Brandywine Realty Trust — Q2 2015 Form 10-Q
Business context and reporting period. This combined filing covers Brandywine Realty Trust and its operating partnership for the quarter and six months ended June 30, 2015. The company is a REIT focused primarily on office real estate. It owned 199 properties totaling approximately 25.2 million rentable square feet and held interests in 18 unconsolidated ventures with approximately 5.6 million square feet.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $145.6 million | $150.5 million | $296.1 million | $302.6 million |
| Operating income | $31.6 million | $34.2 million | $61.5 million | $63.6 million |
| Net income (loss) | $3.1 million | $2.2 million | $11.7 million | $(0.1) million |
| Net income (loss) available to common shareholders | $1.3 million | $0.4 million | $8.0 million | $(3.7) million |
| Basic EPS | $0.01 | $0.00 | $0.04 | $(0.02) |
| Net operating income (NOI) | $89.3 million | $92.8 million | $179.0 million | $182.9 million |
| Operating cash flow | — | — | $88.6 million | $90.2 million |
| FFO available to common unitholders | $57.4 million | $57.3 million | $115.8 million | $110.9 million |
Margins and cash flows. NOI was approximately 61.3% of revenue in Q2 and 60.5% for the first half; these are calculated ratios, and NOI is a non-GAAP measure. Six-month investing cash outflow was $155.4 million and financing cash outflow was $66.8 million, producing a $133.5 million decline in cash. Cash and equivalents ended the period at $124.0 million, compared with $257.5 million at year-end 2014.
Debt and liquidity. Total debt was $2.45 billion, with a 5.0% weighted-average interest rate and 6.6-year weighted-average maturity. Approximately 73.5% was unsecured. The company had $2.70 billion of total liabilities and $2.12 billion of equity. It closed a new $600 million unsecured revolving facility in May, with no borrowings outstanding at June 30; it may increase commitments by up to a further $400 million under specified conditions. The company reported compliance with debt covenants.
Material changes and significant activity
- Revenue declined 3.2% in Q2 and 2.2% in the first half year over year. Management attributed the decreases mainly to dispositions and lower tenant termination fees; improved same-store occupancy partly offset the pressure.
- Same-store NOI increased $1.7 million in the first half, while total portfolio NOI fell $3.9 million, reflecting asset sales and portfolio changes. Core occupancy was 91.7% at June 30, versus 91.4% at December 31, 2014. Six-month net absorption was negative 55,164 square feet; reported combined rental rates on commenced leases increased 4.6%.
- Interest expense fell $7.3 million in the first half, primarily reflecting prior debt repayments and repurchases, partly offset by the issuance of $500 million of notes in 2014. The company reported $10.6 million of net gains on property dispositions and $2.5 million of impairment charges in the first half.
- The company acquired the remaining 50% interest in Broadmoor Austin Associates for an aggregate purchase price of $211.4 million, taking full ownership of seven fully occupied Austin office buildings. It also acquired land and a Philadelphia mixed-use/parking property, and formed or funded development ventures.
- Nine properties were sold for $147.5 million in the first half. Management raised its 2015 disposition target from $180 million to $300 million, but had no additional sale agreements as of June 30.
Outlook, 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, financing and selective asset sales, while noting that financing may not be available on attractive terms.
- A mortgage loan of approximately $88.5 million matured August 1, 2015. Management intended to seek a 60-day extension and then repay it using available cash.
- Development commitments totaled $312.0 million in the contractual commitments schedule; the company also had up to $80.5 million of tenant-improvement obligations not included in that schedule. Key construction risks include cost overruns, delays, financing and leasing execution.
- An unconsolidated venture’s $174.2 million nonrecourse loan was past maturity and under a forbearance agreement through July 31, 2015, with a lender option for a 60-day extension; the lender could sell the properties or foreclose. The company stated it had no obligation to fund the loan.
- A third party held an option, exercisable through May 4, 2018, to require a property purchase for $35 million plus transaction costs. The company also disclosed venture loan guarantees, including a $24.7 million construction-loan payment guarantee, and customary completion, cost-overrun and environmental guarantees.
- On July 22, 2015, the board authorized up to $100 million of additional common and preferred share repurchases, with no expiration date. The company expected to use available cash and its credit facility.
- Management cited risks including leasing and tenant credit, lower rental rates or occupancy, interest-rate and financing conditions, development execution, venture-partner performance, asset valuations, impairments, environmental matters and REIT qualification. Ordinary-course litigation was disclosed; the company did not expect current matters to have a material adverse effect.
Important facts for investors to verify
- Whether the planned extension and repayment of the $88.5 million mortgage were completed, and the resulting effect on cash and borrowing capacity.
- Progress toward the $300 million disposition target, sale proceeds and any additional impairment charges.
- Leasing, occupancy and rent trends, including the effect of expiring leases and the decline in first-half net absorption.
- Remaining funding needs, schedules and leasing for major developments and unconsolidated ventures, including the new Washington, D.C. projects.
- Use and impact of the new $100 million repurchase authorization, alongside distributions and capital requirements.
- Performance of the nonrecourse venture with the matured loan and any exposure under guarantees or the $35 million property put option.