BRANDYWINE REALTY TRUST quarterly report, Q3 FY2019

Brandywine Realty Trust — Q3 2019 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results cover Brandywine Realty Trust and its operating partnership, which management operates as one enterprise. The company owned 95 properties totaling approximately 16.7 million rentable square feet, primarily office assets in Philadelphia, Austin, and the Washington, D.C. region.

Key financial metrics

Metric	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Total revenue	$145.3 million	$135.0 million	$433.4 million	$405.1 million
Operating income (loss)	$27.3 million	$(24.9) million	$80.6 million	$35.3 million
Net income (loss)	$6.8 million	$(43.5) million	$17.7 million	$13.8 million
Net income (loss) per common share	$0.04	$(0.24)	$0.10	$0.07
Net operating income (NOI, non-GAAP)	$89.3 million	$82.1 million	$262.7 million	$243.2 million
Funds from operations available to common holders (FFO, non-GAAP)	$64.0 million	$63.2 million	$186.3 million	$183.4 million

Margins: NOI was approximately 61.4% of revenue in Q3 2019, versus 60.8% in Q3 2018; for the nine-month periods, approximately 60.6% versus 60.0%.
Cash flow: Nine-month operating cash flow was $155.3 million, compared with $154.5 million. Investing used $77.1 million and financing used $70.8 million; cash and restricted cash increased $7.3 million to $30.5 million.
Capital spending: Nine-month outlays included $53.4 million for tenant improvements, $33.9 million for redevelopment, $55.0 million for development, and $13.2 million for leasing costs.
Debt and liquidity: Debt principal outstanding was $2.092 billion, versus $2.044 billion at year-end 2018; weighted-average interest rate was 3.9% and weighted-average maturity 5.7 years. At quarter-end, the company reported $29.9 million cash and $452.0 million available on its $600 million revolving facility, net of letters of credit. It was in compliance with debt covenants.
Balance sheet: Total assets were $4.020 billion and total liabilities $2.318 billion at September 30, 2019. Equity was $1.702 billion.
Occupancy and distributions: Core-property occupancy was 93.2%, compared with 93.0% a year earlier. The quarterly distribution was $0.19 per share; $0.57 per share was declared over the first nine months.

Material changes and notable items

Revenue rose 7.7% in Q3 and 7.0% for the nine months. Growth primarily reflected acquisitions and recently completed properties, notably the Austin portfolio and Quarry Lake II, partly offset by property dispositions. Nine-month same-store NOI declined $2.7 million, while total NOI increased $19.5 million.
Q3 2018 included a $56.9 million impairment charge on eight Washington, D.C.-area properties classified as held for sale; there was no comparable impairment in 2019. This largely explains the swing in reported operating income and net income for the quarter.
Nine-month 2018 results included $37.3 million of gains from real estate venture transactions, compared with $3.6 million in 2019. Accordingly, 2019 net income increased only modestly despite higher revenue and NOI.
Depreciation and amortization increased $27.1 million for the nine months, primarily due to acquisitions and properties placed in service. Real estate taxes increased $9.8 million, including higher assessments and acquired properties. Interest expense rose $3.2 million, primarily from greater revolving-credit borrowings.
The company adopted lease accounting standard ASC 842 in 2019, recording a $21.8 million right-of-use asset and $22.5 million operating lease liability at quarter-end. Adoption also affected an unconsolidated venture’s results and produced a cumulative equity adjustment.
Management corrected prior-period acquisition accounting and depreciation errors. It stated the errors were immaterial to previously issued statements, but revised comparative figures; nine-month 2018 net income was reduced by $0.8 million.

Outlook, risks and contingencies

No specific earnings or operating guidance is provided. Management said it expects available cash, operating cash flow, financing capacity, and asset-sale proceeds to meet near-term needs and fund existing development and redevelopment projects, while noting this depends on market and financing conditions.
Key developments include 405 Colorado Street in Austin, estimated at $114.0 million with expected completion in Q4 2020; The Bulletin Building redevelopment, estimated at $84.8 million with expected completion in Q2 2020; and 4040 Wilson, a joint venture project expected to complete in Q2 2020. Development costs, leasing, construction schedules, and funding remain execution risks.
Management cautioned that weaker economic conditions could increase vacancy and tenant defaults, reduce rents, raise tenant-improvement costs, and constrain financing. Interest-rate and refinancing exposure also remain relevant; 91.7% of debt principal was fixed-rate or hedged at quarter-end.
Guarantees for unconsolidated ventures include up to $41.3 million on a $150 million construction loan, a $0.3 million payment guarantee, and customary completion, cost-overrun, and environmental guarantees. Most venture debt is nonrecourse, subject to customary exceptions.
Routine litigation and environmental exposures were disclosed; management did not expect legal matters to have a material adverse effect. No material risk-factor changes were reported.
Subsequent event: On October 10, 2019, the company issued $200 million of notes due 2024 and 2029, receiving approximately $214.3 million net. It used about $145.5 million to repay the revolving credit facility.

Important facts for investors to verify

How much revenue and NOI growth is recurring same-store performance versus acquisitions, completed projects, and dispositions; monitor same-store NOI and occupancy.
Leasing economics, including retention, rental-rate changes, and tenant-improvement and leasing-commission costs, which increased materially per square foot in the reported leasing statistics.
Execution, remaining funding needs, leasing, and completion timelines for major development and redevelopment projects, including venture-level commitments and guarantees.
Debt maturities and refinancing capacity, including the effects of the October 2019 notes issuance and repayment of the credit facility.
The impact of the revised comparative financial statements and ASC 842 adoption on year-over-year comparability and venture performance.
The collection risk associated with accrued rent receivables, the $11.3 million general allowance, and tenants for which lease revenue is recognized on a cash basis.