Brandywine Realty Trust — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Brandywine is a REIT operating through Brandywine Operating Partnership, which held 96 properties totaling approximately 16.9 million rentable square feet across Philadelphia, its suburbs, Austin, Washington, D.C., and other markets. The Parent Company owned 99.4% of the Operating Partnership.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $144.2 million, up 7.7% from $133.8 million | $288.0 million, up 6.6% from $270.1 million |
| Net income | $6.3 million, down from $12.9 million | $10.8 million, down from $57.3 million |
| Net income per common share | $0.03, versus $0.07 | $0.06, versus $0.32 |
| Net operating income (NOI) | $86.9 million, up from $81.2 million | $173.4 million, up from $161.1 million |
| Funds from operations available to common shareholders and unit holders | $62.2 million, versus $63.0 million | $122.3 million, versus $120.2 million |
| Cash provided by operating activities | Not stated for the quarter | $85.5 million, versus $97.5 million |
Q2 operating income was $27.1 million, compared with $32.5 million. Higher property-level revenue and NOI were offset below NOI by increased depreciation, real estate taxes, interest expense, and equity losses from real estate ventures. Six-month 2018 net income included $37.3 million of gains from real estate venture transactions, making the year-over-year decline in reported net income especially pronounced. The filing does not provide a single headline operating-margin measure.
At June 30, total assets were $4.05 billion and total liabilities were $2.32 billion. Debt carrying value was $2.10 billion; unpaid principal was $2.11 billion, compared with $2.04 billion at December 31, 2018. Cash and cash equivalents were $31.6 million ($32.0 million including restricted cash). The company reported $435.0 million of available credit-facility capacity, net of letters of credit, under its $600 million facility. Management stated it believed available liquidity and operating cash flows were sufficient for existing capital requirements and investment opportunities.
Six-month investing cash outflow was $58.9 million, compared with $122.6 million; financing cash outflow was $17.8 million, compared with $69.2 million. Capital spending included $36.0 million for tenant improvements, $18.4 million for redevelopment, $39.2 million for development, and $9.4 million of leasing costs. The quarterly distribution was $0.19 per share, or $0.38 for the first half. The company repurchased $17.3 million of shares in the first half; none were repurchased in Q2.
Material changes and operating trends
- Core-property occupancy at June 30 was 93.0%, compared with 92.3% a year earlier. Same-store NOI was $68.9 million for Q2, down from $70.5 million; for the first half it was $136.9 million, down from $138.9 million.
- Portfolio revenue growth primarily reflected late-2018 acquisitions, including the DRA Austin portfolio and Quarry Lake II, partly offset by dispositions. Same-store rent growth was modest; rising real estate taxes, particularly in Philadelphia CBD, pressured same-store results.
- Q2 combined rental rates on new, expansion, and renewal leasing increased 12.1%; first-half combined rental rates increased 14.0%. First-half net absorption was 82,991 square feet, versus negative 90,462 square feet a year earlier.
- Credit-facility borrowings increased to $163.5 million from $92.5 million at year-end. The company reported a 3.9% weighted-average interest rate on total debt and a 6.0-year weighted-average maturity. Scheduled principal payments include $87.2 million in 2020, $419.8 million in 2022, and $556.7 million in 2023.
- Q2 and first-half 2019 results included a $1.3 million gain from a real estate venture connection agreement. First-half 2018 results included $25.7 million from the sale of the evo venture and an $11.6 million gain from a venture-interest exchange.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings or FFO guidance. Management identified development and redevelopment funding as a primary use of capital for the rest of 2019.
- Projects under construction included the Bulletin Building redevelopment, 405 Colorado Street development, and 426 W. Lancaster Avenue redevelopment, with combined estimated costs of $213.7 million and $75.3 million funded as of June 30. The company also described the 4040 Wilson venture development, expected to complete in Q2 2020, and ongoing planning for Schuylkill Yards.
- Management cautioned that economic weakness could increase vacancies, reduce rents, increase tenant concessions and defaults, and constrain financing. Development risks include delays, cost overruns, leasing shortfalls, and financing availability. Approximately 4.10% of annualized base rent was scheduled to expire without penalty during 2019.
- The company was in compliance with debt covenants at June 30. It had guarantees on venture debt, including up to $41.3 million on a $150 million construction loan, plus customary completion, cost-overrun, environmental, and nonrecourse carve-out guarantees. Most venture debt was nonrecourse, subject to exceptions.
- The company adopted lease accounting Topic 842 in 2019, recording $22.4 million of ground-lease right-of-use assets and liabilities at adoption. Adoption also resulted in a $0.7 million accrued-rent write-off. It was evaluating the expected-credit-loss standard effective in 2020 and had not quantified its impact.
- Management revised previously issued comparative financial statements to correct acquisition purchase-price allocation and depreciable-life errors. It concluded the errors were immaterial to prior statements, but corrected the comparative figures; 2018 net income was reduced by $0.3 million for Q2 and $0.5 million for the first half.
- Routine litigation was disclosed; the company did not expect resulting liabilities to materially adversely affect its financial position, results, or cash flows. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether occupancy, leasing spreads, and same-store NOI remain resilient as leases expire and tax and operating costs rise.
- How acquisitions, dispositions, venture gains, and the corrected prior-period figures affect comparisons of recurring earnings and FFO.
- Funding needs and completion progress for development projects, particularly the Bulletin Building, 405 Colorado Street, and 4040 Wilson.
- Capacity to refinance or repay upcoming maturities, especially the 2022 and 2023 obligations, while maintaining covenant compliance and liquidity.
- Exposure under venture guarantees and the collectability and timing of contingent proceeds, including the $9.4 million Marine Piers payment due in 2024.