Brandywine Realty Trust — Q2 2014 Form 10-Q
Business context and period. This combined filing covers Brandywine Realty Trust and its operating partnership for the quarter and six months ended June 30, 2014. The company is an office-focused REIT operating 205 properties totaling approximately 25.4 million rentable square feet, plus interests in 17 unconsolidated ventures. It owned 89.3% of the operating partnership at period-end? The filing states 98.9% ownership; the remaining 1.1% was held by third-party limited partners.
Financial and operating performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $150.5 million | $140.6 million | $302.6 million | $280.2 million |
| Net operating income (NOI) | $92.8 million | $85.7 million | $182.9 million | $170.2 million |
| Operating income | $34.2 million | $29.1 million | $63.6 million | $57.6 million |
| Consolidated net income (loss) | $2.2 million | $7.2 million | $(0.1) million | $11.1 million |
| Net income (loss) attributable to common shareholders; EPS | $0.4 million; $0.00 | $5.3 million; $0.03 | $(3.7) million; $(0.02) | $7.4 million; $0.05 |
| Cash flow from operations | Not stated quarterly | Not stated quarterly | $90.2 million | $96.2 million |
| Funds from operations (FFO) available to common unitholders | $57.3 million | $48.8 million | $110.9 million | $100.5 million |
- Q2 revenue rose about 7% and six-month revenue about 8% year over year. Same-store occupancy improved 1.4 percentage points; increased ownership and consolidation of One and Two Commerce Square also boosted revenue.
- NOI increased about 8% in Q2 and 8% for the six-month period. Reported NOI margins were approximately 61.7% and 60.5%, respectively; NOI is a non-GAAP measure and excludes items such as interest, depreciation, and corporate costs.
- Despite higher revenue and NOI, six-month GAAP results swung to a small consolidated loss and a common-shareholder loss. Results included lower venture-related gains than in 2013; Q2 2013 included a $7.8 million remeasurement gain, while six-month 2013 also included gains from venture transactions and discontinued-property sales.
- Cash and equivalents were $234.8 million at June 30, down from $263.2 million at year-end. Six-month investing cash outflow was $61.4 million and financing outflow was $57.2 million; prior-year investing cash flow included substantial property-sale proceeds.
- Total debt obligations were $2.588 billion, versus $2.595 billion at year-end. Debt included $662.5 million of mortgages, $450 million of unsecured term loans, and approximately $1.476 billion of unsecured senior notes. About 96% of debt was fixed-rate or hedged; $100 million remained unhedged variable-rate debt. The company reported $598.5 million of unused revolver availability and no revolver borrowings.
- Scheduled principal payments were $225.6 million in the second half of 2014 and $409.7 million in 2015. The company reported compliance with debt covenants.
Material changes, outlook, and risks
- Wholly owned property occupancy was 89.3% at quarter-end, up from 87.9% a year earlier. Q2 same-store combined rental rates increased 2.6%; six-month combined rates increased 4.2%. Q2 net absorption was positive 23,091 square feet, while six-month net absorption was negative 28,782 square feet.
- The company acquired 54.1 acres at Encino Trace in Austin for $14.0 million and had funded $18.7 million, including acquisition cost, toward two buildings in development. Completion was scheduled for Q2 2015. It contributed Four Points Centre to an unconsolidated venture, receiving $34.4 million in cash distributions and a $5.9 million venture capital credit; the contribution generated a $0.2 million loss.
- The planned FMC Tower at Cira Centre South was estimated to cost $385 million, with $15.4 million funded by June 30; completion was expected in Q2 2016. Other development commitments totaled $98.5 million, and maximum outstanding tenant-improvement obligations were $102.2 million.
- Management gave no specific earnings or FFO guidance. It expected liquidity needs to be met through operating cash flow, cash balances, financing, and selective property sales, while warning that vacancies, rent pressure, tenant costs, or tighter credit could weaken cash flow and covenant capacity.
- Key risks include tenant rollover and credit risk, interest-rate changes and hedge performance, development delays or cost overruns, financing availability, venture-partner funding, environmental exposures, and REIT qualification. Leases representing about 2.0% of annualized base rent were scheduled to expire in 2014; 2014 core-portfolio retention was 67%.
- The company guaranteed certain venture obligations, including a $24.7 million construction-loan payment guarantee, a $3.2 million guarantee, and a $0.5 million loan guarantee, as well as customary completion and cost-overrun guarantees. Management said routine litigation was not expected to have a material adverse effect. No legal proceedings were listed in Part II.
- The board declared a $0.15-per-share common distribution for the quarter, paid July 21, 2014. The Series E preferred shares carry a 6.90% annual preference. No shares were sold under the at-the-market offering program in the first half of 2014.
Important facts for investors to verify
- Whether occupancy, leasing spreads, and rent collections continue to improve, particularly in the same-store portfolio and markets with upcoming lease expirations.
- The composition and sustainability of earnings and FFO, including the impact of venture transactions, termination fees, property-sale gains, and non-cash depreciation and amortization.
- How the company will refinance or repay near-term maturities, especially the 2014 and 2015 debt, and whether revolver availability and covenant headroom remain adequate.
- Actual remaining costs, financing sources, leasing progress, and completion timing for FMC Tower, Encino Trace, and other development projects.
- Potential cash calls and contingent exposure under venture guarantees, tenant-improvement obligations, and other contractual commitments.