Brandywine Realty Trust — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Brandywine is an office and mixed-use REIT operating primarily in Philadelphia, Austin, Washington, D.C., and nearby markets. At quarter-end, it owned 78 properties with approximately 13.6 million rentable square feet and held interests in 10 unconsolidated real estate ventures.
Financial and operating performance
| Metric | Q2 2022 | Prior comparable period |
|---|---|---|
| Total revenue | $124.0 million | $120.1 million; up 3.3% |
| Net income attributable to common shareholders | $4.5 million; $0.03 per share | Net loss of $0.3 million; approximately $0.00 per share |
| Net operating income (NOI, non-GAAP) | $74.4 million | $72.7 million; up 2.4% |
| Funds from operations available to common shareholders and unitholders (FFO, non-GAAP) | $60.5 million | $55.9 million |
| Interest expense, including deferred financing amortization | $17.1 million | $16.2 million |
For the six months, revenue was $251.5 million versus $240.9 million; net income was $10.8 million versus $6.8 million; net income attributable to common shareholders was $10.5 million versus $6.5 million; and FFO was $120.8 million versus $116.1 million. Six-month operating cash flow was $78.5 million, compared with $79.1 million.
Q2 core-property occupancy was 89.6% at period-end, versus 90.5% a year earlier. Q2 combined rental rates on commenced leases increased 18.4%; six-month net absorption was negative 224,973 square feet. Consolidated Q2 NOI margin was approximately 60% of revenue.
At June 30, total assets were $4.0 billion and total liabilities were $2.3 billion. Debt principal was $2.043 billion, up from $1.852 billion at year-end 2021. Cash and cash equivalents were $28.8 million, with $381.7 million available under the revolving credit facility, net of letters of credit. Fixed-rate debt was 85.7% of total debt; the reported weighted-average interest rate was 3.7%. The quarterly distribution was $0.19 per share.
Changes and notable items
- Revenue growth reflected rent from recently completed or acquired properties, B.Labs, an Austin development placed partly in service, and improved occupancy at FMC Tower. Property operating expenses also rose, including from higher compensation, repairs, and increased property use.
- Core occupancy declined year over year, while Q2 tenant retention improved to 70.3% from 57.5%. Same-store NOI decreased 0.7% for Q2 and 0.9% for the six-month period.
- Investing cash outflow increased to $188.9 million from $68.4 million, reflecting higher development, redevelopment, tenant-improvement, leasing, and venture investment spending. Financing provided $111.8 million, largely reflecting credit-facility borrowings.
- The June 30 credit agreement extended the $600 million revolver maturity to June 2026, with two conditional six-month extensions, and replaced the prior $250 million term loan with a term loan maturing in June 2027. The term loan’s 2.87% fixed rate through swaps lasts only until October 8, 2022.
- Land and other property sales generated reported gains; six-month other income also included insurance proceeds and construction-delay settlement proceeds. These items contributed to reported results and are not necessarily recurring.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or FFO guidance. Management expected to use operating cash flow, venture distributions, cash, credit availability, financing, and property sales to meet liquidity needs; it expected remaining-2022 capital uses to focus primarily on current development and redevelopment projects.
- Management anticipated refinancing the $350 million notes due February 2023, likely with five-to-ten-year notes, and cautioned that the new effective rate would likely exceed the existing rate.
- Management cited uncertainty from inflation, higher interest rates, COVID-19 effects, labor shortages, supply-chain constraints, and market volatility. These factors could pressure tenant credit, occupancy, rents, project costs, financing access, and cash flow. Variable-rate debt and future refinancing are rate-sensitive.
- On July 29, 2022, One Uptown’s two ventures closed construction loans totaling $206.7 million. Brandywine provided carry and limited-payment guarantees, capped at 30% and 15% of the respective loan principal, as well as project-related guarantees.
- A July 14, 2022 venture for the planned 3151 Market Street life-science/office project estimated costs at $307 million; the partner agreed, subject to conditions, to fund up to approximately $55 million for a 45% preferred interest. Brandywine agreed to a completion guarantee.
- Brandywine reported compliance with debt covenants at June 30. It disclosed customary litigation and environmental uncertainties and guarantees or commitments related to venture projects; management did not expect routine legal matters to have a material adverse effect.
Important facts for investors to verify
- Lease expirations, leasing activity, tenant retention, occupancy, and whether rent-rate gains translate into durable cash NOI.
- Funding needs and remaining costs for development and redevelopment projects, including One Uptown and 3151 Market Street, and the scope of related guarantees.
- Ability and cost to refinance the February 2023 notes, and the effect of the term-loan swap expiration and higher rates on interest expense.
- Liquidity after capital spending and distributions, including revolver availability, covenant headroom, and dependence on asset sales or additional financing.
- How much reported earnings growth reflects recurring operations versus property-sale gains, insurance recoveries, and settlement proceeds.