Brandywine Realty Trust Announces $0.36 FFO per Diluted Share for the Third Quarter 2014

RADNOR, Pa., Oct. 22, 2014 /PRNewswire/ -- Brandywine Realty Trust BDN, a real estate investment trust focused on the ownership, management and development of urban, town center and suburban office properties in the mid-Atlantic region and other select markets throughout the United States, today reported its financial and operating results for the three and nine-month periods ended September 30, 2014.

"The third quarter was a solid continuation of our 2014 Business Plan execution," stated Gerard H. Sweeney, President and Chief Executive Officer for Brandywine Realty Trust.  "We anticipate ending the year at over 91% occupied and between 92-93% leased, in line with our core objectives.  Quarterly results reflected strong mark-to-market, tenant retention and same store growth metrics.  Additionally, we made excellent progress in positioning the Company for future growth through expansion of our equity base and achieving our balance sheet goals.  Our 2015 outlook reflects continued occupancy and leasing gains, solid operating fundamentals, reduced rollover exposure, controlled capital costs and pursuit of growth opportunities.  As a result, we are increasing our 2014 FFO guidance range to $1.32 to $1.34 per diluted share and providing our initial 2015 FFO Guidance range of $1.38 to $1.48 per diluted share."

Financial Highlights – Third Quarter

• Funds from Operations (FFO) available to common shares and units in the third quarter of 2014 totaled $62.7 million or $0.36 per diluted share versus $63.0 million or $0.39 per diluted share in the third quarter of 2013.  FFO for the three months of 2014 was impacted by a $3.8 million loss on the early extinguishment of debt and $0.2 million of various transaction costs.  Our third quarter 2014 payout ratio ($0.15 common share distribution / $0.36 FFO per diluted share) was 41.7%.
• Net Income allocated to common shares totaled $6.9 million or $0.04 per diluted share in the third quarter of 2014 compared to a net income of $9.2 million or $0.06 per diluted share in the third quarter of 2013. 
• In the third quarter of 2014, we incurred $13.8 million of revenue maintaining capital expenditures which along with other adjustments to FFO, resulted in $34.3 million or $0.20 per diluted share of Cash Available for Distribution (CAD).  In the third quarter of 2013, we incurred $19.3 million of revenue maintaining capital expenditures that resulted in $27.1 million or $0.17 per diluted share of CAD.  Our third quarter 2014 CAD payout ratio was 75.0% ($0.15 common share distribution / $0.20 CAD per diluted share).
• Our weighted-average fully-diluted shares and units outstanding increased to 174.9 million from 159.8 million for the three months ended September 30, 2014 and 2013, respectively.

Financial Highlights – Nine Months

• Our FFO available to common shares and units in the first nine months of 2014 totaled $173.6 million or $1.05 per diluted share versus $163.6 million or $1.06 per diluted share in the first nine months of 2013.  FFO for the first nine months of 2014 was impacted by (i) $3.8 million loss on the early extinguishment of debt (ii) G&A expense includes $0.6 million due to employee severance costs, (iii) $1.2 million gain on the sale of a vacant land parcel, (iv) $0.8 million of unrecovered weather-related costs, primarily snow removal, and (v) $0.4 million of transaction costs associated with various acquisitions.  FFO for the nine months of 2013 was impacted by a $1.1 million loss on the early extinguishment of debt and $0.4 million of various transaction costs included within G&A expense.  Our first nine months 2014 FFO payout ratio ($0.45 common share distribution / $1.05 FFO per diluted share) was 42.9%. 
• Net income allocated to common shares totaled $3.3 million or $0.02 per diluted share in the first nine months of 2014 compared to net income of $16.5 million or $0.11 per diluted share in the first nine months of 2013.
• In the first nine months of 2014, we incurred $51.5 million of revenue maintaining capital expenditures which along with other adjustments to FFO, resulted in $97.2 million or $0.59 per diluted share of CAD.  In the first nine months of 2013, we incurred $47.0 million of revenue maintaining capital expenditures which resulted in $90.6 million, or $0.58 per diluted share of CAD.  Our first nine months 2014 CAD payout ratio was 76.3% ($0.45 common share distribution / $0.59 CAD per diluted share).
• Our weighted-average fully-diluted shares and units outstanding increased to 165.1 million from 154.9 million for the nine months ended September 30, 2014 and 2013, respectively.

