The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a "safe harbor" for forward-looking statements. This Quarterly Report on Form 10-Q and other materials filed by us with theSEC (as well as information included in oral or other written statements made by us) contain statements that are forward-looking, including statements relating to business and real estate development activities, acquisitions, dispositions, future capital expenditures, financing sources, governmental regulation (including environmental regulation) and competition. We intend such forward-looking statements to be covered by the safe-harbor provisions of the 1995 Act. The words "anticipate," "believe," "estimate," "expect," "intend," "will," "should" and similar expressions, as they relate to us, are intended to identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. As forward-looking statements, these statements involve important risks, uncertainties and other factors that could cause actual results to differ materially from the expected results and, accordingly, such results may differ from those expressed in any forward-looking statements made by us or on our behalf. Factors that might cause actual results to differ materially from our expectations, many of which may be more likely to impact us as a result of the ongoing COVID-19 pandemic, are set forth in the "Risk Factors" section of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Accordingly, we caution readers not to place undue reliance on forward-looking statements. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. The discussion that follows is based primarily on our consolidated financial statements as ofJune 30, 2022 andDecember 31, 2021 and for the three and six months endedJune 30, 2022 and 2021 and should be read along with the consolidated financial statements and related notes appearing elsewhere in this report. The ability to compare one period to another may be significantly affected by acquisitions completed, development properties placed in service and dispositions made during those periods.
OVERVIEW
During the six months endedJune 30, 2022 , we owned and managed properties within five segments: (1) Philadelphia CBD, (2) Pennsylvania Suburbs, (3)Austin, Texas , (4)Metropolitan Washington , D.C., and (5) Other. The Philadelphia CBD segment includes properties located in theCity of Philadelphia inPennsylvania . The Pennsylvania Suburbs segment includes properties inChester ,Delaware andMontgomery counties in thePhiladelphia suburbs. TheAustin, Texas segment includes properties in theCity of Austin, Texas . The MetropolitanWashington, D.C. segment includes properties inNorthern Virginia ,Washington, D.C. andSouthern Maryland . The Other segment includes properties inCamden County, New Jersey andNew Castle County, Delaware . In addition to the five segments, our corporate group is responsible for cash and investment management, development of certain real estate properties during the construction period, and certain other general support functions. We generate cash and revenue from leases of space at our Properties and, to a lesser extent, from the management and development of properties owned by third parties and from investments in the unconsolidated real estate ventures. Factors that we evaluate when leasing space include rental rates, costs of tenant improvements, tenant creditworthiness, current and expected operating costs, the length of the lease term, vacancy levels and demand for space. We continue to seek revenue growth throughout our portfolio by increasing occupancy and rental rates. We also generate cash through sales of assets, including assets that we do not view as core to our business plan, either because of location or expected growth potential, and assets that are commanding premium prices from third party investors. Our financial and operating performance is dependent upon the demand for office, residential, parking, and retail space in our markets, our leasing results, our acquisition, disposition and development activity, our financing activity, our cash requirements and economic and market conditions, including prevailing interest rates. Adverse changes in economic conditions, including the ongoing effects of the global COVID-19 pandemic and the current inflationary environment, could result in a reduction of the availability of financing and higher borrowing costs. We continue to closely monitor the impact of the COVID-19 pandemic and inflation on all aspects of our business, including how it is impacting our tenants, employees, and business partners. Vacancy rates may increase, and rental rates and rent collection rates may decline as the current economic climate may negatively impact tenants. The long-term impact of the ongoing COVID-19 pandemic on the global economy and our tenants and prospective tenants remains uncertain and will depend on new information which may emerge concerning the severity of COVID-19, new variants of COVID-19 and the actions taken to contain it or treat its impact. In addition, the government responses to control the pandemic are creating disruption in the global economy and supply chains and adversely impacting many industries, including owners and developers of office and mixed-use buildings.
Overall economic conditions, including but not limited to labor shortages,
supply chain constraints, inflation, and deteriorating financial and credit
markets, could have a dampening effect on the fundamentals of our business,
including increases in past due accounts, tenant defaults, lower occupancy and
reduced effective rents. These adverse conditions could impact our net
31
——————————————————————————–
Table of Contents
income and cash flows and could have a material adverse effect on our financial condition. We believe that the quality of our assets and the strength of our balance sheet will enable us to raise capital, if necessary, in various forms and from different sources, including through secured or unsecured loans from banks, pension funds and life insurance companies. However, there can be no assurance that we will be able to borrow funds on terms that are economically attractive or at all. The table below summarizes selected operating and leasing statistics of our wholly owned properties for the three and six months endedJune 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Leasing Activity Core Properties (1): Total net rentable square feet owned 12,996,825 12,949,078 12,996,825 12,949,078 Occupancy percentage (end of period) 89.6 % 90.5 % 89.6 % 90.5 % Average occupancy percentage 88.9 % 90.4 % 89.4 % 89.9 %
Total Portfolio, less properties in development/redevelopment (2):
Tenant retention rate (3)
70.3 % 57.5 % 60.6 % 54.1 % New leases and expansions commenced (square feet) 247,597 156,372 359,694 185,475 Leases renewed (square feet) 137,103 95,853 519,458 262,677 Net absorption (square feet) 27,391 19,798 (224,973) (145,328)
Percentage change in rental rates per square foot (4):
New and expansion rental rates
26.2 % 32.7 % 23.9 % 29.8 % Renewal rental rates 8.3 % 13.3 % 17.9 % 11.6 % Combined rental rates 18.4 % 22.2 % 19.6 % 18.7 % Weighted average lease term for leases commenced (years) 8.0 8.5 8.3 7.1 Capital Costs Committed (5): Leasing commissions (per square foot)$ 10.45 $ 12.61 $ 11.95 $ 10.15 Tenant Improvements (per square foot)$ 39.59 $ 35.01 $ 35.81 $ 27.87 Total capital per square foot per lease year$ 4.85 $ 4.29 $ 4.44 $ 3.83 (1)Does not include properties under development, redevelopment, held for sale, or sold. (2)Includes leasing related to completed developments and redevelopments, as well as sold properties. (3)Calculated as percentage of total square feet. (4)Includes base rent plus reimbursement for operating expenses and real estate taxes. (5)Calculated on a weighted average basis for leases commenced during the quarter. Does not include properties under development/redevelopment.
