Business context and reporting period
Brandywine Realty Trust and Brandywine Operating Partnership, L.P. filed this combined, unaudited Form 10-Q for the quarter ended September 30, 2018. The REIT operates primarily through the Operating Partnership. At quarter-end, the Company owned 93 properties with approximately 16.5 million rentable square feet, concentrated in Philadelphia, its suburbs, Washington, D.C., and Austin. Core portfolio occupancy was 93.0%, versus 92.0% a year earlier; leased occupancy was 95.0%.
Financial results and condition
Amounts below are in millions except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $135.0 | $128.4 | $405.1 | $387.1 |
| Net income (loss) | $(43.3) | $19.0 | $14.6 | $48.0 |
| Net income (loss) attributable to common shareholders | $(43.0) | $18.8 | $14.1 | $42.2 |
| Diluted earnings (loss) per share | $(0.24) | $0.11 | $0.08 | $0.24 |
| Net operating income (NOI), non-GAAP | $82.1 | $77.7 | $243.2 | $234.7 |
| Funds from operations available to common shareholders and units, non-GAAP | $63.2 | $61.9 | $183.4 | $175.5 |
For the nine months, operating cash flow was $154.5 million, compared with $128.3 million; investing cash flow was $(180.6) million, compared with $17.5 million provided; and financing cash flow was $(106.2) million, compared with $(314.0) million. Cash, cash equivalents and restricted cash ended at $71.2 million, down from $203.4 million at year-end 2017.
At September 30, cash and cash equivalents were $70.4 million. Debt principal was $1.953 billion, versus $1.949 billion at December 31, 2017; the balance-sheet carrying amount, net of financing adjustments, was $1.938 billion. The weighted-average debt rate was 4.0%, the weighted-average maturity was 7.0 years, and 98.6% of principal was fixed-rate. The Company had no borrowings under its $600 million revolving facility and reported $598.1 million of availability, net of letters of credit. It was in compliance with debt covenants.
Common distributions declared were $0.18 per share in Q3 and $0.54 per share for the nine months, compared with $0.16 and $0.48, respectively, in 2017.
Material changes versus prior periods
- Q3 revenue increased 5.1% year over year and NOI increased 5.6%; nine-month revenue rose 4.6% and NOI rose 3.6%. Management cited rent growth, free rent periods converting to cash rent, and completed or acquired properties, partly offset by dispositions and lower third-party management and development fees.
- Q3 results included a $56.9 million impairment charge on eight Washington, D.C.-area office properties classified as held for sale. This drove the quarterly GAAP loss; the impairment was not present in Q3 2017. The nine-month impairment charge was $56.9 million versus $3.1 million in 2017.
- Nine-month 2018 results included $37.3 million of gains on real estate venture transactions, including a $25.7 million gain on the sale of the evo at Cira Centre South venture and an $11.6 million gain related to the Four Tower Bridge acquisition. The comparable 2017 period included $28.3 million of venture transaction gains.
- Core occupancy improved year over year, but portfolio retention declined: 66.3% for the first nine months of 2018 versus 72.8% in 2017. Same-store NOI was $182.2 million, down from $187.7 million, while total portfolio NOI increased.
- The July 2018 revolving credit amendment extended maturity from May 2019 to July 2022, with two conditional six-month extensions, reduced certain loan margins, and removed the minimum net-worth covenant.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or FFO guidance. Management said liquidity needs are expected to be met through cash, operating cash flow, the revolving facility, financings and selective asset sales. It cited approximately $70.4 million of cash and $598.1 million of revolver availability as resources for current development and redevelopment commitments and other needs.
Management cautioned that weaker economic conditions could raise vacancy, reduce rents and tenant recoveries, increase concessions and defaults, and constrain financing availability or raise borrowing costs. Other material exposures include tenant rollover and credit risk, development delays and cost overruns, interest-rate risk, and guarantees for certain venture debt. The Company reported $664.2 million of aggregate debt at unconsolidated ventures; most is non-recourse, but specified guarantees include up to $41.3 million for a 4040 Wilson construction loan, plus customary completion and cost-overrun guarantees.
Eight Washington, D.C.-area properties were impaired and classified as held for sale at September 30. On October 16, the Company agreed to sell the portfolio for $312.0 million gross, retain a 15% venture interest, and anticipated approximately $292.0 million of net cash proceeds after venture debt financing; closing was expected in Q4 2018. On October 17, it agreed to acquire its partner’s remaining 50% interest in 12 Austin venture properties for $537.0 million, assuming an estimated $245.8 million of mortgage debt; settlement was expected in Q4 and management anticipated recognizing a gain.
Development exposure includes six listed projects with estimated costs of $271.0 million, of which $166.3 million had been funded at quarter-end. The Company also noted that adopting the new lease standard in 2019 was expected to increase 2019 leasing expense by approximately $3.6 million and operating expenses by approximately $0.8 million for specified ground leases; its assessment was not complete.
Important facts for investors to verify
- Whether the Washington-area portfolio sale and Austin venture acquisition closed on expected terms and dates, and the resulting cash, debt, retained ownership and reported gains or losses.
- The valuation assumptions underlying the $56.9 million impairment and whether the planned property sales realize the estimated proceeds.
- Development and redevelopment costs, funding needs, leasing progress and completion schedules, including any cost overruns or guarantee obligations.
- Trends in occupancy, lease retention, rents, tenant credit and same-store NOI, given lower year-to-date retention and weaker same-store NOI.
- Debt maturities, interest-rate exposure, covenant headroom and continued availability of the revolver; confirm that stated liquidity remains sufficient after transactions and distributions.