What happened
Shares of Brandywine Realty Trust (BDN +1.03%) slumped 10.2% in February, according to data provided by S&P Global Market Intelligence. Weighing on the real estate investment trust (REIT) was its fourth-quarter results and guidance for the coming year. While those numbers suggest the office REIT could maintain its dividend, which currently yields an eye-popping 13.5%, the payout's longer-term outlook remains unclear.
So what
Brandywine Realty Trust reported solid results last month. The office REIT generated $55.7 million, or $0.32 per share, of funds from operations (FFO). That was right in line with the analysts' consensus estimate. The company also signed 168,000 square feet of leases in the period, pushing occupancy to 91.1%.
NYSE: BDN
Key Data Points
The REIT also introduced its FFO guidance range for 2023 at $1.12 to $1.20 per share. At the midpoint, it's below analysts' expectations that the REIT would produce $1.19 per share of FFO this year. That's largely due to higher interest expenses from its recent debt refinancing.
Brandywine has raised over $705 million in the past quarter through asset sales, an unsecured bond transaction, and an unsecured loan transaction. That gave it the funds to redeem its $350 million unsecured bond that matured in February. It also allowed the REIT to repay the outstanding balance on its $600 million unsecured credit line, bolstering its liquidity.
Despite those moves, investors remain concerned about Brandywine's ability to maintain its dividend. While it declared its latest dividend payment of $0.19 per share last month, it might not be able to sustain that level much longer.
At that rate, the company's payout ratio will be 95% to 105% of its cash available for distribution this year. Because of that, it's not retaining any money to fund capital expenditures. That's leading the company to borrow money and sell assets to bridge the gap.
Meanwhile, the REIT has another sizable debt maturity to address next year. It has $350 million of 4.1% notes due in October 2024. While the REIT should be able to refinance that debt, it will likely be at a much higher rate, which would further affect FFO.
Now what
Brandywine Realty Trust is walking a tightrope. The REIT is trying to maintain its dividend while funding its capital projects in a challenging office market and interest rate environment. While its development projects should grow net operating income over the long term, it might need to reduce its dividend in the near term to bolster its financial flexibility.
That likelihood of a dividend cut will continue weighing on shares until there's more clarity on the situation.
