Brandywine Realty Trust — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018; comparisons are with Q1 2017 unless noted. Brandywine is an office-focused REIT operating through its 99.2%-owned Operating Partnership. It owned 94 properties totaling approximately 16.5 million rentable square feet, with core portfolio occupancy of 92.3%. Its markets include Philadelphia, the Pennsylvania suburbs, metropolitan Washington, D.C., Austin, and other locations.
Financial and operating metrics
- Revenue: $136.4 million, up 4.2% from $130.9 million. Rent revenue was $106.4 million; tenant reimbursements were $19.8 million.
- Profit: Operating income was $27.8 million, versus $21.9 million; net income was $44.7 million, versus $21.3 million. Net income attributable to common shareholders was $44.2 million, or $0.25 per diluted share, compared with $19.3 million, or $0.11.
- Important earnings component: The quarter included $37.3 million of gains from real estate venture transactions. Without these gains, reported net income materially overstates recurring operating performance.
- Margins and property operations: Operating income was approximately 20.4% of revenue, up from 16.7%. Company-reported net operating income (NOI), a non-GAAP measure, was essentially flat at $79.9 million. Same-store NOI declined $3.7 million to $65.7 million. Core occupancy was 92.3%, down from 93.2% a year earlier. Combined rental rates on new, expansion, and renewal leases increased 10.5%.
- Cash flow: Operating cash flow was $38.7 million, compared with $40.6 million. Investing activities used $6.2 million, versus providing $63.9 million; financing activities used $34.3 million. Cash and restricted cash totaled $201.6 million at quarter-end.
- Debt and liquidity: Debt principal was approximately $1.96 billion, up from $1.95 billion at year-end; reported debt net of discounts and financing costs was $1.94 billion. About 98.6% of principal was fixed-rate, with 1.4% unhedged variable-rate. The weighted-average maturity was 7.5 years and the weighted-average interest rate was 4.0%. The $600 million revolver had no borrowings; approximately $597.7 million remained available after letters of credit. The company reported compliance with financial covenants.
- Distributions and FFO: The quarterly distribution declared was $0.18 per share, up from $0.16. FFO available to common shareholders and unitholders was $57.3 million, versus $56.1 million.
Material changes versus the prior comparable period
- Revenue rose, but same-store revenue declined $1.4 million and same-store NOI fell $3.7 million; growth in recently completed or acquired properties and development activity partly offset those declines.
- Net income increased substantially, primarily due to $25.7 million gain on the sale of the company’s interest in the evo at Cira venture and an $11.6 million gain from exchanging venture interests to obtain control of Four Tower Bridge. Q1 2017 included $14.6 million of venture-sale gains and $7.3 million of real estate disposition gains.
- Interest expense declined to $19.5 million from $21.4 million, reflecting prior debt repayments, partly offset by later debt issuances and reduced capitalized interest.
- Operating cash flow declined modestly, while investing cash flow shifted from a substantial inflow to a use of cash, reflecting lower property-sale proceeds and a $24.9 million acquisition, partly offset by proceeds from venture sales.
Outlook, commentary, risks, and unusual items
- Management stated that cash, operating cash flows, financing capacity, and selective asset sales are expected to meet near-term needs, including development spending, debt service, capital expenditures, and REIT distributions. No specific earnings or FFO guidance was provided in the filing.
- Development and redevelopment projects under construction had estimated costs of $269.7 million, of which $108.3 million had been funded. Risks include cost overruns, delays, financing availability, leasing outcomes, and obtaining approvals.
- Management cautioned that weaker economic conditions could increase vacancies, reduce rental rates, raise tenant incentives, and increase defaults. Core occupancy had already declined year over year.
- Unconsolidated ventures had $639.3 million of aggregate debt. Most was non-recourse, but the company had specified guarantees, including up to $41.3 million related to a $150 million 4040 Wilson venture loan, plus certain completion and cost-overrun guarantees.
- A third party held an option, exercisable through May 4, 2018, to require a property purchase for $35 million plus transaction costs. The filing did not state whether the option was exercised after quarter-end.
- Garza Ranch land-sale proceeds were deferred pending completion of infrastructure work; estimated improvement costs were $13.2 million. The company also disclosed significant development commitments and a $20.5 million anticipated ground-lease acquisition for Schuylkill Yards.
- The company adopted new revenue-recognition and restricted-cash guidance in Q1; neither adoption required restatement of prior reported amounts. The new lease standard was expected to affect accounting and remained under evaluation.
- Management reported effective disclosure controls, no material change in internal controls, no material change in previously disclosed risk factors, and no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- How much of Q1 earnings growth and the reported $0.25 per-share result was attributable to venture transaction gains, and what recurring earnings measures indicate.
- Whether weaker same-store NOI and lower occupancy persist, and how leasing, renewals, and tenant incentives develop.
- Funding needs, leasing progress, and cost or schedule changes across the development and redevelopment pipeline.
- Debt refinancing and covenant capacity, especially the scheduled $556.7 million of 2023 principal payments and $250 million maturity in 2022.
- Whether the May 4, 2018 property put was exercised, and whether venture guarantees or other contingent commitments change.
- Cash-flow comparability: Q1 2017 cash-flow presentation was affected by adoption of restricted-cash guidance.