BRANDYWINE REALTY TRUST quarterly report, Q1 FY2022

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Brandywine Realty Trust — Q1 2022 Form 10-Q

Business context and reporting period

Quarter ended March 31, 2022. Brandywine is a REIT focused on office and mixed-use properties, operating primarily in Philadelphia, the Pennsylvania suburbs, Austin, and the Washington, D.C. region. At quarter-end it owned 81 properties totaling approximately 13.7 million rentable square feet and held interests in 10 unconsolidated real estate ventures. The filing combines the Trust and its operating partnership, which are managed as one enterprise.

Financial and operating results

  • Total revenue was $127.5 million, up 5.5% from $120.8 million. Rental revenue rose 2.1% to $115.9 million.
  • Net income was $6.1 million versus $7.0 million; net income attributable to common shareholders was $5.9 million, or $0.03 per diluted share, compared with $6.8 million, or $0.04, a year earlier.
  • Net operating income (NOI), a non-GAAP measure, increased 7.4% to $79.6 million from $74.1 million. NOI margin was approximately 62.4%, versus 61.4%. GAAP operating income declined 8.6% to $26.7 million.
  • FFO available to common shareholders and unitholders, a non-GAAP measure, was $60.3 million, broadly unchanged from $60.2 million.
  • Operating cash flow was $28.5 million, down from $41.2 million. Investing used $110.8 million, principally reflecting development, redevelopment, capital expenditures, and venture investments. Financing provided $94.1 million, including $133 million net credit-facility borrowings. Cash and restricted cash ended at $40.2 million.
  • At March 31, total assets were $3.93 billion and total liabilities were $2.26 billion. Unsecured debt principal was $1.985 billion; 88.2% was fixed-rate and 11.8% variable-rate and unhedged. Weighted-average debt interest rate was 3.6%, and weighted-average maturity was 3.9 years.
  • Cash and cash equivalents were $39.3 million; available credit-facility capacity was $442.8 million, net of letters of credit. The company reported compliance with debt covenants.
  • Core-property occupancy was 89.4% at quarter-end, down from 90.3% a year earlier. Net absorption was negative 252,364 square feet, compared with negative 165,126. Combined rental rates on commenced leases rose 20.4%, while tenant retention was 55.9%.

Material changes versus the prior-year quarter

  • Revenue and NOI increased, supported in part by newly completed or acquired properties and increased activity at FMC Tower. Same-store NOI declined 1.4%.
  • GAAP net income fell 12.9%, with higher depreciation and amortization and general and administrative expense. G&A rose 51.5%, partly because Q1 2021 included a $2.4 million recovery of legal fees.
  • Other revenue increased to $6.5 million from $0.6 million. Management attributed the increase principally to $3.4 million of excess insurance proceeds and $2.2 million of contractor settlement proceeds for construction delay damages.
  • Equity losses from unconsolidated ventures narrowed to $4.6 million from $6.9 million. Venture investments rose to $461.4 million on the balance sheet from $435.5 million at year-end.
  • Investing cash outflows increased substantially, including $31.9 million for redevelopments, $30.5 million for development, and $26.8 million invested in unconsolidated ventures. Credit-facility borrowings increased, taking the facility balance to $156 million from $23 million.

Outlook, risks, and notable items

  • No quantitative earnings or FFO guidance is provided. Management expects primary capital uses for the remainder of 2022 to include current development and redevelopment projects and states that available liquidity and expected cash flows should support existing requirements and potential investments.
  • The $600 million credit facility was due to mature in July 2022; management intended to renew and extend it for four years on similar economics, with two six-month extension options also available. The $250 million term loan was due in October 2022, and management planned a five-year extension. The $350 million notes due February 2023 were expected to be refinanced; management anticipated higher effective interest rates on refinancings.
  • Risks highlighted include COVID-19-related tenant and leasing uncertainty, inflation, labor shortages, supply-chain constraints, higher borrowing costs, tenant defaults, vacancy, reduced effective rents, and development cost, financing, leasing, and completion risks. Management cautions that actual outcomes may differ from forward-looking statements.
  • Leases representing approximately 7.3% of aggregate annualized base rent were scheduled to expire without penalty during the remainder of 2022. The accrued-rent allowance was $4.1 million.
  • One Uptown, a planned $328.4 million Austin mixed-use project, depends on construction-loan closings for partner funding. If applicable loans did not close by June 30, 2022, the partner could assign its interest to the company without funding project costs. The company reported $56.8 million funded and $9.8 million of additional required funding as of quarter-end.
  • The company classified a Washington, D.C.-area land parcel as held for sale at $25.2 million and sold it on April 14, 2022 for $29.7 million. Austin winter-storm restoration estimates were reduced by $0.8 million in Q1 2022, and the company received an additional $2.4 million in insurance proceeds.
  • Unconsolidated ventures had approximately $1.217 billion of debt. Most venture loans were described as nonrecourse, subject to customary carve-outs; the company also disclosed construction-related completion, cost-overrun, carry, and limited-payment guarantees.
  • The quarterly distribution was $0.19 per share, declared in February and paid April 20, 2022. The company reported no share repurchases during the quarter.

Important facts for investors to verify

  1. Progress and final terms for the credit-facility extension, term-loan extension, and refinancing of the 2023 notes, including resulting interest costs.
  2. Occupancy, leasing and renewal trends, negative net absorption, and exposure to 2022 lease expirations.
  3. Construction-loan closings, partner funding, and the company’s remaining commitments and guarantees for One Uptown and other development projects.
  4. Whether Q1 NOI and FFO trends persist after considering unusual insurance and contractor settlement proceeds and higher property and corporate costs.
  5. Cash-flow needs for development, venture commitments, debt service, and distributions, alongside the debt and guarantees of unconsolidated ventures.