Brandywine Realty Trust — Q1 2014 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2014; comparison is with Q1 2013. Brandywine is a REIT operating through Brandywine Operating Partnership, L.P. At quarter-end, it owned 205 properties totaling approximately 24.9 million rentable square feet, held interests in 17 unconsolidated ventures, and managed approximately 7.9 million square feet for third parties and ventures.
Key financial and operating metrics
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue | $152.1 million | $139.6 million |
| Operating income | $29.4 million | $28.5 million |
| Net income (loss) | $(2.2) million | $3.9 million |
| Common shareholder net income (loss) | $(4.0) million; $(0.03) per share | $2.1 million; $0.01 per share |
| Net operating income (NOI), company-defined | $90.1 million | $84.5 million |
| Funds from operations (FFO), available to common unitholders | $53.6 million | $51.7 million |
| Cash from operating activities | $50.4 million | $50.3 million |
| Cash and cash equivalents, quarter-end | $236.3 million | $263.2 million at Dec. 31, 2013 |
| Total debt obligations | $2.592 billion | $2.595 billion at Dec. 31, 2013 |
NOI was approximately 59.3% of revenue, versus 60.5% in Q1 2013. Debt was predominantly fixed-rate: 96.1% fixed and 3.9% variable and unhedged. The company reported $598.3 million of unused revolving-credit availability, after $1.7 million of letters of credit, and said it was compliant with debt covenants. Scheduled principal payments were $229.0 million for the remaining nine months of 2014 and $409.7 million for 2015.
Material changes versus the prior comparable period
- Revenue rose $12.6 million, or about 9.0%; NOI rose $5.7 million, or about 6.7%. Wholly owned occupancy improved to 89.2% from 87.7% a year earlier. Same-store NOI increased $2.6 million.
- Revenue gains reflected higher occupancy, acquired properties (including One and Two Commerce Square), and termination fees. Property operating expenses increased $7.5 million, including higher snow-removal and utility costs after a severe East Coast winter.
- Net income fell $6.2 million year over year. Q1 2013 included $6.2 million of discontinued-operations income, including a $5.3 million disposition gain; Q1 2014 had no property dispositions classified as discontinued operations. Q1 2014 also included a $1.2 million gain on an undeveloped land sale.
- Operating cash flow was essentially flat. Investing cash flow shifted from a $90.6 million inflow to a $48.4 million outflow, largely because Q1 2013 included substantial property-sale proceeds. Cash declined $26.9 million during Q1 2014.
- Interest expense increased $0.9 million, mainly due to debt assumed with the Commerce Square acquisitions, partly offset by lower costs from no revolving-credit borrowings and debt repurchases. Equity income from ventures declined to $0.2 million from $1.5 million.
Outlook, management commentary, risks, and unusual items
- No specific earnings or FFO guidance was provided. Management said it expected to pursue occupancy and rental-rate growth, while warning that economic weakness could raise vacancies, reduce effective rents, increase tenant costs, and constrain financing.
- Leasing activity included 501,479 square feet of new leases and expansions and 336,047 square feet of renewals. Net absorption was negative 51,873 square feet. Rental rates increased 18.1% on new and expansion leases, 0.1% on renewals, and 6.7% combined.
- Leases representing 3.3% of annualized base rent were scheduled to expire in 2014; retention for those leases was 56.3% at quarter-end. Management cited tenant rollover and credit risk, development delays and cost overruns, interest-rate exposure, and economic and real-estate-market uncertainty.
- The company acquired 54.1 acres at Encino Trace, Austin, for $14.0 million; the development is estimated to cost $43.6 million, with $14.6 million funded by quarter-end and completion scheduled for Q2 2015. A major Philadelphia mixed-use office project, FMC Tower, was expected to cost $385 million, with construction scheduled to begin in Q2 2014 and finish in Q2 2016; the funding mix had not been determined.
- At March 31, tenant-improvement obligations not yet completed could reach $93.3 million, and development contracts totaled $33.3 million. The company also guaranteed certain venture construction loans, including a $24.7 million guarantee, and disclosed cost-overrun, completion, and customary indemnity guarantees.
- After quarter-end, Four Points Centre was contributed to an Austin venture at an agreed value of $41.5 million; the company estimated a $0.2 million loss on the contribution.
Important facts for investors to verify
- How occupancy, net absorption, renewals, and rent spreads develop, and whether 2014 lease expirations are renewed or relet.
- Funding, cost, leasing, and completion progress for FMC Tower and Encino Trace, including the effect of the $93.3 million tenant-improvement commitment.
- Refinancing plans for the $229.0 million of 2014 and $409.7 million of 2015 scheduled principal payments, and continued covenant compliance and revolver access.
- Whether venture performance and guarantees, tenant credit quality, or weaker market conditions create material cash-flow or liquidity pressures.
- Interpretation of GAAP losses alongside FFO and NOI: both are non-GAAP measures, and neither substitutes for net income or operating cash flow.