Item 1. Business
Item 1. Business
Overview
We are a self-administered and self-managed real estate investment trust ("REIT") engaged in the acquisition, development, redevelopment, ownership, management, and operation of a portfolio of office and mixed-use properties. During the twelve months ended December 31, 2020, we owned and managed properties within five markets: (1) Philadelphia Central Business District (“Philadelphia CBD”), (2) Pennsylvania Suburbs, (3) Austin, Texas (4) Metropolitan Washington, D.C., and (5) Other. The Philadelphia CBD segment includes properties located in the City of Philadelphia in Pennsylvania. The Pennsylvania Suburbs segment includes properties in Chester, Delaware and Montgomery counties in the Philadelphia suburbs. The Austin, Texas segment includes properties in the City of Austin, Texas. The Metropolitan Washington, D.C. segment includes properties in Northern Virginia, Washington, D.C., and Southern Maryland. The Other segment includes properties in Camden County in New Jersey and properties in New Castle County in 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. See Note 1, ''Organization of the Parent Company and the Operating Partnership," to our Consolidated Financial Statements for our property portfolio, management services and land holdings. Unless otherwise indicated, all references in this Form 10-K to “square feet” represent the net rentable area.
The Parent Company was organized and commenced its operations in 1986 as a Maryland REIT. The Parent Company owns its assets and conducts its operations through the Operating Partnership and subsidiaries of the Operating Partnership. The Operating Partnership was formed in 1996 as a Delaware limited partnership. The Parent Company controls the Operating Partnership as its sole general partner. See Note 1, ''Organization of the Parent Company and the Operating Partnership," to our Consolidated Financial Statements for the Parent Company's ownership interest in the Operating Partnership. The ownership interests in the Operating Partnership not owned by the Company consist of common units of limited partnership issued to the holders in exchange for contributions of properties to the Operating Partnership. Our structure as an “UPREIT” is designed, in part, to permit persons contributing properties to us to defer some or all of the tax liability they might otherwise incur in a sale of properties. We have offices in Philadelphia, Pennsylvania; Radnor, Pennsylvania; McLean, Virginia; Mount Laurel, New Jersey; Richmond, Virginia; Wilmington, Delaware; and Austin, Texas.
Our principal executive offices are located at 2929 Walnut Street, Suite 1700, Philadelphia, PA 19104, our telephone number is (610) 325-5600 and our website is www.brandywinerealty.com. The content on any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K.
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other information filed or furnished by us with the SEC are available, without charge, on our website, http://www.brandywinerealty.com, as soon as reasonably practicable after they are electronically filed or furnished with the SEC. Copies are also available, free of charge, upon written request to Investor Relations, Brandywine Realty Trust, 2929 Walnut Street, Suite 1700, Philadelphia, PA 19104.
Business Segments
See Note 19, ''Segment Information , ” to our Consolidated Financial Statements for information on results of operations of our reportable segments for the years ended December 31, 2020, 2019, and 2018 and balance sheet amounts as of December 31, 2020 and 2019.
Joint Ventures
From time to time we consider joint venture opportunities with institutional investors or other real estate companies. Joint venture partnerships provide us with additional sources of capital to share investment risk and fund capital requirements. In some instances, joint venture partnerships provide us with additional local market or product type expertise. For information regarding our joint ventures, see Note 4, ''Investment in Unconsolidated Real Estate Ventures,” to our Consolidated Financial Statements.
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Developments/Redevelopments
Our regular interaction with tenants and other market participants keep us current on innovations in workplace layout and smart living. We leverage this information to identify properties primed for development or redevelopment to meet tenant demands and realize value. The expertise and relationships that we have built from managing complex construction projects allow us to add new assets to our portfolio and renovate existing assets in our portfolio.
Business Objective and Strategies for Growth
Our business objective is to deploy capital effectively to maximize our return on investment and thereby maximize our total return to shareholders. To accomplish this objective we seek to:
• concentrate on urban town centers and central business districts in selected regions, and be the best of class owner and developer in those markets with a full-service office in each of those markets providing property management, leasing, development, construction and legal expertise;
• maximize cash flow through leasing strategies designed to capture rental growth as rental rates increase and as leases are renewed;
• attain high tenant retention rates by providing a full array of property management, maintenance services and tenant service amenity programs responsive to the varying needs of our diverse tenant base;
• continue to cultivate long-term leasing relationships with a diverse base of high-quality and financially stable tenants;
• form joint ventures with high-quality partners having attractive real estate holdings or significant financial resources;
• utilize our reputation as a full-service real estate development and management organization to identify acquisition and development opportunities that will expand our business and create long-term value;
• increase the economic diversification of our tenant base while maximizing economies of scale; and
• selectively dispose of properties that do not support our long-term business objectives and growth strategies.
