NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION OF THE PARENT COMPANY AND THE OPERATING PARTNERSHIP
Brandywine Realty Trust (the "Parent Company") is 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. The Parent Company owns its assets and conducts its operations through Brandywine Operating Partnership, L.P. (the "Operating Partnership") and subsidiaries of the Operating Partnership. The Parent Company is the sole general partner of the Operating Partnership and, as of December 31, 2021, owned a 99.5% interest in the Operating Partnership. The Parent Company’s common shares of beneficial interest are publicly traded on the New York Stock Exchange under the ticker symbol “BDN.” The Parent Company, the Operating Partnership, and their consolidated subsidiaries are collectively referred to as the "Company."
As of December 31, 2021, the Company owned 81 properties that contained an aggregate of approximately 13.7 million net rentable square feet (collectively, the “Properties”). The Company’s core portfolio of operating properties (the “Core Properties”) excludes development properties, redevelopment properties, and properties held for sale. The Properties were comprised of the following as of December 31, 2021:
| | | | | | | | | | | |
| Number of Properties | | Rentable Square Feet |
Office properties | 72 | | | 12,097,300 | |
Mixed-use properties | 5 | | | 942,334 | |
| | | |
Core Properties | 77 | | | 13,039,634 | |
Development property | 1 | | | 205,803 | |
Redevelopment properties | 3 | | | 432,699 | |
| | | |
The Properties | 81 | | | 13,678,136 | |
In addition to the Properties, as of December 31, 2021, the Company owned 176.1 acres of land held for development, of which 10.0 acres were held for sale. The Company also held a leasehold interest in one land parcel totaling 0.8 acres, acquired through a prepaid 99-year ground lease, and held options to purchase approximately 55.5 additional acres of undeveloped land. As of December 31, 2021, the total potential development that this inventory of land could support under current zoning and entitlements, including the parcels under option, amounted to an estimated 13.4 million square feet, of which 0.1 million square feet relates to the 10.0 acres held for sale.
As of December 31, 2021, the Company also owned economic interests in nine unconsolidated real estate ventures (see Note 4, ''Investment in Unconsolidated Real Estate Ventures” for further information). The Properties and the properties owned by the unconsolidated real estate ventures are primarily located in or near Philadelphia, Pennsylvania; Austin, Texas; Metropolitan Washington, D.C.; Southern New Jersey; and Wilmington, Delaware.
All references to building square footage, rentable square feet, acres, occupancy percentage, the number of buildings, and tax basis are unaudited.
The Company conducts its third-party real estate management services business primarily through seven management companies (collectively, the “Management Companies”): Brandywine Realty Services Corporation (“BRSCO”), BDN Management Inc. (“BMI”), Brandywine Properties I Limited, Inc. (“BPI”), BDN Brokerage, LLC (“BBL”), Brandywine Properties Management, L.P. (“BPM”), Brandywine Brokerage Services, LLC (“BBS”), and BDN GC Services LLC ("BGCS"). Each of BRSCO, BMI and BPI is a taxable REIT subsidiary. BBS, BBL, BPM, and BGCS are tax disregarded entities wholly owned by the taxable REIT subsidiary entities. As of December 31, 2021, the Operating Partnership owned, directly and indirectly, 100% of each of BRSCO, BMI, BPI, BBL, BPM, BBS, and BGCS. As of December 31, 2021, the Management Company subsidiaries were managing properties containing an aggregate of approximately 23.1 million net rentable square feet, of which approximately 13.7 million net rentable square feet related to Properties owned by the Company and approximately 9.4 million net rentable square feet related to properties owned by third parties and unconsolidated real estate ventures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change in Depreciable Lives of Real Estate Investments
In accordance with its policy, the Company reviews the estimated useful lives of its real estate investments on an ongoing basis. The estimated useful lives of seven operating properties in Austin, Texas were modified to reflect the estimated periods during which these assets will remain in service pursuant to the Company's Uptown ATX master development plans. The estimated useful lives of these properties were decreased from approximately 35 years to approximately 12 years coinciding with the remaining terms of in-place leases. The effect of this change in estimate was a $9.8 million increase in depreciation expense during the year ended December 31, 2021.
Principles of Consolidation
The Company consolidates variable interest entities (“VIEs”) in which it is considered to be the primary beneficiary. VIEs are entities in which the equity investors do not have sufficient equity at risk to finance their endeavors without additional financial support or that the holders of the equity investment at risk do not have a controlling financial interest. The primary beneficiary is defined by the entity having both of the following characteristics: (i) the power to direct those matters that most significantly impact the activities of the VIE and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. For entities that the Company has the obligations to fund losses, its maximum exposure to loss is not limited to the carrying amount of its investments.
The Company continuously assesses its determination of the primary beneficiary for each entity and assesses reconsideration events that may cause a change in the original determinations.
As of December 31, 2021 and 2020, the Company included in its consolidated balance sheets consolidated VIEs having total assets of $46.5 million and $49.2 million, respectively, and total liabilities of $21.0 million and $21.6 million, respectively.
When an entity is not deemed to be a VIE, the Company consolidates entities for which it has significant decision making control over the entity’s operations. The Company’s judgment with respect to its level of influence or control of an entity involves consideration of various factors including the form of the Company’s ownership interest, its representation in the entity’s governance, the size of its investment (including loans), estimates of future cash flows, its ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to replace the Company as manager and/or liquidate the venture, if applicable. The Company’s assessment of its influence or control over an entity affects the presentation of these investments in the Company’s consolidated financial statements. In addition to evaluating control rights, the Company consolidates entities in which the outside partner has no substantive kick-out rights to remove the Company as managing member. The portion of the consolidated entities that are not owned by the Company is presented as noncontrolling interest as of and during the periods consolidated. All intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Operating Properties
Operating properties are carried at historical cost less accumulated depreciation and impairment losses. The value of operating properties reflects their purchase price or development cost. Acquisition costs related to business combinations are expensed as incurred, whereas the costs related to asset acquisitions are capitalized as incurred. Costs incurred for the renovation and betterment of an operating property are capitalized to the Company’s investment in that property. Ordinary repairs and maintenance are expensed as incurred.
Purchase Price Allocation
For acquisitions of real estate or in-substance real estate that are accounted for as business combinations, we recognize the assets acquired (including the intangible value of acquired above- or below-market leases, acquired in-place leases and tenant relationship values), liabilities assumed, noncontrolling interests, and previously existing ownership interests at fair value as of the acquisition date. Any excess (deficit) of the consideration transferred relative to the fair value of the net assets acquired is accounted for as goodwill (bargain purchase gain). Acquisition costs related to business combinations are expensed as incurred.
Acquisitions of real estate and in-substance real estate that do not meet the definition of a business are accounted for as asset acquisitions. The Company generally expects that acquisitions of real estate or in-substance real estate will not meet the definition of business and therefore are accounted for as asset acquisitions, unless specifically noted otherwise. The accounting model for asset acquisitions is similar to the accounting model for business combinations except that the acquisition consideration (including acquisition costs) is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. As a result, asset acquisitions do not result in recognition of goodwill or a bargain purchase gain. Additionally, because the accounting model for asset acquisitions is a cost accumulation model, preexisting interests in the acquired assets, if any, are not remeasured to fair value but continue to be accounted for at their historical cost. Direct acquisition costs are capitalized if an asset acquisition is probable. If we determine that an asset acquisition is no longer probable, no new costs are capitalized and all capitalized costs that are not recoverable are written off.
The purchase price is allocated to the acquired assets and assumed liabilities, including land and buildings, as if vacant based on highest and best use for the acquired assets. The Company assesses and considers fair value of the operating properties based on estimated cash flow projections that utilize discount and/or capitalization rates that it deems appropriate, as well as available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions.
The Company allocates the purchase price of properties considered to be business combinations and asset acquisitions to net tangible and identified intangible assets acquired based on fair values. Above-market and below-market in-place lease values for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) the Company’s estimate of the fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining noncancellable term of the lease (including the below market fixed renewal periods that are considered probable, if applicable). Capitalized above-market lease values are amortized as a reduction of rental income over the remaining noncancellable terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining noncancellable terms of the respective leases, including any below market fixed-rate renewal option periods that are considered probable.
Other intangible assets also include in-place leases based on the Company’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. The Company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases, including leasing commissions, legal and other related expenses. This intangible asset is amortized to expense over the remaining term of the respective leases and any fixed-rate bargain renewal periods. Factors considered by the Company in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance, and other operating expenses, and estimates of lost rents at market rates during the expected lease-up periods, which primarily range from four to twelve months. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing, and leasing activities in estimating the fair value of the tangible and intangible assets acquired. The Company also uses the information obtained as a result of its pre-acquisition due diligence as part of its consideration of the accounting standard governing asset retirement obligations and when necessary, will record a conditional asset retirement obligation as part of its purchase price. The Company also evaluates tenant relationships on a tenant-specific basis. On most of the Company’s acquisitions, this intangible has not been material and, as a result, no value has been assigned.
In the event that a tenant terminates its lease, the unamortized portion of each intangible, including in-place lease values and tenant relationship values, is charged to expense and market rate adjustments (above or below) are recorded to revenue.
Depreciation and Amortization
The costs of buildings and improvements are depreciated using the straight-line method based on the following useful lives: buildings and improvements (5 to 55 years) and tenant improvements (the shorter of (i) the life of the asset (1 to 16 years) or (ii) the lease term).
Construction-in-Progress
Project costs directly associated with the development or redevelopment and construction of a real estate project are capitalized as construction-in-progress. Construction-in-progress also includes costs related to ongoing tenant improvement projects. In addition, interest, real estate taxes, and other expenses that are directly associated with the Company’s development or redevelopment activities are capitalized beginning when activities necessary to ready the asset for its intended use are in progress and capital expenditures have been made and ending when the property is placed in service. Interest expense is capitalized using the Company’s weighted average interest rate. Internal direct costs are capitalized to projects in which qualifying expenditures are being incurred. See Note 3, ''Real Estate Investments," for more information related to the capitalization of project costs.
Ground Leases
The Company is the lessee under long-term ground leases classified as operating leases. The Company makes significant assumptions and judgments when determining the discount rate for the lease to calculate the present value of the lease payments. As the rate implicit in the lease is not readily determinable, the Company estimates the incremental borrowing rate (“IBR”) that it would need to pay to borrow, on a collateralized basis, an amount equal to the lease payments in a similar economic environment, over a similar lease term. The Company utilizes a market-based approach to estimate the IBR for each individual lease. The base IBR is estimated utilizing observable mortgage and corporate bond rates, which are then adjusted to account for considerations related to the Company’s credit rating and the lease term to select an incremental borrowing rate for each lease.
The right of use assets and lease liabilities are presented as “Right of use asset - operating leases, net” and “Lease liability - operating leases”, respectively, on the consolidated balance sheet as of December 31, 2021 and 2020, respectively. The lease liabilities and right of use assets are amortized on a straight-line basis over the lease term with the corresponding expense classified in “Property operating expenses” on the consolidated statements of operations.
The most recent CPI adjustment is used to determine the present value of the lease payments for an indexed lease and ultimately the right of use asset and corresponding lease liability. Rent payments for amounts in excess of this estimated growth rate will be expensed on a cash basis as incurred and are considered variable lease costs.
Impairment of Real Estate Investments
The Company reviews its real estate investments for impairment following the end of each quarter for each of its real estate investments where events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company updates leasing and other assumptions regularly, paying particular attention to real estate investments where there is an event or change in circumstances that indicates an impairment in value. Additionally, the Company considers strategic decisions regarding the future development plans for real estate investment under development and other market factors. For real estate investments to be held and used, the Company analyzes recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over, in most cases, a 10-year hold period. If there is significant possibility that the Company will dispose of assets earlier, it analyzes the recoverability using a probability weighted analysis of the undiscounted future cash flows expected to be generated from the operations and eventual disposition of each asset using various probable hold periods. If the recoverability analysis indicates that the carrying value of the tested real estate investment is not recoverable, the real estate investment is written down to its fair value and an impairment is recognized in the amount of the excess of the carrying amount of the asset over its fair value. If and when the Company’s plans change, it revises its recoverability analysis to use cash flows expected from operations and eventual disposition of each asset using hold periods that are consistent with its revised plans.
Estimated future cash flows used in such analysis are based on the Company’s plans for the real estate investment and its views of market economic conditions. The estimates consider assumptions, including but not limited to market rental rates, capitalization rates, and recent sales data for comparable real estate investments. 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.
Assets Held for Sale
The Company generally reclassifies assets to held for sale when the transaction has been approved by its Board of Trustees, or by officers vested with authority to approve the transaction, and there are no known significant contingencies relating to the sale of the real estate investment within one year of the consideration date and the consummation of the transaction is otherwise considered probable. When a real estate investment is designated as held for sale, the Company stops depreciating the real estate investment and estimates the real estate investment’s fair value, net of selling costs. If the determination is made that the estimated fair value, net of selling costs, is less than the net carrying value of the real estate investment, an impairment is recognized, reducing the net carrying value of the real estate investment to estimated fair value less selling costs. For periods in which a real estate investment is classified as held for sale, the Company classifies the assets and liabilities, as applicable, of the real estate investment as held for sale on the consolidated balance sheet for such periods.
Impairment of Land Held for Development
When demand for build-to-suit properties declines and the ability to sell land held for development deteriorates, or other market factors indicate possible impairment in the recoverability of land held for development, it is reviewed for impairment by comparing its fair value to its carrying value. If the estimated sales value is less than the carrying value, the carrying value is written down to its estimated fair value. Estimated fair value is generally determined using a market valuation approach, comparing the subject property to recent comparable market transactions in a similar location; or using estimated cash flows.
Cash and Cash Equivalents
Cash and cash equivalents are highly-liquid investments with original maturities of three months or less. The Company maintains cash equivalents in money market accounts with financial institutions in excess of insured limits, but believes this risk is mitigated by only investing in or through major financial institutions. The Company does not invest its available cash balances in money market funds. As such, available cash balances are appropriately reflected as cash and cash equivalents on the consolidated balance sheets.
Restricted Cash
Restricted cash consists of cash held as collateral to provide credit enhancement for the Company’s mortgage debt, cash for property taxes, capital expenditures and tenant improvements. Restricted cash also includes cash held by qualified intermediaries for possible investments in like-kind exchanges in accordance with Section 1031 of the Internal Revenue Code in connection with sales of the Company’s properties. Restricted cash is included in “Other assets” in the consolidated balance sheets.
Accounts Receivable and Accrued Rent Receivable
Generally, leases with tenants are accounted for as operating leases. Minimum lease payments under tenant leases are recognized on a straight-line basis over the term of the related lease. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payment terms are recorded as “Accrued rent receivable, net” on the consolidated balance sheets. Included in current tenant receivables are tenant reimbursements which are comprised of amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses that are recognized as revenue in the period in which the related expenses are incurred.
