Brandywine Realty Trust

Ladies and gentlemen, thank you for standing by and welcome to the Brandywine Realty Trust fourth 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker today, Mr. Jerry Sweeney, President and CEO. Sir, you may begin.

Crystal, thank you, and good morning, everyone, and thank you for participating in our fourth quarter 2019 earnings call. On today's call with me, as usual, are George Johnstone, our Executive Vice President of Operations, Dan Palazzo, our Vice President and Chief Accounting Officer, and Tom Wirth, our Executive Vice President 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 estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances 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 after a very brief review of our 19 results, I'll provide an update on the status report of our 2020 business plan. Tom then will provide an update on our financial results for the year and a look ahead to the balance of 20. And then after that, all four of us are certainly available for any questions. We closed 2019 on a very strong note. We exceeded our business plan metrics on cash and gap mark-to-market, tenant retention, and achieved many of our other targets, including ending the year at 95.5% least. We achieved our speculative revenue target, which you may recall we increased twice during the course of the year. We did come up a bit short on our occupancy target, primarily due to several tenants not having completed their tenant-directed fit-out and a minor bankruptcy. Our fourth quarter and full-year FFO was $38. and $1.43 per share respectively, and both were at the upper end of our guidance ranges. Fourth quarter operating performance was strong. It was masked a bit by the termination of KPMG at 1676 International Drive. Absent their vacating, our fourth quarter absorption would have been 112,000 square feet positive. Tenant retention was would have been 77%, and our year-end occupancy would have been 94%. Those statistics, along with the same store growth of 1.5% on a GAAP basis and 2.7% on a cash basis, with our GAAP rank growth and cash rank growth, we think demonstrate the underlying strength of our portfolio's operating performance. Also during the fourth quarter, we sold some remaining joint venture properties in Charlottesville, Virginia. They aggregated about $51 million in sales. We were a minority partner, and we recorded an $8 million gain in exit at those properties. Also during October, we completed a full building lease for our redevelopment property in the Pennsylvania suburbs. This 13-year lease rate was very much in line with our target at rent levels, The lease, however, was five years longer than anticipated, so it required more upfront capital. So our going in initial cash yield was in the 8% range versus our earlier target, but we picked up five additional years of term, so the overall economic returns were very much in line with our projections. That lease will commence in 2020 and wraps up an extremely successful redevelopment undertaking. As Tom will touch on, We did end the year at a 6.1 EBITDA target, which really does position us well going into 2020. So turning to 2020, we are off to a very good start. 2020 business plan is really quite simple. It's, first of all, to take advantage of strong market conditions to meet all of our operating targets and drive net effective rent growth. And then secondarily, to capitalize on all the development planning and approval efforts that we undertook in 2019 by getting some vertical construction underway to drive earnings growth over the next several years. So in pursuit of the operating goals, as you noted in the sub, we're 73% done on our speculative revenue target. Our leasing pipeline remains deep for our existing inventory, including 270,000 square feet in the advanced stage of lease negotiations. As we outlined on page 10 and 11 of our SIP, we expect both the greater Philadelphia and Austin markets to remain strong during the year and generating good activity at building pipeline and good leasing levels. Looking at it, Austin continues to ride the growth wave from corporate attraction efforts and in-market expansions. The unemployment rate fell to 2.6% towards the end of the year. Asking rents continued to increase year over year. with about 2.1 million square feet of absorption during the full year of 2019. Philadelphia also experienced about 500,000 square feet of absorption over the last year. The 12-feet class vacancy rate went down to 5%, among the lowest of the top five largest MSAs. Philadelphia has grown jobs over the last year, a continuation of its performance in the last several years, and we experienced solid demand in the fourth quarter. with asking rents increasing 4.4% year over year. Just