Brandywine Realty Trust

Ladies and gentlemen, thank you for standing by, and welcome to the Brandywine Realty Trust first quarter 2020 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 very much. Good morning, everyone, and thank you for participating in our first quarter 2020 earnings call. On today's call with me are George Johnston, our Executive Vice President 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 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 we file with the SEC. Well, this is no ordinary time. And first and foremost, all of us at Brandywine sincerely hope that you and yours are safe, healthy, and sheltering in place as happily and as productively as possible. The pandemic has disrupted everything and presented a new landscape for everyone and every business. While the duration of the crisis remains unclear, we have assessed the crisis's impact on every element of our business, employee, tenant, vendor safety and security, a return to safe building operations, construction schedule delays, forward leasing pipeline and renewal activity, and, of course, all the related financial implications. Additional details on these and other topics are outlined in our COVID insert found on pages 1 to 13 of our supplemental package. Looking at the first quarter, we opened the year strong. Our first quarter results were among the best we've had in recent years. We had excellent leasing activity. Rental rate mark-to-market was almost 16% on a gap basis and 8% on a cash basis. Same store numbers were tracking slightly ahead of our original plan. Capital costs were at the low end of our targeted range. Our retention rate was 76%. and we posted FFO of 35 cents, which was in line with consensus. Our leasing pipeline was building nicely, including some excellent forward leasing activity on several of our development projects. That strong start is, of course, in the rearview mirror and all somewhat irrelevant given the circumstances, and our entire focus is on the path forward. And as we turn our attention to the impact of the virus, it's important to reflect on where we are and how to extrapolate the current situation to the near and intermediate term future. So several observations from our team before we outline our 20 strategy. First, we have a 25-year track record of building strong employee culture and establishing lasting relationships with our tenants, vendors, and communities. Never has the time for having built those bridges been more important than today. So we have erred on the side of over-communicating with all of our stakeholders. Second, to paraphrase a number of behavioral scientists and economists, how people behave in a pandemic is not really a great guide to how they will act or live their lives in normal times. As one person put it, we're living in the middle of a grand forced experiment, and we really don't know how that experiment is going to play out. So while we have stayed in close touch with our tenants, vendors, political and community leaders, the path forward and the pace we walk down that path is somewhat uncertain. Please note that in developing our 2020 COVID revised business plan, we have pragmatically assessed forward risk and incorporated all those assumptions into our plan. Given the current circumstances, this plan is as accurate as we can make it. Third, every crisis embodies elements of both danger and opportunity. Our clear priority has been to assess every element of risk and institute plans to effectively mitigate or anticipate its effects. We're also, however, focused forward on the opportunity set to anticipate situations where we can enhance our business plan execution, whether that be through extending lease terms, improving the pricing of our current supply chains, We're working with institutional partners to seek opportunities where our market position, talent base, and capital can create growth opportunities. So in looking at the risk factors in our COVID-19 business plan, our first priority is the safety and security of all of our employees, tenants, and buildings. We are very happy to report that no Brandywine employee has contracted the virus, and consistent with applicable state and CDC guidelines, we have maintained a doors-open, lights-on approach to all of our building operations and maintained close communication with our tenants, vendors, and local health and municipal officials. Secondly, we focused on the stability of our economic platform with particular attention to each of the following items. Rent collections. Given that these are no ordinary times and the stay-at-home orders in effect we did receive requests from tenants for rent deferrals. Full details of those efforts are found on page nine of our SIP. Bottom line, we have about 1.6% of our rents coming from retail tenants. Normal monthly billings run about $500,000. We received $150,000 in April. 