Brandywine Realty Trust — Q3 2023 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2023. Brandywine is an office and mixed-use REIT operating primarily through its consolidated operating partnership. At quarter-end, it owned 74 properties totaling approximately 13.2 million rentable square feet, held interests in 12 unconsolidated real estate ventures, and managed approximately 22.7 million square feet in total, including third-party properties.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $129.4 million | $125.6 million | $384.5 million | $377.1 million |
| Net income (loss) | $(21.6) million | $13.5 million | $(39.6) million | $24.2 million |
| Net income (loss) per share | $(0.13) | $0.08 | $(0.23) | $0.14 |
| Net operating income (NOI), non-GAAP | $83.0 million | $78.1 million | $241.2 million | $232.1 million |
| FFO available to common shareholders and unit holders, non-GAAP | $50.6 million | $61.8 million | $151.1 million | $182.5 million |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $111.4 million | $148.2 million |
Q3 NOI was about 64.2% of revenue, compared with 62.2% a year earlier; nine-month NOI was about 62.7% of revenue versus 61.5%. These ratios are calculated from reported figures and are not GAAP margins.
Balance sheet, debt and liquidity
- At September 30, 2023, total assets were $3.92 billion, total liabilities $2.41 billion, and total equity $1.51 billion.
- Cash and cash equivalents were $47.9 million; cash plus restricted cash was $58.6 million. The company reported $557.6 million of available unsecured credit-facility borrowings, net of letters of credit.
- Debt principal was approximately $2.14 billion, versus $1.97 billion at December 31, 2022. The weighted-average interest rate was 5.2%, and weighted-average maturity was 4.2 years. Fixed-rate debt represented 93.1% of principal.
- Scheduled principal maturities include $350 million in 2024 and $700 million in 2027. The $70 million unsecured term loan matures in February 2024, with a possible 12-month extension subject to conditions.
- Operating cash flow of $111.4 million was below cash used in investing of $139.5 million during the first nine months. Financing activities provided $68.3 million; cash and restricted cash increased by $40.2 million.
- The company stated it was in compliance with debt covenants at quarter-end. Moody’s lowered its senior unsecured rating from Baa3 to Ba1 during Q3; S&P’s rating was BBB-. Both outlooks were negative. The downgrade triggered a 25-basis-point increase in the coupon on the 7.55% notes due 2028.
Material changes versus prior periods
- Revenue rose 3.0% in Q3 and 2.0% year to date, while GAAP results shifted to losses. Higher interest expense, increased equity-method venture losses, impairment charges, and the absence of prior-year property-sale gains contributed to the deterioration.
- Interest expense increased to $24.4 million in Q3 from $17.1 million and to $70.7 million for nine months from $49.1 million. Management cited higher-cost debt, including the 2028 notes, and additional financing.
- Equity in losses of unconsolidated ventures increased to $10.7 million in Q3 from $6.3 million and to $24.5 million for nine months from $15.8 million, primarily reflecting higher venture borrowing costs.
- FFO declined despite higher NOI: down approximately 18% in Q3 and 17% for nine months. Core-property occupancy at September 30 was 88.3%, compared with 90.8% a year earlier.
- Same-store NOI increased 0.1% in Q3 and 2.2% year to date. Leasing activity was weaker: nine-month new leases and expansions commenced totaled 219,216 square feet versus 730,392, and tenant retention was 50.8% versus 69.0%.
- Distributions declared in Q3 were $0.15 per share/unit, down from $0.19 in Q3 2022. The Q3 distribution was paid October 18, 2023.
Outlook, risks and unusual items
- Management gave no specific earnings or FFO guidance. It expected available cash, operating cash flows, financing capacity and asset sales to fund near-term needs, with development and redevelopment as primary uses of capital for the remainder of 2023. Management cautioned that economic and financing conditions could impair cash flows or access to funding.
- The company recorded $11.7 million of Q3 impairment on a Pennsylvania Suburbs property based on an executed sale agreement, but said completion of the proposed disposition was not assured. A separate $4.5 million impairment was recorded in Q2 on Three Barton Skyway, which was sold in Q3 for $53.3 million.
- Core occupancy and leasing trends, tenant defaults, rollover, concessions and tenant-improvement costs are risks. Management also cited inflation, higher interest rates, labor and supply constraints, and weaker financial and credit markets.
- Several joint ventures face refinancing uncertainty. MAP Venture’s $180.4 million mortgage had been extended to December 1, 2023, with recapitalization efforts ongoing and no assurance of repayment or further extensions. The Mid-Atlantic Office Venture’s $132.8 million loan matures in January 2024, and Rockpoint Venture’s $233.4 million loan matures in March 2024; extension or restructuring discussions were ongoing.
- The 3151 Market Street venture had not obtained a construction loan as of the filing. Brandywine may have to fund project costs from cash and credit facilities if financing is delayed. The company also disclosed development guarantees and expected remaining equity contributions, including $5.8 million for 3025 JFK and $4.0 million for One Uptown office.
- Brandywine contributed $46.5 million to Commerce Square Venture in connection with refinancing its debt at a 7.79% fixed rate through 2028. The company also recorded a $0.8 million gain on a contribution of development rights to the 3151 Market Street venture.
- Management reported no material change to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Progress on the Pennsylvania Suburbs property sale underlying the $11.7 million impairment and the final sale proceeds.
- Refinancing, extensions or restructuring outcomes for MAP Venture and the Mid-Atlantic and Rockpoint venture loans.
- Availability and terms of construction financing for 3151 Market Street, and any resulting Brandywine funding obligations.
- Occupancy, leasing volume, tenant retention and rent trends, particularly given lower occupancy and leasing activity.
- Debt maturity funding plans, the effect of credit ratings and interest costs, and continued covenant compliance.
- Whether operating cash flow and liquidity are sufficient to cover distributions, capital spending, debt service and venture commitments.