Brandywine Realty Trust — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Brandywine is an office and mixed-use REIT operating primarily in Philadelphia, Austin, Washington, D.C., and surrounding markets. It owned 81 properties totaling approximately 13.7 million rentable square feet and held interests in 10 unconsolidated real estate ventures. Unless noted, amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $120.4 million | $126.1 million | $361.3 million | $408.0 million |
| Net income | $1.0 million | $276.1 million | $7.8 million | $288.2 million |
| Net income attributable to common shareholders | $0.9 million; $0.01/share | $274.4 million; $1.61/share | $7.4 million; $0.04/share | $286.2 million; $1.66/share |
| Net operating income (NOI; non-GAAP) | $73.4 million | $77.1 million | $220.1 million | $249.6 million |
| Funds from operations available to common shareholders and unitholders (FFO; non-GAAP) | $61.1 million | $60.0 million | $177.2 million | $179.1 million |
| Cash provided by operating activities | Not presented by quarter | Not presented by quarter | $140.7 million | $162.5 million |
Q3 NOI was approximately 60.9% of revenue, versus 61.1% a year earlier; nine-month NOI margin was approximately 60.9%, versus 61.2%. These are calculated from the filing’s figures. FFO and NOI are non-GAAP measures and should not be treated as substitutes for GAAP earnings or cash flow.
- Core-property occupancy at September 30 was 90.3%, down from 91.0% a year earlier. Q3 net absorption was negative 20,560 square feet; combined rental rates on new, expansion, and renewal leases increased 15.5%.
- Cash and cash equivalents were $42.5 million at quarter-end. The company reported $598.2 million of available capacity under its $600 million revolving facility, net of letters of credit.
- Debt principal was $1.829 billion: 95.7% fixed-rate and 4.3% variable-rate unhedged. Weighted-average debt interest rate was 3.7%, and weighted-average maturity was 4.7 years. Scheduled principal maturities include $250 million in 2022, $350 million in 2023, and $350 million in 2024.
- Cash and restricted cash declined $3.8 million over the first nine months. Operating cash flow of $140.7 million was offset by $44.9 million used in investing and $99.6 million used in financing, including distributions paid.
- The quarterly distribution was $0.19 per share, declared in September and paid October 20, 2021.
Changes versus comparable periods
- Revenue declined 4.5% in Q3 and 11.4% for the first nine months. Management attributed the decrease mainly to property dispositions and properties taken out of service for redevelopment or future demolition. Same-store revenue rose 1.6% in Q3 and 1.0% year to date.
- GAAP net income fell sharply from 2020, when results included a $271.9 million Q3 gain from selling a preferred equity interest in One and Two Commerce Square and deconsolidating the properties. The comparable nine-month 2020 gain on real estate dispositions was $274.5 million. Thus, the large GAAP earnings decline is not a like-for-like indicator of recurring property performance.
- Q3 FFO available to common shareholders and unitholders increased to $61.1 million from $60.0 million, while nine-month FFO decreased to $177.2 million from $179.1 million.
- Interest expense declined year over year, while equity losses from unconsolidated ventures increased to $20.8 million for the first nine months from $9.9 million. Management cited, among other factors, the Commerce Square venture and lower occupancy at the MAP venture.
- Operating cash flow fell $21.7 million year over year, which the company primarily attributed to properties disposed of or contributed to ventures since the start of 2020.
Outlook, commentary, and notable items
- The filing provides no specific earnings, occupancy, or FFO guidance. Management said it expected remaining 2021 capital needs to focus primarily on current development and redevelopment projects and believed available liquidity was sufficient for existing project requirements and potential opportunities.
- Management reported collecting 99.5% of total cash-based rent due in Q3, including 99.6% from office tenants. As of September 30, rent relief totaling $4.8 million had been provided to 65 tenants, primarily through deferrals and some abatements; ultimate recovery and outcomes of negotiations remain uncertain.
- COVID-19-related economic weakness could pressure tenant credit, occupancy, rents, leasing costs, development execution, and liquidity. Management also identified lease rollover and development risks. Leases representing 9.2% of annualized base rent were scheduled to expire without penalty in 2022.
- The company was in compliance with debt covenants at quarter-end. It had no consolidated secured debt, but disclosed guarantees related to venture debt, including a payment guarantee of up to $41.3 million on the 4040 Wilson construction loan and a carry guarantee and limited payment guarantee of up to 25% of principal on the 3025 JFK venture loan. Cost-overrun and completion guarantees also apply to certain projects.
- The 3025 JFK venture closed on a $186.7 million construction loan in July 2021, bearing interest at 3.50% plus LIBOR, subject to a floor, and maturing in July 2025. The company contributed its prepaid land leasehold interest and had funded $20.5 million of project costs by quarter-end.
- A $50 million Austin preferred-equity investment was redeemed in September before maturity. The company recognized $2.8 million of accelerated minimum return and exit-fee income. February 2021 winter-storm damage in Austin led to a $1.2 million fixed-asset write-off and estimated restoration costs; the company reported $13.0 million of insurance proceeds and full recovery of costs incurred to date.
- Depreciation expense increased by $6.5 million year to date after shortening the estimated useful lives of seven Austin properties from approximately 35 to 12 years in connection with future Broadmoor development plans. The filing also cites accelerated depreciation following certain early lease terminations.
- Management said routine litigation and environmental matters were not expected to have a material adverse effect; the filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether occupancy, leasing activity, and tenant retention improve, and how the 2022 lease expirations affect cash rents.
- How much of reported earnings and FFO reflects recurring operations versus dispositions, venture results, insurance proceeds, and other unusual items.
- Cash flow available after distributions, development spending, and leasing costs, alongside the company’s capacity to refinance or repay the 2022–2024 maturities.
- Actual funding needs and guarantee exposure for 3025 JFK, 4040 Wilson, and other ventures, including construction cost overruns and project completion.
- Whether COVID-19-related rent relief is repaid and whether tenant credit conditions, office demand, and development economics worsen.