Management Comments
“We continue to make excellent progress on our 2023 business plan highlighted by achieving 89% of our speculative revenue target based on the midpoint of our guidance.” stated
Second Quarter Highlights
Financial Results
- Net Loss to common shareholders:
$(12.9) million , or ($0.08 ) per share. - Funds from Operations (FFO):
$49.6 million , or$0.29 per diluted share.
Portfolio Results
- Core Portfolio: 89.4% occupied and 91.1% leased. Our Philadelphia CBD and Pennsylvania Suburb Segments were 95.4% leased and 93.8% occupied and, on an accrual basis, comprised 74.6% of our YTD NOI.
- New and Renewal Leases Signed: 568,000 square feet wholly-owned and 969,000 square feet, including our joint ventures.
- Rental Rate Mark-to-Market: Increased 17.6% / 5.8% on an accrual / cash basis
- Same Store Net Operating Income: increased 6.2% on an accrual basis and increased 6.6% on a cash basis
- Tenant Retention Ratio: 71%
Recent Transaction Activity
Joint Venture and Development Activity
- On
June 2, 2023 , we refinanced the mortgage debt for our Commerce Square Venture, through a new$220.0 million mortgage loan. The new mortgage bears an all-in fixed interest rate of 7.7875% per annum and matures inJune 2028 . In connection with the financing transaction, the Company contributed$50.5 million to the Commerce Square Venture in exchange for an additional equity interest and to fund loan closing costs on behalf of the joint venture. As a result of our equity contribution, our ownership increased from 70% to 78%.
Disposition Activity
- As of
June 30, 2023 , the Company was under an agreement to sell an office property located inAustin, Texas to an unaffiliated third party for$53.3 million . The Company has determined that consummation of the sale is probable and has classified the property as held for sale on the consolidated balance sheets. The sale is subject to customary closing conditions.
2023 Finance / Capital Markets Activity
- We have no outstanding balance on our
$600.0 million unsecured revolving credit facility as ofJune 30, 2023 . - We have
$32.1 million of cash and cash equivalents on-hand as ofJune 30, 2023 .
Results for the Three and Six Month Periods Ended
Net loss allocated to common shares totaled
FFO available to common shares and units totaled
Net loss allocated to common shares totaled
Our FFO available to common shares and units for the first six months of 2023 totaled
Operating and Leasing Activity
In the second quarter of 2023, our same store Net Operating Income (NOI) excluding termination revenues and other income items increased 6.2% on an accrual basis and increased 6.6% on a cash basis for our 71 same store properties, which were 89.4% occupied on both
We leased approximately 568,000 square feet and commenced occupancy on 207,000 square feet during the second quarter of 2023. The second quarter occupancy activity includes 114,000 square feet of renewals, 73,000 square feet of new leases and 20,000 square feet of tenant expansions. We have an additional 224,000 square feet of executed new leasing scheduled to commence subsequent to
Our second quarter tenant retention ratio was 71% in our core portfolio with net absorption of 18,000 square feet during the second quarter of 2023. Second quarter rental rate growth increased 17.6% as our renewal rental rates increased 13.0% and our new lease/expansion rental rates increased 30.1%, all on an accrual basis.
At
Distributions
On
2023 Earnings and FFO Guidance
Based on current plans and assumptions and subject to the risks and uncertainties more fully described in our
Guidance for 2023 | Range | |||||||
Loss per share allocated to common shareholders | ( | ) | to | ( | ) | |||
Plus: real estate depreciation, amortization | 1.30 | 1.30 | ||||||
FFO per diluted share | to | |||||||
Our 2023 FFO key assumptions remain unchanged from the previous quarter and include:
Year-end Core Occupancy Range : 90-91%;Year-end Core Leased Range : 91-92%;- Rental Rate Growth (accrual): 11-13%;
- Rental Rate Growth (cash): 4-6%;
- Same Store (accrual)
NOI Growth Range : 0-2%; - Same Store (cash)
NOI Growth Range : 2.5-4.5%; - Speculative Revenue Target:
$17.0 -$19.0 million ,$16.1 million achieved; Tenant Retention Rate Range : 49-51%;- Property Acquisition Activity: None;
- Property Sales Activity:
$100 -$125 million ;$53.3 million sale currently under agreement - Joint Venture Activity: Our ownership interest in our
Commerce Square joint venture increased from 70% to 78%; - Development Starts: None;
- Financing Activity:
$245 Million Secured Financing (complete);$70.0 Million 2-Year Unsecured Term Loan (complete);$220.0 million secured financing forCommerce Square (complete) and Construction Loan at 155 King ofPrussia Rd inRadnor, PA (in process); - Share Buyback Activity: None;
- Annual earnings and FFO per diluted share based on 174.0 million fully diluted weighted average common shares.