In seeking to increase revenue through our operating, financing and investment
activities, we also seek to minimize operating risks, including (i) tenant
rollover risk, (ii) tenant credit risk and (iii) development risk.
Tenant Rollover Risk
We are subject to the risk that tenant leases, upon expiration, will not be renewed, that space may not be relet, or that the terms of renewal or reletting (including the cost of renovations) may be less favorable to us than the current lease terms. Leases that accounted for approximately 3.3% of our aggregate final annualized base rents as ofJune 30, 2022 (representing approximately 4.8% of the net rentable square feet of the properties) are scheduled to expire without penalty in the remainder of 2022. We maintain an active dialogue with our tenants in an effort to maximize lease renewals. If we are unable to renew leases or relet space under expiring leases, at anticipated rental rates, or if tenants terminate their leases early, our cash flow would be adversely impacted. Tenant Credit Risk
In the event of a tenant default, we may experience delays in enforcing our
rights as a landlord and may incur substantial costs in protecting our
investment. Our management evaluates our accrued rent receivable reserve policy
in light of our tenant base and general and local economic conditions. Our
accrued rent receivable allowance was
32
——————————————————————————–
Table of Contents
receivable balance as of
accrued rent receivable balance as of
If economic conditions deteriorate, including as a result of the ongoing COVID-19 pandemic and the current inflationary environment, we may experience increases in past due accounts, defaults, lower occupancy and reduced effective rents. These conditions would negatively affect our future net income and cash flows and could have a material adverse effect on our financial condition.
Development Risk
Development projects are subject to a variety of risks, including construction delays, construction cost overruns, building moratoriums, inability to obtain financing on favorable terms, inability to lease space at projected rates, inability to enter into construction, development and other agreements on favorable terms, and unexpected environmental and other hazards. As ofJune 30, 2022 the following active development and redevelopment projects remain under construction in progress and we were proceeding on the following activity (dollars, in thousands):
Estimated
Property/Portfolio Name Location Expected Completion Date Activity Type Approximate Square Footage Costs Amount Funded
405 Colorado Street (a) Austin, TX Q2 2021 (c) Development 205,803 $ 121,987 $ 103,312
250 King of Prussia Road (b) Radnor, PA Q3 2022 Redevelopment 168,294 $ 82,854 $ 52,134
2340 Dulles Corner Boulevard (d) Herndon, VA Q2 2023 Redevelopment 268,365
(a)Estimated costs include$2.1 million of existing property basis through a ground lease. Project includes 520 parking spaces. (b)Total project costs includes$20.6 million of existing property basis. (c)The parking garage and occupied portions of the office building were placed into service during 2021. (d)Total project costs include$58.0 million of existing property basis.
In addition to the properties listed above, we have classified one parking
facility in
OnDecember 1, 2021 , we entered into two joint venture agreements to develop One Uptown, a$328.4 million mixed-used project inAustin, Texas . Construction of the project commenced during the fourth quarter of 2021 and we have funded$75.9 million of the total estimated project costs as ofJune 30, 2022 . Under the joint venture agreement, we are required to fund an additional$7.4 million of the project costs. The remaining$245.1 million of the estimated total project costs is expected to be funded by our joint venture partner and proceeds from$206.7 million in construction loans that closed onJuly 29, 2022 . See Note 3, ''Real Estate Investments," to our Consolidated Financial Statements for additional information regarding the project. OnJuly 14, 2022 , we entered into a joint venture agreement to develop3151 Market Street , a$307 million life science project inPhiladelphia, Pennsylvania . Construction of the project commenced during the second quarter of 2022 and we have funded$43.0 million of the total estimated project costs as ofJune 30, 2022 . Under the joint venture agreement, we are required to fund an additional$24.6 million of the project costs. The remaining$239.4 million of the estimated total project costs is expected to be funded by our joint venture partner and proceeds of an expected$185 million in construction loans. See Note 3, ''Real Estate Investments," to our Consolidated Financial Statements for additional information regarding the project.