29 tenants or 45% of leases have been or are in the process of documenting rent deferrals. About 2.1% of our rents come from co-working and conferencing tenants. Normal monthly billings are $675,000. During April, we received $580,000. For April, we received 95% of overall rents, 96% collection rate from our office tenants, and 100% collection rate from our top 30 tenants. The vast majority of rent relief requests are from our retail and co-working tenants. At this point, there have been no rent abatements granted. Rent deferral situations are paid back to us either in 2020 or 21 or via lease extensions. Just a point as well, our leases are clear in that our tenants have a legal obligation to pay us rent. While we certainly recognize every company wants to preserve cash, the legal obligation to pass rent is clear. And as we have done over our history, we'll certainly work with those companies that truly need bridge assistance. From an insurance standpoint, it's also clear that we can't rely on our standard property policy to reimburse us for rent not paid by tenants in default of their contractual obligations. We did, however, have the foresight to procure a $5 million of coverage sublimit for interruption by communicable diseases under our property policy, which we believe will be operative where we have forced majeure claims, such as in the case where we had work stoppages due to government mandates. Due to the uncertainty of the recoverability of these amounts, we have not included any insurance proceeds in our revised business plan. We also were impacted by some construction work stoppages. The vast majority of our construction operations remain shut down. with the exception of Austin, which was shut down for a period of time, and some of our operations in Met D.C. In our 2020 plan, we're assuming that construction gets back to work in the next 30 days. In fact, in Pennsylvania, our governor last night announced plans to restart the opening of our economy on May 8th and has accelerated the restart of construction, obviously compliant with safe distancing and CDC guidelines on May 1st. But the impact of this temporary work stoppage in our 20 plan is $2.3 million of gap NOI, 218,000 square feet of lower occupancy, which reduces our year-end occupancy by 1.4%. We also spent a significant amount of time looking at our leasing pipeline, which stands right now at 1.3 million square feet. Our leasing team and executive directors have been in extensive and repeated touch with every prospect and tenant rep of our 1.3 million square foot pipeline. To the best we can determine as of today, we believe that about 52% of that pipeline, or 670,000 square feet, are deals that are progressing. But clearly, with the shutdown, the execution time is uncertain. but we would anticipate within the next 90 to 120 days. We have about 45% of the deals in our pipeline on hold due to the virus. Of that, based upon the information we have, we think that 10% of those will likely progress to execution. About 70%, it's just simply too early to tell as a lot of our prospects are focused on their own businesses versus their office space requirements. And we believe about 15% is most likely dead requirements because of the virus. And we expect to lose the balance for about 7% to another competitor. We also spend a great deal of time looking at our capital spend. And as Tom will walk through in more detail, we've done a thorough review of our expected spend for the balance of the year and have reduced that spend by $50 million, or about 20%. More detail on that can be found on page 11 of our SIP. We did make some adjustments to spec revenue, as you might expect. And primarily due to slower projected leasing and the impact of construction work stoppages, we're reducing our spec revenue target by $5 million to $26 million. A redevelopment project at 1676 International Drive in Northern Virginia experienced both of these conditions totaling almost 60% of the slide, or $2.9 million. The timing of our major tenant in that project slid until the first part of 21, and the additional lease up that we had projected for the balance of 20, we have also shifted until next year. Overall, leasing delays total about $2.7 million of GAAP revenue, and the previously mentioned work stoppage of 2.3 accounts for the balance. With these revisions, we have $1.1 million of revenue and 149,000 square feet to achieve our plan that we outlined in our press release yesterday. From a dividend coverage and liquidity standpoint, the company is in excellent shape. We're projecting to have between $400 and $480 million available in our line of credit by the end of the year. That number depends on whether we refinance or pay off. an $80 million mortgage securing one of our Philadelphia CBD properties. We only have one $10 million mortgage maturing in 21. No unsecured bond matures until 23. We generate $85 million of free cash flow after debt service and dividend payments, and that dividend is extremely well covered with a 54% FFO and a 70% CAD payout ratios. In looking at our guidance, we set our new range at 137 to 145 per share. The impact of this range on our operating metrics is detailed in both the press release and on page 16 of our SIP. To do a very quick reconciliation, our previous midpoint was $1.46 per share. We did increase, and Tom will talk about during his conversation, our project reserves, which reduced that by two cents. We did a building sale that cost us a penny. Our office leasing slides are close to two cents a share. The construction slides will cost us a penny. We anticipate losing a penny through our joint ventures, and we anticipate losing another penny through lost parking revenue and the hotel component of our AKA project at the FMC Tower. The share buyback, which we also announced, added $0.03 back. So our new midpoint is $1.41. So with those components addressed, we'd like to take a look at the development opportunity set quickly. First of all, on the development front, all four of our production assets, that is Garza, 4.650, and 155 King of Pressure Road, are all fully approved. All work is paid for. They're fully documented. The pricing has been finalized. and they're ready to go subject to leasing. As we've noted previously, each of these projects can be completed within four to six quarters and cost between $40 to $70 million. Pre-COVID-19, we had a strong