Portfolio Highlights

• At September 30, 2014, our core portfolio of 195 properties comprising 23.5 million square feet was 88.9% occupied and we are now 92.5% leased (reflecting new leases commencing after September 30, 2014).  This executed forward leasing, of which 722,000 square feet commences in the fourth quarter, will result in a year-end occupancy of 91.3%.
• In the third quarter of 2014, our Net Operating Income (NOI) excluding termination revenues and other income items increased 2.2% on a GAAP basis and 4.2% on a cash basis for our 191 same store properties.
• We leased approximately 1.3 million square feet and commenced occupancy on over 1.1 million square feet during the third quarter of 2014.  The third quarter occupancy activity includes 766,000 square feet of renewals, 262,000 square feet of new leases and 101,000 square feet of tenant expansions.  We have an additional 863,000 square feet of executed new leasing scheduled to commence subsequent to September 30, 2014.
• We achieved a 72.4% tenant retention ratio in our core portfolio with net absorption of (68,000) square feet during the third quarter of 2014.  Third quarter rental rate growth was 20.3% as our renewal rental rates increased 22.9% and our new lease/expansion rental rates increased 0.5%, both on a GAAP basis.

Investment Highlights

• We have formed a 50/50 joint venture partnership with LCOR/CalSTRS for a mixed-use development located at 1919 Market Street in Philadelphia, Pennsylvania.  The joint venture is planning a 29-story, 455,000 square foot mixed-use development consisting of residential, office, retail and parking components.  The project will be comprised of 321 luxury rental apartments with full concierge service and rooftop amenities that include fitness center, club room with demonstration kitchen, outdoor roof garden with fire pit and ledge pool, and fully-equipped game room including golf simulator.  The office/commercial space will consist of 24,000 square feet and is 90% pre-leased to Independence Blue Cross and CVS. A 215-car structured parking facility will support the development and also offer parking to the public.  As part of its land monetization program, we have contributed the land parcel at 1919 Market Street and will manage the retail and parking components of the project. The project has already closed on an $88.9 million floating-rate secured financing at LIBOR+ 2.25%. 
• Our existing Austin Joint Venture (the "Venture") with DRA Advisors LLC ("DRA") has acquired the following office portfolios in Austin, Texas:
  • Crossings at Lakeline, which consists of two three-story buildings totaling 232,300 square feet located in the northwest submarket in Austin, for a purchase price of $48.2 million, or $208 PSF and was 94% occupied and leased at the time of acquisition.  In addition to partners' equity of $13.7 million, the acquisition was financed with a $34.5 million, five-year fixed-rate mortgage bearing interest at 3.87%.
  • River Place, which consists of seven Class A office buildings totaling 590,900 square feet and two parking structures in Austin, for a purchase price of $128.1 million, or $217 PSF and was 81% occupied and 89% leased at the time of acquisition.  In addition to partners' equity of $40.1 million, to facilitate an expedited closing, Brandywine provided $88.0 million short-term financing to the Venture at 4% until a permanent secured financing is obtained which we expect to close by December 31, 2014.
• On September 30, 2014, we sold Campus Pointe in Reston, Virginia and we currently have under firm contract for sale to close October 24, 2014, Valleybrooke Office Park located in Malvern, Pennsylvania.  The assets total 452,900 square feet for a total sales price of $80.5 million, or $178 per square foot.

Brandywine Awards

• In June 2014, NAIOP, the Commercial Real Estate Development Association, announced the selection of Brandywine as the 2014 Developer of the Year – the association's highest honor. 
• On September 18, 2014, the Delaware Valley Green Building Council awarded Brandywine the 2014 Corporate Groundbreaker Award in recognition of our regional commitment to sustainable development and our role in the annual tri-state creation and success of the Sustainability Symposium.
• During the third quarter, Brandywine earned 10 new 2014 U.S. Environmental Protection Agency (EPA) Energy Star awards and 11 re-certifications for a total of 25 new stars and 37 re-certifications year-to-date. We currently have 138 owned or managed Energy Star-rated buildings (representing over 63% of our overall inventory) encompassing nearly 21.4 million square feet.

Capital Market Highlights

• On August 1, 2014, we completed our public offering of 21,850,000 common shares, including 2,850,000 shares issued and sold to the underwriters, realizing net proceeds of approximately $335.0 million.
• On September 8, 2014, we issued $250 million 4.10% ten-year guaranteed notes and $250 million 4.55% fifteen-year guaranteed notes, realizing net proceeds of approximately $492.0 million.
• On September 16, 2014, we completed a $117.8 million tender offer of our 5.40% Guaranteed Notes due 2014 and 7.50% Guaranteed Notes due 2015, collectively, the "Notes".  In addition, we paid off our unsecured term loans totaling $250 million that were due in 2015 and 2016.
• On October 16, 2014, we redeemed $258.4 million of all outstanding "Notes" not previously retired through the Tender Offer.

Capital Markets Metrics

• At September 30, 2014, our net debt to gross assets measured 37.0%, reflecting no outstanding balance on our $600.0 million unsecured revolving credit facility and $671.9 million of cash and cash equivalents on hand. 
• For the quarter ended September 30, 2014, we had a 2.7 EBITDA to interest coverage ratio and a 6.4 ratio of net debt to annualized quarterly consolidated EBITDA.

