Brandywine Realty Trust

Ladies and gentlemen, thank you for standing by, and welcome to the Brandywine Realty Trust Third Quarter 2019 Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. You may begin.

Thank you very much. Good morning, everyone, and thank you all for participating in our third quarter 2019 earnings call. On today's call with me, as always, are George Johnson, our Executive VP of Operations, Dan Palazzo, our Vice President and Chief Accounting Officer, and Tom Wirth, our Executive VP and Chief Financial Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe these 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. So looking at our business plan, we're in great shape and substantially done for 2019. So after a very brief review of our 2019 plan, we'll outline our 2020 earnings guidance and our business plan. Tom will then provide a synopsis of financial results. And after that, Tom, George, Dan, and I will be available to answer any questions you may have. Our business plan continues to be very straightforward. Simply take advantage of great product and strong markets to lease space at increasing net effective rents by controlling capital costs, delivering positive mark to markets with strong annual rent increases. Our 2019 plan accomplished that objective, as will our 2020 business plan. We are 100% done on our speculative revenue target for 2019. The leasing pipeline looking forward remains deep for our existing inventory at about 1.5 million square feet, including approximately 270,000 square feet in advanced stages of negotiations. For the third quarter, we posted strong rental rate mark-to-markets of 9.3% gap and 4.2% cash. Year-to-date, our cash chain store growth rate is 1.9%. As you may recall, we did elect last year to keep a major renovation project in our same store pool. That project, 1676 International Drive in Northern Virginia, is undergoing a full renovation and is currently 21% occupied. I'll touch on it a little bit later, but this project will deliver an excellent return on our invested capital. By keeping it in the same store, however, it has had a 100 basis point and 250 basis point adverse impact on our 2019 and 2020 same-store growth rate. To illustrate this impact, as well as the impact on our occupancy levels, we did provide a roadmap of 1676 international drives impact on same-store and occupancy levels on page 7 of our supplemental package. Based on excellent progress so far, we've raised the bottom end of our range one cent to 141 and narrowed the top end to 143 for a midpoint of 142 per share. As outlined on page 10 and 11 of our SIP, we expect both greater Philadelphia and Austin to remain strong going into 2020, thereby generating good leasing activity and increasing pipeline and good leasing levels. Couple quick notes on markets. Austin continues to benefit from tremendous corporate attraction and in-market expansion, as well as a tremendous in-migration of population. For the third quarter of 2019, asking rents increased 6.2 percent year over year, with 2.1 million square feet of absorption in the last nine months of 2019. A great way to illustrate the strength of Austin's continued strength and growth is that over the last five years, the Austin market has added over 8.4 million square feet of office space while increasing occupancy by over 320 basis points. Philadelphia had 1 million square feet of absorption over the last year. The trophy class vacancy rate has been reduced to 5% from 5.3% at the end of 2019. which ranks among the lowest of the top 25 largest MSAs. We've continued to grow jobs over the last year and are experiencing solid demand through the third quarter of 19, with asking rents increasing 4.4% year over year. Philadelphia continues to benefit from an emerging life science sector, supported by almost $1 billion in NIH funding, which ranks third nationally behind only Boston and New York City. University City receives 42 percent of all NIH funds allocated to the entire state of Pennsylvania. We believe our Schuylkill Yards development is well positioned to take advantage of this growth acceleration. In fact, Philadelphia was in the news recently when the CEO of Johnson & Johnson said that Philadelphia has the potential to be the Silicon Valley of the healthcare sector. The comprehensive redevelopment of 1676 is on time, on budget. We have 236,000 square feet of vacant space. Our current pipeline is almost 900,000 square feet, which is up significantly since our July call. We are under letter of intent and in advanced lease negotiations on approximately 111,000 square feet. Rent levels we believe will be in the mid-40s, representing about a 15% increase over expiring rents. The projections still reflect that we'll realize a return on our