Accrued rent receivables are carried net of the allowances for doubtful accounts. The allowance for doubtful accounts is an estimate based on the Company's experience of the probability of future events confirming a loss and represents the estimated probable losses. The allowance is generally calculated by assigning risk factors by industry which are primarily based on the Company's historical collection and charge-off experience adjusted for current market conditions, which requires management's judgment.
Investments in Unconsolidated Real Estate Ventures
Under the equity method, investments in real estate ventures are recorded initially at cost and subsequently adjusted for equity in earnings, contributions, distributions, and impairments. The Company generally allocates income and losses from the unconsolidated real estate ventures based on the venture's distribution priorities, which may be different from its stated ownership percentage. For real estate ventures that are constructing assets to commence planned principal operations, the Company capitalizes interest expense to the extent that it is recoverable using the Company’s weighted average interest rate of consolidated debt and its investment balance as a basis. Planned principal operations commence when a property is available to lease and at that point in time, the Company ceases capitalizing interest to its investment basis.
At least quarterly, management assesses whether there are any other than temporary impairment indicators of the Company’s investments in real estate ventures. An investment is other than temporarily impaired only if the fair value of the investment in a real estate venture, as estimated by management, is less than the carrying value and the decline is other than temporary. To the extent that an other than temporary impairment has occurred, an impairment charge is recorded in the amount of the excess of the carrying amount of the investment over the estimated fair value. Management is required to make significant judgments about the estimated fair value of its investments to determine if an impairment exists. Fair value is generally determined through income valuation approaches, including discounted cash flows and direct capitalization models.
When the Company acquires an interest in or contributes assets to a real estate venture project, the difference between the Company’s cost basis in the investment and the value of the real estate venture or asset contributed is amortized over the life of the related assets, intangibles, and liabilities and such adjustment is included in the Company’s share of equity in income of unconsolidated real estate ventures.
Deferred Costs
Certain costs incurred in connection with property leasing are capitalized as deferred leasing costs. Deferred leasing costs consist primarily of third-party and internal leasing commissions that are amortized using the straight-line method over the life of the respective lease which generally ranges from 1 to 16 years. Management re-evaluates the remaining useful lives of leasing costs in conjunction with changes in the respective lease term.
Notes Receivable
The Company accounts for notes receivable on its balance sheet at amortized cost, net of allowance for loan losses. Interest income is recognized over the term of the notes receivable and is calculated based on the contractual terms of each note agreement. At inception and on a quarterly basis, the Company evaluates notes receivable for the current estimate of expected credit losses over the contractual term using a probability-of-default method and reports in net income (as a credit loss expense) the amount necessary to adjust the allowance for credit losses to reflect management's current estimate. Management considers performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor in its evaluation.
Notes receivable are placed on nonaccrual status when management determines, after considering economic and business conditions and collection efforts, that the loans are impaired, or collection of interest is doubtful. Uncollectible interest previously accrued is recognized as bad debt expense. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received.
Deferred Financing Costs
Costs incurred in connection with debt financing are capitalized as a direct deduction from the carrying value of the debt, except for costs capitalized related to the Company’s unsecured credit facility, which are capitalized within the “Deferred costs, net” caption on the accompanying consolidated balance sheets. Deferred financing costs are charged to interest expense over the terms of the related debt agreements. Deferred financing costs consist primarily of loan fees which are amortized over the related loan term on a basis that approximates the effective interest method. Deferred financing costs are accelerated, when debt is extinguished, as part of the “Interest expense-amortization of deferred financing costs” caption within the Company’s consolidated statements of operations. Original issue discounts are recognized as part of the gain or loss on extinguishment of debt, as appropriate.
Revenue Recognition
Rental Revenue
The Company generates revenue under leases with tenants occupying the Properties. Generally, leases with tenants are accounted for as operating leases. The operating leases have various expiration dates. As of December 31, 2021 and 2020, the Company did not have any leases classified as direct-financing or sales-type leases.
Fixed lease payments under tenant leases, determined to be collectible, are recognized on a straight-line basis over the term of the related lease. The cumulative difference between lease revenue recognized under the straight-line method and contractual lease payments are recorded as “Accrued rent receivable” on the consolidated balance sheets. Variable lease payments are recognized as lease revenue in the period in which changes occur in facts and circumstances on which the variable lease payments are based.
Topic 842 requires a binary approach to evaluating leases for collectability. Lessors are required to determine if it is probable that substantially all of the lease payments will be collected from the tenant over the lease term. Should the lessor determine that it is not probable that substantially all of the lease payments will be collected, the standard requires that the lessor write off any accrued rent receivable and begin recognizing lease payments on a cash basis.
The Company’s lease revenue is impacted by the Company’s determination of whether improvements to the property, whether made by the Company or by the tenant, are landlord assets. The determination of whether an improvement is a landlord asset requires judgment. In making this judgment, the Company’s primary consideration is whether an improvement would be utilizable by another tenant upon the then-existing tenant vacating the improved space. If the Company has funded an improvement that it determines not to be landlord assets, then it treats the cost of the improvement as a lease incentive. If the tenant has funded an improvement that the Company determines to be landlord assets, then the Company treats the costs of the improvement as deferred revenue and amortizes these costs into revenue over the lease term.
For certain leases, the Company also makes significant assumptions and judgments in determining the lease term, including assumptions when the lease provides the tenant with an early termination option or purchase option. The lease term impacts the period over which the Company determines and records lease payments and also impacts the period over which it amortizes lease-related costs. The Company considers all relevant factors that create an economic incentive for the lessee and uses judgment to determine if those factors, considered together, signify that the lessee is reasonably certain to exercise the option. For leases where a tenant executes a lease termination, termination fees are generally recognized over the modified term of the lease as rental income. Additionally, any deferred rents receivable are accelerated over the modified lease term.
The Company’s leases also typically provide for tenant reimbursement of a portion of common area maintenance expenses and other operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set in the lease or to the extent that the tenant has a lease on a triple net basis. As the timing and pattern of revenue recognition is the same, rents and tenant reimbursements are treated as a combined lease component and included in the "Rents" caption within the Company's consolidated statements of operations.
Fixed lease payments include contractual rents under lease agreements with tenants recognized on a straight-line basis over the lease term, including amortization of lease incentives and above or below market rent intangibles, and parking income that is fixed under a long-term contract. Variable lease payments include reimbursements billed to tenants, termination fees, bad debt expense, and parking income that is not fixed under a long-term contract.
Point of Sale Revenue
Point of sale revenue consists of parking, restaurant, and flexible stay revenue from the Company’s hotel operations. Point of sale service obligations are performed daily, and the customer obtains control of those services simultaneously as they are performed. Accordingly, revenue is recorded on an accrual basis as it is earned, coinciding with the services that are provided to the Company’s customers. Parking and flexible stay revenue is recognized within rents and restaurant income is recognized within other income on the consolidated statements of operations.
Third party management fees, labor reimbursement, and leasing
The Company performs property management services for its managed real estate ventures and third-party property owners of real estate that consist of: (i) providing leasing services, (ii) property inspections, (iii) repairs and maintenance monitoring, and (iv) financial and accounting oversight. For these services, the Company earns management fees monthly, which are based on a fixed percentage of each managed property’s financial results, and is reimbursed for the labor costs incurred by its property management employees as services are rendered to the property owners. The Company determined that control over the services is passed to its customers simultaneously as performance occurs. Accordingly, management fee revenue is earned as the services are provided to the Company’s customers.
Lease commissions are earned when the Company, as a broker for the third party property owner, executes a lease agreement with a tenant. Based on the terms of the Company’s lease commission contracts, the Company's performance obligation to the customer has been completed upon execution of each lease agreement. The Company’s lease commissions are earned based on a fixed percentage of rental income generated for each executed lease agreement and there is no variable income component.
Development fee revenue is earned through two different sources: (i) the Company performs development services for third parties as an agent and earns fixed development fees based on a percentage of construction costs incurred over the construction period, and (ii) the Company acts as a general contractor on behalf of one of its managed real estate ventures. The Company acts as the principal construction company for the real estate ventures and records gross revenue as it provides construction services based on the quantifiable construction outputs.
In applying the cost based output method of revenue recognition, the Company uses the actual costs incurred relative to the total estimated costs to determine its progress towards contract completion and to calculate the corresponding gross revenue and gross profit to recognize. For any costs that do not contribute to satisfying the Company’s performance obligations, it excludes such costs from its output methods of revenue recognition as the amounts are not reflective of transferring control of the outputs to the customer. The use of estimates in this calculation involves significant judgment.
The following is a summary of revenue earned by the Company’s reportable segments (see Note 19, ''Segment Information,” for further information) during the year ended December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Philadelphia CBD | | Pennsylvania Suburbs | | Austin, Texas | | Metropolitan Washington, D.C. | | Other | | Corporate (a) | | Total |
Fixed rent | $ | 149,441 | | | $ | 113,748 | | | $ | 62,545 | | | $ | 12,410 | | | $ | 8,020 | | | $ | (2,240) | | | $ | 343,924 | |
Variable rent | 41,585 | | | 10,358 | | | 34,850 | | | 646 | | | 2,660 | | | (257) | | | 89,842 | |
Total lease revenue | 191,026 | | | 124,106 | | | 97,395 | | | 13,056 | | | 10,680 | | | (2,497) | | | 433,766 | |
Amortization of deferred market rents | 2,064 | | | (9) | | | 3,322 | | | — | | | — | | | — | | | 5,377 | |
Daily parking & hotel flexible stay | 11,758 | | | 159 | | | 109 | | | 117 | | | 233 | | | — | | | 12,376 | |
Total rents | 204,848 | | | 124,256 | | | 100,826 | | | 13,173 | | | 10,913 | | | (2,497) | | | 451,519 | |
Third party management fees, labor reimbursement and leasing | 893 | | | 34 | | | 452 | | | 6,548 | | | 3,077 | | | 15,440 | | | 26,444 | |
Other income | 2,117 | | | 276 | | | 402 | | | 144 | | | 25 | | | 5,892 | | | 8,856 | |
Total revenue | $ | 207,858 | | | $ | 124,566 | | | $ | 101,680 | | | $ | 19,865 | | | $ | 14,015 | | | $ | 18,835 | | | $ | 486,819 | |
The following is a summary of revenue earned by the Company’s reportable segments (see Note 19, ''Segment Information,” for further information) during the year ended December 31, 2020 (in thousands):
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| |
| Philadelphia CBD | | Pennsylvania Suburbs | | Austin, Texas | | Metropolitan Washington, D.C. | | Other | | Corporate (a) | | Total |
Fixed rent | $ | 166,286 | | | $ | 128,044 | | | $ | 63,366 | | | $ | 29,830 | | | $ | 8,064 | | | $ | (2,412) | | | $ | 393,178 | |
Variable rent | 51,410 | | | 12,951 | | | 35,123 | | | 3,544 | | | 2,401 | | | (1,343) | | | 104,086 | |
Total lease revenue | 217,696 | | | 140,995 | | | 98,489 | | | 33,374 | | | 10,465 | | | (3,755) | | | 497,264 | |
Amortization of deferred market rents | 1,146 | | | (12) | | | 3,531 | | | — | | | 203 | | | — | | | 4,868 | |
Daily parking & hotel flexible stay | 10,777 | | | 179 | | | 49 | | | 135 | | | 232 | | | — | | | 11,372 | |
Total rents | 229,619 | | | 141,162 | | | 102,069 | | | 33,509 | | | 10,900 | | | (3,755) | | | 513,504 | |
Third party management fees, labor reimbursement and leasing | 927 | | | 39 | | | 689 | | | 6,541 | | | 2,560 | | | 7,824 | | | 18,580 | |
Other income | 1,482 | | | 412 | | | 224 | | | 173 | | | 9 | | | 468 | | | 2,768 | |
Total revenue | $ | 232,028 | | | $ | 141,613 | | | $ | 102,982 | | | $ | 40,223 | | | $ | 13,469 | | | $ | 4,537 | | | $ | 534,852 | |
The following is a summary of revenue earned by the Company’s reportable segments (see Note 19, ''Segment Information,” for further information) during the year ended December 31, 2019 (in thousands):
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| |
| Philadelphia CBD | | Pennsylvania Suburbs | | Austin, Texas | | Metropolitan Washington, D.C. | | Other | | Corporate (a) | | Total |
Fixed rent | $ | 178,481 | | | $ | 125,969 | | | $ | 62,232 | | | $ | 39,420 | | | $ | 7,834 | | | $ | (2,412) | | | $ | 411,524 | |
Variable rent | 58,580 | | | 14,282 | | | 34,748 | | | 4,029 | | | 3,080 | | | (495) | | | 114,224 | |
Total lease revenue | 237,061 | | | 140,251 | | | 96,980 | | | 43,449 | | | 10,914 | | | (2,907) | | | 525,748 | |
Amortization of deferred market rents | 3,745 | | | (12) | | | 4,638 | | | — | | | 486 | | | — | | | 8,857 | |
Daily parking & hotel flexible stay | 18,665 | | | 174 | | | 165 | | | 824 | | | 232 | | | — | | | 20,060 | |
Total rents | 259,471 | | | 140,413 | | | 101,783 | | | 44,273 | | | 11,632 | | | (2,907) | | | 554,665 | |
Third party management fees, labor reimbursement and leasing | 876 | | | 43 | | | 1,956 | | | 6,922 | | | 2,915 | | | 6,914 | | | 19,626 | |
Other income | 3,422 | | | 628 | | | 418 | | | 303 | | | 11 | | | 1,344 | | | 6,126 | |
Total revenue | $ | 263,769 | | | $ | 141,084 | | | $ | 104,157 | | | $ | 51,498 | | | $ | 14,558 | | | $ | 5,351 | | | $ | 580,417 | |
(a)Corporate includes intercompany eliminations necessary to reconcile to consolidated Company totals.
Income Taxes
Parent Company
The Parent Company has elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). In order to continue to qualify as a REIT, the Parent Company is required to, among other things, distribute at least 90% of its annual REIT taxable income to its shareholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Parent Company is not subject to federal and state (in states that follow federal rules) income taxes with respect to the portion of its income that meets certain criteria and is distributed annually to its shareholders. Accordingly, a nominal provision for federal and state (as applicable) income taxes is included in the accompanying consolidated financial statements with respect to the operations of the Parent Company. The Parent Company intends to continue to operate in a manner that allows it to meet the requirements for taxation as a REIT. If the Parent Company fails to qualify as a REIT in any taxable year, it will be subject to federal and state (as applicable) income taxes and may not be able to qualify as a REIT for the four tax years following the year in which it first failed to qualify. The Parent Company is subject to certain local income taxes. Provision for federal income taxes is recorded in the income tax provision line item and state and local income taxes have been included in operating expenses in the Parent Company’s consolidated statements of operations.
