properties primarily related to a property placed into redevelopment in our Philadelphia CBD segment.

General and Administrative Expenses

General and administrative expenses across our Total Portfolio increased by $4.4 million from 2018 to 2019, primarily related to a $2.0 million increase in payroll, bonus, stock compensation expense, and related benefits, $1.4 million decrease in capitalized costs, $0.5 million increase in professional fees, and $0.3 million increase in charitable contributions.

Provision for Impairment

During 2018, we recognized a provision for impairment of $71.7 million, which consists of the following :

$56.9 million impairment charge related to the disposition of eight office properties in our Metropolitan Washington, D.C.

$14.8 million held for use impairment charge on an office property in our Metropolitan Washington, D.C.

There was no provision for impairment recognized during 2019.

General and administrative expenses across our Total Portfolio decreased by $1.9 million from 2019 to 2020, primarily related to a $0.8 million decrease in payroll, bonus, stock compensation expense, and related benefits, $0.4 million decrease in travel and entertainment/meals, and $0.4 million decrease in professional fees.

Net Gain on Disposition of Real Estate

The $0.4 million gain on disposition of real estate for 2019 relates to the disposition of the office property at 1900 Gallows Rd in Vienna, Virginia.

The $2.9 million gain on disposition of real estate for 2018 resulted from the following sales transactions:

$2.6 million on the sale of the Subaru NTSC, located in Camden, New Jersey;

$0.4 million on the sale of eight properties in our Metropolitan Washington, D.C.

an immaterial loss from the disposition of the office property at 20 East Clementon Road, in Gibbsboro, New Jersey.

The $289.5 million gain on disposition of real estate for 2020 primarily resulted from the following sales transactions:

• $271.9 million related to the sale of a 30% preferred equity interest in One Commerce Square and Two Commerce Square, which resulted in deconsolidation of the properties and recognition of our investment in the properties at fair value;

• $15.2 million related to the sale of a 60% equity interest in a portfolio of twelve suburban office properties located in suburban Pennsylvania and Maryland, containing an aggregate of 1.1 million square feet ("Mid-Atlantic Office Portf olio"), which resulted in deconsolidation of the properties and recognition of our investment in the properties at fair value;

• $2.3 million related to the disposition of 52 East Swedesford Road, an office property in our Pennsylvania Suburbs segment.

The $0.4 million gain on disposition of real estate for 2019 relates to the disposition of the office property at 1900 Gallows Road in Vienna, Virginia.

Net Gain on Sale of Undepreciated Real Estate

The gain of $2.0 million recognized during 2019 relates to the sale of 9 Presidential Boulevard and contingent consideration received related to a land sale that closed in a prior period.

The gain of $3.0 million recognized during 2018 primarily resulted from the recognition of a deferred gain from the sale of land parcels located at Garza Ranch in Austin, Texas.

Interest Income

Interest income decreased $2.4 million from 2018 to 2019 primarily due to lower average cash balances throughout the year.

The gain of $0.2 million recognized during 2020 primarily resulted from the sale of a land parcel in Horsham, Pennsylvania.

The gain of $2.0 million recognized during 2019 relates to the sale of 9 Presidential Boulevard and from additional consideration received during 2019 related to the Libertyview disposition, which occurred in 2015.

Interest Expense

Interest expense increased $3.3 million from 2018 to 2019 primarily due to a $3.4 million increase in interest expense from increased borrowings on our Credit Facility during 2019 compared to 2018 as well as $1.0 million of additional interest expense from additional borrowings of $100.0 million of our 4.10% Guaranteed Notes due 2024 and $100.0 million of our 4.55% Guaranteed Notes due 2029 in October of 2019.

The $4.4 million increase was partially offset by a $1.3 million decrease from the refinance of our seven-year term loan on December 13, 2018, which reduced the effective interest rate by 0.55%.

