Brandywine Realty Trust — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Amounts are in millions of dollars unless otherwise stated. The filing combines Brandywine Realty Trust and its operating partnership; figures below primarily reflect the Trust.
Business context
Brandywine owns, develops, leases and manages office, industrial and mixed-use real estate. At June 30, 2010, it owned 239 properties totaling approximately 25.0 million net rentable square feet, including three properties under development or redevelopment, and held interests in 15 unconsolidated ventures with approximately 4.6 million square feet. It managed approximately 34.4 million square feet in total.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $137.5 | $142.1 | $280.6 | $288.8 |
| Operating income | $24.8 | $28.8 | $49.6 | $59.0 |
| Operating margin | 18.0% | 20.3% | 17.7% | 20.4% |
| Net income (loss) | ($5.6) | $5.8 | ($6.0) | $4.9 |
| Net income (loss) attributable to common shareholders | ($7.6) | $3.5 | ($10.0) | $0.7 |
| Basic and diluted EPS | ($0.06) | $0.03 | ($0.08) | $0.01 |
- Property operations: Net operating income (NOI) was $83.6 in Q2 versus $87.0 a year earlier, and $167.1 for the six months versus $173.4. Core-portfolio occupancy was 86.4% at quarter-end; occupancy including development and redevelopment properties was 81.5%. Six-month average occupancy was 86.8%, down from 89.1%.
- Cash flow: Six-month operating cash flow was $103.0, compared with $105.1 in 2009. Investing used $100.3 versus $48.0; financing used $4.0 versus $57.1. Cash declined to $0.3 at June 30 from $1.6 at year-end. The 2010 operating cash flow included a $27.4 historic tax-credit contribution.
- Debt and liquidity: Total debt obligations were $2,410.0, down from $2,454.6 at December 31, 2009. Debt was 89.5% fixed rate (including swapped debt) and 10.5% unhedged variable rate; weighted-average rate was 5.5%. The $600.0 revolving facility had $160.0 drawn, $14.0 of letters of credit, a $92.1 tax-credit holdback and $333.9 of unused availability. The company reported compliance with financial covenants.
- Balance sheet: Total assets were $4,617.2 and total equity $1,921.0 at June 30. Accounts receivable allowance was $15.6, or 12.7% of receivables including accrued rent, versus $16.4, or 14.3%, at year-end.
- Distributions and equity: A $0.15-per-common-share distribution was declared for the quarter and paid July 20. The ongoing equity offering had raised $40.9 net through June 30 from 3.29 million shares sold at an average $12.69 per share.
Material changes versus comparable periods
- Revenue declined 3.2% in Q2 and 2.8% for the first six months, primarily reflecting lower rents and occupancy. Management attributed the Q2 rent decrease to lower same-store occupancy, reduced occupancy at a redevelopment property and the deconsolidation of three ventures.
- Same-store occupancy decreased 190 basis points year over year in Q2 and 160 basis points for the six-month period. Six-month lease retention in the core portfolio was 60.8%.
- Q2 and six-month results moved to losses from profits in 2009. Lower interest expense helped, but operating income declined and early debt extinguishment shifted from a $12.0 Q2 gain and $18.7 six-month gain in 2009 to losses of $0.4 and $1.6, respectively, in 2010. A $6.3 gain on the 2010 sale of Westmoreland Plaza partly supported six-month results.
- General and administrative expense rose $1.1 in Q2 and $2.3 for the six months, including increased compensation, hiring and transaction-related costs. Property operating expense rose $1.4 for the six months, partly due to higher snow removal and repair costs.
- Adoption of revised VIE consolidation guidance led to deconsolidation of three ventures from January 1, 2010. The balance sheet removed $37.1 of real estate investments and $42.9 of mortgage debt; a $1.4 cumulative accounting adjustment was recorded. The change also reduced reported rental revenue.
Outlook, risks and unusual items
- Management expected vacancy to increase through 2010 and possibly beyond, with tenant defaults, past-due accounts, lower occupancy and reduced effective rents posing downside risks. It cited constrained credit markets and cautioned financing might be unavailable or more costly. No formal earnings or revenue guidance is provided in the filing.
- Near-term funding needs include operations, leasing and capital expenditures, development costs, distributions and debt maturities. Management cited $613.3 of unsecured debt and $166.8 of mortgage debt scheduled to mature through December 2011. A $183.0 term loan was extended on July 20, 2010 to June 29, 2011; the credit facility and term loan have discretionary extension provisions.
- Development and redevelopment projects totaled $356.4 in projected costs, with $54.5 remaining to fund. The Post Office and Cira South Garage projects represented $342.0 of costs and $53.5 remaining; they were 100% and 93.2% pre-leased, respectively. A forward financing commitment of up to $256.5 depended on project completion and lease commencement and carried extension or termination fees if conditions were not met.
- Two King of Prussia buildings being demolished generated $2.7 of accelerated depreciation in Q2; $1.1 of land was reclassified to land inventory. No impairment charge was recorded in the first half of 2010; the comparable 2009 period included a $3.7 impairment.
- Subsequent events: on August 5, Brandywine acquired the 63%-leased 1717 Arch Street office tower in Philadelphia for approximately $129.0, funded with $51.2 cash and 7,111,112 new partnership units. On July 29, it collected a $40.0 purchase-money mortgage note.
- Other exposures include tax-credit compliance and possible recapture, an IRS audit of tax year 2004, restrictions on selling certain properties before specified dates, environmental obligations and a $0.7 guarantee of a venture loan. Management did not expect routine litigation or environmental matters to have a material adverse effect.
Most important facts for investors to verify
- Debt refinancing and liquidity capacity, especially the 2010–2011 maturities, forward-loan funding conditions and post-quarter acquisition funding.
- Occupancy, lease retention, tenant credit quality and leasing costs, including progress leasing recently completed developments.
- Whether operating cash generation can cover distributions, recurring capital needs and development commitments if rents or occupancy weaken.
- The impact of venture deconsolidation on reported revenue, debt and comparability, and the realization and compliance risks tied to tax-credit arrangements.
- The effect of continued equity issuance and new partnership units on per-share results and ownership dilution.