As of
development projects remain under construction in progress and we were
proceeding on the following activity (dollars, in thousands):
Our Share
Estimated Construction Loan Remaining to
Property/Portfolio Name Location Expected Completion Date Approximate Square Footage Costs Amount Funded Financing be
Funded
3025 JFK Boulevard (55%)Philadelphia, PA Q3 2023 (a)$ 287,272 $ 99,371 $ 186,727 $ - (b) (a)Mixed used building with 428,000 rentable square feet consisting of 200,000 SF of life science/innovation office, 219,000 SF of residential (326 units), and 9,000 SF of retail. (b)We have fully funded our equity commitment of$55.3 million . The remaining amount of the estimated costs to be funded of$187.9 million will be funded by our joint venture partner and the available borrowings under the$186.7 million construction loan. 33
——————————————————————————–
Table of Contents
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations discuss our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Certain accounting policies are considered to be critical accounting policies, as they require management to make assumptions about matters that are highly uncertain at the time the estimate is made and changes in accounting estimate are reasonably likely to occur from period to period. Management bases its estimates and assumptions on historical experience and current economic conditions. Our Annual Report on Form 10-K for the year endedDecember 31, 2021 contains a discussion of our critical accounting policies. There have been no significant changes in our critical accounting policies sinceDecember 31, 2021 . 34
——————————————————————————–
Table of Contents
RESULTS OF OPERATIONS
The following discussion is based on our consolidated financial statements for the three and six months endedJune 30, 2022 and 2021. We believe that presentation of our consolidated financial information, without a breakdown by segment, will effectively present important information useful to our investors. Net operating income ("NOI") as presented in the comparative analysis below is a non-GAAP financial measure defined as total revenue less property operating expenses, real estate taxes and third party management expenses. Property operating expenses that are included in determining NOI consist of costs that are necessary and allocable to our operating properties such as utilities, property-level salaries, repairs and maintenance, property insurance, and management fees. General and administrative expenses that are not reflected in NOI primarily consist of corporate-level salaries, amortization of share awards and professional fees that are incurred as part of corporate office management. NOI is a non-GAAP financial measure that we use internally to evaluate the operating performance of our real estate assets by segment, as presented in Note 13, ''Segment Information," to our consolidated financial statements, and of our business as a whole. We believe NOI provides useful information to investors regarding our financial condition and results of operations because it reflects only those income and expense items that are incurred at the property level. While NOI is a relevant and widely used measure of operating performance of real estate investment trusts, it does not represent cash flow from operations or net income as defined by GAAP and should not be considered as an alternative to those measures in evaluating our liquidity or operating performance. NOI does not reflect interest expenses, real estate impairment losses, depreciation and amortization costs, capital expenditures and leasing costs. We believe that net income, as defined by GAAP, is the most appropriate earnings measure. See Note 13, ''Segment Information," to our Consolidated Financial Statements for a reconciliation of NOI to our consolidated net income as defined by GAAP.
Comparison of the Three Months Ended
The following comparison for the three months ended
months ended
(a)"Same Store Property Portfolio," which represents 73 properties containing an aggregate of approximately 12.9 million net rentable square feet, and represents properties that we owned and consolidated for the three-month periods endedJune 30, 2022 and 2021. The Same Store Property Portfolio includes properties acquired or placed in service on or prior toApril 1, 2021 and owned and consolidated throughJune 30, 2022 , excluding properties classified as held for sale, (b)"Total Portfolio," which represents all properties owned and consolidated by us during the three months endedJune 30, 2022 and 2021, (c)"Recently Completed/Acquired Property," which represents one property placed into service or acquired on or subsequent toApril 1, 2021 , (d)"Development/Redevelopment Properties ," which represents four properties currently in development/redevelopment. A property is excluded from our Same Store Property Portfolio and moved into Development/Redevelopment in the period that we determine to proceed with development/redevelopment for a future development strategy, and (e)"Q2 2021 through Q2 2022 Dispositions," which represents three properties disposed of fromApril 1, 2021 throughJune 30, 2022 . 35
——————————————————————————–
Table of Contents
Comparison of three months endedJune 30, 2022 to the three months endedJune 30, 2021 Recently Completed/Acquired Same Store Property Portfolio PropertiesDevelopment/Redevelopment Properties Other (Eliminations) (a) Total Portfolio (dollars and square feet in millions except per share amounts) 2022 2021 $ Change % Change 2022 2021 2022 2021 2022 2021 2022 2021 $ Change % Change Revenue: Rents$ 110.1 $ 109.0 $ 1.1 1.0 %$1.2 $ 0.1 $ 1.5$ 0.1 $ 4.1 $ 2.0 $ 116.9 $ 111.2 $ 5.7 5.1 % Third party management fees, labor reimbursement and leasing - - - - % - - - - 5.9 6.6 5.9 6.6 (0.7) (10.6) % Other 0.3 0.3 - - % - - - - 0.9 1.9 1.2 2.2 (1.0) (45.5) % Total revenue 110.4 109.3 1.1 1.0 % 1.2 0.1 1.5 0.1 10.9 10.5 124.0 120.0 4.0 3.3 % Property operating expenses 29.3 27.5 1.8 6.5 % 0.1 - 0.3 (0.7) 3.4 2.5 33.1 29.3 3.8 13.0 % Real estate taxes 13.1 13.3 (0.2) (1.5) % 0.1 0.1 0.3 0.8 0.2 0.4 13.7 14.6 (0.9) (6.2) % Third party management expenses - - - - % - - - - 2.8 3.6 2.8 3.6 (0.8) (22.2) % Net operating income 68.0 68.5 (0.5) (0.7) % 1.0 - 0.9 - 4.5 4.0 74.4 72.5 1.9 2.6 % Depreciation and amortization 39.6 40.0 (0.4) (1.0) % 0.6 - 0.6 - 3.1 2.7 43.9 42.7 1.2 2.8 % General & administrative expenses - - - - % - - - - 8.3 8.4 8.3 8.4 (0.1) (1.2) % Net gain on disposition of real estate (0.1) (0.1) - - % Net gain on sale of undepreciated real estate (4.1) - (4.1) - % Operating income (loss)$ 28.4 $ 28.5 $ (0.1) (0.4) %$0.4 $ - $ 0.3 $ -$ (6.9) $ (7.1) $ 26.4 $ 21.5 $ 4.9 22.8 % Number of properties 73 73 1 4 78 Square feet 12.9 12.9 0.1 0.6 13.8 Core Occupancy % (b) 89.5 % 90.5 % 100.0 % Other Income (Expense): Interest and investment income 0.4 1.7 (1.3) (76.5) % Interest expense (16.3) (15.5) (0.8) 5.2 % Interest expense - Deferred financing costs (0.8) (0.7) (0.1) 14.3 % Equity in loss of unconsolidated real estate ventures (5.0) (7.2) 2.2 (30.6) % Net income (loss)$ 4.7 $ (0.2) $ 4.9 (2450.0) % Net income attributable to Common Shareholders ofBrandywine Realty Trust $ 0.03 $ -$ 0.03 - % (a)Represents certain revenues and expenses at the corporate level as well as various intercompany costs that are eliminated in consolidation, third-party management fees, provisions for impairment, and changes in the accrued rent receivable allowance. Other/(Eliminations) also includes properties sold and properties classified as held for sale. (b)Pertains toCore Properties .
