Brandywine Realty Trust — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Brandywine Realty Trust is a REIT that conducts its business through Brandywine Operating Partnership, L.P.; the combined filing reports their consolidated results. The company owned 96 properties totaling approximately 16.9 million rentable square feet and held interests in 10 unconsolidated real estate ventures.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $143.9 million | $136.4 million |
| Net operating income (NOI; non-GAAP) | $86.5 million | $79.9 million |
| Net income | $4.1 million | $44.7 million |
| Net income attributable to common shareholders | $3.9 million; $0.02 per diluted share | $44.2 million; $0.25 per diluted share |
| FFO available to common shareholders and unit holders (non-GAAP) | $60.1 million | $57.3 million |
| Net cash from operating activities | $17.8 million | $38.7 million |
Revenue rose about 5.5%, and NOI rose about 8.3%; consolidated NOI margin was approximately 60.1%, compared with 58.6%. Same-store NOI was $68.6 million, down slightly from $68.8 million. Operating income declined to $25.7 million from $27.9 million, in part as depreciation and amortization increased to $52.0 million from $43.3 million.
Cash and cash equivalents were $14.4 million at March 31, 2019; cash plus restricted cash was $14.8 million. The company reported $437.6 million of available credit-facility borrowings, net of letters of credit. Gross debt principal was approximately $2.11 billion, up from $2.04 billion at year-end 2018; the balance-sheet carrying amount, net of discounts and financing costs, was $2.095 billion. Weighted-average debt interest rate was 3.9%, and weighted-average maturity was 6.0 years. The company reported covenant compliance.
Changes from the prior comparable period
- Net income fell by $40.6 million, chiefly because Q1 2018 included a $37.3 million gain on real estate venture transactions; Q1 2019 included only $0.3 million of such gains. Q1 2018 gains included the sale of the evo at Cira Centre South venture and an exchange of venture interests.
- Rent revenue increased $11.3 million, primarily from tenant reimbursements and billings, cash rents, and deferred market rent. Third-party management, labor reimbursement and leasing revenue decreased $3.7 million, largely due to lower management and development fees.
- Interest expense increased $0.8 million, reflecting higher credit-facility borrowings, partly offset by a lower rate on the refinanced term loan. Equity-method losses increased to $1.4 million from $0.8 million.
- Operating cash flow decreased by $20.9 million year over year. Investing cash outflow was $41.3 million, versus $6.2 million, mainly reflecting lower venture-sale proceeds and higher development, redevelopment, tenant-improvement and leasing expenditures.
Operations, outlook and notable items
- Core-property occupancy was 92.1%, versus 92.3% a year earlier; leasing was 95.0%. Retention increased to 66.2% from 51.3%, and combined rental rates on new, expansion and renewal leases increased 14.6%. Net absorption remained negative at 65,796 square feet.
- Management said it expects liquidity needs to be met through operating cash flows, venture distributions, cash, credit availability, debt or equity financing, and property sales. It identified current development and redevelopment projects as a primary use of capital for the rest of 2019. The filing provides no quantified earnings or FFO guidance.
- Projects under construction or redevelopment included The Bulletin Building, expected to be completed in Q2 2020 at estimated total costs of $83.1 million; 405 Colorado Street, expected in Q4 2020 at $114.0 million; and 426 W. Lancaster Avenue, with remaining work primarily tenant improvements. The company also described development and financing risks for the 4040 Wilson venture.
- The board authorized up to $150 million of share repurchases; the company repurchased 1.34 million shares for $17.3 million at an average $12.92 per share, leaving $132.7 million available. The quarterly distribution was $0.19 per share, paid April 18, 2019.
- Adoption of lease accounting Topic 842 resulted in recognition of a $22.2 million right-of-use asset and $22.4 million operating lease liability for ground leases. The adoption also produced a $5.3 million cumulative-effect reduction to equity, including a $0.7 million accrued-rent write-off and the company’s $4.6 million share of an unconsolidated venture adjustment.
- The company recorded $0.8 million of depreciation in Q1 2019 that should have been recorded in 2018; management concluded the adjustment was not material to either period. A $9.4 million deferred payment from the 2017 Marine Piers sale is now expected January 15, 2024 after the tenant exercised its sublease extension option.
- Unconsolidated ventures had $498.2 million of aggregate debt. Most was nonrecourse, but the company disclosed guarantees including up to $41.3 million on a venture construction loan, plus customary completion, cost-overrun and environmental obligations.
- Management cautioned that weaker economic conditions could increase vacancies, reduce rents, raise tenant costs and impair collections or access to financing. No material change to previously disclosed risk factors was reported. The company reported effective disclosure controls and no material litigation expected to adversely affect its financial position, results or cash flows.
Important facts for investors to verify
- Whether occupancy, leasing and rental-rate gains translate into positive net absorption and sustained same-store NOI growth.
- The timing, remaining cost and leasing progress of development and redevelopment projects, especially The Bulletin Building and 405 Colorado Street.
- Debt maturities and refinancing capacity, including $416.8 million scheduled in 2022 and $556.7 million in 2023, as well as variable-rate exposure and covenant headroom.
- Operating cash generation relative to distributions, capital spending and share repurchases; operating cash flow was below distributions paid in Q1.
- Collectability and timing of deferred or contingent proceeds, including the $9.4 million Marine Piers payment expected in 2024, and potential exposure under venture guarantees.