Brandywine Realty Trust — Q1 2013 Form 10-Q
Business context and reporting period. The combined filing covers Brandywine Realty Trust and its operating partnership for the quarter ended March 31, 2013. The REIT operates through the partnership. At quarter-end, the company owned 214 properties with approximately 24.3 million net rentable square feet and held interests in 19 unconsolidated ventures. Its portfolio spans office, industrial and mixed-use properties across seven U.S. regions.
Financial and operating performance
- Revenue: $140.6 million, up 4.5% from $134.5 million in Q1 2012. Rental revenue rose to $115.6 million from $109.7 million, while tenant reimbursements increased to $20.4 million from $18.7 million.
- Profit: GAAP net income was $3.9 million versus $9.3 million; net income attributable to common shareholders was $2.1 million versus $7.1 million. EPS was $0.01 versus $0.05. Continuing operations remained loss-making, with a $2.0 million loss versus a $7.9 million loss. Discontinued operations contributed $5.9 million, including a $5.3 million property-sale gain, compared with $17.2 million in Q1 2012.
- Property operations and margins: NOI, a non-GAAP measure, increased 4.2% to $85.1 million from $81.6 million; NOI margin was approximately 60.5% versus 60.7%. Operating income was $28.7 million versus $27.5 million.
- FFO: Funds from operations available to common shareholders and unitholders was $51.7 million, compared with $47.1 million.
- Cash flow: Operating cash flow was $49.8 million versus $44.2 million. Investing activities provided $91.0 million, mainly reflecting property and venture-interest sales; financing activities used $94.5 million. Cash and equivalents ended the quarter at $47.9 million, up from $1.5 million at year-end.
- Debt and liquidity: Debt obligations were $2.394 billion, down from $2.465 billion at December 31, 2012. Approximately 95.8% of principal debt was fixed-rate or hedged; $100 million was unhedged variable-rate debt. The revolving facility had no borrowings and $599.1 million of unused availability after letters of credit. The company reported compliance with debt covenants. Scheduled principal payments were $8.5 million for the remainder of 2013 and $250.3 million in 2014.
- Distributions: The company declared a $0.15-per-common-share/unit distribution. Its Series E preferred securities carry a 6.90% annual preferential return.
Changes versus the prior comparable period
- Revenue and NOI improved, supported by higher same-store occupancy, rent increases and late-2012 acquisitions. Same-store occupancy was 87.6%, versus 87.4% a year earlier; total wholly owned portfolio occupancy was 87.7%.
- Combined new and renewal rental rates increased 9.5%; renewal rates rose 11.0%. Net absorption was negative 123,940 square feet, and the core portfolio retention rate was 52.7%.
- Interest expense declined $3.2 million, primarily following debt repayments and maturities, partly offset by interest on debt issued in late 2012.
- Lower gains on property dispositions drove the year-over-year decrease in GAAP net income: discontinued-operations gains were $5.3 million versus $14.7 million.
- Debt declined by approximately $71.4 million from year-end, and unhedged variable-rate debt fell from $169 million to $100 million.
Outlook, commentary and risks
- The filing provides no specific earnings or FFO guidance. Management expected economic uncertainty could pressure occupancy, rents, tenant credit and financing availability, and said vacancy could rise through 2013 and possibly beyond.
- Management said available cash, operating cash flow, financing capacity and selective asset sales were expected to support liquidity needs, while cautioning that financing or sale proceeds might not be available on attractive terms. It identified tenant improvements, leasing costs, debt maturities and development spending as funding needs.
- In February, the company sold eight New Jersey office properties for $121 million; the properties were 86.9% occupied. It also sold its 20% interest in the Beacon venture, with proceeds approximately equal to carrying value.
- The company formed a 30%-owned venture developing an 850-bed student housing tower in Philadelphia. Estimated project cost is $158.5 million, with completion targeted for 2014. The company’s share of a construction-loan payment guaranty was approximately $23 million, in addition to completion and cost-overrun guarantees.
- A $7.0 million mortgage note receivable is owed by a borrower that defaulted; payments are expected to resume in 2014 and management expected repayment by 2015, but warned a housing-market deterioration could cause a material loss. The company also cited a potential $5.9 million write-off if development of a remaining land parcel does not proceed by the applicable deadline.
- After quarter-end, the company raised $181.7 million net from issuing 12.65 million common shares. Proceeds were intended for general corporate purposes, including capital expenditures, acquisitions, development or debt repayment. It also bought the land under Three Logan Square for $20.8 million, eliminating future ground-lease obligations.
- Management reported no material change in previously disclosed risk factors, no material expected effect from routine litigation, and no impairment charges in the quarter. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether occupancy, leasing spreads and negative net absorption develop as management anticipated, and how much lease rollover occurs in 2013.
- Debt refinancing plans for the $250.3 million scheduled in 2014, covenant headroom, and actual use of the post-quarter equity proceeds.
- Whether the defaulted $7.0 million note is collected as expected and whether the Grove project stays within budget and schedule, including the company’s guarantee exposure.
- How recurring operating performance and FFO compare with GAAP earnings, which were materially affected by property-sale gains and discontinued operations.
- The effect of the 12.65 million-share offering on per-share results and distributions.