Total Revenue
Rents from the Total Portfolio increased primarily as a result of the following: •$1.2 million increase related to the commencement of operations ofB.Labs , a life science incubator lab in our Philadelphia CBD segment, during the first quarter of 2022; •$1.1 million increase related to our Recently Completed/Acquired Property; •$1.2 million increase related to a development property in ourAustin, Texas segment that was partially placed into service during the third quarter of 2021; and •$0.8 million increase related to the residential and hotel components at theFMC Tower in our Philadelphia CBD segment related to higher occupancy partially due to the lifting of COVID-19 pandemic restrictions. Third party management fees, labor reimbursement, and leasing income decreased primarily due to a$0.5 million decrease related to a third party management contract terminated in the fourth quarter of 2021 and a$0.3 million decrease in fees earned from our MAP Venture primarily related to decreases in leasing commissions and construction management fees.
Other income decreased primarily due to
proceeds related to a property in our
million
2021.
Property Operating Expenses
Property operating expenses across our Total Portfolio increased primarily as a
result of the following:
36 -------------------------------------------------------------------------------- Table of Contents •$0.7 million increase related to a development property in ourAustin, Texas segment that was partially placed into service during the third quarter of 2021; •$0.6 million increase related to the commencement of operations ofB.Labs , a life science incubator lab in our Philadelphia CBD segment, during the first quarter of 2022; and •$0.5 million increase at the restaurant component ofFMC Tower primarily as a result of the lifting of COVID-19 pandemic restrictions. The remaining increase of$2.0 million is primarily related to miscellaneous increases in property operating expenses across our Total Portfolio, primarily driven by increases in property-related employee compensation expenses, marketing expenses, and repairs and maintenance.
Depreciation and Amortization
Depreciation and amortization expense increased primarily as a result of the following: •$0.6 million increase related to commencement of operations ofB.Labs , a life science incubator lab in our Philadelphia CBD segment, during the first quarter of 2022; and •$0.6 million increase related to our Recently Completed/Acquired Property.
The gain of$4.1 million recognized during the three months endedJune 30, 2022 is related to the sale of one parcel of land in ourMetropolitan Washington , D.C. segment and the sale of a portfolio of four parcels of land and two office buildings in our Other segment.
Interest and Investment Income
Interest and investment income decreased primarily as a result of a$1.2 million decrease related to our preferred equity investment in a single-purpose entity that owned two stabilized office buildings located inAustin, Texas , which closed onDecember 31, 2020 and was redeemed prior to maturity onSeptember 3, 2021 .
Equity in loss of unconsolidated real estate ventures
Equity in loss of unconsolidated real estate ventures decreased primarily due to the following: •$1.9 million decrease associated with our Commerce Square Venture primarily due to a decrease in the amortization of in-place lease intangibles during the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 ; •$0.4 million decrease related to our 4040 Wilson Venture primarily; and •$0.3 million decrease associated with our 1919 Market Venture.
Comparison of the Six Months Ended
The following comparison for the six months ended
months ended
(a)"Same Store Property Portfolio," which represents 73 properties containing an aggregate of approximately 12.9 million net rentable square feet, and represents properties that we owned and consolidated for the six-month periods endedJune 30, 2022 and 2021. The Same Store Property Portfolio includes properties acquired or placed in service on or prior toJanuary 1, 2021 and owned and consolidated throughJune 30, 2022 excluding properties classified as held for sale, (b)"Total Portfolio," which represents all properties owned and consolidated by us during the six months endedJune 30, 2022 and 2021, (c)"Recently Completed/Acquired Property," which represents one property placed into service or acquired on or subsequent toJanuary 1, 2021 , (d)"Development/Redevelopment Properties ," which represents four properties currently in development/redevelopment. A property is excluded from our Same Store Property Portfolio and moved into Development/Redevelopment in the period that we determine to proceed with development/redevelopment for a future development strategy, and (e)"YTD 2021 and 2022 Dispositions," which represents three properties disposed of fromJanuary 1, 2021 throughJune 30, 2022 . 37
——————————————————————————–
Table of Contents
Comparison of the six months endedJune 30, 2022 to the six months endedJune 30, 2021 Same Store Property PortfolioRecently Completed/Acquired Properties Development/Redevelopment Properties Other (Eliminations) (a) Total Portfolio (dollars and square feet in millions except per share amounts) 2022 2021 $ Change % Change 2022 2021 2022 2021 2022 2021 2022 2021 $ Change % Change Revenue: Rents$ 220.8 $ 219.9 $ 0.9 0.4 %$ 2.3 $ 0.1 $ 2.6$ 0.2 $ 7.1$ 4.5 $ 232.8 $ 224.7 $ 8.1 3.6 % Third party management fees, labor reimbursement and leasing - - - - % - - - - 11.0 13.3 11.0 13.3 (2.3) (17.3) % Other 0.6 0.5 0.1 20.0 % - - 0.1 - 7.0 2.4 7.7 2.9 4.8 165.5 % Total revenue 221.4 220.4 1.0 0.5 % 2.3 0.1 2.7 0.2 25.1 20.2 251.5 240.9 10.6 4.4 % Property operating expenses 58.0 55.5 2.5 4.5 % 0.3 (0.1) 0.6 (1.1) 5.8 3.9 64.7 58.2 6.5 11.2 % Real estate taxes 26.2 26.4 (0.2) (0.8) % 0.1 0.1 0.5 1.6 0.8 1.3 27.6 