Brandywine Realty Trust: Form 10-Q for the period ended Sep 30, 2023

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 the SEC (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 are set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2022. 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 of September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and 2022 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 nine months ended September 30, 2023, we owned and managed properties within four segments: (1) Philadelphia CBD, (2) Pennsylvania Suburbs, (3) Austin, Texas, and (4) Other. The Philadelphia CBD segment includes properties located in the City of Philadelphia in Pennsylvania. The Pennsylvania Suburbs segment includes properties in Chester, Delaware and Montgomery counties in the Philadelphia suburbs. The Austin, Texas segment includes properties in the City of Austin, Texas. The Other segment includes properties located in the District of Columbia, Northern Virginia, Southern Maryland, Camden County, New Jersey and New Castle County, Delaware. In addition to the four 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 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.

Overall economic conditions, including but not limited to labor shortages, supply chain constraints, inflation, rising interest rates 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 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.

We continue to seek revenue growth throughout our portfolio by increasing occupancy and rental rates. Occupancy at our Core Properties at September 30, 2023 was 88.3% compared to 90.8% at September 30, 2022.

The table below summarizes selected operating and leasing statistics of our wholly owned properties for the three and nine months ended September 30, 2023 and 2022:

(1) Does not include properties under development, redevelopment, held for sale, or sold.

(2) Includes leasing related to completed developments and redevelopments, recently completed not yet stabilized, and 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.

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 1.2% of our aggregate final annualized base rents as of September 30, 2023 (representing approximately 1.6% of the net rentable square feet of the properties) are scheduled to expire without penalty during the remainder of 2023. 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 our 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 $3.2 million or 1.7% of our accrued rent receivable balance as of September 30, 2023, compared to $3.9 million or 2.1% of our accrued rent receivable balance as of December 31, 2022.

If economic conditions deteriorate, including as a result of inflation and rising interest rates, 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 of September 30, 2023, the following active development and redevelopment projects, within our consolidated portfolio, remain under construction in progress (dollars, in thousands):

(a) Total project costs include $58.0 million of existing property basis.

As of September 30, 2023, the following recently completed development project was not yet stabilized (dollars, in thousands):

(a) Estimated project costs include $20.6 million of existing property basis. The base building was completed in the third quarter of 2022. The remaining amounts unfunded relate to tenant fit-out work to be completed.

(b) The occupied portions of the office building were placed into service throughout 2022 and 2023.

In addition to the properties listed above, we have classified one parking facility in Philadelphia, Pennsylvania as redevelopment.

As of September 30, 2023 the following active unconsolidated real estate venture development projects remain under construction in progress (dollars, in thousands):

(a) The percentage shown represents our ownership in the venture. The ownership interest in 3025 JFK Boulevard and in One Uptown - Office reflect our anticipated ownership interests after giving effect to our contribution of the amounts reflected in "Our Share Remaining to be Funded" in the chart above.

(b) Mixed used building with 428,000 rentable square feet consisting of 200,000 square feet of life science/innovation office, 219,000 square feet of residential (326 units), and 9,000 square feet of retail.

(c) The development budget contemplated receipt of a construction loan of approximately $174.3 million, reflecting a 55% loan to value ratio and, as of the date of this Form 10-Q, no construction loan has been obtained and there can be no assurance that a loan will be obtained. In the event that costs are incurred before a construction loan has been obtained, the Company expects to fund such costs through its credit facilities and cash on hand.

(d) During the three months ended September 30, 2023, the venture placed 95 residential units and a proportionate share of total cost of the building into operations.

As of the date of this Quarterly Report on Form 10-Q, the 3151 Market Street Venture has not secured a construction loan. Under the partnership agreement with our partner in this real estate venture, after our partner has funded the remaining balance of its capital commitment, as shown in the table above, then, until a construction loan has been obtained, we will be obligated to fund the balance of construction costs incurred in the project development.

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 ended December 31, 2022 contains a discussion of our critical accounting policies. There have been no significant changes in our critical accounting policies since December 31, 2022.

