Brandywine Realty Trust — Q3 2011 Form 10-Q
Business context and reporting period. This combined filing covers Brandywine Realty Trust and its operating partnership for the quarter and nine months ended September 30, 2011. The REIT conducts its business through the partnership. At quarter-end, the company owned 236 properties totaling approximately 25.9 million rentable square feet and held interests in 16 unconsolidated ventures with approximately 6.1 million square feet.
Financial and operating performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $145.7 million | $141.5 million | $439.3 million | $418.0 million |
| Operating income | $27.6 million | $26.6 million | $80.9 million | $75.7 million |
| Net income (loss) | $6.6 million | ($6.6 million) | ($0.1 million) | ($12.6 million) |
| Net income (loss) attributable to common shareholders | $4.1 million | ($8.6 million) | ($6.6 million) | ($18.6 million) |
| FFO available to common shareholders and unit holders | $60.3 million | $45.6 million | $156.0 million | $137.9 million |
Amounts are in millions. FFO is a non-GAAP measure. Q3 total revenue rose 3.0%; nine-month revenue rose 5.1%. Nine-month net operating income (NOI) increased to $263.2 million from $249.2 million, while same-store NOI declined to $226.0 million from $236.2 million.
- Occupancy and leasing: Wholly owned portfolio occupancy was 85.6% at quarter-end. Nine-month lease retention was 67.0%. Same-store cash rents fell $13.8 million year over year for the nine months; management cited lower renewal rates and free-rent periods. Nine-month renewal rental rates declined 2.2%.
- Cash flow: Nine-month operating cash flow was $156.0 million, investing cash use was $162.5 million, and financing cash use was $4.4 million. Cash declined by $10.9 million to $5.7 million.
- Debt and liquidity: Debt carrying value was $2.492 billion, versus $2.430 billion at December 31, 2010. Fixed-rate debt was 82.9%; unhedged variable-rate debt was 17.1%. The $600 million credit facility had $166.0 million drawn and $423.4 million of unused availability after letters of credit. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $4.704 billion, total liabilities $2.783 billion, and total equity $1.921 billion. Real estate investments, net, were $4.217 billion.
Material changes and unusual items
- Q3 results included $12.0 million of historic tax-credit transaction income, to be recognized annually over the five-year recapture period. This materially contributed to the quarter’s return to net income.
- In April, the partnership issued $325 million of 4.95% senior notes due 2018; net proceeds of $318.9 million went primarily to credit-facility repayment and general corporate purposes. The facility and $183 million bank term loan were extended to June 29, 2012.
- The company prepaid several mortgages and repurchased $24.3 million principal amount of unsecured notes during the nine months. Approximately $561.1 million of unsecured debt and $15.3 million of mortgage principal were scheduled to mature through December 2012.
- Management recorded a $4.7 million out-of-period depreciation and amortization adjustment in Q2 related to intangible assets that should have been written off in earlier periods, and a $0.5 million prior-year electricity-reimbursement adjustment in Q1. Management considered the adjustments immaterial to prior periods and the current statements.
- The company declared a quarterly common distribution of $0.15 per share, paid October 19, 2011. It sold no shares under its continuous offering program in Q3; nine-month proceeds were $8.0 million.
Outlook, risks and contingencies
No specific earnings or operating guidance was provided. Management expected economic weakness and financial-market volatility to continue pressuring occupancy, effective rents, tenant credit and financing availability, potentially through 2012 and beyond. It said operating cash flows, financing and selective property sales were expected to meet liquidity needs, but acknowledged that financing or asset sales might not be available on attractive terms or at all.
- Near-term refinancing is important: the credit facility and bank term loan mature in June 2012, and management was exploring refinancing options. Scheduled 2012 debt principal payments were approximately $513.7 million.
- Development and leasing risks include four recently completed projects totaling 0.7 million square feet still being leased up, with an estimated $8.4 million of additional 2011 tenant-improvement and leasing costs. Two land parcels require development commencement by December 31, 2012; failure to proceed or obtain an extension could result in a $7.7 million cost write-off.
- A $7.2 million mortgage note receivable was in forbearance after borrower default. Management judged the note recoverable based on collateral value, but further housing-market deterioration or borrower nonperformance could cause a material impairment.
- Other exposures include tax-credit compliance and potential recapture, an IRS audit of the 2004 tax year, tax-protected property-sale restrictions, ground-lease obligations, and guarantees of approximately $0.7 million for a venture. Management did not expect material effects from routine litigation or the IRS adjustment as described.
- After quarter-end, holders redeemed $59.5 million of exchangeable notes at par, leaving approximately $0.4 million outstanding. On October 28, the company sold two New Jersey properties for $22.8 million.
Important facts for investors to verify
- Progress and terms of refinancing the 2012 maturities, and continued compliance with credit-facility and note covenants.
- Whether occupancy, same-store rents, renewal pricing and retention improve from the reported levels.
- Cash available after capital expenditures, leasing costs, debt service and distributions, given only $5.7 million of reported cash.
- The sustainability and timing of historic tax-credit income, including compliance with recapture requirements through 2015.
- Collection of the defaulted $7.2 million note and the status of the land-development commitments and potential $7.7 million write-off.
- Effects of the October note redemption and property sales on debt, liquidity and future recurring revenue.