29.4 (1.8) (6.1) % Third party management expenses - - - - % - - - - 5.3 6.5 5.3 6.5 (1.2) (18.5) % Net operating income 137.2 138.5 (1.3) (0.9) % 1.9 0.1 1.6 (0.3) 13.2 8.5 153.9 146.8 7.1 4.8 % Depreciation and amortization 79.5 77.6 1.9 2.4 % 1.1 - 1.0 0.4 6.0 5.2 87.6 83.2 4.4 5.3 % General & administrative expenses - - - - % - - - - 18.3 14.9 18.3 14.9 3.4 22.8 % Net gain on disposition of real estate (0.1) (0.1) - - % Net gain on sale of undepreciated real estate (5.0) (2.0) (3.0) 150.0 % Operating income (loss)$ 57.7 $ 60.9 $ (3.2) (5.3) %$ 0.8 $ 0.1 $ 0.6$ (0.7) $ (11.1) $ (11.6) $ 53.1 $ 50.8 $ 2.3 4.5 % Number of properties 73 73 1 4 78 Square feet 12.9 12.9 0.1 0.6 13.8 Core Occupancy % (b) 89.5 % 90.5 % 100.0 % Other Income (Expense): Interest and investment income 0.9 3.4 (2.5) (73.5) % Interest expense (32.1) (31.8) (0.3) 0.9 % Interest expense - Deferred financing costs (1.5) (1.4) (0.1) 7.1 % Equity in loss of unconsolidated real estate ventures (9.5) (14.2) 4.7 (33.1) % Income tax provision (0.1) - (0.1) - % Net income$ 10.8 $ 6.8 $ 4.0 58.8 % Net income attributable to Common Shareholders ofBrandywine Realty Trust $ 0.06 $ 0.04 $ 0.02 50.0 % (a)Represents certain revenues and expenses at the corporate level as well as various intercompany costs that are eliminated in consolidation, third-party management fees, provisions for impairment, and changes in the accrued rent receivable allowance. Other/(Eliminations) also includes properties sold and properties classified as held for sale. (b)Pertains toCore Properties .
Total Revenue
Rents from the Total Portfolio increased primarily as a result of the following: •$2.3 million increase related to a development property in ourAustin, Texas segment that was partially placed into service during the third quarter of 2021; •$2.2 million increase related to our Recently Completed/Acquired Property; •$2.0 million increase related to the residential and hotel components at theFMC Tower in our Philadelphia CBD segment related to higher occupancy partially due to the lifting of COVID-19 pandemic restrictions; and •$1.4 million increase related to the commencement of operations ofB.Labs , a life science incubator lab in our Philadelphia CBD segment, during the first quarter of 2022. Third party management fees, labor reimbursement, and leasing income decreased primarily due to a$1.1 million decrease in fees earned from our MAP Venture primarily related to decreases in leasing commissions and construction management fees,$1.0 million decrease related to a third party management contract terminated in the fourth quarter of 2021, and$0.3 million decrease as a result of the sale of the final property at our Allstate Venture during the fourth quarter of 2021. 38
——————————————————————————–
Table of Contents
Other income increased primarily as a result of the following: •$3.4 million in excess insurance proceeds received during the six months endedJune 30, 2022 offset by$0.7 million received during the six months endedJune 30, 2021 related to a property in ourAustin, Texas segment; and •$2.2 million of settlement proceeds received from a general contractor for liquidated damages as a result of a construction delay at a property in ourAustin, Texas segment.
Property Operating Expenses
Property operating expenses across our Total Portfolio increased primarily as a result of the following: •$1.4 million increase related to the commencement of operations ofB.Labs , a life science incubator lab in our Philadelphia CBD segment, during the first quarter of 2022; •$1.4 million increase related to a development property in ourAustin, Texas segment that was partially placed into service during the third quarter of 2021; •$0.8 million increase at the restaurant component ofFMC Tower primarily as a result of the lifting of COVID-19 pandemic restrictions; and •$0.3 million increase related to the Recently Completed/Acquired Property.
The remaining increase of
property operating expenses across our Total Portfolio, primarily driven by
increased use of our properties by the tenants as a result of lifting of
COVID-19 pandemic restrictions and increases in property-related employee
compensation expenses, marketing expenses, and repairs and maintenance.
Real Estate Taxes
Real estate taxes decreased primarily due to a
properties in our Pennsylvania Suburbs segment as a result of tax reassessments.
Depreciation and Amortization
Depreciation and amortization expense increased primarily as a result of the following: •$3.3 million increase in depreciation expense due to the reassessment of the estimated useful life of seven properties in ourAustin, Texas segment pursuant to future demolition plans as part of our Broadmoor master development plan beginning in the second quarter of 2021; and •$1.2 million increase related to the commencement of operations ofB.Labs , a life science incubator lab in our Philadelphia CBD segment, during the first quarter of 2022. General and Administrative General and administrative expenses increased primarily as a result of a$2.4 million recovery of previously expensed legal fees incurred in pursuit of a settlement that was received in the first quarter of 2021. In addition,$1.4 million of the increase is related to increased non-cash compensation expense during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 .
The gain of
due to the following:
•$3.4 million related to the sale of a parcel of land in ourMetropolitan Washington , D.C. segment; and •$0.6 million related to the sale of a portfolio of five parcels of land and three operating properties in our Other segment. The gain of$2.0 million recognized during the six months endedJune 30, 2021 is related to the formation of the 3025 JFK Venture, which resulted in deconsolidation of the project and recognition of our investment in the real estate venture at fair value.