Interest expense decreased $7.6 million from 2019 to 2020 primarily driven by the following:

• $4.2 million decrease due to deconsolidation of One Commerce Square and Two Commerce Square and the associated mortgage loans on July 21, 2020;

• $2.0 million reduction to prior period accretions of interest expense on account of a contingent payment to an unaffiliated third party, a portion of which contingent payment ceased to be probable in the third quarter due to the purchase of the Two Logan Square first mortgage;

• $1.5 million decrease due to an increase in capitalized interest for 2020 compared to 2019.

• $0.3 million additional decrease in interest expense due to the acquisition of the first mortgage on Two Logan Square;

• $4.5 million decrease primarily related to decreased borrowings on the line of credit and lower interest rates during 2020 compared to 2019.

These decreases were offset by a $4.9 million increase in interest expense related to our issuance of an additional $100.0 million in aggregate principal amount of each of our outstanding 4.100% Guaranteed Notes due 2024 and 4.550% Guaranteed Notes due 2029 during the fourth quarter of 2019.

Equity in Loss of Real Estate Ventures

The decrease in equity in loss of Real Estate Ventures of $5.3 million from 2018 to 2019 is primarily related to:

$4.1 million decrease due to the other than temporary impairment charge at the BDN – AI Venture during the fourth quarter of 2018;

$7.6 million decrease due to the $10.4 million share of impairments taken on two properties at the BDN - AI Venture during 2018, compared to the $2.8 million share of impairment related to a property at the BDN - AI Venture during 2019;

$3.9 million increase primarily due to increased ground rent expense at the MAP venture during 2019 compared to 2018 as a result of the adoption of Topic 842;

$1.7 million increase related to our acquisition and consolidation of DRA Advisor's 50% ownership interest in the DRA Austin Venture during the fourth quarter of 2018, which generated $1.7 million of income during 2018;

$0.5 million increase related to the Herndon Innovation Center Venture, which was formed during the fourth quarter of 2018.

Equity in loss of Real Estate Ventures increased $8.7 million from 2019 to 2020 is primarily related to:

• $9.2 million increase associated with our Commerce Square Venture formed on July 21, 2020;

• $1.8 million increase related to depreciation and interest expense being recorded at our 4040 Wilson Venture due to portions of the project being placed into service during 2020 as leases commenced;

• $0.5 million increase related to our MAP Venture due to lower revenues from lower occupancy rate during 2020 than 2019;

• $0.3 million increase related to reduced parking income at our 1919 Market Street Venture due to the COVID-19 pandemic.

These increases were offset by a decrease in Equity in Loss of Real Estate Ventures of $2.8 million at our Allstate Venture related to a held for use impairment recorded during 2019, compared to no impairments in 2020.

Net Gain on Real Estate Venture Transactions

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• $1.3 million related to proceeds received from the third-party owner of an adjacent property for the right to construct an “above-grade connection” with the building owned by the 51 N Street venture.

The $142.2 million net gain on Real Estate Venture transactions during 2018 relates to the following:

$103.8 million gain from the acquisition of the remaining properties with the DRA Austin venture;

$25.7 million gain from the sale of the evo at Cira Centre South Venture;

$11.6 million gain recognized on the exchange of our 20% interest in the Seven Tower Bridge Venture for the remaining 35% interest in the Four Tower Bridge Venture;

$1.1 million gain from the sale of BDN – AI Venture’s Station Square properties.

Gain on promoted interest in unconsolidated real estate venture

During 2018, there was a gain on promoted interest in an unconsolidated real estate venture of $28.3 resulting from the acquisition of the remaining DRA Austin venture properties.

There was no comparable activity during 2019.

Net income decreased by $101.0 million from 2018 to 2019 as a result of the factors described above.

Net income increased by $272.8 million from 2019 to 2020 as a result of the factors described above.

Net Income per Common Share – fully diluted

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LIQUIDITY AND CAPITAL RESOURCES

Our principal liquidity needs for the next twelve months are as follows:

fund normal recurring expenses,

fund capital expenditures, including capital and tenant improvements and leasing costs,

fund repayment of certain debt instruments when they mature,

fund current development and redevelopment costs,

fund commitments to unconsolidated real estate ventures,

fund distributions to shareholders to maintain REIT status, and

fund common share repurchases.

