Brandywine Realty Trust — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Brandywine is a REIT operating primarily through Brandywine Operating Partnership. At quarter-end, the company owned 192 properties totaling approximately 24.8 million rentable square feet and held interests in 17 unconsolidated real estate ventures.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $152.6 million | $146.6 million | $448.6 million | $449.2 million |
| Operating income | $29.5 million | $30.8 million | $91.1 million | $94.4 million |
| Net income | $20.3 million | $8.9 million | $32.0 million | $8.8 million |
| Net income attributable to common shareholders | $18.3 million | $7.0 million | $26.3 million | $3.3 million |
| Diluted EPS | $0.10 | $0.04 | $0.15 | $0.02 |
| Net operating income (NOI) | $94.0 million | $89.3 million | $273.0 million | $272.3 million |
NOI margin was approximately 61.6% in Q3 2015 versus 60.9% in Q3 2014, and 60.8% for the first nine months versus 60.6% a year earlier. NOI is a non-GAAP measure. Common distributions remained $0.15 per share quarterly ($0.45 for nine months).
- Cash flow: Nine-month operating cash flow was $145.0 million, up from $133.0 million. Investing used $191.4 million and financing used $160.4 million, producing a $206.9 million cash decrease. Cash and equivalents were $50.6 million at September 30, down from $257.5 million at year-end 2014.
- Debt and liquidity: Debt totaled approximately $2.45 billion: $645.1 million mortgage debt and $1.80 billion unsecured debt. Weighted-average interest rate was 5.0%, and weighted-average maturity was 6.3 years. The $600 million unsecured revolver had no borrowings at quarter-end; the company reported compliance with debt covenants. Debt maturities included $357.8 million in 2016 and $320.4 million in 2017.
- FFO: NAREIT FFO available to common unitholders was $76.9 million in Q3 versus $62.7 million, and $191.8 million for nine months versus $173.6 million.
Changes versus comparable periods
- Q3 revenue rose 4.1%, while nine-month revenue was essentially flat. Same-store occupancy improved, and same-store NOI increased $4.8 million in Q3 and $6.7 million year to date.
- Despite higher revenue, operating income declined in both comparisons, primarily reflecting higher depreciation and amortization. Interest expense fell $3.6 million in Q3 and $10.9 million for nine months, partly offsetting operating-income declines.
- Net income increased substantially, but comparisons include material non-operating items: $11.9 million of historic tax-credit transaction income in each reported period, higher property-disposition gains in 2015, and $2.5 million of 2015 impairment charges. Q3 2014 also included a $2.6 million debt-extinguishment loss.
- Core-property occupancy was 92.5% at September 30, 2015, compared with 91.4% at December 31, 2014. Nine-month combined rental rates on new/expansion and renewal leases rose 6.7%.
Outlook, management commentary, risks, and unusual items
- No specific earnings or FFO guidance is provided. Management said it was pursuing occupancy and rent growth and increased its 2015 disposition target to $400 million after selling $206.4 million of properties; six suburban New Jersey properties were under agreement for an expected $56.5 million.
- Development and investment activity was significant. The company acquired the remaining 50% of Broadmoor Austin Associates for an aggregate purchase price of $211.4 million and continued major development commitments, including the 870,000-square-foot FMC Tower project. Management cites construction costs and delays, leasing and financing availability, tenant defaults, interest rates, property values, and venture-partner performance as key risks.
- After quarter-end, the company repaid the $88.0 million Tysons Corner mortgage. It amended a $200 million term loan, added $50 million, and extended maturity to October 2022; the resulting $250 million balance was swapped to a fixed 3.72% rate.
- Other exposures include guarantees for certain venture debt and construction projects; up to $85 million of tenant-improvement obligations not yet completed; and a property put option requiring a $35 million purchase, plus costs, if exercised by May 2018. The filing reports routine litigation and no expected material adverse effect from current legal proceedings.
- The company repurchased 4.7 million common shares for $60.8 million during the first nine months. The Board’s authorization was up to $100 million, with $39.2 million remaining at September 30.
Investor facts to verify
- How much of earnings and FFO growth is recurring versus attributable to tax-credit income, property-sale gains, acquisitions, and other nonrecurring items.
- Lease-up, rent growth, tenant retention, and capital costs, particularly as leases expire and development projects move toward completion.
- Funding needs and refinancing plans for near-term maturities, development commitments, and the reduced cash balance; confirm continued covenant compliance.
- Completion and proceeds from the six properties held for sale, progress toward the $400 million disposition target, and any resulting impairment charges.
- Actual funding exposure from venture guarantees, tenant-improvement commitments, and the $35 million put option.