RESULTS OF OPERATIONS

The following discussion is based on our consolidated financial statements for the three and nine months ended September 30, 2023 and 2022. 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 September 30, 2023 and September 30, 2022

The following comparison for the three months ended September 30, 2023 to the three months ended September 30, 2022, makes reference to the effect of the following:

(a) “Same Store Property Portfolio,” which represents 69 properties containing an aggregate of approximately 12.4 million net rentable square feet, and represents properties that we owned and consolidated for the three-month periods ended September 30, 2023 and 2022. The Same Store Property Portfolio includes properties acquired or placed in service on or prior to July 1, 2022 and owned and consolidated through September 30, 2023, excluding properties classified as held for sale,

(b) “Total Portfolio,” which represents all properties owned and consolidated by us during the three months ended September 30, 2023 and 2022,

(c) “Recently Completed/Acquired Properties,” which represents two properties placed into service or acquired on or subsequent to July 1, 2022,

(d) “Development/Redevelopment Properties,” which represents three 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) “Q3 2022 through Q3 2023 Dispositions,” which represents five properties disposed of from July 1, 2022 through September 30, 2023.

Comparison of the three months ended September 30, 2023 to the three months ended September 30, 2022

(dollars and square feet in millions except per share amounts)

(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 to Core Properties.

(c) Held for use impairment charges are excluded from Same Store Portfolio operating income and presented in Other (Eliminations).

Total Revenue

Rents from the Total Portfolio increased primarily as a result of the following:

• $6.3 million increase related to our Recently Completed/Acquired Properties, which are comprised of 405 Colorado, Austin, TX and 250 King of Prussia Road, Radnor, PA;
• $1.5 million increase related to a lease commencement in our redevelopment property at 2430 Dulles Corner, Herndon, VA;
• $2.0 million decrease due to the sales of Three Barton Skyway, Austin, TX in the third quarter of 2023 and 200 Barr Harbor Drive, Conshohocken, PA in the fourth quarter of 2022;
• $0.6 million decrease due to the early termination of a single tenant occupant at a property in Austin, TX; and
• $0.7 million decrease due to net changes in leasing activity within the remainder of the portfolio.

Property Operating Expenses

Property Operating Expenses decreased as a result of the following:

• Sales of Three Barton Skyway, Austin, TX in the third quarter of 2023 and 200 Barr Harbor Drive, Conshohocken, PA in the fourth quarter of 2022.

Depreciation and Amortization

Depreciation and amortization expense increased primarily as a result of the following:

• $1.9 million increase related to accelerated depreciation on the tenant improvements due to the early termination of a single tenant occupant at a property in our Austin, Texas segment;
• $1.5 million increase due to the placement into service of our Recently Completed/Acquired Properties;
• $0.8 million increase due to the partial placement into service of one of our redevelopment properties;
• $0.9 million decease due to the sales of Three Barton Skyway, Austin, TX in the third quarter of 2023 and 200 Barr Harbor Drive, Conshohocken, PA in the fourth quarter of 2022; and
• $0.6 million decrease due to removing two buildings from service, one in our Austin, Texas segment in the third quarter of 2023 and one in our Philadelphia CBD segment in the third quarter of 2022.

Provision for Impairment

During the third quarter of 2023, we recognized a provision for impairment of $11.7 million on an office property located in our Pennsylvania Suburbs segment. See Note 3 “Real Estate Investments,” for further information.

Net Gain on Disposition of Real Estate

In the third quarter of 2022, a net gain on disposition of real estate of $8.7 million was recognized, primarily related to the gain of $8.3 million due to the formation of the One Uptown Ventures, which resulted in deconsolidation of the project and recognition of our investment in the real estate venture at fair value.

Net Gain on Sale of Undepreciated Real Estate

In the third quarter of 2022, a net gain on sale of undepreciated real estate of $3.0 million was recognized, primarily related to the $2.6 million gain due to formation of the 3151 Market Street Venture, which resulted in deconsolidation of the project and recognition of our investment in the real estate venture at fair value as well as additional gain of $0.4 million recognized during the three months ended September 30, 2022 related to the sale of a parcel of land in our Metropolitan Washington, D.C. segment during the second quarter of 2022.

Interest Expense

Interest expense increased primarily due to a full quarter of our interest incurred on our 2028 Bonds (issued in December 2022), which carry an effective interest rate of 7.75% per annum compared to the retired 2023 Bonds, which carried an effective interest rate of 3.865% per annum. In addition, we closed on our $245 million secured term loan which paid down our line of credit and obtained another $70 million of unsecured financing in March 2023 resulting in higher leverage at higher interest rates over the prior period.