The tax basis of the Parent Company’s assets was $3.1 billion and $2.9 billion for the years ended December 31, 2021 and December 31, 2020, respectively.
The Parent Company is subject to a 4% federal excise tax if sufficient taxable income is not distributed within prescribed time limits. The excise tax equals 4% of the annual amount, if any, by which the sum of (a) 85% of the Parent Company’s ordinary income and (b) 95% of the Parent Company’s net capital gain exceeds cash distributions and certain taxes paid by the Parent Company. No excise tax was incurred in 2021, 2020 or 2019.
The Parent Company has elected to treat several of its subsidiaries as taxable REIT subsidiaries (each a “TRS”). A TRS is subject to federal, state and local income tax. In general, a TRS may perform non-customary services for tenants, hold assets that the Parent Company, as a REIT, cannot hold directly and generally may engage in any real estate or non-real estate related business. The Company’s taxable REIT subsidiaries did not have material tax provisions or deferred income tax items as of December 31, 2021 and December 31, 2020.
Operating Partnership
In general, the Operating Partnership is not subject to federal and state income taxes, and accordingly, no provision for income taxes has been made in the accompanying consolidated financial statements. The partners of the Operating Partnership are required to include their respective share of the Operating Partnership’s profits or losses in their respective tax returns. The Operating Partnership’s tax returns and the amount of allocable partnership profits and losses are subject to examination by federal and state taxing authorities. For any year beginning on or after January 1, 2017, the Operating Partnership can be assessed with federal income tax in the course of an audit by the IRS. Under the partnership audit rules included in the Bipartisan Budget Act of 2015, the Operating Partnership has the option to make a push-out election and allocate the partnership adjustments to all the former partners for the tax year under audit.
The tax basis of the Operating Partnership’s assets was $3.1 billion and $2.9 billion for the years ended December 31, 2021 and December 31, 2020, respectively.
The Operating Partnership may elect to treat a subsidiary REIT under Sections 856 through 860 of the Code, if applicable. Each subsidiary REIT would be required to meet the requirements for treatment as a REIT under Sections 856 through 860 of the Code. If a subsidiary REIT fails to qualify as a REIT in any taxable year, that subsidiary REIT would be subject to federal and state income taxes and would not be able to qualify as a REIT for the four subsequent taxable years. Also, each subsidiary REIT would be subject to certain local income taxes.
The Operating Partnership has elected to treat several of its subsidiaries as TRSs, which are subject to federal, state and local income tax.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders, as adjusted for unallocated earnings, if any, of certain securities, by the weighted average number of common shares outstanding during the year. Diluted EPS reflects the potential dilution that could occur from common shares issuable in connection with awards under share-based compensation plans, including upon the exercise of stock options, and conversion of the noncontrolling interests in the Operating Partnership. Anti-dilutive shares are excluded from the calculation.
Earnings Per Unit
Basic earnings per unit is computed by dividing net income available to common unitholders, as adjusted for unallocated earnings, if any, of certain securities issued by the Operating Partnership, by the weighted average number of common unit equivalents outstanding during the year. Diluted earnings per unit reflects the potential dilution that could occur from units issuable in connection with awards under share-based compensation plans, including upon the exercise of stock options. Anti-dilutive units are excluded from the calculation.
Share-Based Compensation Plans
The Parent Company maintains a shareholder-approved equity-incentive plan known as the Amended and Restated 1997 Long-Term Incentive Plan (the “1997 Plan”). The 1997 Plan is administered by the Compensation Committee of the Parent Company’s Board of Trustees. Under the 1997 Plan, the Compensation Committee is authorized to award equity and equity-based awards, including incentive stock options, non-qualified stock options, restricted share rights and performance-based share units. The Company's share-based employee compensation plan is described more fully in Note 15, ''Share Based Compensation, 401(k) Plan and Deferred Compensation."
Comprehensive Income
Comprehensive income is recorded in accordance with the provisions of the accounting standard for comprehensive income. The accounting standard establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income includes the effective portions of changes in the fair value of derivatives.
Accounting for Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments and hedging activities in accordance with the accounting standard for derivative and hedging activities. The accounting standard requires the Company to measure every derivative instrument (including certain derivative instruments embedded in other contracts) at fair value and record them on the balance sheet as either an asset or liability. See disclosures below related to the accounting standard for fair value measurements and disclosures.
For derivatives designated as cash flow hedges, the effective portions of changes in the fair value of the derivative are reported in other comprehensive income while the ineffective portions are recognized in earnings.
The Company actively manages its ratio of fixed-to-floating rate debt. To manage its fixed and floating rate debt in a cost-effective manner, the Company, from time to time, enters into interest rate swap agreements as cash flow hedges, under which it agrees to exchange various combinations of fixed and/or variable interest rates based on agreed upon notional amounts.
Fair Value Measurements
The Company estimates the fair value of its derivatives in accordance with the accounting standard for fair value measurements and disclosures. The accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Financial assets and liabilities recorded on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
•Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access;
•Level 2 inputs are inputs, other than quoted prices included in Level 1, which are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals; and
•Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little if any, related market activity or information.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Non-financial assets and liabilities recorded at fair value on a non-recurring basis include non-financial assets and liabilities measured at fair value in a purchase price allocation and the impairment. The fair values assigned to the Company's purchase price allocations primarily utilize Level 3 inputs. The fair value assigned to the long-lived assets and equity method investments for which there was impairment recorded utilize Level 3 inputs.
Risks and Uncertainties - COVID-19
Currently, one of the most significant risks and uncertainties the Company faces is the potential adverse effect of the ongoing global COVID-19 pandemic, which has significantly slowed global economic activity and caused significant volatility in financial markets, causing many to fear a global recession. The responses of many countries, including the U.S., have included mandatory quarantines, restrictions on business activities, including construction activities, restrictions on group gatherings, restrictions on travel and mandatory closures. These actions have disrupted the global economy and supply chains and adversely impacted many industries, including owners and developers of real estate. Moreover, there is significant uncertainty around the breadth and duration of business disruptions related to the COVID-19 pandemic, as well as its impact on the U.S. economy and consumer confidence. Demand for space at the Company's properties is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market valuations, rent levels and availability of competing space. The extent to which the COVID-19 pandemic impacts the Company's results will depend on
future developments, many of which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, future action plans, and vaccination efforts. The COVID-19 pandemic has caused continued negative economic impacts, market volatility, and business disruption, which could negatively impact the Company's tenants’ ability to pay rent, the Company's ability to lease vacant space, and the Company's ability to complete development and redevelopment projects. These consequences, in turn, could materially impact the Company's results of operations.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and is effective between March 12, 2020 and December 31, 2022. The guidance may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply elections as applicable as additional changes in the market occur.
3. REAL ESTATE INVESTMENTS
As of December 31, 2021 and 2020, the gross carrying value of the operating properties was as follows (in thousands): | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Land | $ | 410,144 | | | $ | 407,514 | |
Building and improvements | 2,653,492 | | | 2,665,232 | |
Tenant improvements | 408,966 | | | 401,363 | |
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Total | $ | 3,472,602 | | | $ | 3,474,109 | |
Construction-in-Progress
Internal direct construction costs totaling $7.9 million in 2021, $8.4 million in 2020, and $7.4 million in 2019 and interest totaling $7.0 million in 2021, $4.6 million in 2020, and $3.2 million in 2019 were capitalized related to the development, redevelopment and construction of tenant improvements of certain properties and land holdings.
During the years ended December 31, 2021, 2020 and 2019, the Company’s internal direct construction costs are comprised entirely of capitalized salaries. The following table shows the amount of compensation costs (including bonuses and benefits) capitalized for the years presented (in thousands):
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| December 31, |
| 2021 | | 2020 | | 2019 |
Development | $ | 4,815 | | | $ | 4,802 | | | $ | 3,047 | |
Redevelopment | 1,170 | | | 543 | | | 775 | |
Tenant Improvements | 1,917 | | | 3,021 | | | 3,609 | |
Total | $ | 7,902 | | | $ | 8,366 | | | $ | 7,431 | |
2021 Acquisitions
During the year ended December 31, 2021, the Company did not acquire any properties from a third party.
2020 Acquisitions
The following table summarizes the property acquisitions during the year ended December 31, 2020 (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property/Portfolio Name | | Acquisition Date | | Location | | Property Type | | Rentable Square Feet/Acres | | Purchase Price (a) |
145 King of Prussia Road | | February 27, 2020 | | Radnor, PA | | Land | | 7.75 acres | | $ | 11,250 | |
1505-11 Race Street | | November 5, 2020 | | Philadelphia, PA | | Office | | 119,763 | | | $ | 9,700 | |
250 King of Prussia Road (b) | | November 30, 2020 | | Radnor, PA | | Office | | 169,843 | | | $ | 20,250 | |
(a)Exclusive of transaction costs and price adjustments. See purchase price allocation table below for a breakout of the net purchase price for wholly owned properties.
(b)This property was placed into redevelopment and is therefore included within Construction-in-progress on the consolidated balance sheets.
The Company accounted for the acquisition of 1501-11 Race Street as an asset acquisition and therefore capitalized $0.3 million of acquisition related costs. The Company utilized a number of sources in making estimates of fair value (including comparative sales transactions and market leasing assumptions) for purposes of allocating the purchase price to tangible and intangible assets acquired The acquisition values have been allocated as follows (in thousands):
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| 1505-11 Race Street | |
Building, land and improvements | $ | 9,723 | | |
Intangible assets acquired | 2,422 | | |
Below market lease liabilities assumed | (2,193) | | |
Total unencumbered acquisition value | 9,952 | | |
Amortization period of intangible assets | 1.5 years | |
Amortization period of below market liabilities assumed | 1.5 years | |
2019 Acquisitions
During the year ended December 31, 2019, the Company did not acquire any properties from a third party.
Dispositions
The following table summarizes the property dispositions during the years ended December 31, 2021, 2020 and 2019 (dollars in thousands):
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Property/Portfolio Name | | Disposition Date | | Location | | Property Type | | Rentable Square Feet/Acres | | Sales Price | | Gain/(Loss) on Sale (a) |
1100 Lenox Drive | | September 8, 2021 | | Lawrenceville, NJ | | Land | | 5.0 acres | | $ | 2,575 | | | $ | 68 | |
2100-2200 Lenox Drive | | July 6, 2021 | | Lawrenceville, NJ | | Land | | 35.2 acres | | $ | 8,900 | | | $ | 842 | |
Mid-Atlantic Office Portfolio (b) (d) | | December 21, 2020 | | Various | | Office | | 1,128,645 | | | $ | 192,943 | | | $ | 15,164 | |
One and Two Commerce Square (c) | | July 21, 2020 | | Philadelphia, PA | | Office | | 1,896,142 | | | $ | 115,000 | | | $ | 271,905 | |
Keith Valley | | June 15, 2020 | | Horsham, PA | | Land | | 14.0 Acres | | $ | 4,000 | | | $ | 201 | |
52 East Swedesford Road | | March 19, 2020 | | Malvern, PA | | Office | | 131,077 | | | $ | 18,000 | | | $ | 2,336 | |
1900 Gallows Rd | | September 11, 2019 | | Vienna, VA | | Office | | 210,632 | | | $ | 36,400 | | | $ | (367) | |
9 Presidential Boulevard | | March 15, 2019 | | Bala Cynwyd, PA | | Land | | 2.7 Acres | | $ | 5,325 | | | $ | 751 | |
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(a)Gain/(Loss) on Sale is net of closing and other transaction related costs.
(b)The Company sold a 60% equity interest in a portfolio of twelve suburban office properties containing an aggregate of 1.1 million square feet ("Mid-Atlantic Office Portfolio"), nine of which are located in the Pennsylvania suburbs and three of which are located in Maryland, to an unrelated third party for a gross sales price of $192.9 million. The transaction resulted in deconsolidation of the properties and formation of PA/MD NNN Office JV, LLC ("Mid-Atlantic Office JV"). The Company recorded its investment at fair value and recognized a gain of $15.2 million in "Net gain on disposition of real estate" on the consolidated statements of operations. See Note 4, ''Investment in Unconsolidated Real Estate Ventures," for further information.
(c)The Company sold a 30% preferred equity interest in two office buildings located in Philadelphia, Pennsylvania, to an unrelated third party for $115.0 million (the "Commerce Square Venture Transaction"), which resulted in deconsolidation of the properties and formation of Brandywine Commerce I LP and Brandywine Commerce II LP (collectively, the "Commerce Square Venture"). The transaction valued the properties at $600.0 million. The Company recorded its investment at fair value and recognized a gain of $271.9 million in "Net gain on disposition of real estate" on the consolidated statements of operations. See Note 4, ''Investment in Unconsolidated Real Estate Ventures," for further information.
(d)The sales price includes $4.1 million of variable consideration held in escrow that will be released to the Company over a six to nine month holdback period if certain tenants remain in compliance with certain payment terms of their lease agreements. The Company estimated the amount of the variable consideration that it deemed probable of collection and included such amount in the transaction price. The amount estimated as probable of collection was received during 2021. The Company will continue to evaluate the probability of collection on the remaining holdback and recognize any changes to the amount deemed probable as incremental gain on sale.
In addition, on February 2, 2021, the Company contributed its investment in a 99-year prepaid leasehold interest in a one-acre land parcel held for development at 3025 JFK Boulevard in Philadelphia, Pennsylvania to a newly formed joint venture with an unaffiliated third party. The project is part of the Schuylkill Yards master development. The Company's investment in the project was valued at $34.8 million and the transaction resulted in deconsolidation of the property and conversion of Brandywine Opportunity Fund, L.P. (formerly a wholly-owned subsidiary of the Operating Partnership) to a real estate venture ("3025 JFK Venture"). The Company recorded its investment at fair value and recognized a gain of $2.0 million in "Net gain on sale of undepreciated real estate" on the consolidated statements of operations. See Note 4, "Investment in Unconsolidated Real Estate Ventures," for further information.
During the year ended December 31, 2019, the Company also recorded a $1.0 million gain related to contingent consideration received related to a land sale that closed in a prior period in the Other segment. The Company also received additional proceeds from a sale that closed in a prior year related to a property in the Metropolitan Washington, D.C. segment resulting in $0.7 million of additional gain on sale.