About
Conference Call and Audio Webcast
We will release our second quarter earnings after the market close on
Looking Ahead – Third Quarter 2023 Conference Call
We expect to release our third quarter 2023 earnings on
Forward-Looking Statements
This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “will,” “strategy,” “expects,” “seeks,” “believes,” “potential,” or other similar words. Because such statements involve known and unknown risks, uncertainties and contingencies, actual results may differ materially from the expectations, intentions, beliefs, plans or predictions of the future expressed or implied by such forward-looking statements. These forward-looking statements, including our 2023 guidance and the progress of our projects under development, are based upon the current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and not within our control. Such risks, uncertainties and contingencies include, among others: risks related to the impact of COVID-19 and other potential future outbreaks of infectious diseases on our financial condition, results of operations and cash flows and those of our tenants as well as on the economy and real estate and financial markets; reduced demand for office space and pricing pressures, including from competitors, that could limit our ability to lease space or set rents at expected levels or that could lead to declines in rent; uncertainty and volatility in capital and credit markets, including changes that reduce availability, and increase costs, of capital or that delay receipt of our planned debt financings and refinancings; the effect of inflation and interest rate fluctuations, including on the costs of our planned debt financings and refinancings; the potential loss or bankruptcy of tenants or the inability of tenants to meet their rent and other lease obligations; risks of acquisitions and dispositions, including unexpected liabilities and integration costs; delays in completing, and cost overruns incurred in connection with, our developments and redevelopments; disagreements with joint venture partners; unanticipated operating and capital costs; uninsured casualty losses and our ability to obtain adequate insurance, including coverage for terrorist acts; asset impairments; our dependence upon certain geographic markets; changes in governmental regulations, tax laws and rates and similar matters; unexpected costs of REIT qualification compliance; and costs and disruptions as the result of a cybersecurity incident or other technology disruption. The declaration and payment of future dividends (both timing and amount) is subject to the determination of our
Non-GAAP Supplemental Financial Measures
We compute our financial results in accordance with generally accepted accounting principles (GAAP). Although FFO and NOI are non-GAAP financial measures, we believe that FFO and NOI calculations are helpful to shareholders and potential investors and are widely recognized measures of real estate investment trust performance. At the end of this press release, we have provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure.
Funds from Operations (FFO)
We compute FFO in accordance with standards established by the
Net Operating Income (NOI)
NOI (accrual basis) is a financial measure equal to net income available to common shareholders, the most directly comparable GAAP financial measure, plus corporate general and administrative expense, depreciation and amortization, interest expense, non-controlling interest in the
In our analysis of NOI, particularly to make comparisons of NOI between periods meaningful, it is important to provide information for properties that were in-service and owned by us throughout each period presented. We refer to properties acquired or placed in-service prior to the beginning of the earliest period presented and owned by us through the end of the latest period presented as
Core Portfolio
Our core portfolio is comprised of our wholly-owned properties, excluding any properties currently in development, re-development or re-entitlement.
CONSOLIDATED BALANCE SHEETS (unaudited, in thousands, except share and per share data) | ||||||||
