Brandywine Realty Trust — FY2010 Form 10-K
Business context and reporting period. This combined filing covers Brandywine Realty Trust and its operating partnership for the fiscal year ended December 31, 2010; quarterly figures are unaudited. Brandywine is a self-managed REIT focused on office, industrial and mixed-use real estate, primarily in the Mid-Atlantic, Texas and California. At year-end it owned 233 properties with approximately 25.6 million square feet, held interests in 17 unconsolidated ventures, and managed approximately 7.8 million square feet for third parties and ventures. The Trust owned 93.1% of the operating partnership.
Key financial and operating metrics
| Metric | FY2010 | FY2009 |
|---|---|---|
| Total revenue | $566.9 million | $575.1 million |
| Operating income | $100.4 million | $118.1 million |
| Income (loss) from continuing operations | $(29.6) million | $5.3 million |
| Net income (loss) | $(17.6) million | $8.1 million |
| Net income (loss) attributable to common shareholders | $(25.6) million | $(0.2) million |
| Common-share diluted EPS | $(0.19) | $0.00 |
| Cash provided by operating activities | $185.1 million | $220.4 million |
| Cash and cash equivalents at year-end | $16.6 million | $1.6 million |
| Total debt (reported carrying amount) | $2.43 billion | $2.45 billion |
Revenue declined 1.4% year over year. Operating income was approximately 17.7% of revenue. The common distribution was $0.60 per share for 2010, unchanged from 2009; the quarterly rate was $0.15. The filing reports year-end occupancy of 85.6% for the Properties in one section and 87.6% for the core portfolio in its property table. Core-portfolio annualized base rent was $455.0 million.
For fourth-quarter 2010, revenue was $147.7 million, net loss was $5.0 million and loss per common share was $0.05. The filing does not provide a clear fourth-quarter cash-flow or margin value.
Material changes versus the prior comparable period
- Same-store cash rent revenue fell $13.6 million, primarily reflecting a 320-basis-point decrease in average same-store occupancy. Total portfolio operating cash flows declined $35.3 million to $185.1 million.
- Property operating expenses rose $5.0 million, including higher costs at newly placed-in-service properties and increased snow removal and repairs; real estate taxes fell $2.6 million. Depreciation and amortization increased $6.9 million.
- Net income moved from $8.1 million profit to a $17.6 million loss. The comparison was affected by 2009’s $23.2 million gain on early debt extinguishment versus a $2.1 million loss in 2010, partly offset by higher 2010 gains on property sales.
- Brandywine acquired Three Logan Square for approximately $129 million, including $51.2 million cash and 7.1 million Class F units; the building was 67.2% leased. It placed four properties totaling approximately 1.9 million square feet in service and sold eight properties for approximately $52.6 million gross sale proceeds ($50.1 million net cash proceeds).
- Unsecured note repurchases reduced principal by $82.7 million. The debt mix shifted: fixed-rate debt fell to 79.3% from 91.3%, while unhedged variable-rate debt rose to 20.7% from 8.7%.
Liquidity, debt and outlook
- At December 31, 2010, the $600 million revolving credit facility had $183.0 million drawn and $405.8 million unused availability, after $11.2 million of letters of credit. The facility and $183 million term loan matured in June 2011, with extension options described in the filing.
- Approximately $554.4 million of principal payments were scheduled in 2011, including $425.8 million of unsecured debt and $128.5 million of mortgage debt. Holders of the exchangeable notes could request redemption of the remaining notes on October 20, 2011.
- Debt weighted-average interest rate at year-end was 5.4%; unhedged variable debt was reported at 1.6%. The company was in compliance with debt covenants at year-end. Management said it expected to address maturities with facility capacity, asset sales and other financing sources, but cautioned that financing could be harder to obtain or more costly.
- Management expected vacancy to increase and effective rents to weaken in 2011 and potentially beyond, with higher tenant installation costs. It did not intend to start new development or redevelopment projects in the near future. It expected to spend a further $14.2 million in 2011 leasing recently completed developments and had $0.8 million remaining on a $14.8 million garage redevelopment, expected to finish in or around Q4 2011.
- There was no specific earnings or operating guidance. The company’s stated strategy emphasized liquidity, balance-sheet strengthening, selective asset sales and capital retention.
Risks, contingencies and unusual items
- Economic weakness, office demand and tenant credit quality could further pressure occupancy, rents, collections and cash flow. Approximately 8.8% of year-end annualized base rent was scheduled to expire in 2011; 2010 lease retention was 65.9%.
- Refinancing and covenant risks are material given 2011 maturities, tighter credit markets and the increase in variable-rate exposure. A 100-basis-point increase in rates was estimated to increase annual interest expense by approximately $1.1 million on variable-rate debt.
- The Broadmoor venture’s single-tenant lease renewal remained under negotiation. Management said the investment was not impaired at year-end, but an adverse outcome could result in a material impairment.
- An IRS proposed adjustment concerning the 2004 TRC acquisition was being appealed. The company said it would not create a material tax liability if upheld, but could lead to a claim under a tax-protection agreement.
- Tax-protection restrictions constrain sales of certain properties; environmental liabilities, development costs, joint-venture obligations, REIT qualification and property impairment also pose risks. The filing reports no material environmental claim known to the company and says routine legal proceedings were not expected to materially affect results.
- 2010 included a $2.7 million depreciation charge for buildings being demolished and a $1.2 million depreciation adjustment for prior-period project close-out errors; management said the errors were not material to prior periods or FY2010 as a whole. No impairment charge was recorded in 2010.
- Three previously consolidated ventures were deconsolidated under a new VIE accounting standard, reducing reported assets and debt; this was an accounting presentation change, not a property sale.
Important facts for investors to verify
- How the company funded or refinanced the approximately $554 million of scheduled 2011 principal maturities, including the credit facility and term-loan extensions and exchangeable-note redemption.
- Whether occupancy, leasing spreads, tenant retention and collections stabilized after year-end, particularly for the 2011 lease expirations and recently completed developments.
- Whether liquidity, covenant headroom and the higher floating-rate debt share remained adequate as financing conditions and interest rates changed.
- The terms and resolution of the Broadmoor lease negotiations, and any resulting impairment or venture funding requirement.
- Whether the IRS audit appeal or tax-protection arrangements, tax-credit compliance, ground-lease obligations or other contingencies produced material costs.
- How reported losses compare with recurring property cash generation, considering gains on sales, depreciation, debt-extinguishment results and the VIE deconsolidation.