Brandywine Realty Trust — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. The company is a REIT focused on office and mixed-use properties, operating mainly in Philadelphia, its suburbs, Austin, and the Washington, D.C. area. It held 72 core properties totaling approximately 12.8 million rentable square feet, plus development and redevelopment properties. Core occupancy was 89.8% at year-end, down from 91.3% in 2021.
Financial results and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $506.1 million | $486.8 million |
| Operating income | $119.7 million | $93.3 million |
| Net income | $54.0 million | $12.4 million |
| Net income per common share | $0.31 | $0.07 |
| Net operating income (NOI, non-GAAP) | $311.7 million | $298.5 million |
| Funds from operations (FFO, non-GAAP) | $238.2 million | $237.6 million |
| Cash from operating activities | $209.3 million | $190.9 million |
| Cash and cash equivalents at year-end | $17.6 million | $27.5 million |
Revenue increased 4.0%; property-level NOI rose 4.5%. The GAAP net-income improvement was substantially affected by property and joint-venture transaction gains, including a $26.7 million gain from selling the company’s 50% interest in the 1919 Market venture and $25.7 million of gains on real estate dispositions and land sales. FFO, a REIT operating measure, was essentially flat.
Net cash used in investing activities was $190.6 million, including substantial development, redevelopment, tenant-improvement, and venture investment spending. Net cash used in financing activities was $28.6 million; cash and restricted cash declined by $9.9 million overall. The annual common distribution was $0.76 per share, or $0.19 quarterly.
At December 31, 2022, debt principal totaled $1.971 billion, versus $1.852 billion a year earlier. The weighted-average year-end interest rate was 5.0%, compared with 3.7%; 21.2% of debt was variable-rate and unhedged as reported. The company had $505.2 million of available unsecured-credit-facility borrowings, net of letters of credit. It reported compliance with debt covenants.
Material changes and notable items
- Rental revenue rose 4.3%, but year-end core occupancy fell and portfolio net absorption was negative 171,208 square feet. Tenant retention improved to 64.1% from 52.8%.
- Leasing spreads increased: combined new, expansion, and renewal rental rates were 18.7% higher than prior rents, versus 16.2% in 2021. Tenant-improvement costs per square foot also rose to $30.77 from $18.38.
- Interest expense increased to $68.8 million from $62.6 million, reflecting higher borrowing balances and rates. The reported year-end debt mix and rate figures are subject to subsequent transactions.
- The company issued $350 million of 7.55% notes due 2028 and repurchased $295.7 million of 3.95% notes due 2023 in December. In January 2023, it redeemed the remaining $54.3 million of 2023 notes and closed a $245 million secured, interest-only loan at 5.875% due 2028, using proceeds partly to reduce revolver borrowings.
- Development and redevelopment remained a significant capital commitment. The company reported three active wholly owned projects, as well as several venture projects, with expected completion dates extending through 2024.
Outlook, risks, and contingencies
Management provided no numerical earnings or occupancy guidance. It expects 2023 capital use to focus primarily on current development and redevelopment projects and believes available liquidity, operating cash flow, financing, and property sales can meet near-term needs. Management cautioned that uncertain economic conditions could increase vacancies and tenant costs, reduce effective rents, and raise financing costs.
Key risks include office-space demand and leasing uncertainty, tenant credit and lease rollover, inflation and higher interest rates, refinancing and covenant constraints, development delays or cost overruns, and property-value impairment. The company recorded a $4.7 million impairment on a Washington, D.C.-area office property expected to be sold. It also has venture-related guarantees and commitments, including development completion and cost-overrun guarantees, and $6.6 million of fixed future obligations under its Schuylkill Yards neighborhood program. Management said routine litigation was not expected to materially affect the company. The auditor identified real-estate impairment assessment as a critical audit matter; the financial statements received an unqualified audit opinion.
Investor verification priorities
- Confirm the sustainability of leasing demand, occupancy, tenant retention, and rent growth, particularly in Austin and Washington, D.C.
- Review 2022 earnings for the effect of venture and property-sale gains; compare recurring performance using NOI, FFO, and operating cash flow.
- Assess the cost and funding plan for development projects, venture obligations, guarantees, and rising tenant-improvement costs.
- Evaluate post-year-end secured borrowing, note redemptions, floating-rate exposure, debt maturities, and remaining credit-facility availability.
- Check distribution capacity against cash flow, capital needs, debt terms, and REIT requirements.