one note on a major redevelopment project, 1676 International, that comprehensive $24 million repositioning is substantially complete, and we're in a full marketing mode. We've already leased 75,000 square feet in the lower bank. for a mid-2020 occupancy. We have about 220,000 square feet remaining and a current pipeline of just shy of 400,000 square feet. In addition, based on the current stacking in the building, we have constructed several spec suites on the lowest available floors to accommodate smaller tenants who are in need of quick occupancy. Rental rate levels in our proposals and the executed lease match our pro forma rates. and represented about a 15% increase over the expiring rent. Our 2020 business plan projects will lease an additional 125,000 square feet during the third and fourth quarter of 20, and our spec revenue target does include, in the aggregate, $3 million of revenue from this project, with about $1.7 million yet to do. The numbers support our previously indicated guidance that this project will generate in excess of a 20% return on incremental capital, and we expect it to stabilize around an 11% yield on the fully loaded basis. The 20 operating plan is also headlined by two metrics that we think demonstrate excellent earnings potential. Our cash mark-to-market range is between 8% and 10%, and our gap mark-to-market range is between 17% and 19%, our best in recent memory. We do anticipate that for the year, all of our regions will post positive mark-to-market results on both a cash and gap basis. Furthermore, our disciplined focus on controlling capital costs, which we expect to stay below 15% for 2020, combined with this mark-to-market does result in us growing net effective rents in our 2000 plan by 8%. Also, from an earnings acceleration standpoint, the major 2020 rollovers do create significant upside in 2021 and 2022. SHI, for example, in Austin is a 20% cash and a 28% gap mark to market. Macquarie in Philadelphia is an 18% cash and 22% gap. And Reliance, again, in Philadelphia is a 20% cash and a 24% gap mark to market. We do expect our gap same store to be in the range of 2% to 4%, primarily driven by Philadelphia, which is about 4.5%. and the Pennsylvania suburbs coming in just shy of 7%. For obvious reasons, Met DC and Austin will be negative due to the KPMG and the SHI move-outs. One point that we think is worth amplifying is our same store forecast, due to the inclusion of 1676, we don't really think reflects the underlying strength of our portfolio. For example, without the inclusion of this property, our 2020 cash same store range would be 2.5 to 4.5%. We did illustrate the impact of this in more detail on page 7 of our supplemental package. Just a couple quick words on major vacancies. I've already chatted about 1676. Essentially there we have 125,000 square feet to lease up and need to generate $1.7 million of gap revenue in the latter half of the year. SHI, We have about $2.7 million of gap revenue from the 184,000 square foot roll. Cash mark to market is over 19%. Eighty percent of that is already booked, so what's left to do is just north of $500,000 of additional spec revenue. When we take a look at the Macquarie rollover at our Commerce Square building in Philadelphia, we don't have any leasing or any gap revenue really projected as part of our 2020 business plan. It's also important to recognize that the remaining open assumptions in our plan are predominantly smaller spaces. In fact, no single vacancy is larger than 17,000 square feet. And as George can amplify, if of interest, we've already executed 81% of our anticipated renewals for the year and have active negotiations underway with a significant percentage of the remaining balance. Now, looking forward, for capitalizing on all of our development approval work during 2019, during the past year, we achieved all of our goals on all of our development planning efforts. We completed the full approval, the full design, development, and construction pricing on all of our production assets, that being Garza and Four Points in Austin, 650 Park and 155 King of Pressure Road in Pennsylvania. So we are in a full go position on all four of those projects. And as we noted last quarter, these assets can be completed within four to six quarters. They will cost between $40 and $70 million. So the aggregate investment in those four assets is just north of $200 million. They range in size between 100,000 and 165,000 square feet. The cash yields on each of them are circling 8%. And of these projects, we have a combined prospect list of 1.8 million square feet. So they're ready to go, and we do have, as Tom will touch on, two development starts built into our 2020 plan. A quick observation on a couple of our existing developments. 