ASSETS | ||||||||
Real estate investments: | ||||||||
Operating properties | $ | 3,597,211 | $ | 3,617,240 | ||||
Accumulated depreciation | (1,125,145 | ) | (1,063,060 | ) | ||||
Right of use asset - operating leases, net | 19,346 | 19,664 | ||||||
Operating real estate investments, net | 2,491,412 | 2,573,844 | ||||||
Construction-in-progress | 245,677 | 218,869 | ||||||
Land held for development | 71,493 | 76,499 | ||||||
Prepaid leasehold interests in land held for development, net | 27,762 | 35,576 | ||||||
Total real estate investments, net | 2,836,344 | 2,904,788 | ||||||
Assets held for sale, net | 52,664 | — | ||||||
Cash and cash equivalents | 32,111 | 17,551 | ||||||
Restricted cash and escrow | 10,876 | — | ||||||
Accounts receivable | 11,654 | 11,003 | ||||||
Accrued rent receivable, net of allowance of | 183,191 | 179,771 | ||||||
Investment in unconsolidated real estate ventures | 630,505 | 567,635 | ||||||
Deferred costs, net | 95,102 | 96,639 | ||||||
Intangible assets, net | 11,676 | 18,451 | ||||||
Other assets | 90,362 | 78,667 | ||||||
Total assets | $ | 3,954,485 | $ | 3,874,505 | ||||
LIABILITIES AND BENEFICIARIES' EQUITY | ||||||||
Secured term loan, net | $ | 241,383 | $ | — | ||||
Unsecured credit facility | — | 88,500 | ||||||
Unsecured term loan, net | 318,065 | 248,168 | ||||||
Unsecured senior notes, net | 1,574,373 | 1,628,370 | ||||||
Accounts payable and accrued expenses | 116,913 | 132,440 | ||||||
Distributions payable | 32,957 | 32,792 | ||||||
Deferred income, gains and rent | 24,786 | 25,082 | ||||||
Intangible liabilities, net | 8,811 | 10,322 | ||||||
Liabilities related to assets held for sale | 1,041 | — | ||||||
Lease liability - operating leases | 23,268 | 23,166 | ||||||
Other liabilities | 56,228 | 52,331 | ||||||
Total liabilities | $ | 2,397,825 | $ | 2,241,171 | ||||
Common Shares of | 1,719 | 1,716 | ||||||
Additional paid-in-capital | 3,159,276 | 3,153,229 | ||||||
Deferred compensation payable in common shares | 19,965 | 19,601 | ||||||
Common shares in grantor trust, 1,207,415 and 1,179,643 issued and outstanding as of | (19,965 | ) | (19,601 | ) | ||||
Cumulative earnings | 1,158,240 | 1,176,195 | ||||||
Accumulated other comprehensive income | 5,216 | 3,897 | ||||||
Cumulative distributions | (2,775,124 | ) | (2,709,405 | ) | ||||
1,549,327 | 1,625,632 | |||||||
Noncontrolling interests | 7,333 | 7,702 | ||||||
Total beneficiaries' equity | $ | 1,556,660 | $ | 1,633,334 | ||||
Total liabilities and beneficiaries' equity | $ | 3,954,485 | $ | 3,874,505 |
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except share and per share data) | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||
Revenue | |||||||||||||||
Rents | $ | 118,133 | $ | 116,897 | $ | 238,981 | $ | 232,798 | |||||||
Third party management fees, labor reimbursement and leasing | 6,227 | 5,924 | 12,229 | 11,032 | |||||||||||
Other | 1,522 | 1,221 | 3,899 | 7,717 | |||||||||||
Total revenue | 125,882 | 124,042 | 255,109 | 251,547 | |||||||||||
Operating expenses | |||||||||||||||
Property operating expenses | 31,891 | 33,111 | 65,485 | 64,659 | |||||||||||
Real estate taxes | 11,571 | 13,746 | 26,173 | 27,559 | |||||||||||
Third party management expenses | 2,557 | 2,792 | 5,196 | 5,349 | |||||||||||
Depreciation and amortization | 47,079 | 43,959 | 92,679 | 87,741 | |||||||||||
General and administrative expenses | 9,360 | 8,328 | 18,842 | 18,328 | |||||||||||
Provision for impairment | 4,468 | — | 4,468 | — | |||||||||||
Total operating expenses | 106,926 | 101,936 | 212,843 | 203,636 | |||||||||||
Gain on sale of real estate | |||||||||||||||
Net gain on disposition of real estate | — | 144 | — | 144 | |||||||||||
Net gain on sale of undepreciated real estate | — | 4,127 | 781 | 5,024 | |||||||||||
Total gain on sale of real estate | — | 4,271 | 781 | 5,168 | |||||||||||
Operating income | 18,956 | 26,377 | 43,047 | 53,079 | |||||||||||
Other income (expense): | |||||||||||||||
Interest and investment income | 520 | 449 | 1,025 | 889 | |||||||||||
Interest expense | (23,669 | ) | (16,341 | ) | (46,322 | ) | (32,083 | ) | |||||||