pipeline of deals that could have kicked off one or more of these projects. As we look at the crisis now, clearly starting any development is an elective decision and will be evaluated on a case-by-case basis. And as such, you'll note in our revised business plan, we have reduced our two projected 2020 starts down to one, which we achieved with the start of our 3,000 Market Street project. In looking at our existing development projects, at 405 Colorado, as we identified in our supplemental, we did have a disappointment post-quarter close. Our lead 70,000-square-foot tenant terminated their lease. pursuant to a one-time right to terminate if we did not meet an interim milestone delivery date. Based on the original construction schedule we had, we had a significant cushion built in to meet that milestone. The general contractor, while still being able to complete the project on time, missed that milestone date. We will naturally have a claim against that contractor, but right now our focus is on getting the project built and leased. So that project now stands at 18% leased with 160,000 square feet to lease in what we know will be a very exciting addition to Austin's skyline. We had a great pipeline of deals before the crisis, and we expect that pipeline to reemerge and have been in touch with a number of those prospects. Due to the short construction shutdown we did have in Austin, we did slide the completion date back to Q1 2021. and due to this tenant event, moved the stabilization date back to Q4-21. On the Bulletin Building, due solely to the mandated construction work stoppage, we are moving the completion date back one quarter to Q3-20. Given that that building is fully leased, we did move the stabilization date up to the Q4 of 20, so that'll be fully stabilized. 3000 Market Street, this is a renovation project within Schuylkill Yards. This 64,000-square-foot building is being fully converted into a life science facility, and we're very fortunate to have recently signed a lease with a life science tenant where they will take the entire building on a 12-year lease commencing in the third quarter of 21 and deliver a development yield of 8.5%. So we're really excited. This is truly a great exclamation point to our emerging life science push in University City. Just quick updates on Broadmoor and Schuylkill Yards. On Broadmoor, we're advancing Block A, which is a combination of 360,000 square foot office building and 340 apartments through final design and pricing. At Schuylkill Yards, we continue the design development process for a dedicated life science building and anticipate that with the schedule we have in place, market conditions permitting, that could start in the first half of next year. On our Schuylkill Yards West project, which is our office residential tower, as you know from previous calls, that's fully approved, priced, and ready to go, subject to finalizing our debt and equity structure. Certainly, the virus had a big impact on the timing of this project start. We continue to work with our preferred QOZ equity partner, but the crisis has certainly slowed the pace of procuring financing. We do remain optimistic that we'll get that across the finish line when the situation returns to some level of normalcy. On the investment front, we sold one property during the quarter for $18 million. We also repurchased net after dividend savings $55 million of our own shares. Those shares were purchased at a 10.5% cap rate, an 8% dividend yield, and an imputed value of $203 per square foot. As we assessed it, regardless of the trading price of our stock, this was a good investment, delivering both immediate and better returns than our targeted developments, and was paid for via the asset sale and the capital spending reduction of $50 million. To provide a frame of reference, the average cap rates in our markets on asset sales since the great financial crisis has been 6.4%. and an average price per square foot of $350. Both of those metrics more than supporting this investment, as well as when you compare that to current replacement costs between $400 and $600, it further amplifies the validity of making that investment in our own shares. There are a tremendous number of private capital sources actively looking for high-quality investments, particularly with well-capitalized partners. We continue to have an active dialogue with several institutional investors and private equity firms. We are exploring several asset-level joint ventures that would improve our return on invested capital, enhance our liquidity, and provide growth capital. While these discussions are active, constructive, and ongoing, there's no certainty as to their outcome, but we continue to pursue and look forward to continued improvement in the debt markets. The last opportunity I'd like to just spend a moment on is the opportunity set embedded in the future of office market demand drivers post the virus. Whether you believe there will be more or less demand, more square feet per employee, more work from home, the immutable constant will be that high-quality office space will be a recipient of any demand drivers. Tenants clearly want safe, secure, healthy environments. We do believe that owners of best-of-class products like Brandywine will be beneficiaries of these future demand drivers. I'd ask you to note the building access security HVAC elevator lines that we have identified in our COVID supplemental package insert. And we're also keeping all these potential changes in consumer preferences in mind as we finalize our development planning. Tom will now provide an overview of our financial results.