405 Colorado in downtown Austin is on track for a year-end 20 completion. We're now 52% leased. 97,000 square feet remain, and we have a leasing pipeline of over 200,000 square feet. Project cost remains at $114 million, and we are targeting a yield on cost of 8.5% and expect that to stabilize in mid-21. The bulletin building here in Philadelphia, that renovation, the exterior work is ongoing and will be completed on budget and on schedule in early Q2 of this year. As you may recall, that entire building is leased to Spark Therapeutics, a life science company owned by Roche Pharmaceuticals, and we still project a 9.3% free and clear return. In looking at our large master plan mixed-use projects, on pages 15 and 16 in our SUP, we did provide more information. To highlight a few points, our full master plan approvals are now in place. That's two years ahead of schedule, so we're able to accomplish all of the zoning overlays in 2019. The design, development, and pricing is substantially done on the first two buildings. Marketing efforts do continue with about a 1.1 million square foot active pipeline, and a significant component of that being life science tenancies. We are in very advanced discussions with joint venture equity financing sources, and as we've indicated before, our current front money investment balance in both of those projects of approximating $90 million should be sufficient to meet the equity requirements under our contemplated joint venture structures. If we are successful in finalizing the current equity and debt financing negotiations, we will be in a position to go on the West Tower in the first half of 2020. The East Tower, which is obviously a larger project with primarily office and a life science component, will require an anchor tenant, and we continue that process as well, in addition to working on the equity and debt financing arrangements. The Schuylkill Yards master plan can accommodate almost 2 million square feet of life science space. As I mentioned last quarter, We are proceeding with the design development on a 400,000-square-foot dedicated life science building. And in addition to that, the new ground-up life science building, we noted on page 13 that we have started the conversion of 3000 Market Street, an existing 60,000-square-foot office building, into a life science facility. Design and pricing is being finalized. with selective demo already underway. We do expect to be able to deliver that project in the first quarter of 2021. That decision was really driven by the tremendous near-term demand we're seeing from smaller life science companies with the objective that if we can get them into 3,000 market, we can capture their future growth at Schuylkill Yards. Turning to Austin, our Broadmoor development, Again, all approvals done. As we've noted in the SUP, we can do 2.7 million square feet and 855 apartments with the existing buildings that are substantially to IBM and a couple other tenants in place. We're into full planning and costing on three blocks as detailed in the SUP. Blocks A and F will be in a position to start by mid-year 2020. Discussions on the train station, public space sequencing, and our retail hospitality initiatives are continuing at an excellent pace. We are also in discussions with private capital sources as we finalize the financial plan for an accelerated build out of this overall redevelopment. We only have one acquisition program for 2020, which is a 160,000-square-foot building in Radnor that we are purchasing as part of our overall transaction with Penn Medicine. This project is an exciting redevelopment opportunity in one of the region's premier submarkets. Right now, we anticipate closing on that project in the second quarter of 20 and moving it immediately into redevelopment. On the disposition front, We are marketing several smaller buildings in the Pennsylvania suburbs and continue to have numerous discussions with private equity sources on both the acquisition and disposition fronts. As you know, our 20 plan has $50 million in incremental spend projected on our two development starts. As we've indicated previously, to finance these opportunities, we will be consistent with what I just mentioned, evaluating well-timed asset sales, looking at some of our existing joint venture structures to harvest profits, and to make sure that we generate sufficient liquidity and maintain our balance sheet targets. So to close, our focus is now on executing our 20 business plan. We're delighted that the bottom line result for 2020 is a strong cash-to-market, cash-mark-to-market, net effective rent growth, 3% FFO growth rate, and a debt-to-EBITDA range between 6.1 and 6.3. I'll now turn the presentation over to Tom for an overview of financial results.

