Brandywine Realty Trust — Q2 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2012. Brandywine is a REIT operating primarily through Brandywine Operating Partnership, L.P. At quarter-end, the company owned 230 properties with approximately 24.9 million rentable square feet and held interests in 18 unconsolidated ventures with approximately 6.5 million square feet.
Financial and operating performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $137.6 million | $139.2 million | $277.0 million | $280.9 million |
| Operating income | $28.9 million | $23.2 million | $57.9 million | $49.8 million |
| Net income (loss) | $6.8 million | ($6.2 million) | $16.1 million | ($6.7 million) |
| Net income (loss) attributable to common shareholders | $1.5 million | ($8.2 million) | $8.6 million | ($10.8 million) |
| Common-share earnings (loss) per share | $0.01 | ($0.06) | $0.06 | ($0.08) |
| Net operating income (NOI) | $84.3 million | $84.8 million | $168.9 million | $167.1 million |
| FFO available to common shareholders and units | $44.6 million | $47.5 million | $91.7 million | $95.7 million |
Margins and property operations. NOI was approximately 61% of revenue in both Q2 and the first half of 2012, based on reported figures. Same-store NOI increased $0.7 million in Q2 and $4.4 million in the first half. Wholly owned property occupancy was 86.9% at June 30; same-store occupancy was 87.1% in Q2 versus 85.5% a year earlier. First-half leasing retention was 68.9%.
Cash flow and liquidity. First-half operating cash flow was $75.6 million, down from $88.3 million. Investing activities provided $10.0 million, compared with $97.3 million used in the prior-year period, reflecting property-sale proceeds and securities transactions. Financing activities provided $104.0 million; cash rose to $190.1 million from $0.4 million at year-end 2011. The company reported $596.8 million of unused availability under its new revolving credit facility, net of letters of credit.
Debt. Debt obligations totaled approximately $2.51 billion at June 30, up from $2.39 billion at December 31, 2011. The company reported 96% fixed-rate debt, including debt hedged to fixed rates, and a 5.3% weighted-average period-end interest rate. Unhedged variable-rate debt was $100 million. The company said it was in compliance with debt covenants.
Material changes versus the prior comparable period
- First-half revenue decreased $3.9 million, while NOI increased $1.8 million. Lower tenant reimbursements, termination fees and cash rents were partly offset by higher straight-line rent and lower property operating costs.
- Operating income improved, in part because depreciation and amortization declined; management attributed much of the decrease to fewer lease-termination write-offs and a $4.7 million prior-year out-of-period depreciation adjustment.
- Reported net income improved substantially, but results included $24.8 million of first-half gains reported in discontinued operations, including a deferred gain recognized after repayment of a note related to earlier property sales. Continuing operations remained loss-making: $10.5 million for the first half.
- First-half FFO available to common holders declined to $91.7 million from $95.7 million.
- The company refinanced in February 2012: it closed a $600 million revolving credit facility and $600 million of term loans, and used term-loan proceeds to repay and terminate its former facility and term loan. It also repaid 2012-maturity notes and repurchased $14.7 million principal of other unsecured notes.
Outlook, risks and unusual items
- Management provided no specific earnings or FFO guidance. It expected economic weakness and financial-market volatility could continue to pressure occupancy, effective rents, tenant credit and cash flows; vacancy could rise and tenant installation costs could increase.
- Three properties were sold during the first half. Eleven Exton, Pennsylvania flex/office properties were classified as held for sale at June 30 and sold on July 18, 2012 for $52.7 million.
- Occupancy, leasing and development risks remain material. Leases representing approximately 4.8% of annualized base rent expired without penalty during 2012. Two parcels subject to development agreements require development to commence by December 31, 2012; failure to proceed or obtain an extension could require a $7.9 million write-off.
- A $7.2 million purchase-money mortgage is subject to a troubled-debt-restructuring forbearance after borrower default. The company considered the note recoverable at June 30 based on its cash-flow analysis, but warned deterioration in the housing market could result in a material loss.
- Other risks include refinancing and covenant compliance, interest-rate changes, tenant defaults, real estate venture exposure, potential impairment, REIT qualification, tax-credit compliance and restricted-property sale obligations. The company reported no impairment charge for the periods presented and no material change to previously disclosed risk factors.
- Unrealized derivative losses were $10.6 million in first-half comprehensive income, primarily reflecting changes in interest-rate swap fair values. The filing says derivatives are used for hedging, not speculation.
Important facts for investors to verify
- How much of reported earnings and per-share improvement reflects property operations versus disposition and deferred gains in discontinued operations?
- Whether occupancy, renewal spreads, retention and same-store NOI trends persist, and how the July sale affects the portfolio’s recurring rent base.
- Debt maturities, refinancing terms, covenant headroom and actual borrowing availability under the revolving facility.
- Collection progress and assumptions supporting the recoverability of the $7.2 million mortgage note, and progress on the two development parcels before the deadline.
- Cash available for distributions after recurring capital expenditures, tenant improvements, leasing costs and debt service; first-half FFO declined despite positive GAAP net income.