We also consider the following to be important objectives:
• to develop and opportunistically acquire high-quality office properties at attractive yields in markets that we expect will experience economic growth and where we can achieve operating efficiencies;
• to monetize or deploy our land inventory for development of high-quality office properties, or rezone from office/industrial to life science/lab, residential, retail and hotel to align with market and demand shifts as appropriate;
• to control development sites, including sites under purchase options, that could support new office, life science/lab, retail and residential development within our core markets;
• to capitalize on our redevelopment expertise to selectively develop, redevelop and reposition properties in desirable locations that other organizations may not have the resources to pursue;
• to own and develop high quality office and mixed-use real estate meeting the demands of today’s tenants who require sophisticated telecommunications and related infrastructure, support services, sustainable features and amenities, and to manage those facilities so as to continue to be the landlord of choice for both existing and prospective tenants;
• to strategically grow our portfolio through the development and acquisition of new product types that support our strategy of transient-oriented and amenity based mixed-use properties located in the central business district of Philadelphia, Pennsylvania; Pennsylvania Suburbs; Austin, Texas; and Washington, D.C.; and
• to secure third-party development contracts, which can be a significant source of revenue and enable us to utilize and grow our existing development and construction management resources.
We expect to concentrate our real estate activities in markets where we believe that:
• current and projected market rents and absorption statistics justify construction activity;
• we can maximize market penetration by accumulating a critical mass of properties and thereby enhance operating efficiencies;
• barriers to entry (such as zoning restrictions, utility availability, infrastructure limitations, development moratoriums and limited developable land) will create supply constraints on available space; and
• there is potential for economic growth, particularly job growth and industry diversification.
Operational Strategy
We currently expect to continue to operate in markets where we have a concentration advantage due to economies of scale. We believe that where possible, it is best to operate with a strong base of properties in order to benefit from the personnel allocation and the market strength associated with managing multiple properties in the same market. We also intend to
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selectively dispose of properties and redeploy capital if we determine a property cannot meet our long term earnings growth expectations. We believe that recycling capital is an important aspect of maintaining the overall quality of our portfolio.
Our broader strategy remains focused on continuing to grow earnings, enhance liquidity and strengthen our balance sheet through capital retention, debt reduction, targeted sales activity and management of our existing and prospective liabilities.
In the long term, we believe that we are well positioned in our current markets and have the expertise to take advantage of both development and acquisition opportunities, as warranted by market and economic conditions, in new markets that have healthy long-term fundamentals and strong growth projections. This capability, combined with what we believe is a conservative financial structure, should allow us to achieve disciplined growth. These abilities are integral to our strategy of having a diverse portfolio of assets, which will meet the needs of our tenants.
We use experienced on-site construction superintendents, operating under the supervision of project managers and senior management, to control the construction process and mitigate the various risks associated with real estate development.
In order to fund developments, redevelopments and acquisitions, as well as refurbish and improve existing properties, we primarily use proceeds from property dispositions, excess cash from operations after satisfying our dividend and other financing requirements, and external sources of debt and equity capital. The availability of funds for new investments and maintenance of existing properties largely depends on capital markets and liquidity factors over which we can exert little control.
Competition
The real estate business is highly competitive. Our properties compete for tenants with similar properties primarily on the basis of location, total occupancy costs (including base rent and operating expenses), services and amenities provided, and the design and condition of the improvements. We also face competition when attempting to acquire or develop real estate, including competition from domestic and foreign financial institutions, other REITs, life insurance companies, pension funds, partnerships and individual investors. Additionally, our ability to compete depends upon trends in the economies of our markets, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, land availability, our ability to obtain necessary construction approvals, taxes, governmental regulations, legislation and population trends.
Human Capital Resources
As of December 31, 2020, we had approximately 341 employees. We are focused on creating a challenging, enriching, respectful, diverse, inclusive, collaborative and rewarding work environment for our employees whom we consider to be among our most valuable assets. We offer the following policies and programs which we believe are illustrative of our continued commitment to our employees:
• A compensation program and benefits package which we consider to be competitive among our peers.
• An extensive Employee Safety Manual, and thoughtful operational protocols and other measures, which prioritize the health, safety and well-being of our employees.
• Our promotion of diversity and inclusion in our hiring practices.
◦ In 2020, approximately 33% of all new hires were females and approximately 58% of all new hires were ethnic minorities.
• Regular training and career development opportunities and a tuition reimbursement program.
