Brandywine Realty Trust — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Brandywine is an office and mixed-use REIT operating primarily in the Philadelphia region, Austin, and the Washington, D.C. area. At quarter-end it owned 94 properties totaling approximately 16.6 million rentable square feet. Figures below are consolidated and generally in U.S. dollars.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $136.8 million | $144.2 million | $281.9 million | $288.0 million |
| Operating income | $26.5 million | $27.1 million | $56.6 million | $53.3 million |
| Net income | $4.0 million | $6.3 million | $12.1 million | $10.8 million |
| Net income per common share, diluted | $0.02 | $0.03 | $0.07 | $0.06 |
| Net operating income (NOI; non-GAAP) | $84.4 million | $86.9 million | $172.5 million | $173.4 million |
| FFO available to common shareholders and unitholders (non-GAAP) | $57.7 million | $62.2 million | $119.0 million | $122.3 million |
- Q2 revenue declined 5.1% year over year; net income fell 35.7%. Six-month revenue decreased 2.1%, while net income rose 11.7%, helped in part by property-sale gains.
- Q2 NOI margin was approximately 61.6% of revenue, versus 60.3% in Q2 2019; six-month NOI was nearly flat year over year. FFO available to common holders declined 7.3% in Q2 and 2.7% for the first half.
- Cash from operations was $100.3 million for the first half, compared with $85.5 million a year earlier. Investing used $75.3 million and financing used $70.7 million; cash and restricted cash declined $45.7 million to $45.5 million.
- At June 30, cash and cash equivalents were $44.8 million; available credit-facility capacity was $537.3 million, net of letters of credit. Reported debt obligations were $1.981 billion after excluding $220.7 million of mortgage debt classified with assets held for sale; total scheduled principal before that exclusion was $2.201 billion. Weighted-average debt rate was 3.8%, and average maturity was 5.3 years.
- Core-property occupancy was 90.7%, down from 93.0% a year earlier. The quarterly distribution was $0.19 per share. The company repurchased $60.0 million of shares in the first half.
Material changes and operating trends
- Q2 rent revenue decreased $5.6 million, principally due to dispositions, a large tenant termination in the Washington, D.C. market, lower parking income, and reduced hotel and residential revenue at FMC Tower related to COVID-19.
- Q2 property operating expenses fell $5.4 million, including lower property use and COVID-related closures. The cost reductions partly offset lower revenue; total Q2 NOI was down 2.9%.
- Leasing statistics showed negative net absorption of 314,645 square feet in Q2 and 252,138 square feet for the first half. First-half tenant retention was 49.1%, versus 72.4% in 2019. Combined rental rates on commenced leases increased 17.4% for the first half, as reported by the company.
- At June 30, approximately 2.4% of annualized base rent was scheduled to expire during the remainder of 2020.
Outlook, risks, and unusual items
- The filing provides no quantified earnings or FFO guidance. Management said liquidity needs were expected to be funded through operating cash flow, cash, credit availability, financing, and asset sales, but cautioned that the pandemic’s duration and effects were uncertain.
- The company collected 99.6% of Q2 cash-based rent due and reported receipt of approximately 98% of July cash-based rent to date. It had provided $4.6 million of rent relief to 62 tenants, primarily deferrals; management cautioned that recovery and negotiations remained uncertain.
- COVID-19 risks cited include tenant payment defaults, higher vacancy, reduced rents, increased concessions and leasing costs, financing constraints, and delays to development. Construction moratoriums affected projects during Q2 but had been lifted in the company’s active-development markets; management said delays had not materially affected projects.
- An $80.5 million mortgage maturity on Two Logan Square was due in August 2020, unless refinanced or extended. Debt maturities also include $317.3 million in 2022 and $556.7 million in 2023. The company reported covenant compliance at June 30.
- On July 21, 2020, the company sold a 30% preferred equity interest in One and Two Commerce Square for $115.0 million, receiving $100.8 million net cash. It expected to recognize a gain exceeding $270 million in Q3, subject to final adjustments. The properties’ $222.1 million mortgage remained with the joint venture.
- Real-estate venture debt totaled $618.9 million; most was nonrecourse except customary carve-outs. The company guaranteed up to $41.3 million of a $150 million construction loan for 4040 Wilson and had other completion and cost-overrun guarantees.
- Management reported no material impact to the financial statements from COVID-related lease concessions to date, and no material changes to previously disclosed risk factors. Routine litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether rent collections, occupancy, leasing activity, and tenant-credit conditions weakened after the reported Q2 and July collection figures.
- Completion and final accounting for the Commerce Square transaction, including the realized gain, net proceeds, and ongoing venture exposure.
- How the Two Logan Square maturity was resolved and whether subsequent debt refinancing or repayment changed liquidity and covenant headroom.
- Whether rent deferrals were repaid as scheduled and whether tenant concessions, credit losses, or lease vacancies increased.
- Delivery, leasing, and remaining funding requirements for the development and redevelopment projects, alongside the company’s debt guarantees and venture obligations.