Brandywine Realty Trust (NYSE: BDN) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; figures are unaudited. Brandywine owns and operates office and mixed-use properties, primarily in Philadelphia, Austin and nearby markets. At quarter-end, it owned 76 properties with approximately 13.4 million rentable square feet; core-property occupancy was 89.4%, versus 89.6% a year earlier.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $125.9 million | $124.0 million | $255.1 million | $251.5 million |
| Operating income | $19.0 million | $26.4 million | $43.0 million | $53.1 million |
| GAAP net income (loss) | $(12.7) million | $4.7 million | $(18.0) million | $10.8 million |
| Net income (loss) attributable to common shareholders | $(12.9) million | $4.5 million | $(18.2) million | $10.5 million |
| Loss per common share | $(0.08) | $0.03 | $(0.11) | $0.06 |
| Net operating income (NOI), non-GAAP | $79.9 million | $74.4 million | $158.3 million | $154.0 million |
| FFO available to common shareholders and unit holders, non-GAAP | $49.6 million | $60.5 million | $100.4 million | $120.8 million |
Q2 NOI margin was approximately 63.4% of revenue, compared with 60.0% a year earlier; six-month NOI margin was approximately 62.0%, compared with 61.2%. NOI and FFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
For the six months, operating cash flow was $61.3 million, down from $78.5 million. Investing activities used $137.9 million, compared with $188.9 million; financing provided $101.2 million, compared with $111.8 million. Cash and restricted cash totaled $43.0 million at June 30, versus $18.4 million at year-end 2022. The quarterly distribution declared was $0.19 per share.
Material changes and capital position
- Revenue rose modestly year over year, supported by new lease commencements and recently completed/acquired properties. Six-month rents increased 2.7%; core occupancy was broadly stable.
- Higher interest expense was a major earnings headwind: Q2 interest expense was $23.7 million versus $16.3 million; six-month expense was $46.3 million versus $32.1 million. Management attributed the increase to higher-cost debt and additional borrowing, including the 7.55% 2028 notes.
- Equity-method losses from unconsolidated ventures increased to $7.6 million in Q2 from $5.0 million, and to $13.8 million for six months from $9.5 million, primarily reflecting higher venture borrowing costs.
- Total debt principal was $2.144 billion at June 30, up from $1.971 billion at year-end 2022. The period-end weighted-average interest rate was 5.1%, and weighted-average maturity was 4.5 years. Approximately 93.1% of debt was fixed rate; 6.9% was unhedged variable rate.
- Debt actions included a $245 million, 5.88% secured loan maturing in 2028; a $70 million floating-rate unsecured term loan due February 2024, with a possible one-year extension; and redemption of the remaining $54.3 million 2023 notes. The $250 million unsecured term loan was swapped to a fixed rate.
- At June 30, the company reported $557.6 million of available capacity under its $600 million unsecured credit facility, net of letters of credit. It stated it was compliant with financial covenants.
Outlook, risks and unusual items
- The filing provides no specific earnings or FFO guidance. Management expects remaining-2023 capital use to focus primarily on current development and redevelopment projects and believes available cash, operating cash flows and financing capacity can meet capital needs.
- An Austin office property was classified as held for sale under an agreement for $53.3 million. The company recorded a $4.5 million impairment; anticipated proceeds net of selling costs were $51.5 million, with closing expected in Q3 subject to conditions and no assurance of completion.
- The MAP Venture’s $181 million mortgage had a June 2023 maturity and was extended by the lender to October 1, 2023. The company and partner were working on a recapitalization; repayment or further extension was not assured. Brandywine reported a negative $41.3 million investment balance and stated it had no obligation to fund additional equity to this venture.
- Development financing and guarantees merit attention. The 3151 Market Street Venture had not secured its contemplated construction loan as of the filing date; after the partner funds its remaining commitment, Brandywine may have to fund further project costs until financing is obtained. The company also disclosed completion/cost-overrun guarantees and estimated remaining equity needs of $12.7 million for 3025 JFK and $10.0 million for One Uptown.
- Management cautioned that economic weakness, inflation, higher interest rates, tenant defaults, vacancies, lower effective rents and increased tenant costs could pressure cash flow and covenant capacity. Office leasing and development risks include lease rollover, construction costs, delays and financing availability.
- The company recognized a $0.8 million gain from contributing buildable development rights to the 3151 Market Street Venture. No material change to previously disclosed risk factors was reported; routine litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Progress and final terms for the Austin property sale, including whether the expected Q3 closing and net proceeds are achieved.
- Whether the MAP Venture mortgage was refinanced, repaid or further extended, and any resulting exposure to Brandywine.
- Availability and terms of construction financing for 3151 Market Street and other projects, plus actual company funding needs under venture guarantees.
- Debt maturities and refinancing capacity, especially the $350 million due in 2024 and $70 million term loan due in February 2024, along with borrowing costs and covenant headroom.
- Trends in core occupancy, lease commencements, tenant retention, concessions and rent growth; Q2 combined rental-rate growth was 17.6% on commenced new and renewed leases, while six-month growth was 16.0%.
- Whether operating cash flow and liquidity continue to cover distributions, debt service and development commitments as interest and joint-venture costs remain elevated.