Interest and Investment Income
Interest and investment income decreased by$2.5 million primarily as a result of our preferred equity investment in a single-purpose entity that owned two stabilized office buildings located inAustin, Texas , which closed onDecember 31, 2020 and was redeemed prior to maturity onSeptember 3, 2021 .
Equity in Loss of
Equity in loss of unconsolidated real estate ventures increased primarily due to
the following:
39 -------------------------------------------------------------------------------- Table of Contents •$3.1 million decrease associated with our Commerce Square Venture primarily due to a decrease in the amortization of in-place lease intangibles during the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 ; •$0.6 million decrease associated with our 1919 Market Venture; •$0.6 million decrease associated with our 4040 Wilson Venture; and •$0.4 million decrease associated with MAP Venture. 40
——————————————————————————–
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
General
Our principal liquidity funding needs for the next twelve months are as follows: •normal recurring expenses; •capital expenditures, including capital and tenant improvements and leasing costs; •debt service and principal repayment obligations; •current development and redevelopment costs; •commitments to unconsolidated real estate ventures; •distributions to shareholders to maintain our REIT status; •possible acquisitions of properties, either directly or indirectly through the acquisition of equity interest therein; and •possible common share repurchases. We expect to satisfy these needs using one or more of the following: •cash flows from operations; •distributions of cash from our unconsolidated real estate ventures; •cash and cash equivalent balances; •availability under our unsecured credit facility; •secured construction loans and long-term unsecured indebtedness; •sales of real estate or contributions of interests in real estate to joint ventures; and •issuances of Parent Company equity securities and/or units of theOperating Partnership . As ofJune 30, 2022 , the Parent Company owned a 99.7% interest in theOperating Partnership . The remaining interest of approximately 0.3% pertains to common limited partnership interests owned by non-affiliated investors who contributed property to theOperating Partnership in exchange for their interests. As the sole general partner of theOperating Partnership , the Parent Company has full and complete responsibility for theOperating Partnership's day-to-day operations and management.The Parent Company's source of funding for its dividend payments and other obligations is the distributions it receives from theOperating Partnership . As summarized above, we believe that our liquidity needs will be satisfied through available cash balances and cash flows from operations, financing activities and real estate sales. Rental revenue and other income from operations are our principal sources of cash to pay operating expenses, debt service, recurring capital expenditures and the minimum distributions required to maintain our REIT qualification. We seek to increase cash flows from our properties by maintaining quality standards for our properties that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. Our revenue also includes third-party fees generated by our property management, leasing, development and construction businesses. We believe that our revenue, together with proceeds from property sales and debt financings, will continue to provide funds for our short-term liquidity needs. However, material changes in our operating or financing activities may adversely affect our net cash flows. With uncertain economic conditions, vacancy rates may increase, effective rental rates on new and renewed leases may decrease and tenant installation costs, including concessions, may increase in most or all of our markets during 2022 and possibly beyond. As a result, our revenues and cash flows could be insufficient to cover operating expenses, including increased tenant installation costs, pay debt service or make distributions to shareholders over the short-term. If this situation were to occur, we expect that we would finance cash deficits through borrowings under our unsecured credit facility and other sources of debt and equity financings. In addition, a material adverse change in cash provided by operations could adversely affect our compliance with financial performance covenants under our unsecured credit facility, including unsecured term loans and unsecured notes. As ofJune 30, 2022 we were in compliance with all of our debt covenants and requirement obligations. OnJune 30, 2022 , we executed the 2022 Credit Agreement, which, among other things, provides for the Revolving Credit Facility and Term Loan. As ofJune 30, 2022 , based on theOperating Partnership's unsecured senior debt rating, the applicable margin for revolving loans under the Revolving Credit Facility was 105.0 basis points (excluding the applicable facility fee of 25 basis points) and was 120.0 basis points for the Term Loan, plus, in each case, a daily SOFR adjustment of 10 basis points. Through a series of interest rate swaps, the$250.0 million principal amount of the Term Loan has a fixed interest rate of 2.87% untilOctober 8, 2022 . See Note 7, ''Debt Obligations," for further information. In addition, we are continuing to monitor the ongoing COVID-19 pandemic and the related economic impacts, inflation, market volatility, and business disruption, and its impact on our tenants. The severity and duration of the pandemic and its impact on our operations and liquidity is uncertain and continues to evolve globally. However, if the pandemic continues, there will likely be continued negative economic impacts, market volatility, and business disruption which could negatively impact our tenants' 41
——————————————————————————–
Table of Contents
ability to pay rent, our ability to lease vacant space, and our ability to
complete development and redevelopment projects, and these consequences, in
turn, could materially impact our results of operations.
We have granted rent relief requests primarily to our co-working and retail tenants. The relief requests have substantially all been in the form of rent deferral for varying lengths of time, but were primarily repaid in 2020 and 2021. For those tenants we believe require rent relief, we have granted deferrals and, in some instances, rent abatements while receiving extended lease terms through favorable lease extensions. We continue to assess the merits of rent deferral requests and can give no assurances on the outcomes of these ongoing negotiations, the amount and nature of the rent relief packages and ultimate recovery of the amounts deferred. We use multiple financing sources to fund our long-term capital needs. When needed, we use borrowings under our unsecured credit facility for general business purposes, including to meet debt maturities and to fund distributions to shareholders as well as development and acquisition costs and other expenses. In light of the volatility in financial markets and economic uncertainties, it is possible, that one or more lenders under our unsecured credit facility could fail to fund a borrowing request. Such an event could adversely affect our ability to access funds under our unsecured credit facility when needed to fund distributions or pay expenses. Our ability to incur additional debt is dependent upon a number of factors, including our credit ratings, the value of our unencumbered assets, our degree of leverage and borrowing restrictions imposed by our lenders. If one or more rating agencies were to downgrade our unsecured credit rating, our access to the unsecured debt market would be more limited and the interest rate under our unsecured credit facility and unsecured term loan would increase.