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;

• 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;

• issuances of Parent Company equity securities and/or units of the Operating Partnership.

As of December 31, 2020, the Parent Company owned a 99.4% interest in the Operating Partnership.

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The Parent Company’s source of funding for its dividend payments and other obligations is the distributions it receives from the Operating Partnership.

We believe that our liquidity needs will be satisfied through available cash balances and cash flows generated by operations, financing activities, and selective property sales.

Base rent, reimbursement for operating expenses, 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.

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.

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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 throughout 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.

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As of December 31, 2020, 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 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.

We collected 98.3% of total cash-based rent due from tenants during the fourth quarter of 2020.

In addition, approximately 97.9% of January 2021 total cash-based rent has been received from our tenants to date, which reflects a 98.7% 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 $4.1 million of rent relief to 62 tenants approximating 0.8 million square feet.

The deferrals represent approximately 0.8% of annualized revenue.

We continue to 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.

See Note 2, ''Summary of Significant Accounting Policies," to our Consolidated Financial Statements for further information related to our accounting policies for rent concessions.

Pursuant to our accounting elections, rental revenue continued to be recognized for tenants subject to deferral agreements, as long as such agreements did not result in a substantial increase in our rights as the lessor.

As a result, rent deferrals did not have a material impact on revenues for the year ended December 31, 2020.

We use multiple financing sources to fund our long-term capital needs.

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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 revolving credit facility and unsecured term loans would increase.

The Parent Company unconditionally guarantees the Operating Partnership’s secured and unsecured obligations, which, as of December 31, 2019 , amounted to $315.4 million and $1,828.6 million, respectively.

Capital Market/Debt Transactions

The Parent Company also 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 unconditionally guarantees the Operating Partnership’s unsecured obligations, which, as of December 31, 2020, amounted to $1,828.6 million.

The Company did not have any secured debt obligations as of December 31, 2020.

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 has registered 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.

See Note 12, ''Beneficiaries' Equity of the Parent Company ,” to our Consolidated Financial Statements for further information related to the continuous offering program that we generally maintain as well as information related to our share repurchase program during the year ended December 31, 2019 .

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.

See Note 13, ''Beneficiaries' Equity of the Parent Company,” to our Consolidated Financial Statements for further information related our former continuous offering program that we have generally maintained as well as information related to our share repurchase program during the year ended December 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 2019, we sold 2.7 acres of undeveloped land and one office property for net cash proceeds of $5.0 million and $34.1 million respectively.

Our primary uses of capital will be to fund the completion of our current development and redevelopment projects with approximately $90.5 million of cash and cash equivalents and $598.5 million of available borrowings under our Credit Facility, net of $1.5 million in letters of credit outstanding.

During 2020, we sold 14.0 acres of land as well as one office property for net cash proceeds of $3.5 and $17.5 million, respectively.

In addition, we sold a 30% preferred equity interest in One Commerce Square and Two Commerce Square for net cash proceeds of $100.8 million and a 60% equity interest in the Mid-Atlantic Office Portfolio for net cash proceeds of $155.8 million.

As of December 31, 2020, we had $46.3 million of cash and cash equivalents and $598.4 million of available borrowings under our Credit Facility, net of $1.6 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 2021 will be to fund our current development and redevelopment projects.

The following discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be a comprehensive discussion of the changes in our cash flows for the years presented.

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Year Ended December 31,

(Decrease) Increase

Activity 2020 2019 (Decrease) Increase

Operating $ 225,806 $ 234,230 $ (8,424)

Investing 18,290 (130,659) 148,949

Financing (288,189) (35,612) (252,577)

Net cash flows $ (44,093) $ 67,959 $ (112,052)

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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.