One Uptown Venture
On December 1, 2021, the Company entered into two joint venture agreements with affiliates of Canyon Partners Real Estate to commence development of One Uptown, a $328.4 million mixed-used project in Austin, Texas. One Uptown has been designed to deliver 348,000 square feet of Class-A workspace and 15,000 square feet of street-level retail (through the "office" joint venture) and 341 apartment residences and a public park (through the "multifamily" joint venture) and a six-story parking garage to be shared by the two joint ventures. The Company's partner in each of the two joint ventures has agreed, subject to customary funding conditions, including closing of the applicable construction loan, to fund approximately $57.5 million of the combined project costs in exchange for a 50% preferred equity interest in each of the two joint ventures, with the Company retaining a 50% common equity interest in each. The Company is in the process of securing a construction loan for each of the two joint ventures that would total approximately $213.4 million, representing 65% of the combined project costs. Under the terms of each of the joint venture agreements, the joint venture partner has no obligation to fund any portion of the applicable project costs until the closing of the applicable construction loan. This right prevents the Company from meeting the sale recognition criteria of ASC 606 until the applicable closings of the construction loans.
Held for Use Impairment
As of December 31, 2021, 2020, and 2019, the Company evaluated the recoverability of the carrying value of its properties that triggered assessment. Based on the analysis, no impairments were identified during the twelve months ended December 31, 2021, 2020, and 2019.
Held for Sale
As of December 31, 2021, the Company determined that the sale of two adjacent parcels of land within the Other segment totaling 10.0 acres was probable and classified these properties as held for sale. As such, $0.6 million was classified as “Assets held for sale, net” on the consolidated balance sheets. The Company closed on the sale of the two parcels of land on January 20, 2022 for an aggregate sales price of $1.6 million.
4. INVESTMENT IN UNCONSOLIDATED REAL ESTATE VENTURES
As of December 31, 2021, the Company held ownership interests in nine unconsolidated real estate ventures for a net aggregate investment balance of $411.1 million, which includes a negative investment balance in one unconsolidated real estate venture of $24.4 million, reflected within "Other liabilities" on the consolidated balance sheets. As of December 31, 2021, four of the real estate ventures owned properties that contained an aggregate of approximately 8.2 million net rentable
square feet of office space; two real estate ventures owned 1.4 acres of land held for development; one real estate venture owned 1.0 acres of land in active development; one real estate venture owned a mixed used tower comprised of 250 apartment units and 0.2 million net rentable square feet of office/retail space; and one real estate venture owned a residential tower that contained 321 apartment units.
The Company accounts for its interests in the unconsolidated real estate ventures, which range from 15% to 70%, using the equity method. Certain of the unconsolidated real estate ventures are subject to specified priority allocations of distributable cash.
The Company earned management fees from the unconsolidated real estate ventures of $8.1 million, $4.7 million and $4.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company earned leasing commissions from the unconsolidated real estate ventures of $3.8 million, $1.1 million and $1.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company had outstanding accounts receivable balances from the unconsolidated real estate ventures of $2.5 million and $1.2 million as of December 31, 2021 and 2020, respectively.
The amounts reflected in the following tables (except for the Company’s share of equity in income) are based on the financial information of the individual unconsolidated real estate ventures. The Company records operating losses of a real estate venture in excess of its investment balance if the Company is liable for the obligations of the real estate venture or is otherwise committed to provide financial support to the real estate venture.
The Company’s investment in the unconsolidated real estate ventures as of December 31, 2021 and 2020, and the Company’s share of the unconsolidated real estate ventures’ income (loss) for the years ended December 31, 2021 and 2020 was as follows (in thousands):
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| Ownership Percentage | | Carrying Amount | | Company's Share of unconsolidated real estate venture Income (Loss) | | Unconsolidated Real Estate Venture Debt at 100%, gross |
| | | 2021 | | 2020 | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
Office Properties | | | | | | | | | | | | | | | |
Commerce Square Venture | 70% (a) | | $ | 247,798 | | | $ | 253,128 | | | $ | (15,501) | | | $ | (9,150) | | | — | | | $ | 213,069 | | | $ | 219,168 | |
Mid-Atlantic Office Venture | 40% (a) | | 31,680 | | | 32,996 | | | 932 | | | 96 | | | — | | | 123,015 | | | 120,831 | |
Brandywine - AI Venture LLC | 50% | | — | | | 10,302 | | | (721) | | | 185 | | | (2,800) | | | — | | | — | |
Herndon Innovation Center Metro Portfolio Venture, LLC | 15% | | 15,844 | | | 16,019 | | | (174) | | | (358) | | | (498) | | | 207,302 | | | 207,302 | |
MAP Venture | 50% | | (24,396) | | | (11,516) | | | (8,683) | | | (6,570) | | | (6,102) | | | 184,263 | | | 185,000 | |
PJP VII | 25% (b) | | — | | | — | | | — | | | — | | | 190 | | | — | | | — | |
PJP II | 30% (b) | | — | | | — | | | — | | | — | | | 81 | | | — | | | — | |
PJP VI | 25% (b) | | — | | | — | | | — | | | — | | | (185) | | | — | | | — | |
Other | | | | | | | | | | | | | | | |
4040 Wilson Venture (c) | 50% | | 31,059 | | | 34,454 | | | (2,258) | | | (2,162) | | | (368) | | | 145,000 | | | 141,857 | |
1919 Venture | 50% | | 13,791 | | | 15,434 | | | 427 | | | 59 | | | 328 | | | 88,860 | | | 88,860 | |
Development Properties | | | | | | | | | | | | | | | |
3025 JFK Venture | 55% | | 56,370 | | | — | | | (118) | | | — | | | — | | | — | | | — | |
JBG - 51 N Street (c) | 70% | | 21,213 | | | 21,237 | | | (402) | | | (457) | | | (313) | | | — | | | — | |
JBG - 1250 First Street Office (c) | 70% | | 17,751 | | | 17,757 | | | (199) | | | (227) | | | (255) | | | — | | | — | |
| | | $ | 411,110 | | | $ | 389,811 | | | $ | (26,697) | | | $ | (18,584) | | | (9,922) | | | $ | 961,509 | | | $ | 963,018 | |
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(a)Ownership percentage represents the Company’s combined interest including preferred and common equity holdings. See "Commerce Square Venture" and "Mid-Atlantic Office JV" sections below for more information.
(b)On October 29, 2019, the Company sold its interest in PJP II, PJP VI and PJP VII. See "PJP Ventures" section below for more information on the disposal.
(c)This entity is a VIE.
The following is a summary of the financial position of the unconsolidated real estate ventures in which the Company held interests as of December 31, 2021 and December 31, 2020 (in thousands):
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| December 31, 2021 | | December 31, 2020 |
Net property | $ | 1,563,263 | | | $ | 1,520,804 | |
Other assets | 434,687 | | | 488,805 | |
Other liabilities | 331,947 | | | 333,049 | |
Debt, net | 956,668 | | | 956,688 | |
Equity (a) | 709,335 | | | 719,872 | |
(a)This amount does not include the effect of the basis difference between the Company's historical cost basis and the basis recorded at the real estate venture level, which is typically amortized over the life of the related assets and liabilities. Basis differentials occur from the impairment of investments, purchases of third party interests in existing real estate ventures and upon the transfer of assets that were previously owned by the Company into a real estate venture. In addition, certain acquisition, transaction and other costs may not be reflected in the net assets at the real estate venture level.
The following is a summary of results of operations of the unconsolidated real estate ventures in which the Company held interests during the twelve-month periods ended December 31, 2021, 2020 and 2019 (in thousands):
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| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Revenue | $ | 214,792 | | | $ | 150,276 | | | $ | 132,358 | |
Operating expenses | (117,273) | | | (85,812) | | | (71,784) | |
Interest expense, net | (30,569) | | | (22,661) | | | (21,908) | |
Depreciation and amortization | (97,147) | | | (70,805) | | | (53,331) | |
Provision for impairment | (1,393) | | | — | | | (5,664) | |
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Loss on early extinguishment of debt | — | | | — | | | (1,231) | |
Net loss | $ | (31,590) | | | $ | (29,002) | | | $ | (21,560) | |
Ownership interest % | Various | | Various | | Various |
Company's share of net loss | $ | (25,972) | | | $ | (18,540) | | | $ | (9,865) | |
| | | | | |
Basis adjustments and other | (725) | | | (44) | | | (57) | |
Equity in loss of unconsolidated real estate ventures | $ | (26,697) | | | $ | (18,584) | | | $ | (9,922) | |
As of December 31, 2021, the aggregate principal payments of the unconsolidated real estate ventures recourse and non-recourse debt payable to third-parties are as follows (in thousands):
| | | | | |
2022 | $ | 8,543 | |
2023 | 477,649 | |
2024 | 330,317 | |
2025 | — | |
2026 | 145,000 | |
Thereafter | — | |
Total principal payments | 961,509 | |
Net deferred financing costs | (5,923) | |
Net original issue premium | 1,082 | |
Outstanding indebtedness | $ | 956,668 | |
4040 Wilson Venture
The 4040 Wilson LLC Venture (“4040 Wilson”) consists of one property containing an aggregate of 225,000 square feet of office/retail and 250 apartment units, located in the Metropolitan Washington, D.C. segment. The Company and its partner each own a 50% interest in 4040 Wilson. The residential component and office/retail portion of 4040 Wilson were substantially complete and placed into service during the first quarter of 2020 and the first quarter of 2021, respectively. During the fourth quarter of 2021, 4040 Wilson refinanced the $150.0 million secured construction loan into a $155.0 million mortgage loan secured by the property. The interest rate on this loan is 1.8% over term SOFR and matures in December 2026.
Brandywine - AI Venture
During the year ended December 31, 2021, Brandywine - AI Venture, recorded a $1.4 million held for sale impairment charge related to 3141 Fairview Park Drive. The Company’s share of the impairment charge was $0.7 million, which is reflected in “Equity in loss of Real Estate Ventures” in the consolidated statements of operations for the year ended December 31, 2021. The impairment was measured based on an executed sale agreement with a third-party. The Company determined that its investment in the real estate venture is not impaired as the Company's share of the distributable cash is in excess of the Company's basis in the real estate venture. On November 9, 2021, BDN AI Venture sold 3141 Fairview Park Drive, the last remaining office property, totaling 183,618 rentable square feet in Falls Church, Virginia, at an aggregate sales price of $27.6 million. The Company received cash proceeds of $12.6 million after closing costs. The Company recorded an $3.0 million gain within the caption "Net gain on real estate venture transactions" within its consolidated statements of operations for the year ended December 31, 2021 upon liquidation of the venture.
During 2019, BDN - AI Venture recorded a $5.6 million held for use impairment charge related to 3141 Fairview Park Drive. The Company’s share of the impairment charge was $2.8 million which is reflected in “Equity in loss of unconsolidated real estate ventures” in the consolidated statements of operations for the year ended December 31, 2019. The impairment was measured based on an appraisal of the property performed by a third party. The Company determined that its investment in the real estate venture was not impaired as the Company's share of the distributable cash was in excess of the Company's basis in the real estate venture.
During 2019, BDN - AI Venture transferred an office building located in Falls Church, Virginia containing 180,659 rentable square feet to the mortgage lender in full satisfaction of the lender’s outstanding $26.0 million mortgage loan. The mortgage loan was nonrecourse to the Company. The Company recognized its $2.2 million share of the gain on debt forgiveness in "Net gain on real estate venture transactions" in the consolidated statements of operations for the year ended December 31, 2019.
3025 JFK Venture
On February 2, 2021, the Company contributed its investment in a 99-year prepaid leasehold interest in a one-acre land parcel held for development at 3025 JFK Boulevard in Philadelphia, Pennsylvania to the 3025 JFK Venture. The Company's initial investment in this real estate venture at February 2, 2021 was $34.8 million. The real estate venture was formed to develop a 570,000 square foot mixed-use building at property under the long-term ground lease. The estimated project cost is approximately $287.3 million, and the joint venture partner has agreed, subject to customary funding conditions, to fund up to approximately $45.2 million of the project costs in exchange for a 45% preferred equity interest in the venture and the Company will retain a 55% preferred equity interest.
On July 23, 2021, the 3025 JFK Venture closed on a $186.7 million construction loan, which bears interest at 3.50% plus LIBOR (subject to a LIBOR floor of 0.25%) per annum and matures in July 2025. In addition to its $34.8 million credit for contribution of the leasehold interest at 3025 JFK Venture, the Company has funded $20.5 million of project costs as of December 31, 2021. The remaining project costs will be funded by the joint venture partner and the construction loan.
The Company has determined that the 3025 JFK Venture is a variable interest entity ("VIE"). As a result, the Company used the VIE model under the accounting standard for consolidation in order to determine whether to consolidate the 3025 JFK Venture. Based upon each member’s shared power over the activities of 3025 JFK Venture under the operating and related agreements, and the Company’s lack of control over the development and construction phases of the project, 3025 JFK Venture is accounted for under the equity method of accounting.
Mid-Atlantic Office JV
On December 21, 2020, the Company contributed a portfolio of twelve properties containing an aggregate of 1,128,645 square feet, nine of which are located in the Pennsylvania suburbs segment and three located in the Metropolitan Washington, D.C segment, to the Mid-Atlantic Office JV, for a gross sales price of $192.9 million. After the transaction, the Company owns approximately 25% of the equity interest in the Mid-Atlantic Office JV through a $20.0 million preferred equity holding and approximately 15% of the equity interest through a common equity interest (representing 20% of the total common equity), for a combined approximately 40% equity interest in the venture. On the closing date, Mid-Atlantic Office JV also obtained $147.4 million of third-party debt financing secured by the twelve properties within the venture, with an initial advance of $120.8 million. During the fourth quarter 2021, the Mid-Atlantic Office JV borrowed an additional
$2.2 million. The remaining funds available under the loan are $24.4 million. The loan bears interest at LIBOR + 3.15% capped at a total maximum interest rate of 5.6% and matures on January 9, 2024.
Commerce Square Venture
On July 21, 2020, the Company sold a 30% preferred equity interest in the entities that own One Commerce Square and Two Commerce Square, two office properties containing 1,896,142 square feet in Philadelphia, Pennsylvania. After the transaction, the Company owns approximately 32% of the equity interest in Commerce Square Venture through preferred equity interest holdings and approximately 38% of the equity interest in Commerce Square Venture as the sole common equity holder, for a combined approximately 70% equity interest in the venture. The properties held by the venture remain encumbered by the existing mortgages.
PJP Ventures
On October 29, 2019, PJP II, PJP VII and PJP VI, three real estate ventures in which the Company owned a 25%-30% interest, each sold its sole operating office property, totaling 204,347 rentable square feet in Charlottesville, Virginia, at an aggregate sales price of $51.0 million. The Company received cash proceeds of $9.1 million after closing costs and related debt payoffs. The Company recorded an $8.0 million gain within the caption "Net gains on real estate venture transactions" within its consolidated statements of operations for the year ended December 31, 2019.
