Brandywine Realty Trust — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Brandywine Realty Trust is a REIT operating through Brandywine Operating Partnership, L.P. At quarter-end, the Trust owned 93.1% of the partnership. Amounts below are in millions unless stated otherwise.
Business context and operating performance
The company owned 235 properties totaling approximately 25.8 million net rentable square feet and held interests in 17 unconsolidated real estate ventures with approximately 6.5 million square feet. Its core portfolio occupancy was 85.3% at March 31; average occupancy for the quarter was 85.1%, compared with 87.9% in Q1 2010.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $148.6 | $141.4 | +$7.1, about 5.0% |
| Operating income | $28.5 | $24.6 | +$3.9 |
| Operating margin | 19.2% | 17.4% | Calculated from reported figures |
| Net operating income (NOI) | $86.4 | $82.7 | +$3.7 |
| Loss from continuing operations | $(0.4) | $(7.0) | Improved |
| Net loss | $(0.5) | $(0.4) | Loss increased slightly |
| Net loss attributable to common shareholders | $(2.6) | $(2.5) | Loss per share $(0.02) in both periods |
Revenue growth reflected $9.7 million from Three Logan Square and the IRS Philadelphia Campus and Cira South Garage, acquired or placed in service in 2010. Same-store cash rents fell $4.6 million, principally as same-store occupancy declined 250 basis points. Real estate taxes increased $1.7 million. A $2.8 million gain from selling a retained interest in three properties benefited Q1 2011 continuing results; Q1 2010 included a $6.3 million gain in discontinued operations.
Cash flow, debt and liquidity
- Operating cash flow was $57.7 million, versus $39.9 million. Investing used $62.5 million and financing used $11.6 million; cash declined $16.3 million to $0.2 million from $16.6 million at year-end.
- Capital expenditures were $33.8 million, property acquisitions used $22.0 million, and leasing costs used $4.8 million. Cash distributions paid to shareholders were $22.3 million.
- Total debt obligations were $2.441 billion at March 31, up from $2.430 billion at December 31. The reported weighted-average rate was 5.3%; 78.8% was fixed-rate or swapped to fixed, and 21.2% was unhedged variable-rate debt.
- Credit facility borrowings were $197.0 million; after $10.3 million of letters of credit, $392.7 million of the $600 million facility remained available. The company reported compliance with all financial covenants.
- The credit facility and $183 million bank term loan were extended from June 2011 to June 2012, subject to extension fees. The company reported $615 million of unsecured debt and $170.5 million of mortgage debt maturing through December 2012.
- On April 5, after quarter-end, the company issued $325 million of 4.95% senior notes due 2018 at an effective rate of 5.137%. Net proceeds of $318.9 million were used to repay credit-facility debt and for general purposes. On April 1, it also prepaid the remaining Arboretum mortgage balance without penalty.
Changes, outlook, risks and unusual items
- Management expected vacancy risk to persist through 2011 and possibly beyond, with potential tenant defaults, lower occupancy and effective rents, and higher tenant-improvement costs. It provided no quantified earnings or operating guidance.
- Leases representing 5.9% of annualized base rent expired without penalty in 2011. Q1 core-portfolio tenant retention was 68.2%.
- Development and leasing commitments included $0.5 million remaining on a garage redevelopment and an expected $12.7 million of 2011 tenant improvements and leasing costs for five recently completed developments.
- Two land parcels under development agreements require construction to start by December 31, 2012; otherwise, absent an extension, $7.7 million of preparation costs could be written off.
- The Broadmoor venture investment was not impaired at quarter-end, but ongoing lease-renewal negotiations could lead to a potentially material impairment. The company also disclosed a $0.7 million guarantee of venture loans and a $20 million remaining preferred-equity funding commitment expected by the end of 2012.
- A $0.5 million prior-period electricity underbilling adjustment was recorded in Q1 2011; management said the current- and prior-period effects were not material. No impairment charges were recorded in Q1.
- Historic and New Markets tax-credit arrangements carry compliance and recapture risks through 2015. Management did not anticipate material refunds or reductions in investor contributions. The IRS’s proposed adjustment in a 2004 tax audit was under appeal; the filing said it would not create a material tax liability if upheld, though a related tax-protection claim could arise.
- Management cited restricted financing availability, higher borrowing costs, interest-rate exposure, covenant risk, tenant credit and rollover risk, and possible property-value declines. It stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether occupancy and leasing improve, especially given the 85.3% quarter-end core occupancy, lower year-over-year average occupancy, and 2011 lease expirations.
- How the April 2018 note issuance affected credit-facility borrowings and refinancing needs, including maturities through 2012 and the October 2011 redemption option on the exchangeable notes.
- Whether operating cash flow can sustain distributions and fund capital, tenant-improvement, development and joint-venture commitments.
- The outcomes of the Broadmoor lease negotiations, the two land-development deadlines, the IRS tax audit appeal and ongoing tax-credit compliance.
- Reported net loss excludes the importance of noncash depreciation and amortization; the filing does not provide a funds-from-operations (FFO) figure in the supplied text.