Equity in Income of Real Estate Ventures

The increased losses from our joint ventures is primarily due to higher interest rates on the ventures’ outstanding indebtedness.

Comparison of the Nine Months Ended September 30, 2023 and September 30, 2022

The following comparison for the nine months ended September 30, 2023 to the nine months ended September 30, 2022, makes reference to the effect of the following:

(a) “Same Store Property Portfolio,” which represents 69 properties containing an aggregate of approximately 12.4 million net rentable square feet, and represents properties that we owned and consolidated for the nine-month periods ended September 30, 2023 and 2022. The Same Store Property Portfolio includes properties acquired or placed in service on or prior to January 1, 2022 and owned and consolidated through September 30, 2023 excluding properties classified as held for sale,

(b) “Total Portfolio,” which represents all properties owned and consolidated by us during the nine months ended September 30, 2023 and 2022,

(c) "Recently Completed/Acquired Properties," which represents two properties placed into service or acquired on or subsequent to January 1, 2022,

(d) "Development/Redevelopment Properties," which represents three 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 2022 and 2023 Dispositions," which represents six properties disposed of from January 1, 2022 through September 30, 2023.

Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022

(dollars and square feet in millions except per share amounts)

(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 to Core Properties.

(c) Held for use impairment charges are excluded from Same Store Portfolio operating income and presented in Other (Eliminations).

Total Revenue

Rents from the Total Portfolio increased primarily as a result of the following:

• $9.7 million increase related to our Recently Completed/Acquired Properties which comprise 405 Colorado, Austin, TX and 250 King of Prussia Road, Radnor, PA;
• $5.4 million increase related to new lease commencements, net of rollover, from July 2022 to September 2023;
• $4.4 million decrease due to the sales of Three Barton Skyway, Austin, TX in the third quarter of 2023 and 200 Barr Harbor Drive in the fourth quarter of 2022; and
• $2.1 decrease due to the early termination of a single tenant occupant at a property in our Austin, Texas segment in the third quarter of 2023 and removing one building from service in our Philadelphia CBD segment in the third quarter of 2022.

Other income decreased primarily as a result of the following:

• A decrease of $1.4 million of excess insurance proceeds received during the nine months ended September 30, 2023 in comparison to the nine months ended September 30, 2022. During the nine months ended September 30, 2023 and 2022, we

received $1.0 million and $2.4 million, respectively, of excess insurance proceeds relating to a property in our Austin, Texas segment;

• $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 our Austin, Texas segment during the nine months ended September 30, 2022; and
• $0.5 million offset related non-rental or fee income activities.

Depreciation and Amortization

Depreciation and amortization expense increased primarily as a result of the following:

• $3.7 million increase due to the placement into service of our Recently Completed/Acquired Properties;
• $2.9 million increase related to accelerated depreciation on the tenant improvements due to the early termination of a single tenant occupant at a property in our Austin, Texas segment;
• $2.4 million increase related to tenant improvements placed into service, made up of $1.7 million in the Philadelphia CBD segment and $0.7 million in the Other segment;
• $0.8 million increase due to the partial placement into service of our redevelopment property; and
• $1.4 million decrease due to the sales of Three Barton Skyway, Austin, TX in the third quarter of 2023 and 200 Barr Harbor Drive in the fourth quarter of 2022; and
• $1.3 million decrease due to removing two buildings from service, one in our Austin, Texas segment in the third quarter of 2023 and one in our Philadelphia CBD segment in the third quarter of 2022.

Provision for Impairment

During the third quarter of 2023, we recognized a provision for impairment of $11.7 million on an office property located in our Pennsylvania Suburbs segment. See Note 3 “Real Estate Investments,” for further information.

During the second quarter of 2023, we recognized a provision for impairment of $4.5 million on an office property located in our Austin Texas, segment which met the held for sale criteria as of June 30, 2023 and was sold during the three months ended September 30, 2023.

Net Gain on Sale of Undepreciated Real Estate

The gain of $0.8 million recognized during the nine months ended September 30, 2022 is related to the contribution of a prepaid leasehold interest to the 3151 Market Street Venture at fair value.