Herndon Innovation Center Metro Portfolio Venture, LLC
The Herndon Innovation Center Metro Portfolio Venture, LLC (“Herndon Innovation Center”) consists of eight properties containing an aggregate of 1,293,197 square feet, located in the Metropolitan Washington, D.C. segment. The Company and its partner own 15% and 85% interests in the Herndon Innovation Center, respectively.
On March 29, 2019, Herndon Innovation Center obtained $134.1 million of third-party debt financing, secured by four properties within the venture, with an initial advance of $113.1 million. The remaining funds available under the loan have not yet been drawn. The Company received $16.7 million for its share of the cash proceeds on April 12, 2019. The loan bears interest at LIBOR + 1.95% capped at a total maximum interest rate of 5.45% - 6.45% over the term of the loan and matures on March 29, 2024. On April 11, 2019, the venture obtained an additional $115.3 million of third-party debt financing secured by the remaining four properties within the venture, with an initial advance of $94.2 million. The remaining funds available under the loan have not yet been drawn. The loan bears interest at LIBOR + 1.80% capped at a total maximum interest rate of 6.3% and matures on April 11, 2024. On April 12, 2019, the Company received $13.8 million for its share of the cash proceeds from the financing.
MAP Venture
The MAP Venture owns 58 office properties that contain an aggregate of 3,924,783 square feet located in the Pennsylvania Suburbs, New Jersey/Delaware, Metropolitan Washington, D.C. and Richmond, Virginia ("MAP Venture"). The MAP Venture leases the land parcels under the 58 office properties through a ground lease that extends through February 2115. Annual payments by the MAP Venture, as tenant under the ground lease, initially total $11.9 million and increase 2.5% annually through November 2025. Thereafter, annual rental payments increase by 2.5% or CPI at the discretion of the lessor.
1919 Venture
1919 Venture owns a 29-story, 455,000 square foot mixed-use tower consisting of 321 luxury apartments, 24,000 square feet of commercial space and a 215-car structured parking facility. See Note 5, ''Debt and Preferred Equity Investments" for additional information regarding the related-party note receivable with 1919 Venture.
JBG Ventures
JBG Ventures consists of 51 N 50 Patterson, Holdings, LLC Venture ("51 N Street") and 1250 First Street Office, LLC Venture ("1250 First Street"), with the Company owning a 70.0% equity interest and JBG/DC Manager, LLC ("JBG") owning a 30.0% equity interest in each of the two ventures. 51 N Street owns 0.9 acres of undeveloped land and 1250 First Street, owns 0.5 acres of undeveloped land.
5. DEBT AND PREFERRED EQUITY INVESTMENTS
Austin Preferred Equity Investment
On December 31, 2020, the Company invested $50.0 million in exchange for a preferred equity interest in a single-purpose entity that owned two stabilized office buildings located in Austin, Texas. The Company accounted for this mandatorily redeemable investment as a note receivable, which was included within "Other assets" on the consolidated balance sheets.The preferred equity interest accrued a 9.0% annual return, compounded and paid monthly. The investment was required to be redeemed no later than December 31, 2023 (subject to a one-year extension option). On September 3, 2021, the $50.0 million investment was redeemed prior to maturity. As a result, the Company recognized an incremental $2.8 million of income on early redemption related to its accelerated minimum return and exit fees paid in cash on the redemption date during the three months ended September 30, 2021, which is included in "Interest and investment income" on the consolidated statements of operations.
1919 Venture Note Receivable
During 2018, each of the Company and the other equity partner in 1919 Venture, an unconsolidated real estate venture, provided a $44.4 million mortgage loan to 1919 Venture and, as a result, the Company recorded a $44.4 million related-party note receivable from 1919 Venture. The loan bears interest at a fixed 4.0% per annum interest rate with a scheduled maturity on June 25, 2023. 1919 Venture used the proceeds from the loans to repay its then outstanding $88.8 million construction loan. See Note 4, ''Investment in Unconsolidated Real Estate Ventures” for further information regarding 1919 Venture. As of December 31, 2021, the debt investment was performing in accordance with its terms and remains on accrual status.
6. LEASES
Lessor Accounting
The Company leases properties to tenants under operating leases with various expiration dates. Future contractual lease payments under operating leases at December 31, 2021 are as follows (in thousands):
| | | | | | | | |
Year | | |
2022 | | $ | 328,553 | |
2023 | | 327,981 | |
2024 | | 304,240 | |
2025 | | 274,216 | |
2026 | | 249,045 | |
Thereafter | | 952,898 | |
Lessee Accounting
As of December 31, 2021, the Company is the lessee under six long-term ground leases classified as "operating leases" in the consolidated balance sheets. Certain of the Company’s ground leases contain extension options and the Company considered all relevant factors in determining if it was reasonably certain that it would exercise such extension options. The Company concluded that it was not reasonably certain that it would exercise the extension options and, therefore, has not included the extension period in the remaining lease terms. With the exception of certain ground leases that are subject to rent increases periodically based on the CPI index, all lease payments under the ground lease are fixed.
The table below summarizes the Company’s operating lease cost (in thousands) recognized through “Property operating expenses” on the consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
Lease Cost | | 2021 | | 2020 |
Fixed lease cost | | $ | 2,100 | | | $ | 2,100 | |
Variable lease cost | | 43 | | | 45 | |
Total | | $ | 2,143 | | | $ | 2,145 | |
| | | | |
Weighted-average remaining lease term (years) | | 55.2 | | 55.9 |
Weighted-average discount rate | | 6.3 | % | | 6.3 | % |
Lease payments by the Company under the terms of all noncancellable ground leases of land are expensed on a straight-line basis regardless of when payments are due. The Company’s ground leases, excluding prepaid ground leases, have remaining lease terms ranging from 8 to 63 years. Lease payments on noncancellable leases at December 31, 2021 are as follows (in thousands):
| | | | | | | | |
Year | | Minimum Rent |
2022 | | $ | 1,248 | |
2023 | | 1,263 | |
2024 | | 1,305 | |
2025 | | 1,321 | |
2026 | | 1,338 | |
Thereafter | | 107,793 | |
Total lease payments | | $ | 114,268 | |
Less: Imputed interest | | 91,306 | |
Present value of operating lease liabilities | | $ | 22,962 | |
The Company obtained ground tenancy rights related to three properties in Philadelphia, Pennsylvania, which 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 the Company. Such amounts, if any, will be reflected as contingent rent when incurred. The ground leases also provide for payment by the Company of certain operating costs relating to the land, primarily real estate taxes. The above schedule of future minimum rental payments does not include any contingent rent amounts or any reimbursed expenses.
7. DEFERRED COSTS
As of December 31, 2021 and 2020, the Company’s deferred costs were comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Total Cost | | Accumulated Amortization | | Deferred Costs, net |
Leasing costs | $ | 143,895 | | | $ | (57,445) | | | $ | 86,450 | |
Financing costs - Unsecured Credit Facility | 6,299 | | | (5,887) | | | 412 | |
Total | $ | 150,194 | | | $ | (63,332) | | | $ | 86,862 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Total Cost | | Accumulated Amortization | | Deferred Costs, net |
Leasing costs | $ | 139,207 | | | $ | (55,656) | | | $ | 83,551 | |
Financing costs - Unsecured Credit Facility | 6,299 | | | (4,994) | | | 1,305 | |
Total | $ | 145,506 | | | $ | (60,650) | | | $ | 84,856 | |
During the years ended December 31, 2021, 2020 and 2019, the Company capitalized internal direct leasing costs of $2.1 million, $1.6 million, and $1.7 million, respectively.
8. INTANGIBLE ASSETS AND LIABILITIES
As of December 31, 2021 and 2020, the Company’s intangible assets/liabilities were comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Total Cost | | Accumulated Amortization | | Intangible Assets, net |
Intangible assets, net: | | | | | |
In-place lease value | $ | 72,376 | | | $ | (44,066) | | | $ | 28,310 | |
Tenant relationship value | 167 | | | (97) | | | 70 | |
Above market leases acquired | 486 | | | (310) | | | 176 | |
| | | | | |
| | | | | |
Total intangible assets, net | $ | 73,029 | | | $ | (44,473) | | | $ | 28,556 | |
| | | | | |
| Total Cost | | Accumulated Amortization | | Intangible Liabilities, net |
Intangible liabilities, net: | | | | | |
Below market leases acquired | $ | 27,025 | | | $ | (14,044) | | | $ | 12,981 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Total Cost | | Accumulated Amortization | | Intangible Assets, net |
Intangible assets, net: | | | | | |
In-place lease value | $ | 91,552 | | | $ | (43,400) | | | $ | 48,152 | |
Tenant relationship value | 2,091 | | | (1,938) | | | 153 | |
Above market leases acquired | 530 | | | (265) | | | 265 | |
| | | | | |
| | | | | |
Total intangible assets, net | $ | 94,173 | | | $ | (45,603) | | | $ | 48,570 | |
| | | | | |
| Total Cost | | Accumulated Amortization | | Intangible Liabilities, net |
Intangible liabilities, net: | | | | | |
Below market leases acquired | $ | 31,263 | | | $ | (12,815) | | | $ | 18,448 | |
For the years ended December 31, 2021, 2020, and 2019, the Company accelerated the amortization of intangible assets by approximately $3.6 million, $0.3 million, and $4.5 million, respectively, as a result of tenant move-outs prior to the end of the associated lease term. For the years ended December 31, 2021, 2020, and 2019 the Company accelerated the amortization of approximately $0.6 million, $0.1 million, and $2.2 million of intangible liabilities as a result of tenant move-outs.
As of December 31, 2021, the Company’s annual amortization for its intangible assets/liabilities, assuming no prospective early lease terminations, was as follows (dollars in thousands):
| | | | | | | | | | | |
| Assets | | Liabilities |
2022 | $ | 9,642 | | | $ | 2,588 | |
2023 | 6,724 | | | 1,540 | |
2024 | 4,433 | | | 1,321 | |
2025 | 3,255 | | | 1,044 | |
2026 | 1,195 | | | 754 | |
Thereafter | 3,307 | | | 5,734 | |
| | | |
| | | |
Total | $ | 28,556 | | | $ | 12,981 | |
9. DEBT OBLIGATIONS
The following table sets forth information regarding the Company’s consolidated debt obligations outstanding as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 | | Effective Interest Rate | | Maturity Date | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
UNSECURED DEBT | | | | | | | | |
$600 million Unsecured Credit Facility | $ | 23,000 | | | $ | — | | | LIBOR + 1.10% | | July 2022 | (a) |
Seven-Year Term Loan - Swapped to fixed | 250,000 | | | 250,000 | | | 2.87% | | October 2022 | |
$350.0M 3.95% Guaranteed Notes due 2023 | 350,000 | | | 350,000 | | | 3.87% | | February 2023 | |
$350.0M 4.10% Guaranteed Notes due 2024 | 350,000 | | | 350,000 | | | 3.78% | | October 2024 | |
$450.0M 3.95% Guaranteed Notes due 2027 | 450,000 | | | 450,000 | | | 4.03% | | November 2027 | |
$350.0M 4.55% Guaranteed Notes due 2029 | 350,000 | | | 350,000 | | | 4.30% | | October 2029 | |
Indenture IA (Preferred Trust I) | 27,062 | | | 27,062 | | | LIBOR + 1.25% | | March 2035 | |
Indenture IB (Preferred Trust I) | 25,774 | | | 25,774 | | | LIBOR + 1.25% | | April 2035 | |
Indenture II (Preferred Trust II) | 25,774 | | | 25,774 | | | LIBOR + 1.25% | | July 2035 | |
Principal balance outstanding | 1,851,610 | | | 1,828,610 | | | | | | |
Plus: original issue premium (discount), net | 8,187 | | | 10,137 | | | | | | |
Less: deferred financing costs | (6,211) | | | (8,152) | | | | | | |
Total unsecured indebtedness | $ | 1,853,586 | | | $ | 1,830,595 | | | | | | |
| | | | | | | | |
(a)The Company has the ability to extend the term of the Unsecured Credit Facility until July 2023 through two successive six-month extension options.
The Parent Company unconditionally guarantees the unsecured debt obligations of the Operating Partnership (or is a co-borrower with the Operating Partnership) but does not by itself incur unsecured indebtedness. The Parent Company has no material assets other than its investment in the Operating Partnership.
On July 17, 2018, the Company amended and restated its revolving credit agreement (as amended and restated, the “Unsecured Credit Facility”). The amendment and restatement, among other things: (i) maintained the total commitment of the revolving line of credit of $600.0 million; (ii) extended the maturity date from May 15, 2019 to July 15, 2022, with two six-month extensions at the Company’s election subject to specified conditions and subject to payment of an extension fee; (iii) reduced the interest rate margins applicable to Eurodollar loans; (iv) provided for an additional interest rate option based on a floating LIBOR rate; and (v) removed the covenant requiring the Company to maintain a minimum net worth. In connection with the amendments, the Company capitalized $2.7 million in financing costs, which will be amortized through the July 15, 2022 maturity date.
At the Company's option, loans outstanding under the Unsecured Credit Facility will bear interest at a rate per annum equal to (1) LIBOR plus between 0.775% and 1.45%, based on the Company's credit rating, or (2) a base rate equal to the greatest of (a) the Administrative Agent's prime rate, (b) the Federal Funds rate plus 0.5% or (c) LIBOR for a one month period plus 1.00%, in each case, plus a margin ranging from 0.0% to 0.45% based on the Company's credit rating. The Unsecured Credit Facility also contains a competitive bid option that allows banks that are part of the lender consortium to bid to make loan advances to the Company at a reduced interest rate. In addition, the Company is also obligated to pay (1) in quarterly installments a facility fee on the total commitment at a rate per annum ranging from 0.125% to 0.30% based on the Company's credit rating and (2) an annual fee on the undrawn amount of each letter or credit equal to the LIBOR Margin. Based on the Company's current credit rating, the LIBOR margin is 1.10% and the facility fee is 0.25%.
The terms of the Unsecured Credit Facility require that the Company maintain customary financial and other covenants, including: (i) a fixed charge coverage ratio greater than or equal to 1.5 to 1.00; (ii) a leverage ratio less than or equal to 0.60 to 1.00, subject to specified exceptions; (iii) a ratio of unsecured indebtedness to unencumbered asset value less than or equal to 0.60 to 1.00, subject to specified exceptions; (iv) a ratio of secured indebtedness to total asset value less than or equal to 0.40 to 1.00; and (v) a ratio of unencumbered cash flow to interest expense on unsecured debt greater than 1.75 to 1.00. In addition, the Unsecured Credit Facility restricts payments of dividends and distributions on shares in excess of 95% of the Company's funds from operations (FFO) except to the extent necessary to enable the Company to continue to qualify as a REIT for Federal income tax purposes.