incremental capital of over 20%, and we'll stabilize that property at about a 9% yield on aggregate new basis. Turning to the balance sheet in time, we'll touch on this. We did take advantage of the public debt markets to raise $215 million of unsecured bonds at an average rate of 3% and an average term of 7.5 years. This financing improves our liquidity. We now have full availability under our $600 million line of credit, and we also lowered our overall cost of debt and extended our maturity schedule. So with that overview of the excellent backdrop of 2019, we also announced our 2020 business plan along with related earnings guidance. The 2020 plan is headlined by two operating metrics that demonstrate excellent future growth potential. Our cash mark-to-market range is between 8% and 10%, and our gap mark-to-market range is between 17% and 19%. We anticipate that for 2020, all of our regions will post positive mark-to-market results on both a cash and gap basis. Also, from a forward growth perspective, our major 2020 rollovers include creates significant upside due to tremendous mark-to-markets. Our FHI rollover in Austin is a 20% cash and a 28% gap mark-to-market. Macquarie in Philadelphia is an 18% cash and a 22% gap. And Reliance also in Philadelphia is a 20% cash and a 24% gap. So our gap thanks to our growth rate of 2.4%, is driven by Philadelphia at 4.5 percent and the Pennsylvania suburbs at just shy of 7 percent. Obviously, due to the rollovers taking place, MetDC and Austin will be slightly negative due to those rolls. As I noted earlier, our same-store forecast, due to the inclusion of 1676, we don't believe reflects the strength of our overall portfolio. And as we noted on that schedule, Without the inclusion of this property, our 2020 cash-shame store range would be 2.5% to 4.5%, which we think is pretty solid. Other key operating highlights, spec revenue of $31 million, already 50% achieved. Occupancy levels will close out between 94% and 95%, and will also be 95% to 96% leased by year-end 2020. Including the rollout of Macquarie of 150,000 square feet in July, we do project a retention rate of 65%. Capital, which is a key focus of ours, will run about 14% of revenues, which is consistent with our 2019 run rate. We do project growing FFO of 3% at the midpoint. And our debt-to-EBITDA range, we project the year-end will be between 6.1 and 6.3 times. CAD will range between 71% and 78% and is down slightly from our 2019 range. That decrease is primarily attributable to the capital and free rent to the anticipated backfill of 1676 International Drive, where we are projecting absorbing a number of square feet within 12 months of that space being vacated. Just to amplify a couple of vacancies, impact on 20. At 1676, we are projecting about 200,000 square feet of lease up at a cash mark to market of 14.7% and about $3 million of gap revenue as part of our 2020 plan. On the SHI role in Austin, we're projecting... about 148,000 square feet of absorption at a cash mark-to-market of just shy of 20%. Forty percent of that square footage has already been executed, and we anticipate generating a couple million dollars of revenue on a GAAP basis from that SHI release. Macquarie, we have no GAAP and no cash revenue in our 2020 release. as a result of that mid-year rollout. Just to further amplify, that $5 million of revenue coming out of 1676 and SHI is gap revenue, not cash. So the upshot is our 2020 operating forecast grows FFO at 3%, keeps our balance sheet strong, deploys some capital into development, keeps our capital ratios on track with excellent cash and gap mark to markets. To spend a few minutes on development and investments, when we do look at the development landscape and the investment side of our business, we do recognize that there's a lot of uncertainty in the macro environment that could impact the near-term economic outlook. If you think back, our goal for 2019 was really to get all of our targeted development projects in a full go mode with all approvals, design development, and marketing programs fully in place. As we're closing out 19, we feel we've accomplished that objective. But looking forward to 2020 and 21, assuming continuation of the demand drivers that we're seeing and continued strong market conditions, we do plan on placing more land into active development. As such, our 2020 plan includes two targeted development starts. And our development pipeline can really be classified into two components, our near-term production-level assets and our long-term mixed-use master plan developments. Our production-level assets can be completed within four to six quarters. They cost between $40 and $70 million dollars. and range in size between 100,000 and 165,000 square feet. The cash yields in all these projects are targeted around 8%. These assets are Four Points and Garza in Austin, and 650 Park Avenue and 155 King of Prussia Road in Pennsylvania. On these projects, we have a combined prospect list aggregating almost 2 million square feet, Each of these projects are ready to go pending pre-leasing. As I mentioned, we have two starts going into our 2020 plan. Just a quick note on a couple projects we have under existing development. 