Brandywine Realty Trust

Good day, ladies and gentlemen, and welcome to the fourth quarter 2018 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star to zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, President and CEO, Mr. Jerry Sweeney. You may begin.

Demetri, thank you very much. Good morning, everyone, and thank you for participating in our fourth quarter 2018 earnings call. On today's call with me today are George Johnstone, Executive Vice President of Operation, Dan Palazzo, Vice President and Chief Accounting Officer, and Tom Worth, our Executive VP and Chief Financial Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meanings of the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC. We're going to take a little bit more of a streamlined approach this quarter. So, our comments this morning will summarize 2018 activity but primarily focus on our 2019 plan. After an overview, Tom will provide a synopsis of our financial results, and then Tom, George, Dan, and I will be available for any questions. We close the year strong. We exceeded our business plan metrics on cash and gap mark-to-market, capital ratios, tenant retention, and achieved many of our other targets, including ending the year at 95.5% leased. We did come up a little short on our spec revenue, primarily due to slower occupancy of lease spaces, which also resulted in our being below our year-end occupancy target and our same store growth rates. On a very positive note, however, Q4 leasing activity accelerated over Q3 by 17%, and was up 3 percent over 2017 levels, building strong momentum for 2019. We also completed several previously announced transactions in Austin and Northern Virginia. The baseline effect of this swap reduced our DC revenue contribution to 8 percent and increased our revenue contribution from Austin to 18 percent. It also moved capital and revenue dollars to a market with strong positive mark-to-market and a 12% capital ratio from a market with negative mark-to-market and a 20% capital ratio. We also continued the liquidation of our Allstate JV through selling Station Square in Silver Spring at $107 million value at a 6.5% cash cap rate. We also acquired Quarry Lake, a 121,000-square-foot building for $39.5 million at about a 6% cash cap rate. That asset is a perfect complement to our Northwest Austin portfolio, provides excellent mark-to-market upside for us in a few years, and reflects our objective to continue increasing our revenue contributions from Austin to 25%. As Tom will touch on, none of the benefits of these Austin acquisitions will flow through to our 2019 same-store numbers. During the fourth quarter, we reinitiated and fully expended the remaining capacity on our share repurchase plan by purchasing 2.5 million shares for $32 million. The Board also approved a new $150 million share repurchase plan which we did use during January to purchase an additional 550,000 shares, bringing aggregate purchases to $39 million at an average price of $12.76 per share. We also redeemed $7 million of operating partnership units for cash. We do plan to continue to use this repurchase program opportunistically as part of our capital deployment programs. We also announced a 5.6 percent dividend increase supported by improved portfolio performance and strong cash flow growth. On the development front, we closed the year with the delivery of our fully leased 500 North Gulf Road and Broadmoor 6 in Austin and the sale of our Subaru training facility. Turning to 2019, we are off to a great start. In our supplement pages 10 and 11, we did provide some additional color on the greater Philadelphia and Austin markets. Suffice it to say, both markets remain strong with good activity building pipeline and leasing levels. We have also raised our spec revenue target by 1.6 percent, and our leasing pipeline stands today at 1.7 million square feet, including 436,000 square feet in advanced stages of negotiation. Austin continues to benefit from corporate attraction and in-market expansions, most notably Apple, Google, Oracle, and Samsung, as well as an emerging life science sector. Rental rates increased 6.5% in 2018, and Austin closed the year with 1.3 million square feet of absorption. Philadelphia also closed out 2018 on a very strong note, with rents up 4.4% and with over 1.1 million square feet of tenants new to the city over the last two years, clearly reflecting continued acceleration of Philadelphia as an emerging life science and transportation-centric employment hub. The city added almost 17,000 jobs during 2018, primarily driven by growth in financial services and the health care and life science fields. Looking at our plan, our spec revenue plan is 77% completed, and other than the increase in spec revenue, all of our other operating metrics remain the same as we announced in October. Overall, our pipeline of deals is stronger, and levels of activity have increased across the board, including in Radnor, where our pipeline is almost 300,000 square feet versus a targeted 2019 absorption level of of about 126,000 square feet. Another item of particular note is the high level of activity that we're seeing at our 1676 International Drive project in Tyson's Corner. As previously announced, we're investing $24 million to completely reimagine the entire building. including lobby, amenities, restrooms, mechanical systems, and a lot of outdoor space reconfiguration, as well as improving access to the building from the road network. All of that work will be substantially completed by the vacation of the existing tenant at the end of the third quarter. That will leave us with about 200,000 square feet to lease, and our current pipeline of deals already stands at at well over 600,000 square feet. So we really are delighted with how well that renovation plan has been received and are very confident of creating another successful value-add story. We continue to make excellent progress in our development pipeline, as was included in the press release. We are closing in on a pre-lease of our 405 Colorado project in downtown Austin, 114,000 1,200,000 square foot office building over a 520 car parking deck. More importantly, we have an extremely strong pipeline of deals aggregating almost 400,000 square feet. So given that pipeline and the depth of it and our confidence in its execution, we're planning to start this project in the next 45 days. Our development and leasing activities at Schuylkill Yards, Garza, Four Points, and Radnor are all progressing well. We are completing the design development process on each project, and giving pre-leasing achievement could be in a position to start one or two of those projects by year-end 2019. Just giving a quick update on Schuylkill Yards. We did update the disclosure in the SIP on page 15. design and pricing work continues at an excellent pace. We have seen a real upsurge in activity through our marketing campaign, and our pipeline today currently stands at over 1.5 million square feet, including several hundred thousand square feet of life science uses. Equity sourcing discussions on Schuylkill Yards also remain extremely encouraging. To refresh everyone's memory, Schuylkill Yards is in a Federal Qualified Opportunity Zone, which has generated significant interest from a variety of capital sources looking for both excellent real estate investments with federal capital gain deferral advantages. The goal for Schuylkill Yards is to have the projects in a position to start over the next four quarters, of course, assuming favorable market and financing conditions. On Broadmoor, we're designing a 350,000 square foot office and retail site, as well as a residential site that can do 300 plus units. We plan to, again, subject to real estate and capital market conditions, be in a position to start either one of those or both over the next four or five quarters. From an investment standpoint, we do not have any sales or acquisitions built into our 2019 plan. We are, however, exploring the sale of some assets to harvest profit, generate additional liquidity, and really accelerate our return on invested capital and cash flow growth trajectory. As we did in 2018, we would expect that any deployment of this type to be earnings neutral or positive and would accelerate bottom line cash flow growth. So to wrap up, the 2019 business plan is in excellent shape. We're confident of meeting all of our goals. We remain very encouraged by the depth of our leasing pipeline on both our existing inventory and our growing development pipeline. Tom will now provide an overview of our financial results.

