Brandywine Realty Trust — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Brandywine is an office and mixed-use REIT operating primarily in Philadelphia, its suburbs, Austin, and the Washington, D.C. area. At quarter-end it owned 92 properties totaling approximately 14.7 million rentable square feet; core-property occupancy was 91.0%.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $126.1 million | $145.3 million | $408.0 million | $433.4 million |
| Net income attributable to common shareholders | $274.4 million | $6.7 million | $286.2 million | $17.2 million |
| Diluted earnings per share | $1.60 | $0.04 | $1.66 | $0.10 |
| Net operating income (NOI) | $77.1 million | $89.3 million | $249.6 million | $262.7 million |
| Funds from operations available to common shareholders and units | $60.0 million | $64.0 million | $179.1 million | $186.3 million |
- Reported earnings included a $271.9 million gain from the Commerce Square transaction; therefore, GAAP net income and EPS substantially overstate the period’s recurring operating performance. FFO, a non-GAAP measure, declined about 6% for the quarter and 4% year to date.
- Revenue fell 13.2% in Q3 and 5.8% year to date. Q3 portfolio NOI declined 13.6%; nine-month NOI declined 4.9%. Same-store NOI was down 3.3% in Q3 and approximately flat year to date.
- Nine-month operating cash flow was $162.5 million, versus $155.3 million in 2019. Investing activities used $24.0 million and financing activities used $166.6 million. Cash and restricted cash totaled $63.0 million at period-end, down from $91.2 million at year-end 2019.
- Debt obligations were approximately $1.92 billion at quarter-end, with a 3.8% weighted-average interest rate and 5.4-year weighted-average maturity. Approximately 97.2% of principal was fixed rate. The company reported no revolver borrowings and $598.4 million of available capacity, net of letters of credit, and said it complied with debt covenants.
- Total assets were $3.99 billion and total liabilities were $2.18 billion. The quarterly distribution declared was $0.19 per share.
Material changes and unusual items
- On July 21, Brandywine sold a 30% preferred equity interest in One and Two Commerce Square for $115 million gross proceeds (about $100.8 million net cash proceeds). The transaction valued the properties at $600 million, deconsolidated the properties and related mortgages, and generated the $271.9 million accounting gain. Brandywine retained approximately 70% combined equity ownership but accounts for the venture under the equity method because the outside investor has substantive participating rights.
- Property dispositions, including Commerce Square, contributed to lower rental revenue; other reported drivers included reduced parking income, a large tenant termination in the D.C. segment, and COVID-related weakness in FMC Tower’s hotel, residential, and restaurant components. Q3 equity-method losses increased to $5.8 million from $2.0 million.
- Core occupancy declined to 91.0% from 93.2% a year earlier. Nine-month tenant retention was 53.4% versus 72.2%; net absorption was negative 150,576 square feet versus positive 116,164 square feet. Rental rates on leases signed rose, but leasing activity and occupancy remain important to monitor.
- The company repurchased 6.25 million shares for $60 million during the first nine months, at an average $9.60 per share. No repurchases occurred in Q3; $82.9 million remained authorized at quarter-end.
Outlook, risks, and contingencies
- No specific earnings or full-year financial guidance is provided in the supplied filing text. Management said it expected liquidity needs to be met through operating cash flow, cash balances, venture distributions, available credit, financing, and asset sales.
- COVID-19 was identified as a significant uncertainty, with potential effects on tenant credit and rent payments, leasing demand, occupancy, effective rents, development schedules, and access or cost of financing. The company collected 99.5% of Q3 cash-based rent due; approximately 97% of October cash-based rent had been received to date, including 97% from office tenants.
- Rent relief had been provided to 59 tenants covering approximately 0.9 million square feet, totaling $4.5 million; relief was primarily deferrals, with some abatements. Deferrals represented approximately 0.9% of annualized revenue. Recovery and outcomes of ongoing tenant negotiations were uncertain.
- Development projects included 405 Colorado Street (estimated cost $116 million; $58 million funded; expected completion Q1 2021) and 3000 Market Street (estimated cost $38 million; $16.3 million funded; expected completion Q1 2021). COVID-related construction moratoriums had been lifted in the company’s active development markets, but could return.
- After quarter-end, on October 21, the company acquired the $79.8 million Two Logan Square mortgage at par, using cash and credit-facility proceeds. It also reported a $20.3 million Radnor acquisition under contract, expected to close in Q4, and a $20 million additional preferred-equity commitment to Commerce Square.
- Real estate ventures had approximately $842 million of aggregate debt, generally nonrecourse except for customary carve-outs. Brandywine guaranteed up to $41.3 million of a $150 million construction loan for 4040 Wilson and also provided certain completion and cost-overrun guarantees. The filing said routine litigation was not expected to materially affect the company.
Important facts for investors to verify
- Underlying operating trends excluding the Commerce Square gain, particularly FFO, same-store NOI, occupancy, retention, and leasing activity.
- Tenant rent collections, repayment of deferred rent, and any further concessions as pandemic-related conditions evolve.
- Execution and funding of development projects and the Radnor acquisition, alongside the additional Commerce Square investment commitment.
- Debt maturities, refinancing plans, revolver availability, and the effect of acquiring the Two Logan Square mortgage on liquidity and debt service.
- Performance and financing exposure of unconsolidated ventures, including the 4040 Wilson guarantees and Commerce Square’s equity-method results.