Interest expense - amortization of deferred financing costs | (1,114 | ) | (805 | ) | (2,141 | ) | (1,514 | ) | |||||||
Equity in income of unconsolidated real estate ventures | (7,598 | ) | (4,981 | ) | (13,765 | ) | (9,544 | ) | |||||||
Net gain on real estate venture transactions | 181 | — | 181 | — | |||||||||||
Net income (loss) before income taxes | (12,724 | ) | 4,699 | (17,975 | ) | 10,827 | |||||||||
Income tax (provision) benefit | (13 | ) | (48 | ) | (38 | ) | (75 | ) | |||||||
Net income (loss) | (12,737 | ) | 4,651 | (18,013 | ) | 10,752 | |||||||||
Net income attributable to noncontrolling interests | 41 | (14 | ) | 58 | (22 | ) | |||||||||
Net income (loss) attributable to | (12,696 | ) | 4,637 | (17,955 | ) | 10,730 | |||||||||
Nonforfeitable dividends allocated to unvested restricted shareholders | (204 | ) | (98 | ) | (274 | ) | (246 | ) | |||||||
Net income (loss) attributable to Common Shareholders of | $ | (12,900 | ) | $ | 4,539 | $ | (18,229 | ) | $ | 10,484 | |||||
PER SHARE DATA | |||||||||||||||
Basic income (loss) per Common Share | $ | (0.08 | ) | $ | 0.03 | $ | (0.11 | ) | $ | 0.06 | |||||
Basic weighted average shares outstanding | 171,962,162 | 171,527,031 | 171,818,463 | 171,411,631 | |||||||||||
Diluted income (loss) per Common Share | $ | (0.08 | ) | $ | 0.03 | $ | (0.11 | ) | $ | 0.06 | |||||
Diluted weighted average shares outstanding | 171,962,162 | 172,260,429 | 171,818,463 | 172,575,408 |
FUNDS FROM OPERATIONS (unaudited, in thousands, except share and per share data) | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||
Net income (loss) attributable to common shareholders | $ | (12,900 | ) | $ | 4,539 | $ | (18,229 | ) | $ | 10,484 | |||||
Add (deduct): | |||||||||||||||
Net income (loss) attributable to noncontrolling interests - LP units | (41 | ) | 16 | (57 | ) | 26 | |||||||||
Nonforfeitable dividends allocated to unvested restricted shareholders | 204 | 98 | 274 | 246 | |||||||||||
Net gain on real estate venture transactions | (181 | ) | — | (181 | ) | — | |||||||||
Net gain on disposition of real estate | — | (144 | ) | — | (144 | ) | |||||||||
Provision for impairment | 4,468 | — | 4,468 | — | |||||||||||
Depreciation and amortization: | |||||||||||||||
Real property | 39,119 | 36,631 | 77,749 | 72,793 | |||||||||||
Leasing costs including acquired intangibles | 7,103 | 6,597 | 13,243 | 13,591 | |||||||||||
Company’s share of unconsolidated real estate ventures | 12,145 | 12,903 | 23,709 | 24,198 | |||||||||||
Partners’ share of consolidated real estate ventures | (4 | ) | (5 | ) | (8 | ) | (10 | ) | |||||||
Funds from operations | $ | 49,913 | $ | 60,635 | $ | 100,968 | $ | 121,184 | |||||||
Funds from operations allocable to unvested restricted shareholders | (309 | ) | (154 | ) | (533 | ) | (392 | ) | |||||||
Funds from operations available to common share and unit holders (FFO) | $ | 49,604 | $ | 60,481 | $ | 100,435 | $ | 120,792 | |||||||
FFO per share - fully diluted | $ | 0.29 | $ | 0.35 | $ | 0.58 | $ | 0.70 | |||||||
Weighted-average shares/units outstanding — fully diluted (a) | 172,797,873 | 172,776,896 | 172,811,483 | 173,149,640 | |||||||||||
Distributions paid per common share | $ | 0.19 | $ | 0.19 | $ | 0.38 | $ | 0.38 | |||||||
FFO payout ratio (distributions paid per common share/FFO per diluted share) | 66 | % | 54 | % | 66 | % | 54 | % | |||||||
SAME STORE OPERATIONS – 2nd QUARTER
(unaudited and in thousands)
Of the 76 properties owned by the Company as of
Three Months Ended | ||||||||
2023 | 2022 | |||||||
Revenue | ||||||||
Rents | $ | 108,193 | $ | 108,008 | ||||
Other | 251 | 264 | ||||||
Total revenue | 108,444 | 108,272 | ||||||
Operating expenses | ||||||||
Property operating expenses | 28,077 | 28,749 | ||||||
Real estate taxes | 10,372 | 12,632 | ||||||
Net operating income | $ | 69,995 | $ | 66,891 | ||||
Net operating income - percentage change over prior year | 4.6 | % | ||||||
Net operating income, excluding other items | $ | 69,866 | $ | 65,817 | ||||
Net operating income, excluding other items - percentage change over prior year | 6.2 | % | ||||||
Net operating income | $ | 69,995 | $ | 66,891 | ||||