Thank you, Jerry. Our fourth quarter net income totaled $16.7 million, or $0.09 per diluted share, and FFO totaled $67 million, or $0.38 per diluted share, which were at the upper end of our guidance estimates. Some general observations regarding the fourth quarter results. Operating results were generally in line with our third quarter guidance. One highlight is our operating expenses did benefit from lower tenant reserves, while our G&A was negatively impacted by some one-time transactional and professional costs. And other income was below our forecast also for the fourth quarter due to some timing of anticipated transactions. Our fourth quarter same-store gap at OI growth was negatively impacted by some tenants that had some substantial completion delays and tenant leasing slides, all of which will commence in the first quarter of 2020. Our fourth quarter fixed charge and interest rate coverage ratios were 3.7 and 4.1 respectively. Both metrics improved as compared to the fourth quarter of 2018 and were better than our forecasted results. Our fourth quarter annualized net debt to EBITDA decreased to 6.1, and at the lower end of our 6.0 to 6.3 guidance. The ratio benefited from improved operating income and higher than expected year-end cash balances. The increase in cash was primarily due to the delay of our acquisition of the land parcel in Radner, Pennsylvania, which we anticipate will close during this quarter, and sales proceeds from the joint venture interests in Charlottesville, Virginia. Looking forward to the first quarter of 2020, we have the following general assumptions. Portfolio operating income will total approximately $84 million and will be sequentially lower by a million dollars, primarily due to increased operating expenses. FFO contributions from our unconsolidated joint ventures will total about $2.5 million for the first quarter, which is down about $400 million from the fourth quarter. and $200,000 after adjusting for the PJP sale in Charlottesville. For the full year 2020, the FFL contribution is estimated to be about $9.5 million. G&A, our fourth quarter G&A, will increase from $6.9 million to $9.5 million. That sequential increase is consistent with prior years and primarily due to the timing of deferred compensation expense recognition. For the full year, G&A expense we estimate will total about $32 million. Interest expense will be about $20.5 million for the first quarter, with 97.5 of the balance fixed rate on our balance sheet. Capitalized interest will approximate $700,000, and full year interest rate will approximate $82 million. In looking at that plan, we have several capital items we are talking about. One assumption is the payoff of the four-tower bridge mortgage, about $9 million in November 2020. Capitalized interest will be about between $3.2 million up a little bit from last year. We're going to pay off the two Logan mortgage, which matures on May 1st. This mortgage approximates $80 million at just under a 4% rate. Termination fee and other income, we continue to anticipate termination of the fee income, totaling $4 million for the first quarter and $11.5 million for the year. Net management fees, quarterly NOI will be $2.5 million and we'll approximate $8 million for the year. Land sales and tax provision, we expect to net to zero, and we have no anticipated ATM or share buyback activity. On the investments, as Jerry mentioned, guidance assumes no new sales activity. Building acquisition activity is for 250 King of Crusher Road for $20 million, and an additional land parcel at Raptor, which did get delayed to the beginning of 2020, and that's another $18 million. Any development starts that we have, which is $50 million in our liquidity, we do not expect them to generate, if they do start, any earnings in 2020. Our CAD range is 71% to 78%. The main contributors is going to be some higher straight-line rent this year versus next, just under $10 million. And, again, the releasing space at $1676 million. is going to generate revenue-maintained capital of a dime due to the tenants that will come in within the first year of the vacancy. Our total uses in capital for the year is $535 million, $150 million of development, $135 million of common dividends, revenue-maintained capital of $64 million, revenue created of $50 million, mortgage amortization, $7 million, $90 million of debt payoffs, which I mentioned earlier, for the mortgages, the acquisition of 250 Kingwood Pressure Road for $20 million, and the acquisition of the land for $19 million. Primary sources will be cash flow of $220 million, $215 million of line use, using up the $90 million of cash we have on hand, and roughly $10 million of land sales that we have programmed. Based on that capital plan, our line of credit balance will be approximately $250 million at year end. We also project that our net debt to IPEDA will range between 6-1 and 6-3, with the main variable being timing and scope of our development activities. In addition, our debt to GAV will be between 42% and 43%. In addition, we anticipate our fixed charge ratio will approximate 3.7, and the interest coverage will approximate 4.1. I'll now turn the call back over to Jared. Great, Tom.