BRANDYWINE REALTY TRUST quarterly report, Q1 FY2023

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Brandywine Realty Trust — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Brandywine is a REIT focused on office and mixed-use properties, primarily in the Philadelphia region and Austin. At quarter-end, it owned 77 properties totaling approximately 13.6 million square feet and held interests in 11 unconsolidated real estate ventures. The company cautions that interim results are not necessarily indicative of full-year results.

Financial and operating performance

  • Revenue: $129.2 million, up 1.3% from $127.5 million. Rents rose 4.2% to $120.8 million; other income declined to $2.4 million from $6.5 million, partly because Q1 2022 included insurance proceeds and contractor settlement income that did not recur.
  • Profitability: Operating income was $24.1 million, down 9.7%. Net loss attributable to common shareholders was $5.3 million, or $0.03 per share, versus net income of $5.9 million, or $0.03 per share. Higher interest expense and greater losses from unconsolidated ventures weighed on results.
  • Property operations: Consolidated NOI, a non-GAAP measure, was $78.4 million, down 1.5%. Same-store NOI increased 1.4% to $70.0 million. Core occupancy was 89.0%, compared with 89.3% a year earlier; average occupancy was 88.9%, versus 89.9%.
  • Leasing: Tenant retention was 45.2%, down from 55.9%. Net absorption was negative 109,287 square feet, compared with negative 252,364 square feet. Combined rental rates on commenced leases increased 14.9%, versus 20.4%.
  • Funds from operations: FFO available to common shareholders and unitholders was $50.8 million, versus $60.3 million, a decrease of approximately 15.7%. FFO is non-GAAP and is not a substitute for net income or operating cash flow.
  • Cash flow: Operating activities generated $5.4 million, down from $28.5 million. Investing used $45.0 million, compared with $110.8 million; financing provided $134.3 million, compared with $94.1 million. Cash and restricted cash ended the quarter at $113.1 million.
  • Debt and liquidity: Consolidated debt principal was $2.144 billion at quarter-end, versus $1.971 billion at year-end 2022. Fixed-rate debt represented 93.1% of principal; weighted-average interest rate was 5.1% and average maturity was 4.7 years. Cash and cash equivalents were $96.9 million, with $582.6 million of available unsecured credit facility capacity, net of letters of credit. The company reported compliance with its financial covenants.
  • Balance sheet: Total assets were $4.0 billion and total liabilities were $2.4 billion at March 31, 2023. Net real estate investments were $2.9 billion.

Material changes and notable items

  • Interest expense increased to $22.7 million from $15.7 million, reflecting the higher-cost 7.55% 2028 notes compared with the retired 3.95% 2023 notes, as well as new financing.
  • The company entered into a $245 million secured term loan at 5.88%, maturing in February 2028, and a $70 million unsecured term loan due February 2024, with a possible 12-month extension. It redeemed the remaining $54.3 million principal balance of its 2023 notes.
  • Principal debt maturities include $350 million in 2024 and $70 million in 2025; the filing’s debt schedule lists $700 million in 2027 and $595 million in 2028.
  • The company contributed 200,000 square feet of buildable density to the 3151 Market Street venture and recorded a $0.8 million gain. Equity in losses of unconsolidated ventures increased to $6.2 million from $4.6 million.
  • The $250 million unsecured term loan was swapped to a fixed rate of 5.01%, effective January 2023. A derivative fair-value loss of $5.3 million contributed to other comprehensive loss.
  • The quarterly distribution was $0.19 per share, or $32.8 million in total, payable in April. No share repurchases occurred in the quarter.

Outlook, risks and contingencies

  • Management expects available cash, operating cash flows, financing capacity and other sources to meet near-term needs, and identified funding current development and redevelopment projects as a primary use of capital during the rest of 2023. No specific earnings or full-year financial guidance is provided in the filing text.
  • Management cautioned that uncertain economic conditions, inflation, rising interest rates and credit-market volatility could increase vacancies, tenant defaults and leasing costs, or reduce effective rents and cash flows. Higher interest rates have already increased borrowing costs.
  • The 3151 Market Street venture had not secured a construction loan as of the filing date. After the partner funds its remaining commitment, Brandywine may need to fund the project’s remaining construction costs until financing is obtained. The company also disclosed that it had not obtained a construction loan for its 155 King of Prussia Road development.
  • The Commerce Square venture’s mortgage maturity had been extended to June 5, 2023; the venture was working to satisfy the debt, but repayment or further extensions were not assured. The debt is non-recourse to Brandywine.
  • Brandywine has completion, cost-overrun and other guarantees related to certain venture developments, including limited payment guarantees tied to construction loans. It also disclosed a $20.0 million additional preferred-equity commitment to the Commerce Square venture, of which $9.5 million had been contributed.
  • The filing states that no material changes had occurred in previously disclosed risk factors, and that routine legal proceedings were not expected to have a material adverse effect.

Important facts for investors to verify

  • Lease expirations and renewal outcomes: leases representing approximately 4.3% of aggregate final annualized base rent were scheduled to expire without penalty during the remainder of 2023.
  • Whether occupancy, tenant retention and leasing activity improve, and whether reported rental-rate increases translate into sustained cash flow.
  • Progress on construction financing, costs and completion at 3151 Market Street and other development projects, including potential funding obligations for Brandywine.
  • Repayment or extension of the Commerce Square venture mortgage, and the effects of venture debt and losses on Brandywine’s investment.
  • Debt-service capacity and refinancing plans, particularly for the 2024 and 2025 maturities, given higher interest costs and relatively low Q1 operating cash flow.
  • Reconcile the filing’s liquidity and debt schedules with subsequent disclosures: the reported $582.6 million of available credit facility capacity, debt maturities and any later financing or covenant developments.