Brandywine Realty Trust — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 25, 2013. The filing covers the full year, with quarterly results also provided. Brandywine is a self-managed REIT focused primarily on office properties and operates through Brandywine Operating Partnership, L.P.
Business context and portfolio
At year-end, the company owned 221 properties containing approximately 25.1 million rentable square feet, with 88.3% occupancy. Its properties and ventures are concentrated in the Philadelphia region, Washington, D.C., New Jersey/Delaware, Richmond, Austin, and California. It also held interests in 19 unconsolidated ventures and managed approximately 7.4 million square feet for third parties and ventures.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $559.8 million | $561.8 million |
| Operating income | $118.2 million | $100.0 million |
| Net income (loss) | $6.5 million | ($4.7 million) |
| Net loss attributable to common shareholders | ($8.2 million); ($0.06) per share | ($13.0 million); ($0.10) per share |
| Net operating income (NOI, non-GAAP) | $339.4 million | $334.9 million |
| Cash from operating activities | $157.3 million | $178.7 million |
| Funds from operations available to common holders (FFO, non-GAAP) | $170.5 million | $203.4 million |
| Total indebtedness at year-end | $2.465 billion | $2.394 billion |
Total revenue declined about 0.3%, while operating income rose; reported operating margin was approximately 21.1% of revenue and NOI was approximately 60.6%. Same-store occupancy increased 190 basis points to 88.3%; combined new and renewal rental rates increased 2.0%. Common distributions remained $0.60 per share for the year ($0.15 quarterly).
Year-end assets were $4.507 billion, liabilities $2.733 billion, and cash and cash equivalents $1.5 million. The $600 million unsecured revolving facility had $69 million drawn and $530.1 million of stated unused availability, including the effect of letters of credit. The weighted-average interest rate on total debt was 5.1%; 93.2% of debt was fixed-rate, with $169 million unhedged variable-rate debt.
Material changes and unusual items
- NOI increased $4.5 million year over year, supported by higher same-store occupancy and lower property operating expenses. Mild winter conditions, lower utility costs, and reduced repairs and maintenance contributed to the expense decline.
- Cash from operations fell $21.5 million. FFO available to common holders declined $32.9 million, despite higher NOI.
- Net income included $36.7 million from discontinued operations, including a $34.8 million disposition gain. Continuing operations recorded a $30.2 million loss.
- The company refinanced its credit arrangements, issued $250 million of 3.95% notes due 2023, and repurchased approximately $165 million of unsecured notes. Early debt extinguishment losses were $22.0 million; repayment of a term-loan portion also resulted in a $3.0 million hedge-termination charge.
- It issued $96.3 million net proceeds of 6.90% Series E preferred shares, redeemed Series C and D preferred shares, and recorded a $4.1 million preferred-share redemption charge.
- Fourteen properties were sold for approximately $175.8 million in stated sales prices; acquisitions included Austin and Philadelphia office properties. Two properties totaling approximately 611,000 square feet were under redevelopment at year-end.
- Fourth-quarter 2012 revenue was $142.5 million and net loss was $26.7 million, or $0.21 per common share. The quarter included a $0.6 million out-of-period deferred-compensation expense adjustment; management said the adjustment was not material.
Outlook, risks and contingencies
Management described economic growth and credit conditions as uncertain and warned that vacancy could rise, effective rents could fall, and tenant installation costs could increase during 2013 and beyond. It expected to fund liquidity needs through operating cash flow, available credit, selective property sales, and debt or equity financing. No specific earnings or FFO guidance was provided.
Key exposures include office-market demand and lease renewals, tenant credit and defaults, refinancing and interest-rate risk, development costs and lease-up, joint-venture performance, and access to capital. Approximately 8.5% of year-end annualized base rent was scheduled to expire in 2013; 2012 lease retention was 66.2%. Two land-option development agreements were extended to December 31, 2015, with a $3.5 million extension fee; $13.6 million of preparation costs could be written off if development does not proceed and no further extension is secured. Management reported compliance with debt covenants at year-end. It expected no material liability from the pending IRS audit settlement; routine litigation was not expected to have a material adverse effect.
Investor facts to verify
- Reconcile the full-year GAAP net income to the common-shareholder loss, and assess how much reported earnings depended on asset-sale gains and discontinued operations.
- Review the decline in operating cash flow and FFO, and compare recurring cash generation with distributions, capital spending, leasing costs, and debt service.
- Confirm debt maturities, refinancing assumptions, covenant headroom, credit-facility availability, and the effect of variable rates and hedge arrangements.
- Track 2013 lease expirations, tenant retention, occupancy, rental-rate spreads, tenant receivables, and the $16.6 million doubtful-account allowance.
- Monitor redevelopment progress and costs, the two land-option commitments, and the potential write-off of $13.6 million in development preparation costs.
- Assess venture funding needs and contingent exposure, including guarantees, tax-credit compliance obligations, and restrictions on sales or refinancing of certain properties.