Brandywine Realty Trust — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. This combined filing covers Brandywine Realty Trust and its operating partnership, which the Trust controls and consolidates. Amounts below are U.S. dollars.
Business context
The company is a REIT focused primarily on office properties, with industrial and mixed-use assets, property management, and real estate ventures. At year-end it owned 232 consolidated properties with approximately 25.2 million rentable square feet, held interests in 18 unconsolidated ventures, and managed about 7.4 million square feet for third parties and ventures.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $581.8 million | $560.0 million |
| Operating income | $105.7 million | $98.7 million |
| Net income (loss) | $(4.7) million | $(17.6) million |
| Loss per common share | $(0.10) | $(0.19) |
| Net operating income (NOI, non-GAAP) | $348.0 million | $332.6 million |
| Cash from operating activities | $179.0 million | $185.1 million |
| Cash and cash equivalents at year-end | $0.4 million | $16.6 million |
| Total indebtedness | $2.394 billion | $2.430 billion |
| Common-share distributions paid | $0.60 per share | $0.60 per share |
Revenue rose about 3.9%, while NOI rose about 4.6%; same-store NOI declined about 3.7% to $288.9 million. Reported operating margin was approximately 18.2% of revenue and NOI was approximately 59.8% of revenue. These margins are calculated from reported figures; NOI is a non-GAAP measure and excludes, among other items, corporate expenses, interest, depreciation, and leasing costs. Funds from operations available to common shareholders and units (FFO, non-GAAP) increased to $203.4 million from $185.8 million.
Year-end occupancy was reported as 86.5% for wholly owned properties; the core-property table separately reports 89.5% leased. Average occupancy was 85.3%, versus 86.7% in 2010. New and expansion rental rates were up 0.2%, while renewal rates were down 1.9%. Net absorption was 300,556 square feet.
Material changes and capital activity
- 2011 net loss narrowed by $12.9 million year over year. Continuing-operations loss improved to $13.2 million from $31.3 million.
- Same-store revenue fell $16.6 million, reflecting weaker leasing and free-rent periods; revenue growth in the total portfolio was supported by acquisitions and properties placed in service.
- The company issued $325 million of 4.95% senior notes due 2018, repurchased $106.2 million principal of unsecured notes, and prepaid $210.5 million of secured debt. It also sold four properties and contributed three properties to a 50/50 Allstate-affiliated venture, receiving $120.1 million net proceeds.
- On February 1, 2012, after year-end, the company closed a new $600 million revolving facility and $600 million of term loans, using initial term-loan proceeds to repay and terminate the prior facility and term loan, both scheduled to mature in June 2012.
- Cash from operations declined $6.1 million. Investing cash outflow narrowed substantially to $47.9 million, while financing activities used $147.2 million; cash decreased by $16.2 million during the year.
Outlook, risks, and unusual items
- Management expected weak economic conditions to continue weighing on occupancy, effective rents, tenant credit, and leasing costs, potentially into 2012 and beyond. It anticipated delaying and reducing development activity; it provided no specific earnings or FFO guidance in the supplied filing text.
- Four recently completed development properties totaling about 0.7 million square feet were still in lease-up. The company expected to spend an additional $8.5 million on them in 2012. Two optioned land parcels had development-start deadlines of December 31, 2012; failure to start or secure an extension could trigger a $7.7 million write-off.
- About 9.5% of year-end annualized base rent was scheduled to expire in 2012. The 2011 lease-expiration retention rate was 65.2%.
- Liquidity and refinancing remain sensitive to credit-market access, interest rates, property values, tenant defaults, and compliance with debt covenants. The company reported covenant compliance at December 31, 2011, and $322 million of unused availability under the then-current revolving facility. Its debt schedule showed approximately $476.9 million of principal maturities in 2012; the February 2012 refinancing addressed the prior facility and term-loan maturities.
- Notable accounting items included $12.0 million of historic tax-credit transaction income in 2011 and a $4.7 million out-of-period depreciation and amortization adjustment, which management said was not material to prior or current-period financial statements. A $0.5 million electricity underbilling correction also increased 2011 revenue; management likewise deemed the adjustment immaterial.
- A borrower on a $7.2 million purchase-money mortgage defaulted and entered forbearance. Management assessed the note as recoverable at year-end, but warned that missed conditions or further housing-market deterioration could result in a material loss.
- The company disclosed an IRS audit appeal relating to a 2004 transaction; management said the proposed adjustment would not create a material tax liability if upheld, though a related tax-protection claim could arise. Routine litigation was not expected to have a material adverse effect. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported occupancy measures (86.5% occupied versus 89.5% leased) and track same-store occupancy, renewal rents, and tenant retention.
- Review the 2012 debt-maturity schedule and the terms, hedges, covenants, and actual borrowing costs of the February 2012 refinancing.
- Assess whether the four developments lease up as planned and whether the two optioned parcels meet their development deadlines or avoid the potential $7.7 million write-off.
- Evaluate the quality and collectability of accrued rent and receivables, including the $7.2 million mortgage note under forbearance.
- Separate recurring operating performance from historic tax-credit income, property-sale gains, and the out-of-period accounting adjustments; review the company’s non-GAAP NOI and FFO reconciliations.
- Confirm that distributions remain supported by cash flow, liquidity, and debt-covenant capacity; the filing reports a $0.60 annual common distribution.