Brandywine Realty Trust — Q2 2013 Form 10-Q
Business context and reporting period. This combined filing covers the quarter and six months ended June 30, 2013. Brandywine is a REIT operating primarily through its 98.8%-owned Operating Partnership. At quarter-end, it owned 210 properties with approximately 24.2 million rentable square feet and held interests in 17 unconsolidated ventures.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $140.9 million | $131.8 million | $280.7 million | $265.6 million |
| Operating income | $29.2 million | $27.1 million | $57.8 million | $54.4 million |
| Net income | $7.2 million | $6.8 million | $11.1 million | $16.1 million |
| Net income attributable to common shareholders | $5.3 million | $1.5 million | $7.4 million | $8.6 million |
| Diluted earnings per common share | $0.03 | $0.01 | $0.05 | $0.06 |
| Net operating income (NOI) | $85.9 million | $80.7 million | $170.5 million | $161.9 million |
For the six months, cash from operating activities was $96.8 million, versus $75.6 million a year earlier. Investing activities provided $68.6 million, chiefly reflecting property-sale proceeds; financing activities provided $49.0 million. Cash and cash equivalents ended the period at $215.9 million, up from $1.5 million at year-end 2012.
At June 30, total debt obligations were approximately $2.38 billion, compared with $2.47 billion at December 31, 2012. Debt was 95.8% fixed-rate and 4.2% unhedged variable-rate; the weighted-average rate was 5.1%. The revolving credit facility had no borrowings, with $599.1 million of unused availability. The company reported compliance with debt covenants. The common distribution declared was $0.15 per share.
Material changes and operating performance
- Q2 revenue rose $9.1 million year over year, reflecting higher cash rents, acquisitions, and tenant reimbursements. Six-month revenue increased $15.1 million; same-store cash rents rose, while occupancy at wholly owned properties was 87.9% at quarter-end.
- Management reported Q2 combined new, expansion, and renewal rental rates 10.6% above prior rents; six-month combined rates were 10.2% higher. Six-month net absorption was negative 103,724 square feet.
- Q2 common-shareholder earnings improved year over year, but six-month net income fell $5.0 million. Discontinued operations declined to $3.8 million for the six months from $30.1 million, largely because prior-year results included substantially larger property-disposition gains.
- Q2 continuing operations included a $7.8 million gain from remeasuring the Six Tower Bridge investment and a $3.7 million gain on the Two/Six Tower Bridge venture exchange. These unusual gains supported reported earnings.
- The company issued 12.65 million common shares in April, generating approximately $181.7 million in net proceeds. It sold a portfolio of eight New Jersey office properties for $121.0 million and completed other property sales; six-month net cash proceeds from property sales were $145.9 million.
Outlook, risks, and contingencies
Management expected continued economic uncertainty to pressure office demand, occupancy, effective rents, tenant credit, and financing availability. It anticipated 5%–7% market-rent growth on leases expiring in 2013, but cautioned that results depend on leasing and renewal outcomes. Management said available cash, operating cash flow, financing, and selective asset sales were expected to meet liquidity needs; this is not a quantified earnings forecast.
- The Grove student-housing project, developed through an unconsolidated venture, had estimated total costs of $158.5 million and targeted completion in 2014. Brandywine’s share of a payment guaranty was approximately $23 million, in addition to completion and cost-overrun guarantees.
- A $7.0 million mortgage note receivable is due from a borrower that defaulted and entered a forbearance agreement. Management expected full repayment by 2015, but warned that weaker home sales could result in a material loss.
- Brandywine could be required to write off $6.0 million of costs on a separate land parcel if development cannot begin by December 31, 2015 and the development period cannot be extended.
- Leases accounting for approximately 2.7% of annualized base rent expired without penalty in 2013. Management reported a 66.2% six-month retention rate in the core portfolio.
- Potential risks include tenant defaults, economic and property-market weakness, rising interest rates, refinancing constraints, venture-partner performance, development costs and delays, REIT qualification, and covenant compliance. The IRS settled an audit matter during Q2 without a material liability; routine legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether occupancy, leasing spreads, retention, and negative six-month absorption translate into stronger recurring rent and NOI.
- How much reported earnings depended on the Tower Bridge gains and property dispositions, versus recurring operations.
- The timing and sources of funds for 2014 debt maturities, and continued access to the credit facility and capital markets.
- Progress, total cost, financing, completion, and guarantee exposure for the Grove project.
- Repayment performance of the defaulted $7.0 million note and the development decision on the parcel carrying $6.0 million of costs.