unsecured debt obligations, which, as of
million
portfolio as of
Capital Markets
The Parent Company issues equity from time to time, the proceeds of which it contributes to theOperating Partnership in exchange for additional interests in theOperating Partnership , and guarantees debt obligations of theOperating Partnership .The Parent Company's ability to sell common shares and preferred shares is dependent on, among other things, general market conditions for REITs, market perceptions about the Company as a whole and the current trading price of the Parent Company's shares.The Parent Company maintains a shelf registration statement that covers the offering and sale of common shares, preferred shares, depositary shares, warrants and unsecured debt securities. Subject to our ongoing compliance with securities laws, and if warranted by market conditions, we may offer and sell equity and debt securities from time to time under the shelf registration statement or in transactions exempt from registration. See Note 11, ''Beneficiaries' Equity of the Parent Company," to our Consolidated Financial Statements for further information related to our share repurchase program. We expect to fund any additional share repurchases with a combination of available cash balances and availability under our unsecured credit facility. The timing and amounts of any repurchases will depend on a variety of factors, including market conditions, regulatory requirements, share prices, capital availability and other factors as determined by our management team. The repurchase program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time without notice.
The Operating Partnership also considers net sales of selected properties and recapitalization of unconsolidated real estate ventures as additional sources of managing its liquidity. During the six months endedJune 30, 2022 , we closed on the sale of three parcels of land for net cash proceeds of$38.8 million as well as a portfolio of 3 office properties and 5 parcels of land inGibbsboro, New Jersey for net cash proceeds of$4.0 million . As ofJune 30, 2022 , we had$28.8 million of cash and cash equivalents and$381.7 million of available borrowings under our unsecured credit facility, net of$4.3 million in letters of credit outstanding. Based on the foregoing, as well as cash flows from operations net of dividend requirements, we believe we have sufficient capital to fund our remaining capital requirements on existing development and redevelopment projects and pursue additional attractive investment opportunities. We expect that our primary uses of capital during the remainder of 2022 will be to fund our current development and redevelopment projects.
Cash Flows
The following discussion of our cash flows is based on the consolidated
statement of cash flows and is not meant to be a comprehensive discussion of the
changes in our cash flows for the periods presented.
42
——————————————————————————–
Table of Contents
As of
equivalents and restricted cash of
respectively. We report and analyze our cash flows based on operating
activities, investing activities, and financing activities. The following table
summarizes changes in our cash flows (in thousands):
Six Months Ended June 30,
Activity 2022 2021 (Decrease) Increase
Operating $ 78,494 $ 79,126 $ (632)
Investing (188,862) (68,403) (120,459)
Financing 111,848 (9,288) 121,136
Net cash flows $ 1,480 $ 1,435 $ 45
Our principal source of cash flows is from the operation of our Properties. Our
Properties provide a relatively consistent stream of cash flows that provides us
with the resources to fund operating expenses, debt service and quarterly
dividends. The decrease in operating cash flows is primarily due to the timing
of operating expense payments.
Cash is used in investing activities to fund acquisitions, development, or
redevelopment projects and recurring and nonrecurring capital expenditures. We
selectively invest in new projects that enable us to take advantage of our
development, leasing, financing, and property management skills and invest in
existing buildings that meet our investment criteria. During the six months
ended June 30, 2022 , when compared to the six months ended June 30, 2021 , the
change in investing cash flows was due to the following activities (in
thousands):
(Decrease)
Increase
Acquisitions of real estate $ (3,446)
Capital expenditures and capitalized interest (124,945)
Capital improvements/acquisition deposits/leasing costs (14,309)
Joint venture investments (11,145)
Proceeds from the sale of properties 34,067
Capital distributions from unconsolidated real estate ventures 569
Other investing activities (1,250)
Increase in net cash used in investing activities $ (120,459)
We generally fund our investment activity through the sale of real estate,
property-level financing, credit facilities, senior unsecured notes, and
construction loans. From time to time, we may issue common or preferred shares
of beneficial interest, or the Operating Partnership may issue common or
preferred units of limited partnership interest. During the six months ended
June 30, 2022 , when compared to the six months ended June 30, 2021 , the change
in financing cash flows was due to the following activities (in thousands):
(Decrease)
Increase
Proceeds from debt obligations $
100,000
Repayments of debt obligations
33,000
Redemption of limited partnership units
(1,772)
Dividends and distributions paid
(113)
Debt financing costs paid
(6,641)
Other financing activities
(3,338)
Increase in net cash provided by financing activities $
121,136
43
——————————————————————————–
Table of Contents Capitalization Indebtedness The table below summarizes indebtedness under our unsecured debt atJune 30, 2022 andDecember 31, 2021 : June 30, 2022 December 31, 2021 (dollars in thousands) Balance: (a) Fixed rate$ 1,750,000 $ 1,750,000 Variable rate - unhedged 292,610 101,610 Total$ 2,042,610 $ 1,851,610 Percent of Total Debt: Fixed rate 85.7 % 94.5 % Variable rate - unhedged 14.3 % 5.5 % Total 100.0 % 100.0 % Weighted-average interest rate at period end: Fixed rate 3.8 % 3.8 % Variable rate - unhedged 2.5 % 1.3 % Total 3.7 % 3.7 % Weighted-average maturity in years: Fixed rate 4.2 4.0 Variable rate - unhedged 6.5 10.6 Total 4.5 4.4
(a)Consists of unpaid principal and does not reflect premium/discount or
deferred financing costs.
