Brandywine Realty Trust — Q3 2010 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2010; figures below are consolidated and in millions of dollars unless noted. Brandywine Realty Trust is a REIT that conducts its business through Brandywine Operating Partnership, which held substantially all assets and debt. At quarter-end, the portfolio comprised 238 properties with approximately 25.9 million rentable square feet, plus interests in 15 unconsolidated ventures.
Financial performance and position
- Revenue: Q3 revenue was $143.0, down 2.0% from $145.9 a year earlier. Nine-month revenue was $422.3, down 2.6% from $433.4.
- Profitability: Q3 operating income was $26.9 versus $33.6; net loss was $6.6 versus net income of $7.3. Common-share loss was $0.06 versus earnings of $0.04. For nine months, operating income was $76.3 versus $92.3; net loss was $12.6 versus net income of $12.2, and common-share loss was $0.14 versus earnings of $0.05.
- Operating margin: Operating income as a share of revenue was 18.8% in Q3 versus 23.0%; for nine months, 18.1% versus 21.3%. Portfolio net operating income (NOI) was $84.7 in Q3, down from $89.8, and $251.0 for nine months, down from $262.3.
- Cash flow: Nine-month operating cash flow was $149.6, versus $163.1; investing cash use was $159.0, versus $118.7; financing cash provided was $111.9, versus $45.0 used. Cash increased $102.5 to $104.0 from $1.6 at year-end 2009. Capital expenditures were $144.9.
- Debt and liquidity: Debt obligations totaled $2.525 billion, up from $2.455 billion at year-end 2009; total liabilities were $2.826 billion and total assets $4.824 billion. Credit-facility borrowings were $22.0, with $14.0 million of letters of credit and $564.0 million of unused availability. The company reported compliance with financial covenants. Fixed-rate debt, including variable debt swapped to fixed, represented 95.5% of debt.
- Distributions and equity: The company declared a $0.15-per-share quarterly common distribution and preferred distributions at stated rates of 7.50% and 7.375%. It raised $65.9 net through its continuous equity offering in the first nine months.
Material changes versus the prior comparable period
- Same-store cash rents fell $4.3 million in Q3 and $9.6 million for nine months; management attributed this primarily to lower same-store occupancy. Total Portfolio cash rents declined $2.8 million in Q3 and $13.7 million for nine months.
- Core portfolio occupancy was 84.9% at September 30. Same-store occupancy was lower by 340 basis points year over year in Q3 and 330 basis points for the nine-month comparison. The nine-month core-portfolio tenant retention rate was 61.9%.
- Operating expenses increased, including higher property operating costs and Q3 interest expense. Nine-month interest expense decreased by $4.8 million, but the prior-year comparison benefited from a $23.7 million gain on debt extinguishment; 2010 recorded a $1.7 million loss instead.
- In August, the company acquired Three Logan Square, a roughly 1.0-million-square-foot Philadelphia office tower that was 66.5% leased, for approximately $129 million, funded with cash and 7.1 million newly issued partnership units. The property contributed $3.1 million of revenue and a $1.2 million operating loss from acquisition through September 30.
- In August, the company received $254.0 million of proceeds from financing secured by the IRS Philadelphia Campus and Cira South Garage, using the proceeds in part to reduce credit-facility borrowings. In 2010, adoption of revised VIE consolidation guidance led to deconsolidation of three ventures.
- Three property sales generated $17.4 million in net cash proceeds during the first nine months. One Austin property was classified as held for sale; no impairment was recorded for it.
Outlook, commentary, and risks
- Management expected vacancy pressure to persist through 2011 and possibly beyond, with potential tenant defaults, lower occupancy, reduced effective rents, and higher tenant installation costs. It cautioned that these conditions could adversely affect earnings and cash flow. No specific earnings or revenue guidance was provided.
- Management considered liquidity adequate and cited operating cash flow, facility availability, financing, equity issuance, and selective property sales as funding sources. It noted that credit markets remained volatile, financing could be more expensive or unavailable, and asset sales might not achieve attractive prices.
- Near-term maturities were significant: the filing cited $475.1 million of unsecured debt and $173.9 million of mortgage debt scheduled through December 2011. The $183 million bank term loan was extended to June 29, 2011; the term loan and credit facility could be extended to June 29, 2012 at the company’s option. Subsequent to quarter-end, the company prepaid a $41.5 million mortgage on October 1, 2010.
- Development commitments included $17.3 million expected to complete lease-up of six recently completed projects and $0.8 million remaining for a garage redevelopment. The company warned that it could write off $7.7 million of costs on two land parcels if development deadlines are missed and extensions cannot be obtained.
- Other matters include tax-credit compliance obligations through 2015, restricted-sale commitments on certain properties, and an IRS audit of the 2004 tax year. Management did not expect material tax-credit refunds or a material audit liability, but outcomes are not assured. A real estate venture loan guarantee was approximately $0.7 million. Management did not expect routine litigation or environmental matters to have a material adverse effect.
- Disclosure controls were reported effective, with no material change in internal controls during the quarter.
Most important facts for investors to verify
- Occupancy, leasing trends, tenant retention, and collections, given falling same-store occupancy and the 61.9% retention rate.
- Debt refinancing plans and available liquidity for maturities through 2011, including reliance on facility extensions, financing markets, and property sales.
- Three Logan Square lease-up and operating performance, and the economics and redemption terms of the partnership units issued for the acquisition.
- Development spending, leasing progress, and whether the two land-parcel development deadlines can be met without a write-off.
- Cash flow coverage of common and preferred distributions, alongside continuing equity issuance and elevated debt.
- Compliance with tax-credit arrangements and any developments in the IRS audit or property-sale restrictions.