The following are the changes in cash flows from our investing activities for the years ended December 31, 2019 and 2018 (in thousands):

During the year ended December 31, 2020, when compared to the year ended December 31, 2019, the change in investing cash flows was due to the following activities (in thousands):

(Decrease) Increase

Acquisitions of real estate $ (39,769)

Capital expenditures and capitalized interest 38,046

Escrow cash/capital improvements/acquisition deposits/leasing costs

Leasing costs/acquisition deposits 4,795

Joint venture investments (10,196)

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Proceeds from the sale of properties 236,319

Notes receivable and other investments

Debt and preferred equity and other investments (53,341)

Increase in net cash provided by investing activities $ 148,949

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 stock, or the Operating Partnership may issue common or preferred units of limited partnership interest.

The following are the changes in cash flow from our financing activities for the years ended December 31, 2019 and 2018 (in thousands):

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 the Operating Partnership may issue common or preferred units of limited partnership interest.

During the year ended December 31, 2020, when compared to the year ended December 31, 2019, the change in financing cash flows was due to the following activities (in thousands):

(Decrease) Increase

Proceeds from debt obligations $ (246,873)

Repayments of debt obligations 35,602

Redemption of limited partnership units

Proceeds from the exercise of stock options (3,724)

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Dividends and distributions paid 2,990

Decrease in net cash used in financing activities

Increase in net cash used in financing activities $ (252,577)

Capitalization

The table below summarizes indebtedness under our mortgage notes payable and our unsecured debt at December 31, 2020 and December 31, 2019:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(dollars in thousands)

Fixed rate $ 1,775,774 $ 2,091,211

Variable rate - unhedged 52,836 52,836

Total $ 1,828,610 $ 2,144,047

Percent of Total Debt:

Fixed rate 97.1 % 97.5 %

Variable rate - unhedged 2.9 % 2.5 %

Total 100.0 % 100.0 %

Weighted-average interest rate at period end:

Fixed rate 3.8 % 3.9 %

Variable rate - unhedged 1.5 % 3.2 %

Total 3.8 % 3.8 %

Weighted-average maturity in years:

Fixed rate 5.2 5.6

Variable rate - unhedged 14.6 15.6

Consists of unpaid principal and does not include premium/discount or deferred financing costs.

Scheduled principal payments and related weighted average annual effective interest rates for our debt as of December 31, 2019 were as follows (in thousands):

Scheduled amortization

Principal maturities

Weighted Average Interest Rate of Maturing Debt

Total 5.4 5.9

(a) Consists of unpaid principal and does not include premium/discount or deferred financing costs.

Scheduled principal payments and related weighted average annual effective interest rates for our debt as of December 31, 2020 were as follows (dollars in thousands):

Period Principal maturities Weighted Average Interest Rate of Maturing Debt

2022 250,000 2.87 %

2023 350,000 3.87 %

2024 350,000 3.78 %

2027 450,000 4.03 %

2029 350,000 4.30 %

Thereafter 78,610 2.08 %

Totals $ 1,828,610 3.76 %

For information related to our debt obligations and their covenants see Note 9, ''Debt Obligations,” to our Consolidated Financial Statements.

Unsecured Debt and Mortgage Notes

Unsecured Debt

The Operating Partnership is the issuer of our unsecured notes which are fully and unconditionally guaranteed by the Parent Company.

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The Operating Partnership was in compliance with all covenants as of December 31, 2020 and 2019.

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 repay its mortgage loans as they mature 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.

The charter documents of the Parent Company and Operating Partnership do not limit the amount or form of indebtedness that the Operating Partnership may incur, and its policies on debt incurrence are solely within the discretion of the Parent Company’s Board of Trustees, subject to the financial covenants in the Credit Facility, indenture and other credit agreements.

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During the year ended December 31, 2020, the Parent Company paid dividends in excess of the 90% criterion.

See Note 12, ''Beneficiaries' Equity of the Parent Company ,” to our Consolidated Financial Statements for further information related to our dividends declared for the fourth quarter, information related to our continuous offering program, and information related to our share repurchase program during the year ended December 31, 2019 .

We do not believe inflation will have a material impact on income from continuing operations.

Commitments and Contingencies

The following table outlines the timing of payment requirements related to our contractual commitments as of December 31, 2019 :

Payments due by Period (in thousands)

Mortgage notes payable (a)

Unsecured term loan (a)

Unsecured debt (a)

Ground leases (b)

Development contracts (c)

Tenant improvements (d)

Interest expense (e)

Other liabilities (f)

Amounts are gross of deferred financing costs and do not include unamortized discounts and/or premiums.