The Company had $23.0 million of borrowings under the Unsecured Credit Facility as of December 31, 2021. During the twelve months ended December 31, 2021, the weighted-average interest rate on Unsecured Credit Facility borrowings was
1.21% resulting in $0.4 million of interest expense. During the twelve months ended December 31, 2020 weighted-average interest rate on Unsecured Credit Facility borrowings was 1.48% resulting in $0.5 million of interest expense.
The Company was in compliance with all financial covenants as of December 31, 2021. Certain of the covenants restrict the Company’s ability to obtain alternative sources of capital.
As of December 31, 2021, the aggregate scheduled principal payments on the Company's debt obligations were as follows (in thousands):
| | | | | |
2022 | $ | 273,000 | |
2023 | 350,000 | |
2024 | 350,000 | |
2025 | — | |
2026 | — | |
Thereafter | 878,610 | |
Total principal payments | 1,851,610 | |
Net unamortized premiums/(discounts) | 8,187 | |
Net deferred financing costs | (6,211) | |
Outstanding indebtedness | $ | 1,853,586 | |
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company determined the fair values disclosed below using available market information and discounted cash flow analyses as of December 31, 2021 and 2020, respectively. The discount rate used in calculating fair value is the sum of the current risk free rate and the risk premium on the date of measurement of the instruments or obligations. Considerable judgment is necessary to interpret market data and to develop the related estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize upon disposition. The use of different estimates and valuation methodologies may have a material effect on the fair value amounts shown. The Company believes that the carrying amounts reflected in the consolidated balance sheets at December 31, 2021 and 2020 approximate the fair values for cash and cash equivalents, accounts receivable, other assets and liabilities, accounts payable and accrued expenses because they are short-term in duration.
The following are financial instruments for which the Company’s estimates of fair value differ from the carrying amounts (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | Carrying Amount (a) | | Fair Value | | Carrying Amount (a) | | Fair Value |
Unsecured notes payable | | $ | 1,502,368 | | | $ | 1,588,780 | | | $ | 1,502,901 | | | $ | 1,607,310 | |
Variable rate debt | | $ | 351,218 | | | $ | 344,754 | | | $ | 327,694 | | | $ | 308,838 | |
| | | | | | | | |
Notes receivable (b) | | $ | 44,430 | | | $ | 45,230 | | | $ | 94,430 | | | $ | 97,372 | |
(a)Net of deferred financing costs of $5.8 million and $7.2 million for unsecured notes payable, $0.4 million and $0.9 million for variable rate debt as of December 31, 2021 and December 31, 2020, respectively.
(b)For further detail, refer to Note 5, ''Debt and Preferred Equity Investments.”
The Company used quoted market prices as of December 31, 2021 and December 31, 2020 to value the unsecured notes payable and, as such, categorized them as Level 2.
The inputs utilized to determine the fair value of the Company’s variable rate debt are categorized as Level 3. The fair value of the variable rate debt was determined using a discounted cash flow model that considered borrowing rates available to the Company for loans with similar terms and characteristics.
The inputs utilized to determine fair value of the Company's notes receivable are unobservable and, as such, were categorized as Level 3. Fair value was determined using a discounted cash flow model that considered the contractual interest and principal payments discounted at a blended interest rate of the notes receivable.
For the Company’s Level 3 financial instruments for which fair value is disclosed, an increase in the discount rate used to determine fair value would result in a decrease to the fair value. Conversely, a decrease in the discount rate would result in an increase to the fair value.
Disclosure about the fair value of financial instruments is based upon pertinent information available to management as of December 31, 2021 and December 31, 2020. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts were not comprehensively revalued for purposes of these financial statements since December 31, 2021. Current estimates of fair value may differ from the amounts presented herein.
11. DERIVATIVE FINANCIAL INSTRUMENTS
Use of Derivative Financial Instruments
The Company’s use of derivative instruments is limited to the utilization of interest rate agreements or other instruments to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions. The counterparties to these arrangements are major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company is potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of the high credit ratings of the counterparties, the Company does not anticipate that any of the counterparties will fail to meet these obligations as they come due. The Company does not hedge credit or property value market risks through derivative financial instruments.
The Company formally assesses, both at the inception of a hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that a derivative is not highly-effective as a hedge or if a derivative ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively for either the entire hedge or the portion of the hedge that is determined to be ineffective. The related ineffectiveness would be charged to the consolidated statement of operations.
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
To comply with the provisions of the accounting standard for fair value measurements and disclosures, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
The following table summarizes the terms and fair values of the Company’s derivative financial instruments as of December 31, 2021 and December 31, 2020. The notional amounts provide an indication of the extent of the Company’s involvement in these instruments at that time but do not represent exposure to credit, interest rate or market risks (amounts presented in thousands).
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Hedge Product | | Hedge Type | | Designation | | Notional Amount | | Strike | | Trade Date | | Maturity Date | | Fair value |
| | | | | | 12/31/2021 | | 12/31/2020 | | | | | | | | 12/31/2021 | | 12/31/2020 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | |
Swap | | Interest Rate | | Cash Flow | (a) | $ | 250,000 | | | $ | 250,000 | | | 2.868 | % | | October 8, 2015 | | October 8, 2022 | | $ | (2,461) | | | $ | (6,627) | |
Swap | | Interest Rate | | Cash Flow | (b) | — | | | 25,774 | | | 3.300 | % | | December 22, 2011 | | January 30, 2021 | | — | | | (120) | |
| | | | | | $ | 250,000 | | | $ | 275,774 | | | | | | | | | | | |
(a)Hedging unsecured variable rate debt.
(b)On January 30, 2021, the interest rate hedge contract for this swap expired.
The Company measures its derivative instruments at fair value and records them in “Other assets” and (“Other liabilities”) on the Company’s consolidated balance sheets.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that the inputs utilized to determine the fair value of derivative instruments are classified in Level 2 of the fair value hierarchy.
Concentration of Credit Risk
Concentrations of credit risk arise for the Company when multiple tenants of the Company are engaged in similar business activities, or are located in the same geographic region, or have similar economic features that impact in a similar manner their ability to meet contractual obligations, including those to the Company. The Company regularly monitors its tenant base to assess potential concentrations of credit risk. Management believes the current credit risk portfolio is reasonably well diversified and does not contain an unusual concentration of credit risk. No tenant accounted for 10% or more of the Company’s rents during 2021, 2020 and 2019.
12. LIMITED PARTNERS' NONCONTROLLING INTERESTS IN THE PARENT COMPANY
Noncontrolling interests in the Parent Company’s financial statements relate to redeemable common limited partnership interests in the Operating Partnership held by parties other than the Parent Company and properties which are consolidated but not wholly owned by the Operating Partnership.
Operating Partnership
The aggregate book value of the noncontrolling interests associated with the redeemable common limited partnership interests in the accompanying consolidated balance sheet of the Parent Company was $8.2 million and $10.5 million as of December 31, 2021 and December 31, 2020, respectively. Under the applicable accounting guidance, the redemption value of limited partnership units are carried at fair value. The Parent Company believes that the aggregate settlement value of these interests (based on the number of units outstanding and the average closing price of the common shares during the last five business days of the quarter) was approximately $11.1 million and $11.7 million as of December 31, 2021 and December 31, 2020, respectively.
13. BENEFICIARIES' EQUITY OF THE PARENT COMPANY
Earnings per Share (EPS)
The following table details the number of shares and net income used to calculate basic and diluted earnings per share (in thousands, except share and per share amounts; results may not add due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Basic | | Diluted | | Basic | | Diluted | | Basic | | Diluted |
Numerator | | | | | | | | | | | |
Net income | $ | 12,366 | | | $ | 12,366 | | | $ | 307,326 | | | $ | 307,326 | | | $ | 34,529 | | | $ | 34,529 | |
Net income attributable to noncontrolling interests | (77) | | | (77) | | | (1,799) | | | (1,799) | | | (262) | | | (262) | |
Nonforfeitable dividends allocated to unvested restricted shareholders | (421) | | | (421) | | | (410) | | | (410) | | | (396) | | | (396) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income attributable to common shareholders | $ | 11,868 | | | $ | 11,868 | | | $ | 305,117 | | | $ | 305,117 | | | $ | 33,871 | | | $ | 33,871 | |
Denominator | | | | | | | | | | | |
Weighted-average shares outstanding | 170,878,185 | | | 170,878,185 | | | 171,926,079 | | | 171,926,079 | | | 176,132,941 | | | 176,132,941 | |
Contingent securities/Share based compensation | — | | | 1,395,055 | | | — | | | 390,997 | | | — | | | 553,872 | |
Weighted-average shares outstanding | 170,878,185 | | | 172,273,240 | | | 171,926,079 | | | 172,317,076 | | | 176,132,941 | | | 176,686,813 | |
Earnings per Common Share: | | | | | | | | | | | |
Net income attributable to common shareholders | $ | 0.07 | | | $ | 0.07 | | | $ | 1.77 | | | $ | 1.77 | | | $ | 0.19 | | | $ | 0.19 | |
The contingent securities/share based compensation impact is calculated using the treasury stock method and relates to employee awards settled in shares of the Parent Company. The effect of these securities is anti-dilutive for periods that the Parent Company incurs a net loss from continuing operations available to common shareholders and therefore is excluded from the dilutive earnings per share calculation in such periods.
Redeemable common limited partnership units totaling 823,983 at December 31, 2021, 981,634 at December 31, 2020 and 981,634 at December 31, 2019, respectively, were excluded from the diluted earnings per share computations because they are not dilutive.
Unvested restricted shares are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per share. For the years ended December 31, 2021, 2020 and 2019, earnings representing nonforfeitable dividends as noted in the table above were allocated to the unvested restricted shares issued to the Company’s executives and other employees under the Company's shareholder-approved long-term incentive plan.
Common and Preferred Shares
On December 7, 2021, the Parent Company declared a distribution of $0.19 per common share, totaling $32.8 million, which was paid on January 19, 2022 to shareholders of record as of January 5, 2022.
During the year ended December 31, 2021, the Company issued 226,695 common shares in a private placement to an unaffiliated third party in exchange for the third party's 1% residual ownership interest in One and Two Commerce Square, an unconsolidated joint venture.
Of the 20,000,000 preferred shares authorized, none were outstanding as of December 31, 2021 or December 31, 2020.
Common Share Repurchases
The Parent Company maintains a common share repurchase program under which the Board of Trustees has authorized the Parent Company to repurchase common shares. On January 3, 2019, the Board of Trustees authorized the repurchase of up to $150.0 million common shares from and after January 3, 2019. During the year ended December 31, 2021, the Company did
not repurchase any common shares. During the year ended December 31, 2020, the Company repurchased and retired 6,248,483 common shares at an average price of $9.60 per share, totaling $60.0 million. During the year ended December 31, 2019, the Company repurchased and retired 1,337,169 common shares at an average price of $12.92 per share, totaling $17.3 million.
Former Continuous Offering Program
On January 10, 2017, the Parent Company entered into a continuous offering program (the “Offering Program”), that permitted the Parent Company to sell up to an aggregate of 16,000,000 common shares in at-the-market offerings.
There was no activity under the Offering Program during 2020 and 2019. At December 31, 2021, no common shares remained available for issuance under the Offering Program, which terminated on January 10, 2020.
14. PARTNERS' EQUITY OF THE PARENT COMPANY
Earnings per Common Partnership Unit
The following table details the number of units and net income used to calculate basic and diluted earnings per common partnership unit (in thousands, except unit and per unit amounts; results may not add due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Basic | | Diluted | | Basic | | Diluted | | Basic | | Diluted |
Numerator | | | | | | | | | | | |
Net income | $ | 12,366 | | | $ | 12,366 | | | $ | 307,326 | | | $ | 307,326 | | | $ | 34,529 | | | $ | 34,529 | |
Net (income) loss attributable to noncontrolling interests | 3 | | | 3 | | | (20) | | | (20) | | | (69) | | | (69) | |
Nonforfeitable dividends allocated to unvested restricted unitholders | (421) | | | (421) | | | (410) | | | (410) | | | (396) | | | (396) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Net income attributable to common unitholders | $ | 11,948 | | | $ | 11,948 | | | $ | 306,896 | | | $ | 306,896 | | | $ | 34,064 | | | $ | 34,064 | |
Denominator | | | | | | | | | | | |
Weighted-average units outstanding | 171,770,843 | | | 171,770,843 | | | 172,907,713 | | | 172,907,713 | | | 177,114,932 | | | 177,114,932 | |
Contingent securities/Share based compensation | — | | | 1,395,055 | | | — | | | 390,997 | | | — | | | 553,872 | |
Total weighted-average units outstanding | 171,770,843 | | | 173,165,898 | | | 172,907,713 | | | 173,298,710 | | | 177,114,932 | | | 177,668,804 | |
Earnings per Common Partnership Unit: | | | | | | | | | | | |
Net income attributable to common unitholders | $ | 0.07 | | | $ | 0.07 | | | $ | 1.77 | | | $ | 1.77 | | | $ | 0.19 | | | $ | 0.19 | |
Unvested restricted units are considered participating securities which require the use of the two-class method for the computation of basic and diluted earnings per unit. For the years ended December 31, 2021, 2020 and 2019, earnings representing nonforfeitable dividends were allocated to the unvested restricted units issued to the Parent Company’s executives and other employees under the Parent Company’s shareholder-approved long-term incentive plan.
Common Partnership Units and Preferred Mirror Units
The Operating Partnership issues partnership units to the Parent Company in exchange for the contribution of the net proceeds of any equity security issuance by the Parent Company. The number and terms of such partnership units correspond to the number and terms of the related equity securities issued by the Parent Company. In addition, the Operating Partnership may also issue separate classes of partnership units. Historically, the Operating Partnership has had the following types of partnership units outstanding: (i) Preferred Partnership Units which have been issued to parties other than the Parent Company; (ii) Preferred Mirror Partnership Units which have been issued to the Parent Company; and (iii) Common Partnership Units which include both interests held by the Parent Company and those held by other limited partners.
Preferred Mirror Partnership Units
In exchange for the proceeds received in corresponding offerings by the Parent Company of preferred shares of beneficial interest, the Operating Partnership has issued to the Parent Company a corresponding amount of Preferred Mirror Partnership Units with terms consistent with that of the preferred securities issued by the Parent Company.
No preferred units were outstanding as of December 31, 2021 or December 31, 2020.
Common Partnership Units (Redeemable and General)
The Operating Partnership has two classes of Common Partnership Units outstanding as of December 31, 2021: (i) Class A Limited Partnership Interest which are held by both the Parent Company and outside third parties and (ii) General Partnership Interests which are held solely by the Parent Company (collectively, the Class A Limited Partnership Interest, and General Partnership Interests are referred to as “Common Partnership Units”). The holders of the Common Partnership Units are entitled to share in cash distributions from, and in profits and losses of, the Operating Partnership, in proportion to their respective percentage interests, subject to preferential distributions on the preferred mirror units and the preferred units.