Scheduled principal payments and related weighted average annual effective interest rates for our debt as ofJune 30, 2022 were as follows (dollars in thousands): Weighted Average Principal Interest Rate of Period maturities Maturing Debt 2022 (six months remaining) $ - - % 2023 350,000 3.87 % 2024 350,000 3.78 % 2025 - - % 2026 214,000 2.59 % 2027 700,000 3.61 % 2028 - - % 2029 350,000 4.30 % 2030 - - % 2031 - - % Thereafter 78,610 2.44 % Totals$ 2,042,610 3.65 % We anticipate refinancing our$350 million 3.95% Guaranteed Notes prior to theFebruary 2023 maturity with similar guaranteed notes that will likely have a term between five and ten years. In the current interest rate environment, we anticipate the new guaranteed notes will have an effective interest rate that is above the current effective interest rate.
Unsecured Debt
The Operating Partnership is the issuer of our unsecured notes which are fully and unconditionally guaranteed by the Parent Company. The indenture under which theOperating Partnership issued its unsecured notes contains financial covenants, including: (i) a leverage ratio not to exceed 60%; (ii) a secured debt leverage ratio not to exceed 40%; (iii) a debt service coverage ratio of greater than 1.5 to 1.0; and (iv) an unencumbered asset value of not less than 150% of unsecured debt.The Operating Partnership is in compliance with all covenants as ofJune 30, 2022 . 44 -------------------------------------------------------------------------------- Table of Contents The charter documents of the Parent Company andOperating Partnership do not limit the amount or form of indebtedness that theOperating Partnership may incur, and its policies on debt incurrence are solely within the discretion of the Parent Company'sBoard of Trustees , subject to the financial covenants in the 2022 Credit Agreement, the indenture and other credit agreements.
Equity
In order to maintain its qualification as a REIT, the Parent Company is required to, among other things, pay dividends to its shareholders of at least 90% of its REIT taxable income. See Note 11, ''Beneficiaries' Equity of the Parent Company," to our Consolidated Financial Statements for further information related to our dividends declared for the second quarter of 2022.
Inflation
Substantially all our leases are structured as base year or triple net leases which provide for reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per square-foot basis, or in some cases, annual reimbursement of operating expenses above certain per square-foot allowances. In addition, approximately 96% of our leases (as a proportion of our wholly-owned portfolio square feet) contain effective annual rent escalations that are either fixed (generally ranging from 2.5% to 3.0%) or indexed based on a consumer price index or other indices. Accordingly, we do not believe that our cash flows or earnings from real estate operations are subject to significant risks from inflation. However, a period of high inflation would cause an increase in the borrowing cost on our variable rate debt and would have an impact on our ability to refinance existing debt or obtain new debt at favorable terms.
Contractual Obligations
Refer to our Annual Report on Form 10-K for the year ended
a discussion of our contractual obligations.
There have been no material changes, outside the ordinary course of business, to
these contractual obligations during the three months ended
Funds from Operations (FFO)
Pursuant to the revised definition of FFO adopted by theBoard of Governors of theNational Association of Real Estate Investment Trusts ("NAREIT"), we calculate FFO by adjusting net income/(loss) attributable to common unit holders (computed in accordance with GAAP) for gains (or losses) from sales of properties, impairment losses on depreciable consolidated real estate, impairment losses on investments in unconsolidated real estate ventures driven by a measurable decrease in the fair value of depreciable real estate held by the unconsolidated real estate ventures, real estate related depreciation and amortization, and after similar adjustments for unconsolidated real estate ventures. Our calculation of FFO includes gains from sale of undepreciated real estate and other assets, considered incidental to our main business, to third parties or unconsolidated real estate ventures. FFO is a non-GAAP financial measure. We believe that the use of FFO combined with the required GAAP presentations, has been beneficial in improving the understanding of operating results of REITs among the investing public and making comparisons of REITs' operating results more meaningful. We consider FFO to be a useful measure for reviewing comparative operating and financial performance because, by excluding property impairments, gains or losses related to sales of previously depreciated operating real estate assets and real estate depreciation and amortization, FFO can help the investing public compare the operating performance of a company's real estate between periods or as compared to other companies. Our computation of FFO may not be comparable to FFO reported by other REITs or real estate companies that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. We consider net income, as defined by GAAP, to be the most comparable earnings measure to FFO. While FFO and FFO per unit are relevant and widely used measures of operating performance of REITs, FFO does not represent cash flow from operations or net income as defined by GAAP and should not be considered as alternatives to those measures in evaluating our liquidity or operating performance. We believe that to further understand our performance, FFO should be compared with our reported net income/(loss) attributable to common unit holders and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements. 45
——————————————————————————–
Table of Contents
The following table presents a reconciliation of net income attributable to common unitholders to FFO for the three and six months endedJune 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (amounts in thousands, except share information) Net income (loss) attributable to common$ 4,555 $ (268) $ 10,510 $ 6,551 unitholders Add (deduct): Amount allocated to unvested restricted 98 94 246 240
unitholders
Net gain on disposition of real estate (144) (68) (144) (142) Depreciation and amortization: Real property 36,631 34,294 72,793 65,828 Leasing costs including acquired intangibles 6,597 7,954 13,591 16,234 Company's share of unconsolidated real estate 12,903 14,060 24,198 27,791
ventures
Partners' share of consolidated real estate (5) (5) (10) (10)
ventures
Funds from operations$ 60,635 $
56,061
Funds from operations allocable to unvested
(154) (150) (392) (363) restricted shareholders Funds from operations available to common share$ 60,481 $
55,911
and unit holders (FFO)
Weighted-average shares/units outstanding – 172,043,498
171,792,415 171,985,863 171,699,909 basic (a) Weighted-average shares/units outstanding - 172,776,896 173,289,294 173,149,640 172,958,591
fully diluted (a)
(a)Includes common shares and partnership units outstanding through the three
and six months ended
© Edgar Online, source