405 Colorado continues on schedule and on budget. We're now 45% leased. We anticipate that project will generate about an 8.5% yield on cost, and the schedule holds with it for Q20 2020. completion, and stabilization by 2021. The Bolton building is under renovation. That work will be done by the second quarter of 2020. And as we've noted, that building, the office component, is fully leased to Spark Therapeutics, and we're actively leasing the first floor's retail space. In looking at our master plan mixed-use projects, which are Schuylkill Yards and Broadmoor, We did update the disclosure within the supplemental package on pages 15 and 16 to provide a lot more information on those projects. So a couple quick highlights on each. On Schuylkill Yards, full master plan approvals are completely in place. The design development is substantially complete on the first two buildings. Final pricing on those buildings is underway. Marketing efforts continue with a pipeline still around 1.5 million square feet, including significant interest from life science tenants. We are in very active discussions with joint venture financing sources to provide equity for the project. Our existing investment base, aggregating approximately $90 million, will be sufficient to meet our equity requirements in the contemplated equity joint venture structures on those projects at our targeted 35% hold. So no additional cash requirements are anticipated on our Schuylkill Yard starts. Prior to starting either tower, we will have final construction pricing lockdown and all equity and debt financing committed and announced as part of any start announcement. Given our read on the residential market, we could be assuming the above conditions are met, in a position to go on the west tower in the next couple quarters. The east tower, which is predominantly office and a potential life science component, does require an active tenant, as well as having those cost and financing conditions met prior to any start. A final point worth noting that you'll see on the page in the supplemental is that our Schuylkill Yards master plan can accommodate almost 2 million square feet of life science space. Given the strong demand drivers we're seeing in that sector, we have also commenced the design development process for a 400,000 square foot dedicated life science building that could commence construction very late in 2020 or early 21 in a joint venture with our life science partner. On Broadmoor, which is framed out on page 16, Again, all approvals done. I do want to highlight that we can build about 2.7 million square feet of space and over 800 apartments with the existing buildings in place. And we are into full planning and costing on three blocks with marketing launches attendant there, too, which I detailed the component parts of that on page 16. All three blocks could be in a position to start by mid-year 20, again assuming favorable market and financing conditions stay in place. Discussions on the train station, public space sequencing, and retail hospitality initiatives are all continuing at an excellent pace. We have one acquisition program for 2020, which is part of the previously announced transaction with Penn Medicine. We have a 160,000-square-foot building in Radnor that we plan on purchasing later in the year. We do anticipate placing that building into redevelopment upon acquisition. Excluding the committed spend we already have in our 2020 plan for 405 Colorado, the Bolton building, and a few other items, as Tom will outline, our plan does include $50 million of incremental spend in 20 on our two projected development starts. To finance these opportunities, we will be evaluating well-timed asset sales, looking at several of our joint ventures to harvest profit, generate liquidity, and reduce debt attribution. We are also evaluating several value-add opportunities. And as we did in 2018 and have done in 2019, we expect any deployments, to be relatively earnings neutral, and accelerate bottom-line cash flow growth. So to close out, 2019 plans essentially wrapped up. Our focus is now on our 2020 plan, and we're delighted that the bottom-line result is strong, effective rent growth, a growth in FFO, and a continued solid balance sheet performance. At this point, I'll turn it over to Tom to review our financial results.