The Common Partnership Units held by the Parent Company (comprised of both General Partnership Units and Class A Limited Partnership Units) are presented as partner’s equity in the consolidated financial statements. Class A Limited Partnership Interest held by parties other than the Parent Company are redeemable at the option of the holder for a like number of common shares of the Parent Company, or cash, or a combination thereof, at the election of the Parent Company. Because the form of settlement of these redemption rights are not within the control of the Operating Partnership, these Common Partnership Units have been excluded from partner’s equity and are presented as redeemable limited partnership units measured at the potential cash redemption value as of the end of the periods presented based on the closing market price of the Parent Company’s common shares at December 31, 2021, 2020 and 2019, which was $13.42, $11.91 and $15.75, respectively. Class A Units of 823,983 as of December 31, 2021, 981,634 as of December 31, 2020, and 981,634 as of December 31, 2019, respectively, were outstanding and owned by outside limited partners of the Operating Partnership.
On December 7, 2021, the Operating Partnership declared a distribution of $0.19 per common partnership unit, totaling $32.8 million, which was paid on January 19, 2022 to unitholders of record as of January 5, 2022.
During the year ended December 31, 2021, the Operating Partnership issued 226,695 common partnership units to the Parent Company in exchange for a 1% residual ownership interest in One and Two Commerce Square, an unconsolidated joint venture, which was acquired from an unaffiliated third party in exchange for an equal number of common shares of the Parent Company.
Common Unit Repurchases
In connection with the Parent Company’s common share repurchase program, one common unit of the Operating Partnership is retired for each common share repurchased. During the year ended December 31, 2021, the Company did not repurchase any units. During the year ended December 31, 2020 the Company repurchased and retired 6,248,483 common units at an average price of $9.60 per unit, totaling $60.0 million. During the year ended December 31, 2019, the Company Repurchased 1,337,169 common units at an average price of $12.92 per unit, totaling $17.3 million.
The common units repurchased were retired and, as a result, were accounted for in accordance with Maryland law, which does not contemplate treasury stock. The repurchases were recorded as a reduction of common units (at $0.01 par value per unit) and a decrease to General Partnership Capital.
Former Continuous Offering Program
On January 10, 2017, the Parent Company entered into a continuous offering program (the “Offering Program”), which permitted it to sell up to an aggregate of 16,000,000 common units in at-the-market offerings. In connection with the commencement of the Offering Program, $0.2 million of upfront costs were recorded to General Partner Capital.
There was no activity under the Offering Program during 2020 and 2019. As of December 31, 2021, no common shares remained available for issuance under the Offering Program, which terminated on January 10, 2020.
15. SHARE BASED COMPENSATION, 401(K) PLAN AND DEFERRED COMPENSATION
401(k) Plan
The Company sponsors a 401(k) defined contribution plan for its employees. Each employee may contribute up to 100% of annual compensation, subject to specific limitations under the Internal Revenue Code. At its discretion, the Company can make matching contributions equal to a percentage of the employee’s elective contribution and profit sharing contributions. The Company funds its 401(k) contributions annually and plan participants must be employed as of December 31 in order to receive employer contributions, except for employees eligible for qualifying retirement, as defined under the Internal Revenue Code. The Company contributions were $0.4 million, $0.5 million, and $0.4 million in 2021, 2020, and 2019, respectively.
Restricted Share Rights Awards
As of December 31, 2021, 474,978 restricted share rights ("Restricted Share Rights") were outstanding under the Company's long term equity incentive plan. These Restricted Share Rights vest over one to three years from the initial grant dates. The remaining compensation expense to be recognized with respect to these awards at December 31, 2021 was $1.8 million and is expected to be recognized over a weighted average remaining vesting period of 1.9 years. During the years ended December 31, 2021, 2020, and 2019, the amortization related to outstanding Restricted Share Rights was $4.1 million (of which $0.5 million was capitalized), $4.3 million (of which $0.4 million was capitalized), and $3.9 million (of which $0.3 million was capitalized), respectively. Compensation expense related to outstanding Restricted Share Rights is included in general and administrative expense.
The following table summarizes the Company’s Restricted Share Rights activity during the year-ended December 31, 2021:
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Non-vested at January 1, 2021 | | 488,735 | | | $ | 15.19 | |
Granted | | 343,179 | | | $ | 12.72 | |
Vested | | (339,579) | | | $ | 15.12 | |
Forfeited | | (17,357) | | | $ | 13.55 | |
Non-vested at December 31, 2021 | | 474,978 | | | $ | 13.51 | |
On March 4, 2021, the Compensation Committee of the Parent Company’s Board of Trustees awarded to officers of the Company an aggregate of 252,278 Restricted Share Rights, which vest over three years from the grant date. Each Restricted Share Right entitles the holder to one common share upon settlement. The Parent Company pays dividend equivalents on the Restricted Share Rights prior to the settlement date. Vesting and/or settlement would accelerate if the recipient of the award were to die, become disabled or, in the case of certain of such Restricted Share Rights, retire in a qualifying retirement prior to the vesting or settlement date. Qualifying retirement generally means the recipient’s voluntary termination of employment after reaching at least age 57 and accumulating at least 15 years of service with the Company. In addition, vesting would also accelerate if the Parent Company were to undergo a change of control and, on or before the first anniversary of the change of control, the recipient’s employment were to cease due to a termination without cause or resignation with good reason.
The Restricted Share Rights granted in 2021, 2020, and 2019 to certain senior executives include an “outperformance feature” whereby additional shares may be earned, up to 200% of the shares subject to the basic award, based on the Company’s achievement of earnings-based targets and development, or investment, based targets during a three-year performance period with an additional two years to fully vest. In addition to the basic award, up to an aggregate of 388,840, 316,236, and 228,858 shares may be awarded under the outperformance feature for the 2021, 2020, and 2019 awards, respectively, to those senior officers whose Restricted Share Rights awards include the "outperformance feature." As of December 31, 2021, the Company has not recognized any compensation expense related to the outperformance feature for the 2019-2021 awards. The Company will continue to evaluate progression towards achievement of the performance metrics on a quarterly basis and recognize compensation expense for the outperformance feature of these awards should it be determined that achievement of these metrics is probable.
In addition, on February 23, 2021, the Compensation Committee awarded non-officer employees an aggregate of 49,267 Restricted Share Rights that generally vest in three equal annual installments. Vesting of these awards is subject to acceleration upon death, disability or termination without cause within one year following a change of control.
On May 18, 2021, the Compensation Committee awarded the Trustees an aggregate of 41,634 fully vested common shares.
In accordance with the accounting standard for share-based compensation, the Company amortizes share-based compensation costs through the qualifying retirement dates for those executives and Trustees who meet the conditions for qualifying retirement during the scheduled vesting period and whose award agreements provide for vesting upon a qualifying retirement.
Restricted Performance Share Units Plan
The Compensation Committee of the Parent Company’s Board of Trustees has granted performance share-based awards (referred to as Restricted Performance Share Units, or RPSUs) to officers of the Parent Company. The RPSUs are settled in common shares, with the number of common shares issuable in settlement determined based on the Company’s total shareholder return over specified measurement periods compared to total shareholder returns of comparative groups over the measurement periods. The table below presents certain information as to unvested RPSU awards.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RPSU Grant Date |
| | 2/21/2019 | | 3/5/2020 | | 3/5/2021 | | Total |
(Amounts below in shares, unless otherwise noted) | | | | | | | | |
Non-vested at January 1, 2021 | | 206,069 | | | 319,600 | | | — | | | 525,669 | |
Granted | | — | | | — | | | 380,957 | | | 380,957 | |
| | | | | | | | |
Units Cancelled | | (3,837) | | | (5,545) | | | (6,796) | | | (16,178) | |
Non-vested at December 31, 2021 | | 202,232 | | | 314,055 | | | 374,161 | | | 890,448 | |
Measurement Period Commencement Date | | 1/1/2019 | | 1/1/2020 | | 1/1/2021 | | |
Measurement Period End Date | | 12/31/2021 | | 12/31/2022 | | 12/31/2023 | | |
Granted | | 213,728 | | | 319,600 | | | 380,957 | | | |
Fair Value of Units on Grant Date (in thousands) | | $ | 4,627 | | | $ | 5,389 | | | $ | 6,389 | | | |
The Company values each RPSU on its grant date using a Monte Carlo simulation. The fair values of each award are being amortized over the three year performance period. During the performance period, dividend equivalents are credited as additional RPSUs, subject to the same terms and conditions as the original RPSUs. The performance period will be abbreviated and the determination and delivery of earned shares will be accelerated in the event of a change in control or if the recipient of the award were to die, become disabled or retire in a qualifying retirement prior to the end of the otherwise applicable three year performance period; provided that, in the case of qualifying retirement for the March, 2021 and 2020 grants, the number of shares deliverable will be pro-rated based on the portion of the performance period actually worked before retirement. In accordance with the accounting standard for share-based compensation, the Company amortizes stock-based compensation costs for the February 2019 grant through the qualifying retirement date for those executives who meet the conditions for qualifying retirement during the scheduled vesting period.
For the year ended December 31, 2021, the Company recognized amortization of the 2021, 2020 and 2019 RPSU awards of $4.3 million, of which $0.5 million was capitalized consistent with the Company’s policies for capitalizing eligible portions of employee compensation. For the year ended December 31, 2020, amortization for the 2020, 2019 and 2018 RPSU awards was $3.0 million, of which $0.4 million was capitalized consistent with the Company’s policies for capitalizing eligible portions of employee compensation. For the year ended December 31, 2019, amortization for the 2019, 2018, and 2017 RPSU awards was $4.2 million, of which $0.6 million was capitalized consistent with the Company’s policies for capitalizing eligible portions of employee compensation.
The remaining compensation expense to be recognized with respect to the non-vested RPSUs at December 31, 2021 was approximately $6.3 million and is expected to be recognized over a weighted average remaining vesting period of 1.5 years.
The Company issued 82,513 common shares on February 1, 2021 in settlement of RPSUs that had been awarded on February 28, 2018 (with a three-year measurement period ended December 31, 2020). Holders of these RPSUs also received a cash dividend of $0.19 per share for these common shares on January 20, 2021.
Employee Share Purchase Plan
The Parent Company’s shareholders approved the 2007 Non-Qualified Employee Share Purchase Plan (the “ESPP”), which is intended to provide eligible employees with a convenient means to purchase common shares of the Parent Company through payroll deductions and voluntary cash purchases at an amount equal to 85% of the average closing price per share for a specified period. Under the plan document, the maximum participant contribution for the 2021 plan year is limited to the lesser of 20% of compensation or $50,000. The ESPP allows the Parent Company to make open market purchases, which reflects all purchases made under the plan to date. In addition, the number of shares separately reserved for issuance under the ESPP is 1.25 million. Employees made purchases under the ESPP of $0.6 million during the year ended December 31, 2021, $0.4 million during the year ended December 31, 2020 and $0.5 million during the year ended December 31, 2019. The Company recognized $0.1 million of compensation expense related to the ESPP during each of the years ended December 31, 2021, 2020, and 2019. Compensation expense represents the 15% discount on the purchase price. The Board of Trustees of the Parent Company may terminate the ESPP at its sole discretion at any time.
Deferred Compensation
In January 2005, the Parent Company adopted a Deferred Compensation Plan (the “Plan”) that allows trustees and certain key employees to defer compensation voluntarily. Compensation expense is recorded for the deferred compensation and a related liability is recognized. Participants may elect designated benchmark investment options for the notional investment of their deferred compensation. The deferred compensation obligation is adjusted for deemed income or loss related to the investments selected. At the time the participants defer compensation, the Company records a liability, which is included in the Company’s consolidated balance sheets. The liability is adjusted for changes in the market value of the participant-selected investments at the end of each accounting period, and the impact of adjusting the liability is recorded as an increase or decrease to compensation cost.
The Company has purchased mutual funds which can be utilized as a funding source for the Company’s obligations under the Plan. Participants in the Plan have no interest in any assets set aside by the Company to meet its obligations under the Plan. For each of the years ended December 31, 2021, December 31, 2020 and December 31, 2019, the Company recorded a nominal amount of deferred compensation costs, net of investments in the company-owned policies and mutual funds.
Participants in the Plan may elect to have all, or a portion of their deferred compensation invested in the Company’s common shares. The Company holds these shares in a rabbi trust, which is subject to the claims of the Company’s creditors in the event of the Company’s bankruptcy or insolvency. The Plan does not permit diversification of a participant’s deferral allocated to the Company common shares and deferrals allocated to Company common shares can only be settled with a fixed number of shares. In accordance with the accounting standard for deferred compensation arrangements where amounts earned are held in a rabbi trust and invested, the deferred compensation obligation associated with the Company’s common shares is classified as a component of shareholder’s equity and the related shares are treated as shares to be issued and are included in total shares outstanding. At both December 31, 2021 and 2020, 1.2 million of such shares were included in total shares outstanding, respectively. Subsequent changes in the fair value of the common shares are not reflected in operations or shareholders’ equity of the Company.
16. DISTRIBUTIONS
The following table provides the tax characteristics of the 2021, 2020 and 2019 distributions paid:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands, except per share amounts) |
Common Share Distributions: | | | | | | |
Ordinary income | | $ | 0.64 | | | $ | 0.41 | | | $ | 0.62 | |
Capital gain | | 0.01 | | | 0.35 | | | — | |
Non-taxable distributions | | 0.11 | | | — | | | 0.14 | |
Distributions per share | | $ | 0.76 | | | $ | 0.76 | | | $ | 0.76 | |
Percentage classified as ordinary income | | 83.90 | % | | 53.90 | % | | 81.00 | % |
Percentage classified as capital gain | | 1.20 | % | | 46.10 | % | | — | % |
Percentage classified as non-taxable distribution | | 14.90 | % | | — | % | | 19.00 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
17. INCOME TAXES AND TAX CREDIT TRANSACTIONS
Income Tax Provision/Benefit
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
As of December 31, 2021 and 2020 there were no deferred tax assets included within “Other assets” in the consolidated balance sheets.
The Company had no accruals for tax uncertainties as of December 31, 2021 and December 31, 2020.
For the year ended December 31, 2021, there was no deferred income tax expense and nominal current income tax expense. For the year ended December 31, 2020, there was no deferred income tax expense and $0.2 million of current income tax benefit. For the year ended December 31, 2019, there was $0.1 million of deferred income tax expense and $0.1 million of current income tax benefit. These amounts are included in “Income tax (provision) benefit” in the consolidated statements of operations.
