Brandywine Realty Trust — Q2 2018 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2018; unaudited results. Brandywine is an office-focused REIT operating primarily through Brandywine Operating Partnership, L.P. At quarter-end, it owned 93 properties totaling approximately 16.5 million rentable square feet, concentrated in Philadelphia, its suburbs, the Washington, D.C. area and Austin. Core portfolio occupancy was 92.3%, versus 92.2% a year earlier; leased occupancy was 94.2%.
Financial performance and position
Amounts below are in millions except per-share data. The Trust and Operating Partnership report substantially the same consolidated operations.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $133.8 | $127.8 | $270.1 | $258.7 |
| Operating income | $30.0 | $25.9 | $57.8 | $47.8 |
| Net income | $13.1 | $7.7 | $57.8 | $29.0 |
| Net income attributable to common shareholders | $12.9 | $4.1 | $57.1 | $23.4 |
| Diluted earnings per share | $0.07 | $0.02 | $0.32 | $0.13 |
| Net operating income (NOI, non-GAAP) | $81.2 | $77.2 | $161.1 | $157.0 |
| FFO available to common shareholders and unit holders (non-GAAP) | $63.0 | $57.4 | $120.2 | $113.5 |
- Revenue increased 4.7% in Q2 and 4.4% for the first half. Reported NOI margin was approximately 60.7% in Q2 (60.4% in Q2 2017) and 59.6% for the first half (60.7% in 2017).
- Six-month net income includes $37.3 million of gains on real estate venture transactions, versus $14.6 million in the prior-year period. The 2018 amount principally reflects the sale of the evo at Cira Centre South venture and the Four/Seven Tower Bridge exchange. These gains materially affect year-over-year GAAP earnings; six-month FFO increased approximately 5.9%.
- Cash provided by operations was $97.5 million for the first half, compared with $82.8 million. Investing used $122.6 million, versus providing $56.9 million, while financing used $69.2 million, versus $263.1 million. Cash, cash equivalents and restricted cash ended at $109.2 million, down from $203.4 million at year-end 2017; balance-sheet cash and cash equivalents were $108.3 million.
- At June 30, total debt principal was approximately $1.96 billion ($1.94 billion carrying value). The weighted-average effective rate was 4.0%, weighted-average maturity 7.2 years, and 98.6% of debt was fixed rate; 1.4% was variable and unhedged. The company reported covenant compliance.
- Quarter-end liquidity included $597.7 million of available revolving-credit capacity, net of letters of credit, and $108.3 million of cash and cash equivalents. The quarterly distribution was $0.18 per share, up from $0.16 a year earlier.
Material changes and notable items
- Q2 revenue rose mainly from cash-rent growth and recently completed or acquired properties, particularly FMC Tower; total Q2 NOI increased 5.3%. However, same-store NOI declined $1.2 million in Q2 and $4.9 million for the first half, partly reflecting higher property taxes and operating costs. Total portfolio growth was supported by acquisitions and properties placed into service.
- The company acquired two Philadelphia parcels through 99-year ground leases, with $39.6 million of prepaid rent, and consolidated Four Tower Bridge through an exchange of venture interests. It also issued a $44.4 million, 4.0% five-year mortgage loan to its 50%-owned Brandywine 1919 venture.
- On July 17, 2018, the company amended and extended its $600 million revolving facility to July 15, 2022, with two conditional six-month extensions. It reduced applicable Eurodollar margins based on credit rating and removed the minimum-net-worth covenant.
- Subaru exercised its option to purchase the training-center project; completion and sale were expected after substantial completion, which the company anticipated in Q3 2018. The company also reported ongoing development and redevelopment projects with estimated costs of $269.7 million and $129.6 million funded at June 30.
Outlook, risks and contingencies
No numerical earnings or FFO guidance is provided in the supplied filing text. Management said liquidity needs were expected to be met from cash, operating cash flow, financing and selective asset sales, and considered available liquidity sufficient for existing projects and potential investments. It cautioned that economic weakness could raise vacancies, reduce rents, increase tenant defaults and concessions, and constrain financing access. Other risks include lease rollover, construction delays and overruns, leasing and development execution, and interest-rate changes. Management identified no material changes to the risk factors in its 2017 Form 10-K.
- Unconsolidated ventures had $645.5 million of aggregate debt. Company recourse included a $0.4 million payment guarantee on a $4.2 million loan and a guarantee of up to $41.3 million on a $150 million construction loan, plus customary completion, cost-overrun and carve-out guarantees.
- Development commitments and costs remain significant. The filing lists $135.7 million of development-contract obligations and $37.4 million of signed-lease tenant-improvement commitments, alongside other project requirements and expected capital improvements.
- The company recorded no impairment charges in the first half of 2018. A $2.8 million deferred gain on Garza Ranch land sales was recognized in Q2 after required infrastructure work was substantially completed. The filing also discloses a $1.2 million out-of-period impairment adjustment relating to 2016, which management determined was not material to prior periods.
- Routine litigation was disclosed; management did not expect resulting liabilities to materially affect financial position, results or cash flows. The company also noted environmental, covenant, refinancing and venture-guarantee risks.
Important facts for investors to verify
- How much of the improvement in reported earnings reflects recurring property operations versus venture-sale and exchange gains; compare GAAP earnings with FFO and same-store NOI.
- Whether same-store NOI softness, higher Philadelphia-area property taxes, occupancy, leasing retention and tenant-improvement costs improve or worsen in subsequent filings.
- Execution, leasing, budgets and funding for development and redevelopment projects, including Schuylkill Yards, One Drexel Plaza, 4040 Wilson and the Subaru sale.
- Debt maturities, refinancing terms and covenant headroom, as well as cash levels after development spending and distributions.
- Collectability and repayment of the $44.4 million related-party venture loan, and the extent of any future calls under venture guarantees.