Thank you, Jerry. I wanted to start off with a review of the net income. We came in at $7.9 million, or $0.04 per diluted share. FSO totaled $61.4 million, or $0.35 per diluted share. Some general observations of the first quarter. Operating results were generally in line with our fourth quarter guidance report. Operating expenses from lower G&A expense was $1 million as compared to the forecast. Let's do this in the timing of some compensation and professional fee recognition. Interest expense lower due to the lower rates that we had forecasted and slightly higher capitalization of interest. First quarter fixed charge and interest coverage ratios were 3.7 and 4.0 respectively. both metrics improved as compared to the first quarter of 2019. Consistent with prior years, our first quarter annualized net debt to IPEDA did increase as G&A increased. The increase to 6.7 was primarily due to higher sequential G&A cash use for our stock repurchase, and this is partially offset by these proceeds from the sale of non-core assets not included in our 2020 business plan. Looking at 2020 guidance, as Jerry outlined earlier, we're reducing the midpoint of our guidance by 5 cents per share. The combined $5 million reduction in spec revenue is 3 cents per share. In light of the increased economic concerns from our tenants, we increased our forecasted reserves by 2 cents per share, and we did that on a general basis, so not included in in our revised same store for now. The non-core asset sale in the first quarter, also including the JV in the fourth quarter, which we didn't adjust guidance for, is about a penny a share. We anticipate similar leasing slides at MAP or JV, where we're 50% owner, and some slides as well at 4040, which did open, get its CEO in February of this year. In addition to that, we believe our parking and FMC operations will be negatively affected in the near term, and we're putting in a penny share for that reduction. And then the reduction to partially offset that is the buyback, which is $0.03 accretive. Looking forward to the second quarter of 2020, we have the following general assumptions. Portfolio-level operating expenses will total about $80 million. This will be sequentially $3.3 million below portfolio the first quarter primarily due to the $1.8 million increase in some operating expenses, its timing of R&M, $600,000 due to the lost gap income from the non-core asset sale that was there in the first quarter, not there in the second quarter, and $1 million due to March move out of SHI Barton Skyway and the lower hotel revenue that we expect to happen at AKA. FFO contribution from unconsolidated joint ventures will total $2 million for the first quarter, which is down $700,000, primarily due to MAP and bringing in 40-40 online, which will incur some initial startup losses. For the full year, the FFO contribution is estimated to be $9.5 million. G&A, our second quarter G&A expense will be $8.5 million, very similar to first quarter. Full year G&A expense will total about $32 million. Interest expense will be $21 million for the second quarter, with 95.3% of our balance sheet debt being fixed rate. Capitalized interest will approximate $1 million, and full-year interest expense is approximately $82 million. Capitalized interest will continue to approximate $3.2 for the year as we continue building 405 Colorado and We extended our mortgage to Logan Square for an additional maturity date from May 1st to August 1st. That mortgage payoff is about $80 million at a 3.98% rate. This loan is very well covered based on the current NOI that's in place, which has grown over time. And we're considering an extension or a refinance of that loan. Termination, other income, we anticipate termination fee and other income to be $2.5 million for the second quarter and $11.5 million for the year. Net management, leasing, and development fees. Quarterly NOI will be $2 million and will approximately $8 million for the quarter. Land sales and tax provision will net to zero. Our buyback activity, as Jerry mentioned, we executed on a stock buyback in March of 2020. at excellent economic terms and an implied 8% cash dividend yield. Since the shares were purchased late in the quarter, the weighted average share count did not have any impact on our first quarter results. In addition, the weighted average share count for the year will be reduced to about $174 million, and for the second quarter will be roughly $172 million as our weighted average share count. We have no anticipated ATM or additional share buyback activity in our plan. For investments, we have no other incremental sales activity in our plan. With the acquisition side, we do have the Radnor land purchase, which did occur this quarter, and we still have the building acquisition at 250 King of Prussia Road for roughly $20 million, and that will be bought later in the year. and that will go into redevelopment, so no earnings impact, no earnings increase for NOI in 2020. Capital plan is outlined. We took a hard look at our capital spend and have reduced 2020 capital by $50 million. While we reduced our earnings, we have saved on the capital for 1676. The reduced development capital is based on only one development start and 3000 market, uh, being our only development start. And that will have, uh, it just lower the amount of prospective capital we had on the other two development starts based on the above our CAD range will remain at 71 to 78 as a lower capital may be offset by deferred rent. That was re that will be repaid in 2020. Uh, Uses are outlined as on page 12. We have $91 million of development capital that's being spent. We have common dividends of $97 million, revenue maintained of $36 million, and then we have $40 million of revenue create, and then $6 million of mortgage amortization. Loan payoff, if we do it, is $80 million. and the acquisition of King of Prussia Road. Primary sources will be cash flow after interest of 182, line use of 150, which would bring us up to the $200 million we've projected, and cash on hand of 33 million, and some land sales that we still expect to have happen later in the year. Based on this capital plan, we would have 200 million outstanding on our line, or 120 if we refinance the mortgage. We projected our net debt to EBITDA will range between 6.3 and 6.5, so it's a little higher than where our range had previously been 6.1 to 6.3. The main reason is the leasing slides that have been talked about, a lot of those affect EBITDA in the fourth quarter. When you annualize that EBITDA, it results in a higher net debt to EBITDA The lower capital spend offsets the share buyback, so that's not affecting it. In addition, our debt to GAV will approximately be 43%. As Jerry mentioned, we have a well-covered dividend, both from FFO and AFFO metric of 54% and 70% respectively. In addition, we anticipate our fixed charge ratio will continue to approximate 3.7% and our interest coverage to approximate 4.1%. I'll now turn the call back over to Jerry.