Future lease payments under the terms of all noncancellable ground leases under which we are the lessee.

Represents contractual obligations for wholly owned development projects and does not contemplate all costs expected to be incurred for such developments.

This table does not include contractual obligations for our real estate venture developments, which are described below.

Represents cash commitments under signed leases and excludes tenant-funded improvements.

The timing of these expenditures may fluctuate.

Variable rate debt future interest expense commitments are calculated using December 31, 2019 interest rates.

Consists of (i) our deferred compensation liability, (ii) the interest accretion on the anticipated transfer tax liability on Two Logan Square in Philadelphia, Pennsylvania;

(iii) the contingent consideration associated with the purchase of 618 Market Street in Philadelphia, Pennsylvania in 2015;

and (iv) a payment to a tenant under a profit sharing arrangement.

The above table does not include amounts related to the development at 4040 Wilson, an unconsolidated real estate venture in which we hold a 50% ownership interest, in Arlington, Virginia.

See Note 4, ''Investment in Unconsolidated Real Estate Ventures ," to our Consolidated Financial Statements for further discussion of this development.

See Note 13, ''Beneficiaries' Equity of the Parent Company,” to our Consolidated Financial Statements for further information related to our dividends declared for the fourth quarter, information related to our former continuous offering program, and information related to our share repurchase program during the year ended December 31, 2020.

Contractual Obligations

We provide customary guarantees for certain development projects of our unconsolidated real estate ventures.

See Note 20, ''Commitments and Contingencies ,” to our Consolidated Financial Statements for further details on payment guarantees provided on the behalf of real estate ventures.

During the fourth quarter of 2017, in connection with the Schuylkill Yards Project, we entered into a neighborhood engagement program and, as of December 31, 2019, had $8.5 million of future contractual obligations, which are included in the table above within the “Development contracts” caption.

The Company is also committed to make additional contributions under the program.

As of December 31, 2019, the Company estimates that these additional contributions, which are not fixed under the terms of agreement, will be $2.8 million .

In connection with the Schuylkill Yards Project, we entered into a neighborhood engagement program and, as of December 31, 2020, had $7.7 million of future contractual obligations.

We are also committed to make additional contributions under the program.

We estimate that, as of December 31, 2020, these additional contributions, which are not fixed under the terms of agreement, will be $2.6 million.

See Note 20, ''Commitments and Contingencies,” to our Consolidated Financial Statements for further information.

As of December 31, 2019, we are under contract to acquire an office property containing approximately 170,000 rentable square feet located in Radnor, Pennsylvania for a purchase price of $20.3 million.

We paid $1 million towards the purchase price in the form of a non-refundable deposit and the transaction is expected to close during 2020.

As of December 31, 2019, we are also under contract to acquire a 7.8 -acre land parcel located in Radnor, Pennsylvania for a purchase price of $11.3 million .

The acquisition of the land parcel closed on February 27, 2020.

Certain of the ground leases, entered into in Philadelphia, Pennsylvania, provide for contingent rent participation by the lessor in certain capital transactions and net operating cash flows of the properties after certain returns are achieved by us.

Such amounts, if any, will be reflected as contingent rent when incurred.

The leases also provide for payment by us of certain operating costs relating to the land, primarily real estate taxes.

The above schedule of future minimum rental payments for ground leases does not include any contingent rent amounts or any reimbursed expenses.

As part of the Operating Partnership’s September 2004 acquisition of a portfolio of properties from the Rubenstein Company (which we refer to as the “TRC acquisition”), the Operating Partnership acquired its interest in Two Logan Square, a 708,844 square foot office building in Philadelphia, primarily through its ownership of a second and third mortgage secured by this property.

This property is consolidated as the borrower is a variable interest entity and the Operating Partnership, through its ownership of the second and third mortgages, is the primary beneficiary.

