Brandywine Realty Trust — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The filing combines Brandywine Realty Trust and its controlled operating partnership; figures below are consolidated and in U.S. dollars. Financial statement amounts are in millions unless noted.
Business context and reporting period
Brandywine is an office-focused REIT operating mainly in Philadelphia, the Pennsylvania suburbs, Metropolitan Washington, D.C., and Austin. At quarter-end, it owned 97 properties with approximately 16.4 million rentable square feet, held interests in 13 unconsolidated real estate ventures, and managed approximately 10.0 million square feet for third parties and ventures.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $128.4 | $129.7 | $387.1 | $393.4 |
| Operating income | $29.5 | $25.9 | $77.3 | $60.5 |
| Net income | $19.0 | $7.9 | $48.0 | $52.9 |
| Net income attributable to common shareholders | $18.8 | $6.0 | $42.2 | $47.0 |
| Diluted earnings per share | $0.11 | $0.03 | $0.24 | $0.27 |
| Net operating income (NOI, non-GAAP) | $77.7 | $78.4 | $234.7 | $237.1 |
| Funds from operations available to common shareholders and units (FFO, non-GAAP) | $61.9 | $58.3 | $175.5 | $104.0 |
NOI margin, calculated as NOI divided by total revenue, was approximately 60.5% in Q3 2017 versus 60.4% a year earlier, and 60.6% for the nine months versus 60.3%. Core Property occupancy was 92.0% at September 30, down from 92.7% a year earlier. Nine-month retention improved to 72.8% from 67.1%; same-store cash rents increased, but portfolio dispositions reduced reported revenue.
Cash flow: Nine-month operating cash flow was $127.8 versus $129.7 in 2016. Investing cash flow was $17.5 versus $538.1, chiefly reflecting much lower property-sale proceeds than during the prior-year portfolio repositioning. Financing cash outflow was $314.0 versus $505.4. Cash fell to $25.3 at September 30 from $193.9 at year-end 2016.
Debt and liquidity: Total debt principal was $1.903 billion, compared with $2.029 billion at December 31, 2016; weighted-average interest rate was 4.1% and average maturity 5.7 years. Approximately 90.6% was fixed-rate, including debt swapped to fixed. The company had $178.0 million drawn on its $600 million revolving facility, $13.5 million in letters of credit, and $408.5 million of unused availability. It reported compliance with financial covenants. Scheduled principal payments include $331.6 million in 2018 and $185.4 million in 2019.
Common distributions declared were $0.16 per share for Q3 and $0.48 per share for the first nine months, versus $0.16 and $0.47, respectively, in 2016. The $100 million Series E preferred shares were redeemed in April 2017.
Material changes versus prior periods
- Q3 common-shareholder earnings increased substantially year over year, alongside higher operating income. The comparison reflects lower depreciation and interest expense and higher real estate venture transaction gains; Q3 net income also included a $13.8 million venture-sale gain.
- Nine-month common-shareholder earnings and revenue declined year over year. The 2016 comparison included a large property-disposition gain and a $66.6 million loss on early debt extinguishment; 2017 had much smaller property-sale gains but included a $28.3 million gain on real estate venture transactions.
- Nine-month FFO increased to $175.5 million from $104.0 million; the periods were materially affected by property sales, impairments, and other nonrecurring items, so the comparison should be reviewed with the company’s FFO reconciliation.
- During the first nine months, the company sold 14 properties and five land parcels, and acquired 3000 Market Street for approximately $32.7 million. It repaid $300 million of 5.70% notes at maturity and redeemed the preferred shares.
Outlook, commentary, risks, and unusual items
No specific quantitative earnings or operating guidance is provided in the supplied filing text. Management said liquidity was expected to be adequate for operations and existing development projects, using cash, operating cash flow, the revolving facility, financings, and selected asset sales. Management cautioned that weaker economic conditions could pressure occupancy, rents, tenant credit, leasing costs, cash flows, and covenant compliance.
- Impairment: A $4.8 million other-than-temporary impairment was recorded on the company’s BDN-AI venture investment, citing weak demand and competition for tenants. Management noted that further market deterioration could require additional impairment. Consolidated property impairment charges for the nine months totaled $3.1 million.
- Development and partner risk: Projects face construction, leasing, financing, cost-overrun, and partner-alignment risks. The company had $560.2 million of estimated costs on listed wholly owned development/redevelopment projects, of which $443.2 million had been funded; these project estimates are not all remaining commitments. The Subaru headquarters arrangement includes an overrun guarantee above its $79.4 million not-to-exceed amount.
- Guarantees and contingencies: Venture-related recourse includes a $55.4 million payment guarantee, a joint and several cost-overrun guarantee on an $88.9 million construction loan, and a $0.4 million payment guarantee. The company also disclosed a $10.0 million mortgage-related letter of credit and a put option that could require a $35.0 million property purchase, plus costs, through May 4, 2018. These are contingent exposures, not necessarily expected cash outflows.
- Other unusual items: The 2017 preferred-share redemption generated a $3.2 million charge. The Marine Piers sale included a $9.4 million deferred installment and gain recognition scheduled for the later installment date. Management reported a $1.2 million impairment charge recorded in Q4 2016 that should have been recorded in Q1 2017, but concluded the timing error was not material to the affected periods.
- Subsequent events: In October 2017, the company commenced a fully preleased 165,000-square-foot Austin development with estimated costs of $48.2 million; acquired One Drexel Plaza and Drexel Square for $35.0 million and committed to at least $8.0 million of improvements; and its DRA Austin venture sold five office portfolios. The company estimated its share of proceeds at $86.4 million and its gain at approximately $52 million.
- The company identified strategic-alliance and Section 1031 exchange qualification risks. It stated that routine litigation was not expected to have a material adverse effect and that disclosure controls were effective.
Most important facts for investors to verify
- Whether occupancy, leasing, and same-store rent trends can offset revenue pressure from dispositions; particularly the decline in Core Property occupancy to 92.0%.
- The composition and sustainability of reported earnings and FFO, including gains from venture and property sales, the BDN-AI impairment, and the 2016 debt-extinguishment charge.
- Funding and refinancing plans for the $331.6 million of 2018 maturities and $185.4 million of 2019 maturities, including the revolving-facility balance and covenant headroom.
- Actual development spending, leasing progress, and exposure to cost overruns or joint-venture guarantees; verify the status of the Subaru projects and other disclosed commitments.
- Completion and accounting of the October transactions, including the estimated DRA Austin venture gain and cash proceeds, and fulfillment of the deferred Marine Piers installment.