Tom? Thank you, Jerry. Our fourth quarter net income totaled $121.8 million, or 68 cents per diluted share, and our FFO totaled $64.3 million, or $0.36 per diluted share. Some general observations about 2018 results. Our balance sheet metrics continue to improve as our fourth quarter fixed charge and interest coverage ratios were 3.5 and 3.8, respectively, a 10% improvement on both metrics as compared to the fourth quarter of 2017. Our fourth quarter net debt to EBITDA improved to 6.0. Our repurchase 3.1 million shares had no material impact on our fourth quarter earnings since the shares were purchased later in the quarter. While our year-end occupancy and speculative revenue were below target, the variance is primarily due to the timing of tenants taking occupancy and some tenants that we anticipate remaining in holdover through 2018. That allowed us to achieve our 95.5 percent portfolio leasing, which represents the midpoint of our range. Looking at 2019 guidance, for the first quarter and year. Property level income will total approximately $83 million and will be incrementally $3.5 million higher than our fourth quarter number. The increase is primarily due to Austin's acquisition totaling about $7.5 million, partially offset by the JV of our properties at Northern Virginia, and the balance coming from the completion of our 500 North Gulf Road and Four Points developments. Our FFF contribution from our consolidated joint ventures, which totaled $3.5 million, and is $2.5 million below our fourth quarter number, primarily due to lower interest in the NOVA joint venture as compared to the Austin joint venture, the sale of Station Square asset, and the non-cash increase to ground rent due to the new accounting standard. G&A for the first quarter will increase from 5.6 to 9.5. The incremental increase is primarily due to the timing of deferred compensation expense recognition, and consistent with prior years, our new capitalization policy will also increase G&A. Our annual G&A should still continue to come in between $30 and $31 million. Interest expense will increase to $20.5 million. with fixed-rate interest being 98.6 percent. Capitalized interest should approximate about $500 million, and full-year interest should approximate $84 to $85 million. Ten and other income will total $1 million for the quarter. Net management, leasing, and development fees will be $3 million for the quarter and will approximate $13 million for the year. Land and tax provisions will net to a positive $2.5 million. and we did lose about $900,000 of income related to the Subaru National Training Center. On the share repurchase, our recent activity will lower our weighted average share count to 178.5, and the numbers don't reflect any additional buyback, but we remain opportunistic. On the financing side, term loan C, we closed that in December with a recast of our term loan to a new five-year loan with no changes in the maturity date The repass of the loan allowed us to lower the effective interest rate by 55 basis points. Our Northern Virginia joint venture financing, we anticipate closing that financing during the first quarter of 2019 and receiving approximately $30 million of net proceeds. Regarding the change in accounting standards, We issued initial guidance. We highlighted a 4.6 or 3 cent charge representing a reduction in the amount of internal leasing costs we had capitalized and an increase in our ground rent expense due to a new straight lining guidelines. We also know that we had not yet concluded on the accounting treatment of a ground lease at one of our joint ventures. Since that date, we have determined that the ground lease expense will increase about 3.3 million, representing a non-cash increase to ground rent expense and negatively impacting the income from our joint ventures. Based on our current capital plan for 2019, it includes $165 million of development, $55 million of revenue maintaining, $40 million of revenue creating spend, and approximately $18 million for the acquisition of the Radnor land. Our line of credit balance will be about $220 million at year end. We projected our net debt to EBITDA ratio between 6.1 and 6.3, and we'll maintain variable being scoped to the development act. And that will vary based on the scope of the development activities during the year. In addition, our net debt to JOV will remain in the low 40 range, 40% range. We continue to anticipate our fixed charge ratio to be around 3.4 and our interest coverage improving to 3.6 by year end 19. And we'll now turn it back over to Jerry. Tom, thanks.