The Operating Partnership currently does not expect to take title to Two Logan Square until, at the earliest, on or about August 2020.

If the Operating Partnership takes fee title to Two Logan Square upon foreclosure of its mortgage, the Operating Partnership has agreed to pay an unaffiliated third party that holds a residual interest in the fee owner of this property an amount equal to $2.9 million.

On the TRC acquisition date, the Operating Partnership recorded a liability of $0.7 million and has been accreting this liability up to $2.9 million through January 2020.

As of December 31, 2019, the Operating Partnership has a balance of $2.9 million for this liability on its consolidated balance sheet.

As part our 2006 merger with Prentiss Properties Trust, our 2004 TRC acquisition and several of our other transactions, we agreed not to sell certain of the properties we acquired in transactions that would trigger taxable income to the former owners.

In the case of the TRC acquisition, we agreed not to sell for a period of up to 15 years from the date of the TRC acquisition the acquired properties at One Logan Square, Two Logan Square and Radnor Corporate Center (January 2020).

We subsequently agreed to extend the no-sale period applicable to Two Logan Square to on or about August 2020.

Our agreements generally provide that we may dispose of the subject properties only in transactions that qualify as tax-free exchanges under Section 1031 of the Internal Revenue Code or in other tax deferred transactions.

If we were to sell a restricted property before the expiration of the restricted period in a non-exempt transaction, we would be required to make significant payments to the parties who sold the applicable property to us for tax liabilities attributed to them.

In connection with the formation of the Commerce Square Venture, we committed to investing an additional $20.0 million of preferred equity in the properties on a pari passu basis with our joint venture partner.

As part of our September 2004 acquisition of a portfolio of properties from The Rubenstein Company (which the we refer to as the “TRC acquisition”), we acquired our interest in Two Logan Square, a 708,844 square foot office building in Philadelphia, Pennsylvania primarily through ownership of a second and third mortgage secured by this property.

This property is consolidated, as the borrower is a VIE and we, through our ownership of the second and third mortgages, are the primary beneficiary.

On October 21, 2020, we also acquired the $79.8 million first mortgage on the property from the third-party mortgage lender pursuant to an agreement with certain of the former owners.

Under the agreement, we have agreed to not take title to Two Logan until the earlier of June 2026 or the occurrence of certain events related to the ownership interests of certain former owners.

If we were to sell the restricted property before the expiration of the restricted period in a non-exempt transaction, we may be required to make significant payments to certain of the former owners of Two Logan Square on account of tax liabilities attributed to them.

Additionally, we will be required to pay these certain former owners an amount estimated at approximately $0.9 million to redeem their residual interest in the fee owner of this property.

The $0.9 million payment is included within "Other liabilities" on the consolidated balance sheets.

Similarly, as part of our 2013 acquisition of substantially all of the equity interests in the partnerships that own One and Two Commerce Square, we agreed, for the benefit of affiliates of the holder of the 1% residual ownership interest in these properties, to not sell these two properties in certain taxable transactions prior to October 20, 2021 without the holder’s consent.

The Commerce Square Venture Transaction did not violate such covenant.

As part of our acquisition of properties, from time to time in tax-deferred transactions, the Company has agreed to provide certain of the prior owners of the acquired properties the right to guarantee the Company’s indebtedness.

If the Company were to seek to repay the indebtedness guaranteed by the prior owner before the expiration of the applicable agreement, the Company would be required to provide the prior owner an opportunity to guaranty qualifying replacement debt.

These debt maintenance agreements may limit the Company’s ability to refinance indebtedness on terms favorable to the Company.

As part of our 2013 acquisition of substantially all of the equity interests in the partnerships that own One and Two Commerce Square, the Company agreed, for the benefit of affiliates of the holder of the 1% residual ownership interest in these properties, to maintain qualifying mortgage debt through October 20, 2021, in the amounts of not less than $125.0 million on One Commerce Square and $100.0 million on Two Commerce Square.

Similarly, the Company agreed with other contributors of assets that obligate it to maintain debt available for them to guaranty.

We invest in properties and regularly incur capital expenditures in the ordinary course of business to maintain the properties.