The gain of $8.0 million recognized during the nine months ended September 30, 2022 is primarily related to the sale of a portfolio of eight parcels of land and three operating properties in our Other segment, resulting in $5.4 million gain. An additional $2.6 million is related the formation of the 3151 Market Street Venture, which resulted in deconsolidation of the project and recognition of our investment in the real estate venture at fair value.

Interest Expense

Interest expense increased primarily due to a full quarter of our interest incurred on our 2028 Bonds (issued in December 2022), which carry an effective interest rate of 7.75% per annum compared to the retired 2023 Bonds, which carried an effective interest rate of 3.865% per annum. In addition, we closed on our $245 million secured term loan which paid down our line of credit and obtained another $70 million unsecured term loan in March 2023, resulting in higher leverage at higher interest rates over the prior period.

Equity in Loss of Unconsolidated Real Estate Ventures

The increased losses from our joint ventures is primarily due to higher interest rates on the outstanding indebtedness of the ventures and a $0.9 million decrease associated with our former 1919 Market Venture where the underlying property was sold in the fourth quarter of 2022.

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 the Operating Partnership.

As of September 30, 2023, the Parent Company owned a 99.7% interest in the Operating Partnership. The remaining interest of approximately 0.3% pertains to common limited partnership interests owned by non-affiliated investors who contributed property to the Operating Partnership in exchange for their interests. As the sole general partner of the Operating Partnership, the Parent Company has full and complete responsibility for the Operating 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 the Operating 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 the remainder of 2023 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 of September 30, 2023 we were in compliance with all of our debt covenants and requirement obligations.

On January 19, 2023, we closed on a term loan secured by seven operating properties with an aggregate principal amount of $245.0 million (the “Secured Facility”). The Secured Facility matures on February 6, 2028. We used the net proceeds from the Secured Facility for general corporate purposes, including to reduce outstanding borrowings under the Company’s Unsecured Credit Facility. On January 20, 2023, we completed the redemption of our then remaining $54.3 million aggregate principal amount of 2023 Notes. See Note 7, “Debt Obligations,” for further information.

On March 1, 2023, we closed on an unsecured term loan with a principal amount of $70.0 million (the “Unsecured Term Facility”). The loan has a scheduled maturity date of February 28, 2024 with an option to extend for twelve months and bears interest at Daily Simple SOFR plus 1.75% with a 0.10% SOFR adjustment. See Note 7, “Debt Obligations,” for further information. 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 for 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.

On August 15, 2023, we entered into a construction loan agreement secured by the development project at 155 King of Prussia Road in Radnor, Pennsylvania in the aggregate principal amount of $50.0 million (the “Construction Loan”). The Construction Loan has a scheduled maturity date of August 16, 2026 with an option to prepay at any time without a fee, premium or penalty. The Construction Loan bears interest at SOFR plus 2.5%.

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.

Our $350 million 7.55% Guaranteed Notes due 2028 ("2028 Notes") includes an interest rate adjustment provision whereby the interest rate payable on the notes is subject to an 25 basis point adjustment if either Moody's Investors Services Inc, and its successors, ("Moody's") or S&P Global Ratings, and its successors ("S&P") downgrades (or subsequently upgrades) its rating assigned to the 2028 Notes. During the third quarter of 2023, Moody’s downgraded our senior unsecured credit rating from Baa3 to Ba1. As a result of the downgrade, the interest rate on our 2028 Notes increased 25 basis points in September 2023 due to the coupon adjustment provisions within the note.

As of September 30, 2023, our senior unsecured credit ratings and outlook were as follows:

If our credit ratings are lowered further, our ability to access the public debt markets, our costs of funds, and other terms for new debt issuances could be adversely impacted. Each of the credit ratings agencies reviews its ratings periodically and there is no guarantee our current credit ratings will remain the same.

The Parent Company unconditionally guarantees the Operating Partnership’s unsecured debt obligations, which, as of September 30, 2023, amounted to $1,898.6 million. We have $245.0 million of debt obligations secured by seven of our wholly-owned portfolio as of September 30, 2023.

