Brandywine Realty Trust — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Brandywine Realty Trust operates through Brandywine Operating Partnership, L.P.; the combined filing reports the enterprise. The portfolio included 219 owned properties with approximately 24.5 million net rentable square feet, plus interests in 19 unconsolidated ventures.
Financial and operating performance
- Revenue: Q3 revenue was $140.4 million, up from $139.4 million a year earlier. Nine-month revenue was $417.4 million, down from $420.3 million.
- Earnings: Q3 net income was $17.1 million versus $6.6 million; diluted common-share EPS was $0.10 versus $0.03. Nine-month net income was $33.2 million versus a $0.1 million loss; EPS was $0.16 versus a $0.05 loss. These results include gains on property dispositions. Continuing operations remained loss-making: $3.4 million for nine months, compared with a $9.3 million loss in 2011.
- Property operations: Net operating income (NOI, a non-GAAP measure) was $84.3 million in Q3 versus $84.0 million, and $253.2 million for nine months versus $251.2 million. Same-store occupancy was 86.5% in Q3 versus 85.5%; nine-month same-store occupancy was 86.4% versus 85.4%. Q3 net absorption was negative 129,364 square feet. Combined rental rates rose 4.3% on Q3 leasing and 1.8% for the nine-month period; nine-month tenant retention was 65%.
- FFO: Funds from operations available to common shareholders and units, a non-GAAP measure, was $57.7 million in Q3 versus $60.3 million, and $149.4 million for nine months versus $156.0 million.
- Cash flow: Nine-month operating cash flow was $122.1 million, down from $156.0 million. Investing activities provided $42.9 million, compared with $162.5 million used in 2011, primarily reflecting property-sale proceeds. Financing provided $76.2 million versus $4.4 million used. Cash ended the period at $241.6 million, compared with $0.4 million at year-end 2011.
- Debt and liquidity: Debt carrying value was $2.507 billion, versus $2.394 billion at year-end 2011. The company had no revolver borrowings and reported $597.2 million of unused availability under its $600 million facility, after letters of credit. About 96% of debt was fixed-rate or hedged; total weighted-average interest rate was 5.3%. The company reported compliance with debt covenants. Scheduled principal payments include $66.9 million in 2013, $250.6 million in 2014, $466.9 million in 2015 and $596.6 million in 2016.
Material changes and unusual items
- The company sold 14 properties during the first nine months for net proceeds of $170.9 million and recognized $34.8 million of disposition gains. Q3 included a $9.9 million gain on the sale of 11 Exton, Pennsylvania properties. Dispositions and related changes affect comparisons with prior periods.
- In Q3, the company formed a 50/50 venture with Toll Brothers, contributing a 20-acre Plymouth Meeting parcel; Toll Brothers contributed $15.5 million for predevelopment of a planned 398-unit apartment project.
- A $23.5 million Trenton-related mortgage note was repaid early during Q2; the company recognized a deferred gain of $12.9 million and $1.0 million of interest income.
- The company issued $96.3 million of 6.90% Series E preferred shares and redeemed $50.2 million of 7.50% Series C preferred shares, recording a $2.1 million redemption charge.
- Nine-month unrealized losses on derivatives were $14.8 million in other comprehensive income. The company reported no impairment charges for the periods presented.
Outlook, risks and contingencies
- No specific earnings, revenue or FFO guidance is provided. Management said sluggish economic conditions and financial-market volatility could pressure occupancy, rents, tenant credit, cash flows and access to financing; it also said current cash, operating cash flow, financing capacity and selective asset sales were expected to support liquidity needs.
- Two land parcels under development agreements require commencement by December 31, 2012. If development does not proceed and an extension is unavailable, up to $9.0 million of related costs could be written off. Management was negotiating extensions through 2015 and considered an extension probable.
- A $7.2 million purchase-money mortgage relates to a borrower that defaulted and is under forbearance; repayments to Brandywine are scheduled to begin in 2014. Management judged the note recoverable, but warned that further weakness in the housing market could result in a material loss.
- Other exposures include tenant defaults, refinancing and covenant risks, interest-rate movements, venture-partner performance, environmental matters, tax-credit compliance and restrictions on selling certain properties. Management expected no material effect from routine litigation or the pending IRS matter, and no material tax-credit refunds.
Investor facts to verify
- How much of reported earnings came from property-sale gains and the Trenton note payoff, versus recurring property operations?
- Whether occupancy, leasing spreads, absorption and tenant retention improve, particularly given negative Q3 net absorption.
- Debt maturities, refinancing plans, revolver availability and ongoing covenant compliance.
- Progress on the land-development extensions and collection of the $7.2 million troubled mortgage note.
- Cash available for distributions after capital expenditures, leasing costs, debt service and preferred distributions; reported FFO is non-GAAP and is not cash flow.