Brandywine Realty Trust — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The filing combines Brandywine Realty Trust and its operating partnership, which management operates as one enterprise.
Business context
Brandywine is a REIT focused on office and industrial property ownership, leasing, development and management. At September 30, it owned 210 properties with approximately 24.1 million rentable square feet, held interests in 18 unconsolidated ventures with approximately 6.2 million square feet, and managed approximately 30.7 million square feet in total. Wholly owned property occupancy was 88.3%.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $143.5 | $134.5 | $424.2 | $400.1 |
| Net operating income (NOI) | $87.3 | $81.0 | $257.9 | $242.9 |
| Operating income | $30.2 | $27.9 | $88.1 | $82.4 |
| Net income | $11.1 | $17.1 | $22.2 | $33.2 |
| Net income attributable to common shareholders | $9.2 | $13.9 | $16.5 | $22.6 |
| Common-share diluted EPS | $0.06 | $0.10 | $0.11 | $0.16 |
| Funds from operations (FFO) available to common holders | $63.0 | $57.7 | $163.6 | $149.4 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $146.2 | $122.1 |
Revenue increased 6.6% in Q3 and 6.0% year to date. NOI margin, calculated as NOI divided by revenue, was approximately 60.8% in Q3 versus 60.2% a year earlier; operating margin was approximately 21.1% versus 20.8%. FFO rose despite lower GAAP net income, which includes real estate depreciation and gains or losses from dispositions.
For the first nine months, investing activities provided $16.5 million and financing activities provided $21.2 million. Cash increased $184.0 million, from $1.5 million at year-end 2012 to $185.5 million, reflecting operating cash generation, property-sale proceeds and financing activity, including the common-share offering.
Debt and liquidity
Total debt obligations were $2.377 billion at September 30, down from $2.465 billion at December 31, 2012. This comprised $434.9 million of mortgage debt, $450.0 million of term loans and $1.492 billion of unsecured senior notes. The revolving credit facility had no borrowings outstanding; after $1.3 million of letters of credit, unused availability was $598.7 million. Approximately 95.8% of debt was fixed-rate, including debt swapped to fixed, and the reported weighted-average rate was 5.1%. The company reported compliance with debt covenants.
Common equity issuance in April generated approximately $181.7 million net. The quarterly common distribution was $0.15 per share; Series E preferred distributions carry a 6.90% annual rate on the $25 liquidation preference.
Material changes and unusual items
- Q3 net income fell $6.0 million year over year, principally because Q3 2012 included a $9.9 million gain on disposition of discontinued operations. Q3 2013 discontinued operations were a loss of $0.1 million.
- Nine-month net income declined $11.0 million, largely because 2012 included $34.8 million of disposition gains, including a deferred gain recognized after repayment of a note receivable. 2013 included $7.8 million from remeasurement of the Six Tower Bridge investment and a $3.7 million gain on a venture exchange.
- Lower interest expense supported results: nine-month interest expense declined $8.1 million, primarily following debt repayments and repurchases. The company recorded a $1.1 million loss on early extinguishment of debt in 2013.
- Cash rents increased with improved occupancy and acquisitions. Same-store leasing statistics showed 88.3% period-end occupancy, 63.1% nine-month retention, and combined new/expansion and renewal rental-rate increases of 9.9% for the nine-month period. Nine-month net absorption was negative 54,434 square feet.
- The company sold multiple properties during 2013, including the Princeton Pike portfolio for $121.0 million. It also acquired the land beneath Three Logan Square for $20.8 million and obtained control of Six Tower Bridge through an exchange transaction.
Outlook, risks and commitments
No formal earnings or FFO guidance is stated in the filing. Management cautioned that economic weakness could pressure occupancy, effective rents, tenant credit and financing availability, and potentially raise tenant-installation costs. It expected liquidity needs to be met through cash, operating cash flow, financing and selective property sales, while noting that funding availability and asset-sale prices cannot be assured.
- After quarter-end, on October 16, the company contributed its remaining Austin portfolio to a 50/50 venture. The transaction generated a $271.5 million distribution before closing adjustments and the company’s $5.2 million post-closing capital commitment, leaving stated net proceeds of $266.3 million.
- Management decided to proceed with the FMC Tower at Cira Centre South, a planned office and residential development with estimated total costs of $341 million and expected initial occupancy in Q2 2016. Approximately 61% of planned office space was pre-leased; funding was expected from cash, potential venture or asset-sale proceeds, and debt or equity.
- The company expected to fund a $69.1 million payment in Q4 2013 for additional interests in One and Two Commerce Square, subject to customary closing conditions and completion of the Parkway Properties–Thomas Properties Group merger.
- The evo at Cira Centre South venture included a company share of a payment guaranty of approximately $23 million, plus completion and cost-overrun guarantees. The company also agreed to guarantee 100% of any lender-mandated recourse for the planned 4040 Wilson venture; no 4040 Wilson guarantees were outstanding at quarter-end.
- Other exposures include $290.2 million of scheduled minimum ground-lease payments, tax-protection restrictions that may limit property sales, and historic/new-markets tax-credit compliance requirements through 2015. Management did not expect material tax-credit refunds or reductions.
- The filing reports routine litigation and no material expected adverse effect; it also states there was no material change in previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether occupancy, leasing spreads and tenant retention improve, and whether negative year-to-date net absorption persists.
- Completion, financing, pre-leasing and total cost of the FMC Tower, and the timing and conditions of the Commerce Square transaction.
- Use of Austin transaction proceeds and the company’s continuing investment, capital and guarantee obligations in its ventures.
- Debt maturities, covenant headroom and refinancing access, particularly given the stated economic and credit-market risks.
- How much reported earnings and cash generation depend on nonrecurring venture gains, tax-credit income, property sales and equity issuance.