Brandywine Realty Trust — Q3 2016 Form 10-Q
Business context and reporting period. This combined filing covers Brandywine Realty Trust and its operating partnership for the quarter and nine months ended September 30, 2016. Brandywine is an office-focused REIT operating mainly in the Philadelphia region, Metropolitan Washington, D.C., and Austin. At quarter-end it owned 117 properties totaling approximately 17.8 million square feet and held interests in 14 unconsolidated real estate ventures. The Parent Company owned 99.1% of the Operating Partnership.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $129.7m | $152.6m | $393.4m | $448.6m |
| Operating income | $25.9m | $29.5m | $60.5m | $88.6m |
| Net income | $7.9m | $20.3m | $52.9m | $32.0m |
| Common-share net income | $6.0m | $18.3m | $47.0m | $26.3m |
| Diluted EPS | $0.03 | $0.10 | $0.27 | $0.15 |
| NOI, non-GAAP | $78.4m | $94.0m | $237.1m | $273.0m |
| FFO available to common shareholders and unit holders, non-GAAP | $58.3m | $76.9m | $104.0m | $192.8m |
Margins. NOI was approximately 60.4% of revenue in Q3 2016 versus 61.6% a year earlier, and approximately 60.3% for the first nine months versus 60.8%. Operating margin was approximately 20.0% in Q3 versus 19.3%, and 15.4% for nine months versus 19.7%.
Cash flow and liquidity. Nine-month operating cash flow was $75.3m, down from $145.0m. Investing activities provided $538.1m, chiefly reflecting property-sale proceeds; financing activities used $451.1m. Cash increased $162.4m to $219.1m. The company reported $585.7m of unused revolving-credit availability, net of outstanding letters of credit.
Debt and balance sheet. Total debt principal was approximately $2.03bn at September 30, compared with $2.42bn at December 31, 2015; the balance-sheet carrying amount, net of discounts and financing costs, was $2.01bn. Weighted-average debt interest rate was 4.5%, and weighted-average maturity was 6.2 years. Debt was reported as fixed-rate, including variable-rate borrowings swapped to fixed. The company was in compliance with financial covenants. Debt maturities include $300m in 2017 and $325m in 2018.
Common distributions declared were $0.16 per share for Q3, up from $0.15 a year earlier. Core-property occupancy was 92.7% at quarter-end versus 92.5% a year earlier.
Material changes versus prior period
- Revenue declined 15.0% in Q3 and 12.3% for nine months, primarily reflecting property dispositions, including the February sale of 58 properties to the Och-Ziff-related venture. Management attributed lower total-portfolio rents and reimbursements mainly to dispositions; same-store Q3 revenue increased $2.9m and same-store NOI increased $0.3m.
- Q3 net income fell $12.4m year over year. Lower interest expense and operating costs were outweighed by the prior-year $11.9m tax-credit income, reduced real-estate disposition gains, and greater losses from unconsolidated ventures.
- Nine-month net income rose year over year, but included a $114.6m gain on real-estate dispositions and $19.5m of gains on venture transactions. The period also included a $66.6m loss on early debt extinguishment and $13.1m of impairment charges. Prior-year results included $11.9m of tax-credit income.
- Debt decreased following repayments and asset sales. The company repaid $149.9m of 6.00% notes at maturity and refinanced Two Logan Square debt at a lower effective rate. It also prepaid Cira Square and Cira South Garage mortgages, incurring substantial prepayment charges.
- Q3 FFO declined to $58.3m from $76.9m; nine-month FFO declined to $104.0m from $192.8m. The filing’s FFO reconciliation adjusts for gains, impairment, and real-estate depreciation and should be considered alongside GAAP results and cash flows.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or FFO guidance. Management said near-term liquidity needs are expected to be met through cash, operating cash flow, the revolving facility, financing, and selective asset sales.
- Management cautioned that weaker economic conditions could increase vacancy, reduce rents, raise tenant-improvement costs, worsen tenant credit, and constrain financing access. It also noted that deterioration could threaten future covenant compliance, although the company was compliant at quarter-end.
- Development activity entails cost, schedule, leasing, financing, and partner risks. Remaining development and redevelopment obligations were $144.3m; tenant improvements of $36.4m and capital improvements of $5.9m were also expected. The Subaru headquarters project carries an uncapped obligation for costs above its current $77.3m not-to-exceed amount.
- Other exposures include venture loan guarantees, cost-overrun and completion guarantees, and a third-party put option that could require a $35m property purchase plus costs through May 2018. Routine litigation was disclosed; management did not expect it to have a material adverse effect.
- Development plans include Schuylkill Yards, for which management anticipated spending approximately $10m–$15m over the following 24 months on planning and approvals. Initial construction was then expected to begin in the first half of 2018; timing, scope, approvals, and financing remain uncertain.
- Unusual quarter activity included a $10.4m impairment at an unconsolidated venture’s Station Square properties, of which Brandywine’s share was $5.2m; $10.5m of venture-transaction gains; and deconsolidation of 3141 Fairview Park Drive into an equity-method venture with no sale gain or loss.
Important facts for investors to verify
- How much of the revenue and FFO decline reflects portfolio sales versus underlying same-store leasing and operating trends.
- The recurring cash-earnings contribution from disposition gains, venture transactions, impairments, and debt-extinguishment costs; review the company’s FFO and NOI reconciliations.
- Progress on leasing, occupancy, retention, rental-rate spreads, and tenant-improvement costs; nine-month retention was 67.1% versus 76.4% in 2015.
- Funding plans for 2017–2018 debt maturities, development commitments, distributions, and any potential share repurchases; $32.7m remained authorized for repurchases at quarter-end.
- Exposure under development guarantees, venture guarantees, the Subaru cost-overrun obligation, and the $35m put option, as well as partner and approval risks for major projects.
- The subsequent October 13 sale of the three Allendale Road properties for $12.8m gross, with an estimated $2.4m gain, and whether expected proceeds and gains are realized.