Distributions

On September 10, 2014, our Board of Trustees declared a quarterly dividend distribution of $0.15 per common share that was paid on October 20, 2014 to shareholders of record as of October 6, 2014.  Our Board also declared a quarterly dividend distribution of $0.43125 for each 6.90% Series E Cumulative Redeemable Preferred Share that was paid on October 15, 2014 to holders of record as of September 30, 2014.

2014 Earnings and FFO Guidance

Our 2014 guidance did not assume any of the capital market transactions highlighted above.  Based on these capital markets transactions, on September 16, 2014, we revised our FFO Guidance to a range of $1.29 to $1.34 per diluted share versus the prior range of $1.43 to $1.48 per diluted share.

Based on current plans and assumptions and subject to the risks and uncertainties more fully described in our Securities and Exchange Commission filings, we are adjusting our 2014 guidance of $1.29 to $1.34 FFO per diluted share to $1.32 to $1.34 per diluted share.  This guidance is provided for informational purposes and is subject to change.  The following is a reconciliation of the calculation of 2014 FFO and earnings per diluted share:

 

 

Our 2014 FFO guidance does not include income/losses arising from the sale of undepreciated real estate.  Our 2014 earnings and FFO per diluted share each reflect $0.075 per diluted share of non-cash income attributable to the fourth of five annual recognitions of 20% of the net benefit of the rehabilitation tax credit financing on the 30^th Street Post Office.  Other key assumptions include:

• Occupancy improving to 91.3% by year-end 2014 with 93 – 94% leased;
• 6.0 – 8.0% GAAP increase in overall lease rates with a resulting 3.0 – 5.0% increase in 2014 same store GAAP NOI;
• 4.0 – 6.0% increase in 2014 same store cash NOI;
• Solely for the purpose of computing guidance, no additional equity or debt capital markets activity, including no share issuances under our ATM Program, and no additional acquisition activity;
• $150.0 million of sales activity at an 8.5% capitalization rate weighted to the second half of 2014; and
• FFO per diluted share based on 169.6 million fully diluted weighted average common shares.

2015 Earnings and FFO Guidance

Based on current plans and assumptions and subject to the risks and uncertainties more fully described in our Securities and Exchange Commission filings, we estimate that full year 2015 FFO per diluted share will be in a range of $1.38 to $1.48.  This guidance is provided for informational purposes and is subject to change.  The following is a reconciliation of the calculation of 2015 FFO and earnings per diluted share:

 

 

Our 2015 FFO guidance does not include income arising from the sale of undepreciated real estate.  Our 2015 earnings and FFO per diluted share each reflect $0.11 per diluted share of non-cash income attributable to the fifth of five annual recognitions of 20% of the net benefit of the rehabilitation tax credit financing and one-time non-cash income from a new market tax credit, which are related to the 30^th Street Post Office and Cira South Garage respectively.  Other key assumptions include:

• Occupancy improving to a range of 92 – 93% by year-end 2015 with 93.5 – 94.5% leased;
• 6.0 – 8.0% GAAP increase in overall lease rates with a resulting 3.0 – 5.0% increase in 2015 same store NOI GAAP;
• 2.0 – 4.0% increase in 2015 same store cash NOI growth;
• $250.0 million of aggregate acquisition activity at an assumed 7.0% capitalization rate;
• $150.0 million of aggregate sales activity at an assumed 8.5% capitalization rate; and
• FFO per diluted share based on 182.8 million fully diluted weighted average common shares.

Non-GAAP Supplemental Financial Measures

We compute our financial results in accordance with generally accepted accounting principles (GAAP).  Although FFO, NOI and CAD are non-GAAP financial measures, we believe that FFO, NOI and CAD calculations are helpful to shareholders and potential investors and are widely recognized measures of real estate investment trust performance.  At the end of this press release, we have provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure.

Funds from Operations (FFO)

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (NAREIT), which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than us.  NAREIT defines FFO as net income (loss) before non-controlling interests and excluding gains (losses) on sales of depreciable operating property, impairment losses on depreciable consolidated real estate, impairment losses on investments in unconsolidated real estate ventures and extraordinary items (computed in accordance with GAAP); plus real estate related depreciation and amortization (excluding amortization of deferred financing costs), and after similar adjustments for unconsolidated joint ventures.  Net income, the GAAP measure that we believe to be most directly comparable to FFO, includes depreciation and amortization expenses, gains or losses on property sales, extraordinary items and non-controlling interests.  To facilitate a clear understanding of our historical operating results, FFO should be examined in conjunction with net income (determined in accordance with GAAP) as presented in the financial statements included elsewhere in this release.  FFO does not represent cash flow from operating activities (determined in accordance with GAAP) and should not be considered to be an alternative to net income (loss) (determined in accordance with GAAP) as an indication of our financial performance or to be an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available for our cash needs, including our ability to make cash distributions to shareholders. 