Capital Markets

The Parent Company issues equity from time to time, the proceeds of which it contributes to the Operating Partnership in exchange for additional interests in the Operating Partnership, and guarantees debt obligations of the Operating 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.

Capital Recycling

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 nine months ended September 30, 2023, we contributed to the 3151 Market Street Venture 200,000 square feet of FAR, which represents buildable density, at the project site, and, upon contribution at fair market value, recognized a gain, net of transaction costs, of $0.8 million.

During the quarter ended September 30, 2023, we completed the sale of Three Barton Skyway, a 173,302 square foot office building located in Austin, TX for $53.3 million. The net proceeds were used for general corporate purposes.

As of September 30, 2023, we had $47.9 million of cash and cash equivalents and $557.6 million of available borrowings under our unsecured credit facility, net of $42.4 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 2023 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.

As of September 30, 2023 and December 31, 2022, we maintained cash and cash equivalents and restricted cash of $58.6 million and $18.4 million, 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):

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.

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 nine months ended September 30, 2023, when compared to the nine months ended September 30, 2022, the change in investing cash flows was due to the following activities (in thousands):

43

We generally fund our investment activity through the sale of real estate, property-level financing, unsecured and secured 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 nine months ended September 30, 2023, when compared to the nine months ended September 30, 2022, the change in financing cash flows was due to the following activities (in thousands):

Capitalization

Indebtedness

The table below summarizes our secured and unsecured debt at September 30, 2023 and December 31, 2022:

(dollars in thousands)

(a) Consists of unpaid principal and does not reflect premium/discount or deferred financing costs.

(b) On November 23, 2022, our $ 250.0 million unsecured term loan was swapped to a fixed rate of 5.01% and matures on June 30, 2027. The effective date of the swap was January 31, 2023.

Scheduled principal payments and related weighted average annual effective interest rates for our debt as of September 30, 2023 were as follows (dollars in thousands):

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 the Operating 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 of September 30, 2023.

The charter documents of the Parent Company and Operating Partnership do not limit the amount or form of indebtedness that the Operating Partnership may incur, and its policies on debt incurrence are solely within the discretion of the Parent Company’s Board of Trustees, subject to the financial covenants in the credit agreement for our Unsecured Credit Facility, the indenture for our unsecured notes and in our other credit agreements.

Investments in Joint Ventures

Mid-Atlantic Office Venture

The Company holds a 40% interest (25% preferred and 15% common) in the Mid-Atlantic Office Venture. As of September 30, 2023, the Company's aggregate investment in this venture was $28.3 million and is reflected in the line item on the consolidated balance sheets “Investments in unconsolidated real estate ventures.” The Company has no obligation to fund additional equity to the Mid-Atlantic Office Venture. The properties held by the Mid-Atlantic Office Venture are encumbered by a $132.8 million secured mortgage loan that is scheduled to mature in January 2024 and is nonrecourse to the Company. The Company and its partner are in active discussions, including with the mortgage lender, as to a potential extension of the loan or other restructuring of the venture. At present, there can be no assurance as to the outcome of these discussions.

Rockpoint Venture

The Company holds a 15% interest in the Rockpoint Venture and, as of September 30, 2023, the Company's investment in this venture, reflected in the line item on the consolidated balance sheets “Investments in unconsolidated real estate ventures,” was $14.0 million. The Company has no obligation to fund additional equity to the Rockpoint Venture. The properties held by the Rockpoint Venture are encumbered by a $233.4 million secured mortgage loan that is scheduled to mature in March 2024 and nonrecourse to the Company. The Company and its partner are in active discussions, including with the mortgage lender, as to a potential extension of the loan or other restructuring of the venture. At present, there can be no assurance as to the outcome of these discussions.

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 third quarter of 2023.

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, as of September 30, 2023, approximately 96% of our leases (as a percentage of the aggregate net rentable square feet of our wholly-owned portfolio) contain effective annual rent escalations that are either fixed (generally ranging from 2.5% to 3.0% per lease year) 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, recent inflation and higher interest rates has caused an increase in our borrowing costs, including on our variable rate debt.

Other Contractual Obligations

We provide customary guarantees for certain development projects of our unconsolidated real estate ventures. See Note 15 “Commitments and Contingencies,” to our Consolidated Financial Statement for further details on payment guarantees provided on behalf of our real estate ventures and refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of our contractual obligations.

