Brandywine Realty Trust — FY 2017 Form 10-K
Business context and reporting period. This combined annual report covers Brandywine Realty Trust, a self-managed REIT, and its operating partnership for the fiscal year ended December 31, 2017. The Trust conducts its business through the Operating Partnership. At year-end, the company owned 93 properties totaling approximately 16.4 million rentable square feet, principally office properties in Philadelphia, the Washington, D.C. region and Austin. Core portfolio occupancy was 92.9%.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $520.5 million | $525.5 million |
| Net income attributable to common shareholders | $115.3 million; diluted EPS $0.65 | $33.0 million; diluted EPS $0.19 |
| Funds from operations (FFO), available to common shareholders and units | $229.2 million; $1.29 per diluted share/unit | $167.0 million; $0.94 per diluted share/unit |
| Net operating income (NOI) | $314.5 million | $316.0 million |
| Cash from operating activities | $182.0 million | $173.1 million |
| Cash and cash equivalents at year-end | $202.2 million | $193.9 million |
| Debt carrying amount | $1,930.8 million | $2,013.1 million |
- Same-store NOI increased 1.1%, while total NOI decreased about 0.5%. Core occupancy fell from 93.9% to 92.9%; average occupancy fell from 93.6% to 91.9%.
- Net income growth reflected, in substantial part, transaction gains: $80.5 million from real estate venture transactions and $31.7 million from real estate dispositions. Results also included a $3.9 million debt extinguishment loss and a $4.8 million impairment of an investment in an unconsolidated venture. FFO is a non-GAAP measure and excludes specified items; it is not a substitute for GAAP earnings or cash flow.
- Cash from investing activities was $79.8 million, versus $500.9 million in 2016, when property-sale proceeds were substantially higher. Financing activities used $253.6 million, compared with $536.8 million used in 2016.
- At year-end, approximately 98.6% of debt was fixed-rate; the weighted-average interest rate was 4.0% and weighted-average maturity was 7.7 years. Gross principal debt was approximately $1,948.7 million, before discounts, premiums and financing costs. The $600 million revolving credit facility had no borrowings outstanding; reported availability, net of letters of credit, was $596.6 million.
- Quarterly common distributions rose from $0.16 to $0.18 per share in the fourth quarter. Total distributions declared for 2017 were $0.66 per share.
Material changes versus the prior comparable period
- Revenue declined approximately 0.9%, as gains in same-store cash rents and income from completed properties were offset by dispositions and lower non-cash rent adjustments. Same-store NOI rose modestly despite lower occupancy.
- Common-shareholder net income and FFO increased, aided by venture and property sale gains and lower impairment and debt-extinguishment charges than in 2016. The 2016 comparison included a $116.983 million real estate disposition gain and a $66.590 million debt extinguishment loss.
- The company sold 20 properties totaling approximately 1.61 million square feet for $159.9 million gross and $142.7 million net proceeds, and sold five land parcels for $29.6 million gross and $28.6 million net proceeds. It acquired One Drexel Plaza and 3000 Market Street in Philadelphia for gross prices of $35 million and $32 million, respectively.
- The company issued $550 million of notes in November, including $450 million of 3.95% notes due 2027 and $100 million of additional 3.95% notes due 2023, and used proceeds in part to repay its 2018 notes. It also repaid $300 million of notes at maturity, redeemed all $100 million of Series E preferred shares, and issued common shares for $51.2 million net proceeds under its at-the-market program.
Outlook, commentary, risks and contingencies
- Outlook: The filing gives no quantified earnings or FFO guidance. Management noted that vacancy could rise and effective rents, tenant credit and leasing economics could weaken during 2018 and beyond. It described a selective approach to development and expects liquidity from operations, property sales and financing to support near-term needs.
- Development: Projects include Schuylkill Yards in Philadelphia, the Subaru National Training Center in Camden, and projects in Austin and elsewhere. The filing’s project-cost disclosures vary by scope: one overview estimates approximately $230.3 million to complete projects, while a project table reports $265.0 million estimated costs and $97.3 million funded. Schuylkill Yards is a phased, long-term project whose timing depends on approvals, preleasing, financing and partner participation.
- Guarantees and commitments: Unconsolidated ventures had $768.9 million of debt, mostly non-recourse. Company recourse included a $55.4 million payment guarantee on evo at Cira, a $0.4 million guarantee for PJP VII and up to $41.3 million for 4040 Wilson; the evo guarantee was cancelled after the subsequent sale of the venture interest. The company also disclosed completion guarantees for land infrastructure and a Subaru development cost-overrun guarantee above a $79.4 million not-to-exceed amount, which management expected to complete under budget. A counterparty could require a $35 million property purchase under a put option exercisable through May 4, 2018.
- Other unusual items: The Austin venture’s property sale drove a $52.2 million gain recognized by the company, including a previously deferred gain. The Marine Piers sale included $9.4 million of deferred purchase consideration and gain recognition contingent on later payment. A $4.8 million other-than-temporary impairment was recorded for the Brandywine-AI venture investment amid weak office demand and competition.
- Principal risks: Office leasing, renewals, tenant defaults and market occupancy; development cost overruns, delays and lease-up; interest rates, refinancing and covenant compliance; valuation and impairment of properties and ventures; partner performance and venture guarantees; environmental and insurance exposure; REIT qualification and tax-law changes; and cybersecurity. Management reported compliance with debt covenants at year-end and no expected material adverse effect from routine legal proceedings. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the reported earnings increase to recurring property performance versus gains on asset and venture sales; review FFO definitions and reconciliation.
- Check occupancy, leasing spreads, retention, upcoming lease expirations and tenant-improvement costs, particularly given the year-over-year occupancy decline.
- Confirm debt principal and carrying-value figures, maturity schedule, revolving-credit availability, interest-rate exposure and covenant headroom.
- Review remaining development funding needs, project-cost estimates and the differing completion-cost totals disclosed in the filing.
- Assess contingent exposure from venture guarantees, Subaru cost overruns, land infrastructure completion obligations and the $35 million put option.
- Review subsequent events: the January 2018 evo at Cira sale generated $43.0 million of company net proceeds, and the 13.1-acre Westpark parcel was sold for $0.5 million.