Brandywine Realty Trust — Q2 2011 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2011, compared with the same 2010 periods. Brandywine is a REIT operating through Brandywine Operating Partnership, which held substantially all company assets and operations. At quarter-end, the company owned 235 properties totaling approximately 25.7 million rentable square feet, held interests in 16 unconsolidated ventures, and managed approximately 33.7 million square feet in total. Amounts below are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $145.4 | $135.5 | $293.6 | $276.5 |
| Operating income | $24.9 | $24.7 | $53.3 | $49.1 |
| Net loss | $(6.2) | $(5.6) | $(6.7) | $(6.0) |
| Net loss attributable to common shareholders | $(8.2) | $(7.6) | $(10.8) | $(10.0) |
| Loss per common share | $(0.06) | $(0.06) | $(0.08) | $(0.08) |
| Net operating income (NOI) | $88.8 | $82.6 | $175.1 | $165.1 |
| Cash from operations | — | $88.3 | $103.0 |
Q2 NOI was approximately 61.1% of revenue, versus 61.0% in Q2 2010; operating income was approximately 17.1% of revenue, versus 18.2%. NOI is a non-GAAP measure and does not include interest, depreciation, general and administrative costs, or capital and leasing expenditures. Six-month investing cash outflow was $97.3 million and financing cash outflow was $6.9 million, producing a $15.8 million decline in cash. Cash at June 30 was $0.7 million.
At June 30, total debt obligations were $2.466 billion (principal before unamortized discounts and premiums: $2.473 billion), compared with $2.430 billion at year-end 2010. Debt was 85.3% fixed-rate and 14.7% variable-rate, unhedged; the reported weighted-average rate was 5.5%. The $600 million credit facility had $42 million drawn and $10.3 million in letters of credit, leaving $547.7 million available. Total assets were $4.668 billion and total liabilities $2.732 billion.
Material changes versus comparable periods
- Q2 revenue increased $9.9 million year over year, while six-month revenue increased $17.1 million. Newer properties—including Three Logan Square, the IRS Philadelphia Campus and Cira South Garage, along with Overlook I and II and Juniper Street Parking Garage—contributed to growth.
- Same-store cash rents fell $4.8 million in Q2 and $10.0 million for the six months. Management cited lower same-store occupancy; portfolio occupancy was 85.8% at quarter-end, and average occupancy was 85.0% for the first half versus 87.4% a year earlier.
- Total portfolio NOI rose $6.2 million in Q2 and $10.0 million in the first half, but same-store NOI fell $2.4 million in Q2 and $8.1 million in the first half. Added properties more than offset same-store weakness.
- Interest expense increased $3.5 million in Q2 and $4.4 million for the first half, reflecting new property-related debt and the 2018 notes, partly offset by mortgage repayments, prior debt retirements and expired hedges. Depreciation and amortization rose; the Q2 amount included a $4.7 million out-of-period charge.
- Operating cash flow declined $14.7 million year over year for the first six months, which management attributed primarily to lower occupancy, property dispositions and timing of receipts and payments. Cash used in investing improved modestly as capital spending declined.
Outlook, risks and unusual items
- Outlook: No specific earnings or FFO guidance is provided. Management expects economic weakness, financing-market volatility and high unemployment to pressure occupancy, tenant credit, effective rents and cash flows. It expects liquidity needs to be met through operations, financing and selected property sales, while noting that financing may be less available or more expensive.
- Leasing and development: Q2 new and expansion rental rates increased 1.8%, while renewal rates declined 1.7%; first-half rates were down 0.2% and 2.8%, respectively. Six-month retention was 66.9%. Four recently completed developments totaling 0.7 million square feet were still leasing up; management expected another $10.3 million of tenant improvements and leasing costs in 2011. Two land parcels have development deadlines by December 31, 2012; failure to proceed could require a $7.7 million write-off.
- Debt and financing: The company issued $325 million of 4.95% senior notes due 2018 in April; net proceeds of $318.9 million were used mainly to repay the credit facility and for general purposes. The credit facility and term loan were extended to June 2012. Approximately $378.7 million of unsecured debt and $52.3 million of mortgage debt were scheduled to mature through December 2012. Holders of $59.8 million of exchangeable notes could request redemption in October 2011. The company reported covenant compliance at June 30.
- Subsequent event: On July 11, the company prepaid the $60 million One Logan Square mortgage using cash and a credit-facility draw; it expected to write off $0.8 million of deferred financing costs in the next quarter.
- Unusual items: Q2 included a $3.8 million gain on sale of Three Greentree Center. First-half continuing operations included a $2.8 million gain from transferring an 11% interest in three properties. The company also recorded a $0.5 million electricity-billing adjustment related to prior years in Q1 and a $4.7 million out-of-period depreciation and amortization adjustment in Q2. Management said these prior-period errors were not material to prior years or the current statements.
- Contingencies and risks: Risks include tenant defaults and vacancies, refinancing and covenant constraints, interest-rate changes, asset-value declines, development costs and leasing delays, joint-venture partner performance, environmental matters and REIT qualification. An IRS audit of the 2004 tax year is under appeal; the proposed adjustment was not expected to create a material tax liability, though a related tax-protection claim remains possible. The filing reports no material change to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect.
Most important facts for investors to verify
- Whether occupancy, same-store rents, renewal pricing and leasing retention stabilize or continue to weaken.
- How the 2012 debt maturities and October 2011 exchangeable-note redemption are addressed, and whether the company maintains covenant compliance and facility access.
- Whether operating cash flow can support capital needs, distributions and debt service given low cash on hand and ongoing leasing costs.
- The pace and cost of lease-up at recently completed properties and any development decisions affecting the $7.7 million at-risk land costs.
- The effects of the $4.7 million out-of-period depreciation adjustment and the $3.8 million property-sale gain on comparisons of recurring performance.
- Progress and potential exposure from the IRS audit, tax-credit compliance obligations through 2015, and other property-sale and tax-protection restrictions.