• The regular assessment of the engagement, satisfaction and retention of our employees.
• Programs such as internally organized affinity groups which are intended to foster an atmosphere of collaboration and inclusion.
Environmental, Social, and Corporate Governance
In connection with our goal of achieving the highest principles of environment, social, and governance (ESG) standards, in 2020, we released our inaugural comprehensive Global Reporting Initiative (GRI) aligned Corporate Social Responsibility Report, which set forth 20 Goals and Key Performance Indicators aligned with the U.N. Sustainable Development Goals and the early stages of our strategy to manage climate risk in alignment with the Task Force on Climate-Related Financial
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Disclosures (TCFD). In addition, we reset our reduction targets for energy, greenhouse gas emissions and water consumption to 15% by 2025 over our 2018 baseline.
The following tables provide our consumption and progress as of year-end 2019 on energy, water, and greenhouse gas emission reductions over our 2018 baseline. This data represents energy and water consumption for Brandywine owned and managed buildings where data was available. Data for the year ended 2020 is not yet available and is expected to be included in our annual Global Real Estate Sustainability Benchmark (“GRESB”) submission in the second quarter of 2021.
Energy Consumption:
Year Energy Consumption Data Coverage as a % of Floor Area (a)
Total Energy Consumed by Floor Area with Data Coverage (MWh)
% of Energy Generated from Renewable Sources (b)
Same Store change in Energy Consumption of Floor Area with Data Coverage (c)
% of Eligible Portfolio that has Obtained an Energy Rating and is Certified to ENERGY STAR (d)
2018 89 % 447,814 49 % N/A 58 %
2019 90 % 405,446 49 % (10) % 35 %
Water Consumption:
Year Water Withdrawal Data Coverage as a % of Total Floor Area (a) Total water Withdrawn by Portfolio (m3) Same Store Change in Water Withdrawn for Floor Area with data Coverage (e)
2018 86 % 1,037,678 N/A
2019 88 % 1,036,805 — %
GHG Emissions:
Year Scope 1 & 2 GHG Data Coverage as % of Total Floor Area (f)
Scope 1 & 2 GHG Emissions (Tonnes CO2)
Same Store Change in Scope 1 & 2 GHG Emissions Data (g)
2018 88 % 145,652 N/A
2019 89 % 133,563 (8) %
(a) Represents the percentage of square footage where consumption data was obtained for the portfolio for the calendar year .
(b) Percentage of energy generated from renewable sources represents purchasing of green power direct from utilities to offset energy usage in deregulated energy markets.
(c) Same Store change in energy consumption compares usage only for the buildings with data available in both 2018 and 2019.
(d) Reduction is substantially the result of the Commercial Buildings Energy Consumption Survey updated modeling in 2019 and the resulting industry-wide drop in ENERGY STAR scores.
(e) Same Store change in water consumption compares usage only for the buildings with data available in both 2018 and 2019.
(f) Scope 1 emissions are calculated by measuring the on-site fuel consumption and combustion (e.g., natural gas consumption, company-owned vehicles), and Scope 2 emissions are calculated by measuring purchased electricity that is generated from off-site sources for the percentage of square footage where data was obtained for the portfolio for the calendar year.
(g) Same Store change in Scope 1 & 2 emissions is based on only comparing the emissions for buildings where comparable data was available for both 2018 and 2019.
In 2020, we earned the highest-level Governance score from ISS, continued to maintain an A rating from MSCI ESG Research, received our sixth annual GRESB Green Star ranking, and achieved Green Lease Leader’s Gold recognition from the Department of Energy and Institute for Market Transformation. We were also recognized as the most committed building owner in the Philadelphia 2030 District initiative to achieve substantial reduction in energy use by the year 2030. We have 21.9 million square feet of green building certifications across our portfolio, including the first UL Verified Healthy Building IAQ Verification Mark certified building in Philadelphia.
With all the challenges of 2020, we believe we responded to the COVID-19 pandemic with proactive plans for a safe and seamless “return to work” for our tenants and by giving back to the many needs of the local community. Our volunteer efforts and financial contributions included over $20,000 collected by employees and matched by us to support 16 third-party employees in our extended family of vendors who were impacted by furloughs and layoffs. Through a meals program in
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partnership with several of our food and beverage tenants, we funded over 36,000 meals to Philadelphians in need. We also donated $350,000 to the Enterprise Center to launch the Grow Philadelphia Small Business COVID-19 Resilience Fund, and provided $200,000 to the African American Chamber of Commerce to make low-interest loans available to Chamber members impacted by the COVID-19 pandemic and social unrest.