Thank you, Jerry. Our third quarter net income totaled $6.7 million, or $0.04 per diluted share, and FFO totaled $64 million, or $0.36 per diluted share, which met consensus estimates. In addition, we narrowed our 2019 guidance by $0.02 per share, and the midpoint remains $1.42 as compared to the initial first and second quarter guidance. Some general observations of the third quarter were operating results were generally in line with our second quarter guidance. Our second quarter fixed charge and interest coverage ratios were 3.6 and 3.9, respectively. Both metrics improved as compared to the third quarter of 2018. Our annualized net debt to EBITDA decreased to 6.3, which benefited from the improving operations and the sale of Plaza 1900 for roughly $36 million. Our 2019 guidance, looking at the fourth quarter, we have some general assumptions. Portfolio operating income will total about $84.5 million. SFO contribution from joint ventures will total $2.5 million. G&A, our fourth quarter G&A expense, will decrease from $7 million to $6.5 million. The incremental decrease is primarily due to expected timing of expenses, and the full year G&A expense will total approximately $31.7 million. Interest expense will be $20.5 million, with 92% of our debt being fixed rate at the end of the quarter, but up to 98% fixed as a result of the bond deal. Capitalized interest will approximate $0.8 million. Full year interest expense should be about $82 million. Termination fee and other, we anticipate termination income of $2.6 million for the year. Other income will approximate $7 million. Net management and leasing development fees will be $2.5 million and approximate $9 million for the year. Financing activity, during the fourth quarter, we took advantage of the public debt markets and issued $200 million of secured bonds at a premium to generate about $214 million of net proceeds. The issuance comprised a reopening of our 24 and 29 bonds, each for $100 million. The issuance resulted in reducing our unsecured line of credit to zero. Weighted average interest rate on those bonds is 3%. The weighted average maturity of seven and a half years. Percent of fixed rate debt is now above 98%, and both bond issuances are now index eligible. Based on our capital plan, which includes $45 million of development and redevelopment, $15 million of revenue maintained, $10 million of revenue create spending, approximately $18.5 million for the acquisition of Radnor Land. Our cash balance will approximate $50 million at year end. Based on our estimated fourth quarter EBITDA capital spend, we continue to project that our net debt to EBITDA ratio will be within 6.0 to 6.3 range, with the main variable being the timing and scope of our development activities and related capital spend. In addition, our debt to GAV will remain in the low 40% range. We anticipate fixed charge to be 3.6 and our interest coverage to be 3.9 by year end. Looking at 2020 guidance, at the midpoint, net income will be 29 cents per diluted share and FFO will be $1.46 per diluted share. Some of our general assumptions, portfolio operating results, property level gap NOI, will increase approximately $10 million year over year, primarily due to Drexel Plaza, which will generate $2 million as the park takes occupancy during the year, and $8 million increase in same-store NOI on a GAAP basis. FFO from our unconsolidated joint ventures will total about $10.5 million. G&A should range between $30 and $31 million. On the investment side, we have no sales activity built into the plan, but we do have the acquisition of 250 King of Crusher Road in Radnor, Pennsylvania, as Jerry mentioned, for $20 million, and we do have two development starts that will not generate any earnings in 2020. Interest expense will increase to approximately $82 to $83 million. primarily due to also in that number includes our payoff of the four-tower bridge mortgage, which will occur in December for about $9 million. Capitalized interest will increase from $3 million to $3.5 million, primarily due to building a 405 Colorado. And we anticipate paying off our two-Logan mortgage on May 1st, which is approximately $80 million and at a rate just below 4%. Land sales and tax provisions should net to about zero. Termination fees and other income should total about $10 million. Net management and development fees will be $8 million, which is about a million and a half below our 2019 estimate. While property management fees will remain constant, we anticipate lower development fee income as the development projects at Garza for SHI and Radnor for Penn Medicine are completed during the first half of 2020. We have no anticipated ATM or share buyback activity. Turning to the capital plan, we do project CAD will be slightly lower, and our coverage will be between 71% and 78%. The main contributors to the lower coverage is due to an increase of straight-line rent and the releasing of the space at 1676, which is anticipated to occur within the 12 months of KPMG leaving the space. Our total plan for the year is about $500 million. It's comprised of about $135 million of development and redevelopment, of which $50 million is going to be new development starts for the year, about $135 of common dividends. Revenue maintained should be $63 million. Revenue create should be $50 million. And as I mentioned, we should have about $90 million of mortgage payoffs for 2 Logan and 4 Tower Bridge, $7 million of mortgage amortization, $20 million for the acquisition of 250 King of Crusher Road. The sources for that will be about $220 million of cash flow after interest, $220 million for the use of a lot of credit, $50 million of cash on hand, which we anticipate at the end of 2019, and about $10 million in land sales. Based on our capital plan, our line of credit balance will be about 220 at the end of the year. We project net debt to EBITDA in a range between 6.1 and 6.3, again, the main variable being timing of development. In addition, our debt to GAV should be maintained in the low 40% range. In addition, we anticipate fixed charge will improve to 3.7, and our interest coverage will improve to 4.0. I'd like to turn the call back over to Jerry.