Net Operating Income (NOI)

NOI is a non-GAAP financial measure equal to net income available to common shareholders, the most directly comparable GAAP financial measure, plus corporate general and administrative expense, depreciation and amortization, interest expense, non-controlling interests and losses from early extinguishment of debt, less interest income, development and management income, gains from property dispositions, gains on sale from discontinued operations, gains on early extinguishment of debt, income from discontinued operations, income from unconsolidated joint ventures and non-controlling interests.  In some cases, we also present NOI on a cash basis, which is NOI after eliminating the effect of straight-lining of rent and deferred market intangible amortization.  NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently.  NOI should not be considered an alternative to net income as an indication of our performance, or as an alternative to cash flow from operating activities as a measure of our liquidity or ability to make cash distributions to shareholders.

Cash Available for Distribution (CAD)

CAD is a non-GAAP financial measure that is not intended as an alternative to cash flow from operating activities as determined under GAAP.  CAD is presented solely as a supplemental disclosure with respect to liquidity because we believe it provides useful information regarding our ability to fund our distributions.  Because other companies do not necessarily calculate CAD the same way as we do, our presentation of CAD may not be comparable to similarly titled measures provided by other companies. 

Revenue Maintaining Capital Expenditures

Revenue maintaining capital expenditures, a non-GAAP financial measure, are a component of our CAD calculation and represent the portion of capital expenditures required to maintain our current level of funds available for distribution.  Revenue maintaining capital expenditures include current tenant improvement and allowance expenditures for all tenant spaces that have been owned for at least one year, and that were not vacant during the twelve-month period prior to the date that the tenant improvement or allowance expenditure was incurred.  Revenue maintaining capital expenditures also include other expenditures intended to maintain our current revenue base.  Accordingly, we exclude capital expenditures related to development and redevelopment projects, as well as certain projects at our core properties that are intended to attract prospective tenants in order to increase revenues and/or occupancy rates.

Third Quarter Earnings Call and Supplemental Information Package

We will host a conference call on Thursday, October 23, 2014 at 9:00 a.m. EDT.  The conference call can be accessed by calling 1-800-683-1525 and referencing conference ID #14731057.  Beginning two hours after the conference call, a taped replay of the call can be accessed 24 hours a day through Thursday, November 6, 2014 by calling 1-855-859-2056 and providing access code #14731057.  In addition, the conference call can be accessed via a webcast located on our website at www.brandywinerealty.com.

We have prepared a supplemental information package that includes financial results and operational statistics related to the third quarter earnings report.  The supplemental information package is available in the "Investor Relations – Financial Reports" section of our website at www.brandywinerealty.com. 

Looking Ahead - Fourth Quarter 2014 Conference Call

We anticipate we will release our fourth quarter 2014 earnings on Wednesday, February 4, 2015, after the market close and will host our fourth quarter 2014 conference call on Thursday, February 5, 2015 at 9:00 a.m. EST.  We expect to issue a press release in advance of these events to reconfirm the dates and times and provide all related information.

About Brandywine Realty Trust

Brandywine Realty Trust is one of the largest, publicly traded, full-service, integrated real estate companies in the United States.  Organized as a real estate investment trust and operating in select markets, Brandywine owns, leases and manages an urban, town center and suburban office portfolio comprising 281 properties and 33.7 million square feet as of September 30, 2014. For more information, please visit www.brandywinerealty.com.

Forward-Looking Statements

Estimates of future earnings per share, FFO per share, common share dividend distributions and certain other statements in this release constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our and our affiliates' actual results, performance, achievements or transactions to be materially different from any future results, performance, achievements or transactions expressed or implied by such forward-looking statements.  Such risks, uncertainties and other factors relate to, among others: our ability to lease vacant space and to renew or relet space under expiring leases at expected levels; competition with other real estate companies for tenants; the potential loss or bankruptcy of major tenants; interest rate levels; the availability of debt, equity or other financing; risks of acquisitions, dispositions and developments, including the cost of construction delays and cost overruns; unanticipated operating and capital costs; our ability to obtain adequate insurance, including coverage for terrorist acts; dependence upon certain geographic markets; and general and local economic and real estate conditions, including the extent and duration of adverse changes that affect the industries in which our tenants operate. Additional information on factors which could impact us and the forward-looking statements contained herein are included in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2013. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events except as required by law.

 

 

 

 

 

 

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SOURCE Brandywine Realty Trust