Funds from Operations (FFO)

Pursuant to the revised definition of FFO adopted by the Board of Governors of the National 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.

The following table presents a reconciliation of net income attributable to common unitholders to FFO for the three and nine months ended September 30, 2023 and 2022:

(amounts in thousands, except share information)

(a) Includes common shares and partnership units outstanding through the three and nine months ended September 30, 2023 and 2022, respectively.

Market risk is the exposure to loss resulting from changes in interest rates, commodity prices and equity prices. In pursuing our business plan, the primary market risk to which we are exposed is interest rate risk. Changes in the general level of interest rates prevailing in the financial markets may affect the spread between our yield on invested assets and cost of funds and, in turn, our ability to make distributions or payments to our shareholders. While we have not experienced any significant credit losses, in the event of a significant rising interest rate environment and/or continued economic slowdown, defaults could increase and result in losses to us which would adversely affect our operating results and liquidity.

Interest Rate Risk and Sensitivity Analysis

The analysis below presents the sensitivity of the market value of the Operating Partnership’s financial instruments to selected changes in market rates. The range of changes chosen reflects its view of changes which are reasonably possible over a one-year period. Market values are the present value of projected future cash flows based on the market rates chosen.

Our financial instruments consist of both fixed and variable rate debt. As of September 30, 2023, our consolidated debt consisted of (i) unsecured notes with an outstanding principal balance of $1,500.0 million, all of which are fixed rate borrowings, (ii) variable rate debt consisting of trust preferred securities with an outstanding principal balance of $78.6 million, (iii) a $600.0 million revolving credit facility with no outstanding balance, (iv) a secured fixed rate term loan with an outstanding principal balance of $245.0 million and (v) two unsecured term loans of $250.0 million and $70.0 million. The $250.0 million unsecured term loan has been swapped to a fixed rate. All financial instruments were entered into for other than trading purposes and the net market value of these financial instruments is referred to as the net financial position. Changes in interest rates have different impacts on the fixed and variable rate portions of our debt portfolio. A change in interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but has no impact on interest incurred or cash flows. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position.

If market rates of interest increase by 100 basis points, the fair value of our outstanding secured fixed rate debt would increase by approximately $8.7 million. If market rates of interest decrease by 100 basis points, the fair value of our outstanding secured fixed rate debt would decrease by approximately $9.1 million.

As of September 30, 2023, based on prevailing interest rates and credit spreads, the fair value of our unsecured notes was $1,314.2 million. For sensitivity purposes, a 100-basis point change in the discount rate equates to a change in the total fair value of our debt of approximately $13.1 million at September 30, 2023.

From time to time or as the need arises, we use derivative instruments to manage interest rate risk exposures and not for speculative or trading purposes. The total outstanding principal balance of our variable rate debt was approximately $398.6 million as of September 30, 2023. The total fair value of our variable rate debt was approximately $355.1 million at September 30, 2023. For sensitivity purposes, if market rates of interest increase by 100 basis points the fair value of our variable rate debt would decrease by approximately $12.6 million at September 30, 2023. If market rates of interest decrease by 100 basis points the fair value of our outstanding variable rate debt would increase by approximately $13.4 million at September 30, 2023.

These amounts were determined solely by considering the impact of hypothetical interest rates on our financial instruments. Due to the uncertainty of specific actions we may undertake to minimize possible effects of market interest rate increases, this analysis assumes no changes in our financial structure.

Controls and Procedures (Parent Company)

(a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, the Parent Company conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this quarterly report. Based on this evaluation, the Parent Company’s principal executive officer and principal financial officer have concluded that the Parent Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

(b) Changes in internal control over financial reporting. There was no change in the Parent Company’s internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the Parent Company’s internal control over financial reporting.

Controls and Procedures (Operating Partnership)

(a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, the Operating Partnership conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act as of the end of the period covered by this quarterly report. Based on this evaluation, the Operating Partnership’s principal executive officer and principal financial officer have concluded that the Operating Partnership’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.

(b) Changes in internal control over financial reporting. There was no change in the Operating Partnership’s internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

As of September 30, 2023, there have been no material changes to the Risk Factors disclosed in “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.