Business context and reporting period
Brandywine Realty Trust, a REIT operating through Brandywine Operating Partnership, L.P., filed this combined Form 10-K for the fiscal year ended December 31, 2019. The company owns, develops, leases and manages office and mixed-use properties, primarily in Philadelphia, its Pennsylvania suburbs, Austin and the Washington, D.C. region. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are noted below.
At year-end, the company owned 95 properties totaling approximately 16.7 million rentable square feet. Core properties were 93.0% occupied. The Trust owned 99.4% of the Operating Partnership.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $580.4 million | $544.3 million | Up 6.6% |
| Net income | $34.5 million | $135.5 million | Down 74.5% |
| Net income attributable to common shareholders | $33.9 million; $0.19 per diluted share | $134.1 million; $0.75 per diluted share | Down 74.7% per share |
| Funds from operations (FFO), available to common share and unit holders | $253.3 million; $1.43 per diluted share | $247.6 million; $1.37 per diluted share | Up 2.3% in dollars |
| Net operating income (NOI), company-reported non-GAAP measure | $354.6 million | $326.2 million | Up 8.7% |
| Same-store NOI | Down 0.3% | — | |
| Cash distributions declared per common share | $0.76 | $0.73 | Up 4.1% |
Operating cash flow was $234.2 million in the consolidated cash flow statement, compared with $227.3 million in 2018. Investing activities used $130.7 million and financing activities used $35.6 million; cash and restricted cash increased by $68.0 million to $91.2 million. The selected financial data elsewhere in the filing reports 2019 operating cash flow of $233.9 million, so the filing does not present a consistent figure.
Year-end total assets were $4.08 billion and total liabilities were $2.39 billion. Debt obligations were approximately $2.14 billion, versus $2.03 billion at year-end 2018. Debt was 97.5% fixed-rate, with a 3.8% weighted-average interest rate and 5.9-year weighted-average maturity. Cash and cash equivalents were $90.5 million; management reported $598.5 million of available credit-facility borrowings, net of letters of credit. The company stated it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue growth primarily reflected properties acquired or brought into the portfolio after January 2018, especially the Austin assets, partly offset by dispositions.
- Core occupancy slipped from 93.3% to 93.0%; tenant retention fell from 72.6% to 65.8%. Combined rental rates on new, expansion and renewal leases increased 12.1%, while leasing commissions and tenant-improvement costs per square foot rose.
- GAAP net income fell sharply, largely because 2018 included $142.2 million of real-estate-venture transaction gains and a $28.3 million promoted-interest gain. In 2019, corresponding venture transaction gains were $11.6 million. Conversely, 2018 included $71.7 million of impairment charges; none were recorded at the consolidated property level in 2019.
- Depreciation and amortization increased $34.0 million, primarily reflecting acquired and recently completed properties. Real estate taxes increased $11.0 million, including higher assessments and acquired properties.
- Debt increased as the company issued an additional $100 million of 4.10% notes due 2024 and $100 million of 4.55% notes due 2029. The company reported no borrowings under its $600 million revolving facility at year-end.
- The company corrected prior-period errors related to acquisition purchase-price allocation and depreciable lives. It revised the 2017 and 2018 comparative financial statements; the filing says the errors were immaterial to those previously issued statements. Adoption of lease accounting guidance also resulted in a $5.3 million cumulative-effect reduction to equity.
Outlook, risks and unusual items
No specific 2020 earnings or FFO guidance is provided in the filing. Management said it expects liquidity needs to be met through operating cash flow, available cash, financing and selective asset sales, and stated that it believes capital is sufficient for remaining committed development projects and potential attractive investments. It cautioned that weaker economic conditions could increase vacancies and concessions, reduce effective rents and raise tenant-installation costs, potentially pressuring cash flow and covenant compliance.
Development and redevelopment underway included approximately 0.6 million square feet. The company identified The Bulletin Building redevelopment and 405 Colorado Street development as projects expected to complete in 2020, with estimated total costs of $84.8 million and $114.0 million, respectively. Development commitments and other contractual obligations were substantial; the filing lists $172.0 million of development contracts, including $112.2 million due within one year.
Debt maturities include $87.2 million in 2020, $256.3 million in 2022 and $556.7 million in 2023. The company also disclosed a $41.3 million payment guarantee on the 4040 Wilson venture’s construction loan, along with customary completion, cost-overrun and environmental guarantees. Other notable matters include the possible assumption of title to Two Logan Square and a related $2.9 million payment, tax-protection restrictions on certain property sales and a $20.3 million contracted property acquisition expected to close in 2020.
Key risks include office demand and tenant credit, lease rollover, development costs and lease-up, interest rates and refinancing, property impairments, joint-venture exposure, environmental and climate-related events, cybersecurity and continued qualification as a REIT. The auditor identified real-estate and unconsolidated-venture impairment assessments as a critical audit matter because they involve significant judgment and assumptions. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the cash-flow disclosure: selected financial data gives operating cash flow of $233.9 million, while the cash flow statement and MD&A give $234.2 million.
- Review the 2023 debt maturity concentration and the company’s refinancing plans, as well as covenant headroom and the terms of available credit.
- Assess leasing and tenant-credit trends, particularly the lower retention rate, occupancy decline and 2020 lease expirations representing 6.9% of year-end annualized base rent.
- Track committed development spending, completion and lease-up progress, and the venture guarantees and other contingent commitments.
- Distinguish recurring property performance and FFO from GAAP net income, which was materially affected by venture gains in 2018 and impairment charges in that year.
- Review the corrected prior-period statements and the assumptions underlying property and joint-venture valuations, given the audit focus on impairment judgments.