Business context and reporting period
Brandywine Realty Trust, a REIT, conducts its business through Brandywine Operating Partnership, L.P.; the combined filing reports them as one enterprise. For the quarter and six months ended June 30, 2017, the company owned 99 properties totaling approximately 16.4 million net rentable square feet and held interests in 13 unconsolidated real estate ventures. Its portfolio is concentrated in Philadelphia, the Pennsylvania suburbs, Washington, D.C., Austin, and other markets.
Financial and operating performance
- Second-quarter revenue: $127.8 million, up 0.5% from $127.2 million a year earlier. Operating income was $26.3 million versus $18.3 million; net income was $7.7 million versus a $1.3 million loss. Net income attributable to common shareholders was $4.1 million, or $0.02 per share, compared with a $3.1 million loss, or $(0.02) per share.
- First-half revenue and earnings: Revenue was $258.7 million, down 1.9% from $263.7 million. Net income was $29.0 million versus $45.0 million, and common-shareholder income was $23.4 million, or $0.13 per share, versus $41.0 million, or $0.23 per share. The prior-year comparison included a large property-sale gain and a $66.6 million loss on early debt extinguishment.
- Property operations: First-half net operating income (NOI), a non-GAAP measure, was $157.0 million versus $158.7 million; same-store NOI increased $3.6 million. Core-property occupancy was 92.2% at June 30, 2017, compared with 92.1% a year earlier. First-half retention improved to 69.9% from 63.2%, while net absorption remained negative at 166,113 square feet.
- Cash flow and liquidity: First-half operating cash flow was $82.2 million, compared with $83.4 million. Investing activities provided $24.8 million, versus $600.3 million, largely reflecting far lower property-sale proceeds than in 2016. Financing used $263.1 million. Cash declined to $37.9 million from $193.9 million at year-end. The company reported $387.6 million of unused revolving-credit availability, in addition to cash.
- Debt and distributions: Total debt principal was $1.926 billion at June 30, with a 4.1% weighted-average interest rate and 5.9-year weighted-average maturity. Of total debt, 89.6% was fixed-rate and 10.4% was unhedged variable-rate. The $600 million revolver had $200 million drawn and $12.4 million in letters of credit. The company repaid $300 million of notes at maturity and redeemed $100 million of preferred shares during the first half. The quarterly common distribution was $0.16 per share.
- Funds from operations: First-half FFO available to common shareholders and unit holders was $113.5 million versus $45.7 million; second-quarter FFO was $57.4 million versus $57.4 million. FFO is non-GAAP and should be considered with GAAP results and cash flows.
Material changes, outlook, and risks
- Portfolio dispositions during the first half included 14 properties and three land parcels. Proceeds from property sales were $102.1 million, well below the unusually high $748.4 million in the prior-year period. The company also sold its 50% interest in a multifamily venture, recognizing a $14.6 million gain.
- Management cited same-store rent growth and free rent converting to cash rent, partly offset by dispositions. Rental-rate growth on new, renewed, and combined leases slowed from the prior-year levels. No quantified earnings guidance is provided. Management said available cash, credit capacity, operating cash flow, financing, and selective asset sales were expected to meet near-term needs, while cautioning that economic weakness could pressure occupancy, rents, tenant credit, and cash flow.
- Development and leasing carry execution and funding risks, including construction delays, cost overruns, leasing uncertainty, and partner disagreements. The company reported $109.7 million of contractual development obligations, plus $52.8 million of tenant improvements not yet completed and expected $18.0 million of capital improvements. It also provided guarantees on certain venture debt, including a $55.4 million payment guarantee and a joint-and-several cost-overrun guarantee related to an $88.9 million construction loan.
- A Section 1031 exchange for the Concord Airport Plaza sale remained incomplete at filing. If a replacement property was not acquired by August 1, 2017, the company could owe $13.5 million in taxes; management said it did not consider that outcome probable. Separately, a $35.0 million property put option remains exercisable through May 4, 2018. On July 18, 2017, the company completed the sale of the 50-acre Bishops Gate parcel for $6.0 million, with no gain or loss expected.
- The filing disclosed an out-of-period adjustment: $1.2 million of impairment was recorded in the prior-year fourth quarter but should have been recorded in first-quarter 2017; $1.9 million of tenant-improvement depreciation recorded in second-quarter 2017 should have been recorded in first-quarter 2017. Management judged the errors immaterial to the affected periods. A $3.2 million preferred-share redemption charge also reduced first-half common earnings.
- Management reported compliance with debt covenants at June 30, 2017. Risks include covenant compliance if conditions deteriorate, interest-rate exposure, reliance on credit markets, and possible tenant defaults or rent pressure. The filing reported no legal proceedings expected to materially affect the company.
Important facts for investors to verify
- Confirm completion and tax treatment of the Concord Airport Plaza 1031 exchange, including whether the potential $13.5 million tax payment was avoided.
- Review upcoming debt maturities, particularly $325 million due in 2018 and the $200 million revolver balance scheduled to mature in 2019, and assess refinancing plans and covenant headroom.
- Track occupancy, leasing spreads, retention, and absorption, including the filing’s differing occupancy comparisons across its operating disclosures.
- Assess development funding, completion timing, cost-overrun exposure, venture guarantees, and the remaining tenant-improvement and capital-improvement obligations.
- Consider the timing adjustments and the preferred redemption charge when evaluating quarterly earnings and comparability with prior periods; reconcile GAAP earnings with NOI and FFO.