BRANDYWINE REALTY TRUST quarterly report, Q2 FY2016

Full document

Brandywine Realty Trust — Q2 2016 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2016; unaudited consolidated results for Brandywine Realty Trust and its operating partnership. The Trust conducts substantially all operations through the partnership.

Business context and reporting period

The company owned 120 properties totaling approximately 18.1 million net rentable square feet and held interests in 16 unconsolidated real estate ventures. Core-property occupancy was 92.1% at June 30, 2016, versus 91.7% a year earlier. The portfolio and segment structure changed materially following the February sale transaction with Och-Ziff.

Financial performance and condition

  • Q2 revenue: $127.2 million, down 12.7% from $145.6 million. Q2 operating income was $18.3 million, down from $30.8 million; net loss was $1.3 million versus net income of $3.1 million. Common-shareholder loss was $3.1 million, or $0.02 per share, versus income of $1.3 million, or $0.01 per share.
  • First-half revenue: $263.7 million, down 10.9% from $296.1 million. Net income was $45.0 million versus $11.7 million, and income attributable to common shareholders was $41.0 million, or $0.23 per share, versus $8.0 million, or $0.04 per share. The increase chiefly reflects disposition gains and is not a like-for-like measure of recurring performance.
  • Property operations: Q2 net operating income (NOI, a non-GAAP measure) was $77.0 million versus $89.3 million; first-half NOI was $158.7 million versus $179.0 million. Same-store Q2 NOI increased to $66.6 million from $65.1 million. Lower total-portfolio results primarily reflect properties sold.
  • Funds from operations: FFO available to common shareholders and unitholders was $57.4 million in Q2, essentially unchanged from $57.4 million a year earlier. First-half FFO was $45.7 million versus $115.8 million; reported FFO includes material disposition-related adjustments, so review the company’s reconciliation.
  • Cash flow: First-half operating cash flow was $29.1 million, down from $88.6 million. Investing activities provided $600.3 million, largely reflecting property-sale proceeds; financing activities used $420.5 million. Cash increased to $265.6 million from $56.7 million at year-end.
  • Debt and liquidity: Principal debt was approximately $2.052 billion at June 30, down from $2.416 billion at year-end; weighted-average interest rate was 4.5% and weighted-average maturity six years. The $600 million revolver had no borrowings at quarter-end. As of July 22, cash was approximately $225.7 million and revolver availability was $585.7 million, net of letters of credit. The company reported compliance with debt covenants.
  • Distributions: The common distribution declared was $0.16 per share for Q2, up from $0.15 a year earlier. The Series E preferred shares carry a 6.90% annual preferential return.

Material changes versus prior comparable period

  • In February, the company disposed of 58 properties totaling approximately 3.9 million square feet through a transaction involving sale of land interests and transfer of buildings to the MAP Venture. It received $354.0 million in proceeds and retained a 50% non-controlling interest. The transaction materially reduced reported rental revenue and portfolio size.
  • The company also sold Cira Square for $354.0 million, recognizing a $115.8 million gain, and sold Herndon Metro Plaza I and II. Total first-half property disposition gain was $114.7 million.
  • To repay the Cira Square and Cira South Garage mortgages early, the company incurred a $66.6 million debt-extinguishment loss, including $44.5 million of prepayment charges and noncash financing-cost write-offs. It also repaid $149.9 million of notes at maturity and refinanced Two Logan Square debt at a lower effective rate.
  • First-half impairment charges totaled $13.1 million, compared with $2.5 million a year earlier, including $11.3 million on three Metropolitan D.C. properties and $1.8 million on a property held for sale.
  • Core-property occupancy improved year over year, but retention declined to 73.0% in Q2 from 78.2%, and same-store net absorption was negative 98,638 square feet in Q2.

Outlook, commentary, risks and unusual items

  • The filing provides no specific earnings or FFO guidance. Management expects liquidity needs to be met through cash, operating cash flow, financing and selective asset sales, while cautioning that weaker economic conditions could pressure occupancy, rents, tenant credit, cash flow and covenant compliance.
  • Near-term maturities include approximately $320 million in 2017 and $325 million in 2018. The company says refinancing or repayment may depend on asset sales and secured or unsecured financing availability.
  • Development and tenant-improvement commitments were approximately $140.1 million and $57.8 million, respectively. The Subaru headquarters development agreement has a $77.3 million not-to-exceed amount, but the company’s obligation for cost overruns is not capped.
  • The planned Schuylkill Yards project with Drexel University could span approximately 5.1 million square feet over about 20 years. The company anticipated $10–15 million of costs over the next 18–24 months for planning and approvals; scope, timing and financing remained subject to approvals and later agreements.
  • Other exposures include a third-party put option requiring a possible $35 million property purchase through May 2018, venture loan guarantees, ground-lease obligations, and development-partner risks. Management stated routine litigation was not expected to have a material adverse effect.
  • Management identified economic and office-market weakness, tenant defaults and leasing costs as risks. The filing also describes derivative-related other comprehensive losses; the fair value of interest-rate swaps was a net liability of approximately $12.5 million at June 30.

Important facts for investors to verify

  • How much of reported earnings and first-half FFO reflects asset sales, impairments, debt prepayment charges and other nonrecurring items; reconcile these measures to recurring property performance.
  • The economics and ongoing obligations of the Och-Ziff/MAP transaction, including ground-lease payments that initially total $11.9 million annually and increase 2.5% annually through November 2025.
  • Leasing trends following lower retention and negative Q2 net absorption, including lease expirations, tenant demand and whether occupancy and rental-rate gains persist.
  • Funding plans for 2017–2018 maturities and development commitments, and sensitivity to interest rates, refinancing conditions and property-sale proceeds.
  • Potential exposure under the uncapped Subaru cost-overrun guarantee, venture guarantees and the $35 million put option.
  • Development execution, leasing and financing risks for Schuylkill Yards and other projects, including whether projected costs, approvals and timelines change.