Brandywine Realty Trust — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; the filing also reports fourth-quarter results. The combined filing covers Brandywine Realty Trust and its operating partnership, which are managed as one enterprise. Brandywine is a REIT focused primarily on office properties in the Philadelphia, Washington, D.C., New Jersey/Delaware, Richmond, Austin and California markets.
Business context and portfolio
- At year-end, the company owned 200 properties totaling approximately 25.1 million rentable square feet. Its core portfolio was 93.0% leased; the broader property portfolio was reported as approximately 91.4% occupied.
- The company held interests in 17 unconsolidated real estate ventures with approximately 6.7 million square feet and managed about 8.9 million square feet for third parties and ventures.
- No single tenant represented more than 10% of 2014 revenue. The largest tenant, the U.S. General Services Administration, represented 7.0% of aggregate annualized base rent.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $597.0 million | $562.2 million |
| Net operating income (NOI) | $361.0 million | $340.4 million |
| Income from continuing operations | $6.0 million | $39.0 million |
| Net income | $6.9 million | $43.2 million |
| Net income attributable to common shareholders | Loss of $0.3 million | $35.5 million income |
| Operating cash flow | $189.0 million | $183.5 million |
| Capital expenditures for tenant improvements, redevelopment and development, plus leasing costs | $261.8 million | $152.5 million |
| Total indebtedness | $2.45 billion | $2.60 billion |
| Cash and cash equivalents at year-end | $257.5 million | $263.2 million |
| FFO available to common shareholders and unit holders | $227.7 million | $210.4 million |
Revenue increased 6.2%, and NOI increased 6.0%; NOI was approximately 60.5% of revenue. Common-share earnings were effectively break-even for the year: reported EPS was $0.00, including a $0.01 loss per share from continuing operations and $0.01 per share from discontinued operations. The $0.60 annual common distribution was unchanged from 2013.
Fourth quarter: Revenue was $147.8 million versus $138.7 million in fourth-quarter 2013. Net income was a loss of $1.9 million, compared with $21.0 million of net income a year earlier; income allocated to common shares was a loss of $3.6 million, or a loss of $0.02 per share, versus $19.0 million, or $0.12 per share. The large year-over-year decline in quarterly earnings merits review of transaction gains and other non-recurring items.
Operating cash flow rose modestly, while investing activities used $270.8 million, primarily reflecting development spending, capital improvements and venture investments, partly offset by asset-sale proceeds. Financing activities provided $76.1 million. The company had no year-end borrowings on its $600 million revolving credit facility and reported $595.7 million of unused availability after letters of credit. It reported compliance with debt covenants.
Material changes and notable transactions
- Occupancy in the core portfolio increased to 91.4% from 89.5%. Same-store rental revenue grew, supported by higher occupancy; same-store NOI increased by $8.1 million.
- Leasing activity expanded: new leases and expansions commenced covered 2.0 million square feet, renewals covered 1.7 million square feet, and net absorption was 504,000 square feet. Combined rental rates on new, expansion and renewal leases increased 8.5%; tenant-improvement and leasing-commission costs per square foot also rose materially.
- The company issued 21.85 million common shares for net proceeds of $335.0 million. It also issued $500 million of notes due 2024 and 2029, using proceeds and cash to repay or redeem older notes, and repaid $250 million of term loans early. Debt declined year over year, but the refinancing and early repayments contributed to a $7.6 million loss on extinguishment of debt.
- Development investment increased substantially. The FMC Tower in Philadelphia was estimated to cost $385 million, with $47.6 million funded by year-end and 60% of office space pre-leased. Encino Trace in Austin was estimated to cost $87.4 million, with $38.8 million funded and one building 75% pre-leased.
- 2014 dispositions generated approximately $117.9 million in aggregate net cash proceeds, including property sales and land sales. The company sold two additional New Jersey office properties in January 2015 for $28.3 million, reporting a $9.0 million gain.
Outlook, risks and contingencies
- No numerical earnings or FFO guidance is provided. Management described the economic recovery as modest and cautioned that vacancy, rent concessions, tenant costs and financing conditions could pressure future revenue and cash flow.
- Management’s stated priorities include strengthening liquidity and the balance sheet through capital retention, debt reduction and selective asset sales, while pursuing selective development and acquisition opportunities. Management noted that funding growth depends on operating cash flow and access to capital markets.
- Debt maturities include approximately $102.0 million in 2015, $367.7 million in 2016, $330.3 million in 2017 and $337.0 million in 2018. The 2016 schedule includes significant mortgage debt; verify refinancing plans and available liquidity.
- Contractual commitments included $402.1 million of development contracts, of which $251.1 million was scheduled within one year, and $86.3 million of tenant-improvement obligations not included in the commitments table. The filing also describes venture guarantees, including a $24.7 million payment guarantee for evo at Cira and a $3.2 million guarantee for the Plymouth Meeting project, plus completion and cost-overrun guarantees.
- Key risks include office-market weakness, lease rollover and tenant defaults, development cost overruns or delays, interest-rate and refinancing exposure, venture-partner risks, property impairment, environmental liabilities, insurance limitations and maintaining REIT status. Approximately 5.2% of year-end annualized base rent was scheduled to expire in 2015; 2014 tenant retention was 71.4%.
- The company recorded a $1.8 million impairment on properties sold in October 2014. Its 2014 results also included asset-sale and venture-related gains, historic tax-credit transaction income, and debt-extinguishment costs; these items affect comparisons of recurring performance.
- Management and the independent auditor reported effective internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements.
Investor facts to verify
- Reconcile the 2014 near-zero common-share EPS with recurring operating performance, FFO growth and significant transaction-related gains and charges.
- Review the debt maturity schedule, mortgage refinancing needs and revolver availability against development, tenant-improvement and venture funding commitments.
- Track leasing costs, lease expirations and renewal outcomes, particularly the 2015 rollover and the increase in tenant-improvement and leasing-commission costs.
- Monitor project budgets, funding sources, pre-leasing and completion timelines for FMC Tower, Encino Trace and major joint-venture developments.
- Assess venture debt, guarantees and partner obligations, and confirm the status and collection of the $88 million Austin Venture loan, which was repaid in January 2015.