Straight line rents & other | (1,238 | ) | (1,616 | ) | ||||
Above/below market rent amortization | (285 | ) | (307 | ) | ||||
Amortization of tenant inducements | 171 | 164 | ||||||
Non-cash ground rent expense | 197 | 201 | ||||||
Cash - Net operating income | $ | 68,840 | $ | 65,333 | ||||
Cash - Net operating income - percentage change over prior year | 5.4 | % | ||||||
Cash - Net operating income, excluding other items | $ | 67,975 | $ | 63,748 | ||||
Cash - Net operating income, excluding other items - percentage change over prior year | 6.6 | % | ||||||
Three Months Ended | ||||||||
2023 | 2022 | |||||||
Net income (loss): | $ | (12,737 | ) | $ | 4,651 | |||
Add/(deduct): | ||||||||
Interest income | (520 | ) | (449 | ) | ||||
Interest expense | 23,669 | 16,341 | ||||||
Interest expense - amortization of deferred financing costs | 1,114 | 805 | ||||||
Equity in loss of unconsolidated real estate ventures | 7,598 | 4,981 | ||||||
Net gain on real estate venture transactions | (181 | ) | — | |||||
Net gain on disposition of real estate | — | (144 | ) | |||||
Net gain on sale of undepreciated real estate | — | (4,127 | ) | |||||
Depreciation and amortization | 47,079 | 43,959 | ||||||
General & administrative expenses | 9,360 | 8,328 | ||||||
Income tax provision (benefit) | 13 | 48 | ||||||
Provision for impairment | 4,468 | — | ||||||
Consolidated net operating income | 79,863 | 74,393 | ||||||
Less: Net operating income of non-same store properties and elimination of non-property specific operations | (9,868 | ) | (7,502 | ) | ||||
Same store net operating income | $ | 69,995 | $ | 66,891 | ||||
SAME STORE OPERATIONS – SIX MONTHS
(unaudited and in thousands)
Of the 76 properties owned by the Company as of
Six Months Ended | ||||||||
2023 | 2022 | |||||||
Revenue | ||||||||
Rents | $ | 220,313 | $ | 216,350 | ||||
Other | 534 | 568 | ||||||
Total revenue | 220,847 | 216,918 | ||||||
Operating expenses | ||||||||
Property operating expenses | 58,382 | 56,949 | ||||||
Real estate taxes | 23,395 | 25,298 | ||||||
Net operating income | $ | 139,070 | $ | 134,671 | ||||
Net operating income - percentage change over prior year | 3.3 | % | ||||||
Net operating income, excluding other items | $ | 138,868 | $ | 132,834 | ||||
Net operating income, excluding other items - percentage change over prior year | 4.5 | % | ||||||
Net operating income | $ | 139,070 | $ | 134,671 | ||||
Straight line rents & other | (3,582 | ) | (4,542 | ) | ||||
Above/below market rent amortization | (571 | ) | (696 | ) | ||||
Amortization of tenant inducements | 336 | 336 | ||||||
Non-cash ground rent expense | 397 | 405 | ||||||
Cash - Net operating income | $ | 135,650 | $ | 130,174 | ||||
Cash - Net operating income - percentage change over prior year | 4.2 | % | ||||||
Cash - Net operating income, excluding other items | $ | 134,086 | $ | 127,137 | ||||
Cash - Net operating income, excluding other items - percentage change over prior year | 5.5 | % | ||||||
Six Months Ended | ||||||||
2023 | 2022 | |||||||
Net income: | $ | (18,013 | ) | $ | 10,752 | |||
Add/(deduct): | ||||||||
Interest income | (1,025 | ) | (889 | ) | ||||
Interest expense | 46,322 | 32,083 | ||||||
Interest expense - amortization of deferred financing costs | 2,141 | 1,514 | ||||||
Equity in loss of unconsolidated real estate ventures | 13,765 | 9,544 | ||||||
Net gain on real estate venture transactions | (181 | ) | — | |||||
Net gain on disposition of real estate | — | (144 | ) | |||||
Net gain on sale of undepreciated real estate | (781 | ) | (5,024 | ) | ||||
Depreciation and amortization | 92,679 | 87,741 | ||||||
General & administrative expenses | 18,842 | 18,328 | ||||||
Income tax provision | 38 | 75 | ||||||
Provision for impairment | 4,468 | — | ||||||
Consolidated net operating income | 158,255 | 153,980 | ||||||
Less: Net operating income of non-same store properties and elimination of non-property specific operations | (19,185 | ) | (19,309 | ) | ||||
Same store net operating income | $ | 139,070 | $ | 134,671 |
Company / Investor Contact:
EVP & CFO
610-832-7434
tom.wirth@bdnreit.com
Source:
2023 GlobeNewswire, Inc., source