18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table details the components of accumulated other comprehensive income (loss) of the Parent Company and the Operating Partnership as of and for the three years ended December 31, 2021 (in thousands):
| | | | | | | | |
Parent Company | | Cash Flow Hedges |
Balance at January 1, 2019 | | $ | 5,029 | |
Change in fair market value during year | | (8,210) | |
Allocation of unrealized (gains)/losses on derivative financial instruments to noncontrolling interests | | 41 | |
Amortization of interest rate contracts reclassified from comprehensive income to interest expense | | 770 | |
Balance at December 31, 2019 | | $ | (2,370) | |
Change in fair market value during year | | (5,972) | |
Allocation of unrealized (gains)/losses on derivative financial instruments to noncontrolling interests | | 29 | |
Amortization of interest rate contracts reclassified from comprehensive income to interest expense | | 752 | |
Balance at December 31, 2020 | | $ | (7,561) | |
Change in fair market value during year | | 4,817 | |
Allocation of unrealized (gains)/losses on derivative financial instruments to noncontrolling interests | | (28) | |
Amortization of interest rate contracts reclassified from comprehensive income to interest expense | | 752 | |
Balance at December 31, 2021 | | $ | (2,020) | |
| | | | | | | | |
Operating Partnership | | Cash Flow Hedges |
Balance at January 1, 2019 | | $ | 4,725 | |
Change in fair market value during year | | (8,210) | |
Amortization of interest rate contracts reclassified from comprehensive income to interest expense | | 770 | |
Balance at December 31, 2019 | | $ | (2,715) | |
Change in fair market value during year | | (5,972) | |
Amortization of interest rate contracts reclassified from comprehensive income to interest expense | | 752 | |
Balance at December 31, 2020 | | $ | (7,935) | |
Change in fair market value during year | | 4,817 | |
Amortization of interest rate contracts reclassified from comprehensive income to interest expense | | 752 | |
Balance at December 31, 2021 | | $ | (2,366) | |
Over time, the unrealized gains and losses held in Accumulated Other Comprehensive Income (“AOCI”) will be reclassified to interest expense when the related hedged items are recognized in earnings. The current balance held in AOCI is expected to be reclassified to interest expense for realized losses on forecasted debt transactions over the related term of the debt obligation, as applicable. The Company expects to reclassify $0.6 million from AOCI into interest expense within the next twelve months.
19. SEGMENT INFORMATION
As of December 31, 2021, the Company owns and manages properties within five segments: (1) Philadelphia Central Business District ("Philadelphia CBD"), (2) Pennsylvania Suburbs, (3) Austin, Texas (4) Metropolitan Washington, D.C. and (5) Other. The Philadelphia CBD segment includes properties located in the City of Philadelphia, 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 the District of Columbia, Northern Virginia and Southern Maryland. The Other segment includes properties located in Camden County, New Jersey and New Castle County, Delaware. In addition to the five segments, the 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. Land held for development and construction in progress is transferred to operating properties by region upon completion of the associated construction or project.
The following tables provide selected asset information and results of operations of the Company’s reportable segments (in thousands):
| | | | | | | | | | | | | | |
Real estate investments, at cost: | | | | |
| | December 31, 2021 | | December 31, 2020 |
Philadelphia CBD | | $ | 1,460,510 | | | $ | 1,433,927 | |
Pennsylvania Suburbs | | 866,223 | | | 871,530 | |
Austin, Texas | | 778,145 | | | 728,741 | |
Metropolitan Washington, D.C. | | 280,921 | | | 352,794 | |
Other | | 86,803 | | | 87,117 | |
| | | | |
| | | | |
Operating Properties | | $ | 3,472,602 | | | $ | 3,474,109 | |
| | | | |
Corporate | | | | |
Right of use asset - operating leases, net | | $ | 20,313 | | | $ | 20,977 | |
Construction-in-progress | | $ | 277,237 | | | $ | 210,311 | |
Land held for development | | $ | 114,604 | | | $ | 117,984 | |
Prepaid leasehold interests in land held for development, net | | $ | 27,762 | | | $ | 39,185 | |
.Net operating income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | Total revenue | | Operating expenses (a) | | Net operating income | | Total revenue | | Operating expenses (a) | | Net operating income (loss) | | Total revenue | | Operating expenses (a) | | Net operating income (loss) |
Philadelphia CBD | | $ | 207,858 | | | $ | (73,695) | | | $ | 134,163 | | | $ | 232,028 | | | $ | (82,505) | | | $ | 149,523 | | | $ | 263,769 | | | $ | (100,219) | | | $ | 163,550 | |
Pennsylvania Suburbs | | 124,566 | | | (40,011) | | | 84,555 | | | 141,613 | | | (46,281) | | | 95,332 | | | 141,084 | | | (47,418) | | | 93,666 | |
Austin, Texas | | 101,680 | | | (39,374) | | | 62,306 | | | 102,982 | | | (39,759) | | | 63,223 | | | 104,157 | | | (38,285) | | | 65,872 | |
Metropolitan Washington, D.C. | | 19,865 | | | (15,386) | | | 4,479 | | | 40,223 | | | (20,791) | | | 19,432 | | | 51,498 | | | (23,455) | | | 28,043 | |
Other | | 14,015 | | | (9,840) | | | 4,175 | | | 13,469 | | | (9,815) | | | 3,654 | | | 14,558 | | | (9,328) | | | 5,230 | |
Corporate | | 18,835 | | | (10,005) | | | 8,830 | | | 4,537 | | | (6,305) | | | (1,768) | | | 5,351 | | | (7,141) | | | (1,790) | |
Operating properties | | $ | 486,819 | | | $ | (188,311) | | | $ | 298,508 | | | $ | 534,852 | | | $ | (205,456) | | | $ | 329,396 | | | $ | 580,417 | | | $ | (225,846) | | | $ | 354,571 | |
(a)Includes property operating expense, real estate taxes and third party management expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unconsolidated real estate ventures: | | | | | | | | |
| | Investment in real estate ventures, at equity | Equity in income (loss) of real estate venture |
| | As of | Year ended December 31, |
| | December 31, 2021 | | December 31, 2020 | | 2021 | | 2020 | | 2019 |
Philadelphia CBD | | $ | 317,959 | | | $ | 268,562 | | | $ | (15,191) | | | $ | (9,090) | | | $ | 328 | |
Metropolitan Washington, D.C. | | 85,867 | | | 99,769 | | | (3,755) | | | (3,019) | | | (4,234) | |
Mid-Atlantic Office JV | | 31,680 | | | 32,996 | | | 932 | | | 96 | | | — | |
MAP Venture | | (24,396) | | | (11,516) | | | (8,683) | | | (6,571) | | | (6,102) | |
Other | | — | | | — | | | — | | | — | | | 86 | |
| | | | | | | | | | |
Total | | $ | 411,110 | | | $ | 389,811 | | | $ | (26,697) | | | $ | (18,584) | | | $ | (9,922) | |
Net operating income (“NOI”) is a non-GAAP financial measure, which we define as total revenue less property operating expenses, real estate taxes, and third party management expenses. Property operating expenses that are included in determining NOI consist of costs that are necessary and allocable to our operating properties such as utilities, property-level salaries, repairs and maintenance, property insurance and management fees. General and administrative expenses that are not reflected in NOI primarily consist of corporate-level salaries, amortization of share awards and professional fees that are incurred as part of corporate office management. NOI presented by the Company may not be comparable to NOI reported by other companies that define NOI differently. NOI is the primary measure that is used by the Company's management to evaluate the operating performance of the Company's real estate assets by segment. The Company believes NOI provides useful information to investors regarding the financial condition and results of operations because it reflects only those
income and expense items that are incurred at the property level. While NOI is a relevant and widely used measure of operating performance of real estate investment trusts, it does not represent cash flow from operations or net income as defined by GAAP and should not be considered as an alternative to those measures in evaluating our liquidity or operating performance. NOI does not reflect interest expenses, real estate impairment losses, depreciation and amortization costs, capital expenditures and leasing costs. The Company believes that net income (loss), as defined by GAAP, is the most appropriate earnings measure. The following is a reconciliation of consolidated net income (loss), as defined by GAAP, to consolidated NOI, (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Net income | | $ | 12,366 | | | $ | 307,326 | | | $ | 34,529 | |
Plus: | | | | | | |
Interest expense | | 62,617 | | | 73,911 | | | 81,512 | |
Interest expense - amortization of deferred financing costs | | 2,836 | | | 2,904 | | | 2,768 | |
| | | | | | |
Depreciation and amortization | | 178,105 | | | 188,283 | | | 210,005 | |
General and administrative expenses | | 30,153 | | | 30,288 | | | 32,156 | |
Equity in loss of unconsolidated real estate ventures | | 26,697 | | | 18,584 | | | 9,922 | |
| | | | | | |
| | | | | | |
Less: | | | | | | |
Interest and investment income | | 8,295 | | | 1,939 | | | 2,318 | |
Income tax (provision) benefit | | (47) | | | 224 | | | (12) | |
| | | | | | |
Net gain on disposition of real estate | | 142 | | | 289,461 | | | 356 | |
Net gain on sale of undepreciated real estate | | 2,903 | | | 201 | | | 2,020 | |
Net gain on real estate venture transactions | | 2,973 | | | 75 | | | 11,639 | |
| | | | | | |
Consolidated net operating income | | $ | 298,508 | | | $ | 329,396 | | | $ | 354,571 | |
20. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved from time to time in litigation on various matters, including disputes with tenants, disputes with vendors, employee disputes and disputes arising out of agreements to purchase or sell properties or joint ventures or disputes relating to state and local taxes. Given the nature of the Company’s business activities, these lawsuits are considered routine to the conduct of its business. The result of any particular lawsuit cannot be predicted, because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. The Company will establish reserves for specific legal proceedings when it determines that the likelihood of an unfavorable outcome is probable and when the amount of loss is reasonably estimable. The Company does not expect that the liabilities, if any, that may ultimately result from such legal actions will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state, and local governments. The Company’s compliance with existing laws has not had a material adverse effect on its financial condition and results of operations, and the Company does not believe it will have a material adverse effect in the future. However, the Company cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on its current Properties or on properties that the Company may acquire.
Fair Value of Contingent Consideration
On April 2, 2015, the Company purchased 618 Market Street in Philadelphia, Pennsylvania. The allocated purchase price included contingent consideration of $2.0 million payable to the seller upon commencement of development. The liability was recorded at a fair value of $1.6 million and has fully accreted through interest expense to $2.0 million as of December 31, 2021. The fair value of this contingent consideration was determined using a probability weighted discounted cash flow model based on the period until development was originally expected to commence. The significant inputs to the discounted
cash flow model were the discount rate and weighted probability scenarios. As the inputs were unobservable, the Company determined the inputs used to value this liability fall within Level 3 for fair value reporting.
Debt Guarantees
As of December 31, 2021, the Company's unconsolidated real estate ventures had aggregate indebtedness of $961.5 million. These loans are generally mortgage or construction loans, most of which are nonrecourse to the Company, except for customary recourse carve-outs. In addition, during construction undertaken by the unconsolidated real estate ventures, including the 3025 JFK Venture, the Company has provided, and expects to continue to provide, cost overrun and completion guarantees, as well as customary environmental indemnities and guarantees of customary exceptions to nonrecourse provisions in loan agreements. In the agreement with its partner in the 3025 JFK Venture, the Company agreed to provide cost overrun and completion guaranties for the project under development. With respect to the construction loan obtained by 3025 JFK Venture on July 23, 2021, the Company has also provided a carry guarantee and limited payment guarantee up to 25% of the principal balance of the $186.7 million construction loan.
Impact of Natural Disasters and Casualty
The Company carries liability insurance to mitigate its exposure to certain losses, including those relating to property damage. The Company records the estimated amount of expected insurance proceeds for property damage and other losses incurred as an asset (typically a receivable from the insurer) and income up to the amount of the losses incurred when receipt of insurance proceeds is deemed probable. Any amount of insurance recovery in excess of the amount of the losses is considered a gain contingency and is not recorded until the proceeds are received.
In February 2021, one of the Company's properties in Austin, Texas sustained damage from the winter storms and resulting power grid failures. As a result of the damage, during the year ended December 31, 2021, the Company recorded a fixed asset write-off totaling $1.2 million. During the year ended December 31, 2021, the Company has recorded an estimated $7.2 million of restoration costs, of which $1.9 million is included in Accounts payable and accrued expenses on the consolidated balance sheets as of December 31, 2021. The Company has also sustained business interruption loss of $3.9 million related to unpaid rent, which is also fully covered under the insurance policy. During the year ended December 31, 2021, the Company has received $15.3 million of insurance proceeds, resulting in full recovery of the costs incurred to date. The $3.0 million of insurance proceeds received in excess of the fixed asset write-off, total business interruption, and total estimated restoration cost during the year ended December 31, 2021 is included in Other income on the consolidated statement of operations.
Other Commitments or Contingencies
Under the terms of each of the One Uptown joint venture agreements, the joint venture partner is not required to fund project costs until the closing of the applicable construction loans. In the event that the Company does not close on the applicable construction loan for each of the joint ventures by June 30, 2022, the joint venture partner could elect to assign its interest in the project to the Company and have no obligation to fund the project costs. In addition, the Company has provided cost overrun and completion guarantees, as well as customary environmental indemnities, for each of the One Uptown joint ventures. See Note 3, ''Real Estate Investments” for further information regarding the One Uptown joint ventures.
In connection with the Schuylkill Yards Project, the Company entered into a neighborhood engagement program and, as of December 31, 2021, had $7.0 million of future fixed contractual obligations. The Company also committed to fund additional contributions under the program. As of December 31, 2021, the Company estimates that these additional contributions, which are not fixed under the terms of agreement, will be $2.4 million.
In connection with the formation of the Commerce Square Venture, the Company has committed to investing an additional $20.0 million of preferred equity in the properties on a pari passu basis with its joint venture partner of which $2.1 million has been contributed by the Company as of December 31, 2021.
As part of the Company’s September 2004 acquisition of a portfolio of properties from The Rubenstein Company (which the Company refers to as the “TRC acquisition”), the Company acquired its interest in Two Logan Square, a 708,844 square foot office building in Philadelphia, Pennsylvania 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 Company, through its ownership of the second and third mortgages, is the primary beneficiary. On October 21, 2020, the Company 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, the Company has 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 the Company were to sell the restricted property before the expiration of the restricted period in a non-exempt transaction, the Company 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, the Company will be required to pay these certain former owners an amount estimated at approximately $0.6 million to redeem their residual interest in the fee owner of this property. The $0.6 million payment is included within "Other liabilities" on the consolidated balance sheets.
The Company invests in its properties and regularly incurs capital expenditures in the ordinary course of business to maintain the properties. The Company believes that such expenditures enhance its competitiveness. The Company also enters into construction, utility and service contracts in the ordinary course of business which may extend beyond one year. These contracts typically provide for cancellation with insignificant or no cancellation penalties.