Brandywine Realty Trust — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. Brandywine is a REIT operating primarily through Brandywine Operating Partnership, L.P. It owned 204 properties with approximately 24.8 million square feet and held interests in 17 unconsolidated real estate ventures. The wholly owned portfolio was 89.5% occupied at year-end.
Financial and operating performance
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $562.2 million | $535.7 million |
| Operating income | $115.8 million | $111.0 million |
| Net income | $43.2 million | $6.5 million |
| Net income attributable to common shareholders; EPS | $35.5 million; $0.23 | $(8.2) million; $(0.06) |
| Net operating income (NOI, non-GAAP) | $340.4 million | $324.8 million |
| Funds from operations available to common shares and units (FFO, non-GAAP) | $210.4 million | $170.5 million |
| Cash from operating activities | $183.5 million | $159.1 million |
| Cash and cash equivalents at year-end | $263.2 million | $1.5 million |
| Total indebtedness | $2.60 billion | $2.47 billion |
Revenue rose approximately 5%; NOI increased approximately 4.8%, with a 2013 NOI margin of approximately 60.6% of revenue. Year-end occupancy improved from 88.3% in 2012 to 89.5%. Rental rates on new and expansion leases increased 7.1%, renewal rates 8.6%, and combined rates 8.1%, as reported by management. Cash from investing activities was $104.7 million, largely reflecting property-sale proceeds; financing activities used $26.5 million. The common distribution remained $0.60 per share for the year ($0.15 quarterly).
Liquidity and debt: The company reported $598.7 million of unused availability under its $600 million revolving facility, after $1.3 million of letters of credit, and no revolver borrowings at year-end. Approximately 96.2% of debt was fixed-rate or hedged; $100 million was unhedged variable-rate debt. Weighted-average debt interest rate was approximately 5.0%, with average maturity of 5.5 years. Scheduled principal payments were $232.4 million in 2014, $409.7 million in 2015, and $467.7 million in 2016. The company reported compliance with debt covenants at year-end.
Fourth quarter: Revenue was $138.7 million versus $136.4 million in Q4 2012. Net income was $21.0 million versus a net loss of $26.7 million; common-share EPS was $0.12 versus $(0.21).
Material changes and notable transactions
- Revenue growth reflected higher same-store occupancy and cash rents, acquisitions, and properties placed in service. Same-store occupancy rose 190 basis points year over year, according to management.
- Net income improvement was substantially affected by non-recurring and transaction-related items: a $25.9 million gain on contributing Austin properties to a joint venture, a $6.9 million gain from remeasurement of venture investments, and $4.2 million of discontinued-operations income. The prior year included $43.8 million of discontinued-operations income, including property-sale gains, and a $22.0 million loss on early debt extinguishment.
- Brandywine contributed seven Austin office properties to a 50%-owned venture, receiving $271.5 million in distributions and reporting net proceeds of $266.3 million after its capital-expenditure commitment. It retained management and leasing responsibilities.
- The company increased its ownership of One and Two Commerce Square to 99%, assuming approximately $237.1 million of mortgage principal, and acquired Four Points Centre for $47.3 million. It also bought the land beneath Cira Centre and Three Logan Square for a combined $45.4 million.
- Property sales and the Austin venture transaction generated aggregate net proceeds of approximately $423.5 million. Brandywine also issued 12.65 million common shares in April, raising $181.5 million net.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or FFO guidance. Management described a selective development and capital-recycling strategy, with emphasis on liquidity, balance-sheet strength, leasing, and targeted asset sales.
- Management cautioned that vacancy could rise and rental rates could fall through 2014 and possibly beyond, while tenant concessions, installation costs, and access-to-capital risks could increase.
- The planned FMC Tower at Cira Centre South was expected to cost approximately $341 million, with initial occupancy targeted for Q2 2016. About 61% of the office space was pre-leased, including a 16-year FMC lease for approximately 253,000 square feet and a 20-year University of Pennsylvania lease for 100,000 square feet. Funding was expected from a mix of cash, joint ventures, asset sales, and debt and equity financing; the residential component was expected to be joint ventured or pre-sold, but no binding agreement was disclosed.
- Other development exposure included the 4040 Wilson office venture, which had not secured its construction lender, and guarantees related to venture projects. Disclosed payment guarantees included $24.7 million for evo at Cira, $3.2 million for the Plymouth apartment venture, and $0.5 million for PJP VII; additional completion and cost-overrun guarantees may apply.
- Key risks include office-market and tenant-credit weakness, lease expirations, interest-rate and refinancing exposure, development cost overruns or delays, joint-venture partner risk, environmental and insurance liabilities, REIT qualification, and restrictions under tax-protection and debt-maintenance agreements. Management said routine legal proceedings were not expected to materially affect financial position, results, or liquidity; it also reported no impairment charges for 2013.
Most important facts for investors to verify
- How much of the 2013 earnings and FFO increase is repeatable after excluding venture gains, asset dispositions, and other unusual items.
- Lease renewals, tenant retention, occupancy trends, and the ability to sustain reported rent increases amid 2014 market conditions.
- Sources and terms of funding for the FMC Tower and other developments, including any binding residential transaction and construction financing.
- Refinancing plans for the $232.4 million 2014 and $409.7 million 2015 principal maturities, and continued covenant compliance and revolver access.
- The eventual cost and exposure from venture guarantees, debt-maintenance agreements, and tax-protection commitments.