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In addition, during construction undertaken by real estate ventures we have provided, and expect to continue to provide, cost overrun, and completion guarantees, with rights of contribution among partners in ventures, as well as customary environmental indemnities and guarantees of customary exceptions to nonrecourse provisions in loan agreements.

As part of our acquisition of properties from time to time in tax-deferred transactions, we have agreed to provide certain of the prior owners of the acquired properties with the right to guarantee our indebtedness.

If we were to seek to repay the indebtedness guaranteed by the prior owner before the expiration of the applicable agreement, we would be required to provide the prior owner an opportunity to guarantee qualifying replacement debt.

These debt maintenance agreements may limit our ability to refinance indebtedness on terms that will be favorable to us.

As part of our 2013 acquisition of substantially all of the equity interests in the partnerships that own One and Two Commerce Square, we agreed, for the benefit of affiliates of the holder of the 1% residual ownership interest in these properties, to maintain qualifying mortgage debt through October 20, 2021.

As of December 31, 2019 , the $116.6 million principal balance on the mortgage debt at One Commerce Square and the $108.5 million principal balance on the mortgage debt at Two Commerce Square were sufficient under each of the debt maintenance agreements.

Similarly, we have agreements in place with other contributors of assets to us that obligate us to maintain debt available for them to guaranty.

Interest Rate Risk and Sensitivity Analysis

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Our financial instruments consist of both fixed and variable rate debt.

As of December 31, 2019 , our consolidated debt consisted of mortgage loans with an outstanding principal balance of $315.4 million and unsecured notes with an outstanding principal balance of $1,500.0 million, all of which are fixed rate borrowings.

As of December 31, 2020, our consolidated debt consisted of unsecured notes with an outstanding principal balance of $1,500.0 million, all of which are fixed rate borrowings.

We also have variable rate debt consisting of trust preferred securities with an outstanding principal balance of $78.6 million, a $600.0 million Credit Facility with no amounts borrowed and an unsecured term loan with an outstanding principal balance of $250.0 million, all of which have been swapped to fixed rates, except for two trust preferred securities with an outstanding principal balance of $52.8 million and the Credit Facility.

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Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio.

A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on interest incurred or cash flows.

A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on

interest incurred or cash flows.

A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position.

If market rates of interest increase by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt would decrease by approximately $7.0 million.

If market rates of interest decrease by 100 basis points, the fair value of our outstanding fixed-rate mortgage debt would increase by approximately $7.3 million.

As of December 31, 2020, based on prevailing interest rates and credit spreads, the fair value of our unsecured notes was $1,607.3 million.

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From time to time or as the need arises, we use derivative instruments to manage interest rate risk exposures and not for speculative purposes.

The total outstanding principal balance of our variable rate debt was approximately $328.6 million and $421.1 million at December 31, 2019 and December 31, 2018 , respectively.

The total outstanding principal balance of our variable rate debt was approximately $328.6 million as of both December 31, 2020 and December 31, 2019.

The total fair value of our variable rate debt was approximately $308.8 million and $309.9 million at December 31, 2020 and December 31, 2019, respectively.

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Net gain on disposition of real estate (289,461) (356)

Gain on promoted interest in unconsolidated real estate venture

Provision for impairment (a)

Other than temporary impairment of equity method investment

Company's share of impairment of an unconsolidated real estate venture — 2,832

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Funds from operations available to common share and unit holders (FFO) $ 240,494 $ 253,347

Weighted-average shares/units outstanding — basic (b)

Weighted-average shares/units outstanding — fully diluted (b)

In accordance with the NAREIT definition of FFO, impairments on land held for development have been excluded.

Includes common shares and partnership units outstanding through the year ended December 31, 2019 and December 31, 2018 , respectively.

Weighted-average shares/units outstanding — basic (a) 172,907,713 177,114,932

Weighted-average shares/units outstanding — fully diluted (a) 173,298,710 177,668,804

(a) Includes common shares and partnership units outstanding through the year ended December 31, 2020 and December 31, 2019, respectively.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis