Brandywine Realty Trust

Ladies and gentlemen, thank you for standing by, and welcome to the Brandywine Realty Trust Third Quarter 2020 Earnings Goal. 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 and then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star and then 0. 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 third quarter 2020 earnings call. On today's call with me, as always, 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 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. Look, first and foremost, all of us at Brandywine sincerely hope that you and yours continue to be safe, healthy, and engaged. The pandemic continues to disrupt all of our lives and has resulted in a new landscape for everyone and certainly every business, and its duration unfortunately remains unclear. At the time of our Q2 earnings call in July, we did anticipate a return to the workplace commencing after Labor Day, and into the fall. Given recent headlines, however, that timeline for many of our tenants has been extended into 2021. And as we noted in our SIP, our portfolio is about 15% occupied, with variances between the different operations, but we can certainly provide more color on that during the Q&A. Additional details on our approach to this crisis are outlined in our COVID-19 inserts. found on pages one to four of the supplemental package. During these prepared comments, we'll review third quarter results and update to our 2020 business plan. Tom will then summarize our financial outlook and update you on our strong liquidity position. After that, Dan, George, and Tom and I are certainly available to answer any questions. So looking at the quarter, we continue to execute on every component of our business plan. We're certainly pleased that most of our 2020 objectives have been achieved. We are 100% complete on our speculative revenue target. And while the volume of executed leases was down a bit quarter over quarter, as you might expect during the summer, regardless of the pandemic, our overall pipeline increased by over 330,000 square feet. For the third quarter, we also posted very strong rental rate mark to market. of 17.1% on a GAAP basis and 9% on a cash basis. In addition, the core portfolio did generate positive absorption of 102,000 square feet, which includes 47,000 square feet of tenant expansions. Also included in those absorption numbers was the full building delivery of our 426 Lancaster Avenue redevelopment in Pennsylvania suburbs. That was 55,000 square feet. and 112,000 square feet of the occupancy back of the SHI space, again, in Austin, Texas. We did experience during the quarter 58,000 square feet of COVID-related terminations. The primary one of that was Philadelphia Sports Club in our Radnor complex of 42,000 square feet and a couple other small hospitality and medical offices. Our full year 2020 same-store numbers are tracking in line with our revised business plan. For this quarter, the numbers were consistent with our business plan and were primarily driven, as you might expect, by the 9-30-2019 move out of KPMG in 183,000 square feet and the SHI move out on 3-30-120. Cash collection rates continue to be among the best in the sector. We've collected over 99% of our third quarter billings, and our October collection rate continues to track very, very well with over 97% of office rents collected as of yesterday. Also on capital, our capital costs were in line with our targeted range as we continue to experience very good success in generating short-term lease extensions that require minimal capital outlay. Retention was 60% and slightly above our full-year range, And based on fourth quarter scheduled lease commencements, we will be within our stated occupancy range. As Tom will articulate in more detail, we did post FFO of 35 cents per share, which is in line with consensus estimates. In taking a broader look at our 20 business plan, as we mentioned on the last call, any crisis embodies a level of danger and opportunity. So our first plan of attack was to fully assess risk to our business and we believe we have instituted plans to either mitigate or anticipate any adverse impacts. We do remain focused on growth, whether that's through our early lease renewal program or margin-improving rebidding programs. We're continuing to work with institutional sources of equity to seek investments and opportunities where we can create earnings and value accretion. But just looking at the risk factors that we face as part of the pandemic, you know, first, And consistent with all applicable state, local, and CDC guidelines, we did maintain a doors-open-lights-on approach to our buildings during the entire breadth of the pandemic thus far. While hard to fully quantify, we estimate the current occupancy levels of our buildings range from 8% in Austin to around 15% in the Philadelphia CBD to 18% in the PA suburbs to 25% in D.C., Now, certainly for a variety of factors, primarily public policy, employer liability concerns, mass transit, virtual schooling, and other safety concerns, most tenants in our portfolio, particularly the larger ones, anticipate a phased return after the new year. That certainly remains fluid, and we're tracking it, but it seems like the larger tenants won't be phasing back in until next year. are we focused on portfolio stability as a top priority with particular focus on these items? Rent collections, already talked about, and I think we're doing fairly well. Rent deferrals, we did frame that on page one of our SIF. We had a total of $4.5 million of deferrals with 4.1 scheduled to repay those deferrals within the next 18 months. Now, interestingly, to date, we've already collected 14% or $536,000 of those deferrals, including $100,000 of early prepayments. So we certainly think that we're making some good progress there. Another key focus for us is strategic tenant outreach. Information, as you may expect, is key right now, and we have an outstanding on-the-ground team of property and leasing professionals in all of our operations. Their top priority is being in close touch with our tenants, understanding their concerns, their transition plans, and seeing where we can provide help. As such, we've reached out to our entire tenant base with a particular focus on those tenants whose spaces roll within the next two years. The results of those efforts are framed out on page two of the SIP and have resulted in 82 active tenant renewal discussions totaling over 920,000 square feet that to date have resulted in 45 tenants totaling 300,000 square feet executing renewals. These leases had an average term of 24 months with about a 2.6% cash mark to market and a sub-5% capital ratio. We certainly hope that as we get more clarity on the pandemic that over the next couple months, we can convert some of those ongoing discussions to executed renewals. From a construction standpoint, nothing really more to update from last quarter. We continue to have construction activity in all of our markets. We have not programmed any further construction delays in our numbers. And we are beginning to see, with the exception of lumber and pressure-treated wood, some downward pressure on construction costs as we're starting to see an overall shrinkage of Ford construction pipelines. And speaking of pipelines, our leasing pipeline stands at 1.6 million square feet. including approximately 400,000 square feet in advanced stages of lease negotiations. As I mentioned, the overall pipeline increased by 331,000 square feet. The expansion of the pipeline was driven by over 444,000 square feet of tours during the quarter, which, as we noted, is up 115% from last quarter. So signs of the market reawakening a bit. From a liquidity and dividend standpoint, Tom will certainly talk about this in more detail, but the company is in excellent shape from a liquidity and capital availability standpoint, as we've outlined on page three. You know, after factoring in the full repayment of the two Logan Square mortgage, we're still projecting to have about $530 million of our line of credit available by year end. We're also anticipating... paying off the small mortgage during the fourth quarter of $9 million. We have no maturities in 21 and no unsecured bond maturities until 23 and have a very good 3.75% weighted average interest rate. Dividend remains incredibly well covered with a 56% FFO and a 76% CAD ratio. And given those mortgage prepayments, We do anticipate that by the end of this year, we will have a completely unencumbered portfolio with no wholly-owned secured mortgages and no wholly-owned mortgages going into 21. Now, to quickly look at our development investment opportunities, first of all, on the development front, all four of our production assets, that's Garza and Four Points in Austin, 650 Park Avenue and 155 in Pennsylvania are all fully approved, fully documented, fully ready to go subject to pre-leasing. We are still actively marketing those. We have a good pipeline on those production assets. As you might expect, it's moving a bit slow, but tenants continue to look at new construction and upgrading their stock as part of their workplace return strategy. 405, Colorado. remains on track for completion in Q2 of next year at a very attractive 8.5 percent cash-on-cash yield. We have a pipeline of almost 200,000 square feet on that project. Again, moving slow, but again, we're pleased with the breadth of that pipeline. But we really don't expect a lot of significant decision-making to occur until we get more clarity on what's happening with the pandemic. 3,000 market, that's the 64,000 square foot life science conversion that we're doing within Schuylkill Yards. Construction's underway. That building is fully leased to Spark Therapeutics on a 12-year lease commencing later in the second half of 2021 at a development yield of 8.5%. In looking at Broadmoor and Schuylkill Yards for just a moment, we are advancing Block A, which is a mixed-use block. consisting of a 350,000 square foot office building and 340 apartment units. That's going through final design and final approvals from the city of Austin. We expect all those tasks to be accomplished by year end. Within Schuylkill Yards, we continue a very strong push to the life science space. As mentioned last quarter, and we've outlined in more detail in the supplemental package, the overall master plan for Schuylkill Yards is is we can do at least 2.8 million square feet of life science space, so we have an excellent long-term opportunity to really create a scalable life science community. 3,000 Market and the Bulletin Building were the first steps in their conversions to create a life science hub. We were also well into the design, development, and marketing process for a 500,000 square foot life science building located at 3151 Market Street, We have a leasing pipeline on that project totaling about 580,000 square feet, and our goal is to be able to start that by Q221, assuming, of course, market conditions permit. Our Schuylkill Yards West project, which is our life science office and residential tower, is fully approved and ready to go, subject to finalizing our debt and equity structure. That project consists of 326 apartments and 100,000 square feet of life science and office space. We currently have an active pipeline of over 300,000 square feet for those commercial uses. And based on this level of interest, we are contemplating starting that project without a pre-lease. Similar to our approach on 3,000, where we looked at existing assets, we have commenced the construction and conversion of floors 3 through 9, within Sierra Center to accommodate life science uses. That will be done in two phases. We have 34,000 square feet already pre-leased, and we currently have a pipeline of about 125,000 square feet. Another interesting point on both Schuylkill Yards and Broadmoor that we can't lose sight of is that based on current approvals and the master plans in place, Between those two sites, they can accommodate about 5,000 multifamily units. On the equity financing front, we have an active ongoing dialogue with a broad cross-section of institutional investors and private equity firms. We continue to explore other asset-level joint ventures and sales to both improve our return on invested capital, generate additional liquidity, and provide growth capital for our development pipeline. And these discussions, as you might expect, encompass both Broadmoor and Schuylkill Yards, but also some of our existing assets. Let me close on this one final point. As you know, our normal practice for many, many years was to provide next year guidance during our third quarter earnings call. But these are not normal times. And as we discussed in our July call, we are not providing 21 guidance at this time. Although our company's overall rent collections remain very strong, we have increasing visibility into our existing portfolio, and even with the rent collections being the highest in the sector, we believe it's prudent to delay our 2021 earnings guidance and business plan until we have better visibility on the duration of the COVID-19 pandemic and its impact on the macroeconomy and, in particular, our markets. Tom will now provide an overview of our financial results.

Thank you, Jerry. Our third quarter net income totaled $274.4 million, or $1.60 per diluted share, and FFO totaled $60 million, or $0.35 per diluted share. Some general observations regarding the third quarter results. The results were generally in line with our second quarter guidance with the following highlights. The property operating income, we estimated $74 million. It came in slightly above that at $74.4 million, which was a good result. Termination and other income, we expected that it ended up 1.3 below projections, primarily due to the timing of certain anticipated transactions that we believe will occur in the fourth quarter. And then interest expense was also lower. by $1.7 million over forecast, primarily due to the interest expense reduction from the loan assumption recapitalization of 2 Logan Square, which resulted in a one-time non-cash reduction in interest expense totaling $2 million. Our third quarter fixed charge and interest coverage ratios were 3.5 and 3.8, respectively. Both metrics improved sequentially as compared to the second quarter, primarily due to the Commerce Square joint venture. Both metrics exclude the one-time interest reduction noted above. As expected, our third quarter annualized net debt to EBITDA started to decrease. The decrease to 6.7 was primarily due to the sequential EBITDA remaining similar to the second quarter, and the reduced debt levels from the Commerce Square joint venture. Two additional reporting items. As Jerry mentioned, cash collections were above 99%. Additionally, we included third quarter deferrals. Our core portfolio would have been very strong, 97%. Collections for October are currently Ninety-seven percent, however, one vendor payment anticipated to be received in the next day or so will bring us up to 99 percent. Write-offs for the quarter were approximately half a penny and primarily due to retail-related tenants. Same store, as outlined on page one of our supplemental, we have included 1.1 and 3.8 million of rent deferrals in our third quarter and year-to-date results. While not billed during the quarter, we feel that presentation will more accurately represent our current same-store metrics with normalized going-forward results not inflated by subsequent cash deferral cash receipts, which is noted above as already starting to be collected. Looking at the fourth quarter guidance, we have the following general assumptions. Property-level operating income will total about $74 million and will be sequentially lower by about $500,000. The decrease is primarily due to the Commerce Square being in our numbers for part of the third quarter, and they will not be in our numbers for the fourth quarter. That totals about $1.5 million. Offsetting that decrease is a sequential increase in the portfolio, which will improve NOI by $1 million. FFO contribution from our unconsolidated joint ventures will total $7.5 million for the quarter, which is up $.3 million from the third quarter, primarily due to the full quarter inclusion of Commerce Square, offset by reduced NOI at our MAP joint venture. For the full year 2020, the FFO contribution is estimated to be about $20 million. G&A... will be about $7 million for the fourth quarter, and full year will be about $31 million. Interest expense will be sequentially higher by $0.8 million compared to the third quarter, and will total $17 million for the fourth quarter. Capitalized interest will be $1.1 million for the fourth quarter, and full year interest expense will be approximately $74 million. Of note, we repaid our mortgage at 2 Logan during October. The mortgage payoff was approximately $79.8 million. That loan had an interest coupon of 3.98%. We anticipate an early prepayment of a wholly owned mortgage at Fort Tower Bridge with an effective interest coupon of 4.5%. With those payoffs, we now have no maturity scheduled on our wholly owned books until 2022 for the term loan. Termination and other income, we anticipate that to be $4.5 million for the fourth quarter. That's up from the 0.9 in the third quarter. And net income, leasing, and development fees, quarterly NOI will be $2.6 million and will approximate $8.5 million for the year. There will be half a million dollars in the fourth quarter as it relates to land sales. Our $272 million gain represented 100% of the gain for reporting purposes We only recognize 30% of that gain for tax purposes, and with some tax planning, we will not require a special dividend in 2020. We have no anticipated ATM additional CR buyback activity scheduled for the investments guidance, no more incremental sales activity. With the acquisition of the land parcel being anticipated fourth quarter, we only have the building acquisition located at 250 King of Crusher Road for $20 million. is scheduled to be acquired in the fourth quarter and held for redevelopment. No NOI will be generated in 2020. Looking at our capital plan, as outlined, we have two development and redevelopment projects in our 2020 capital plan with no additional plans scheduled for the balance of the year. Based on the above, our 2020 CAD will remain in a ratio of 71% to 76% as lower capital will offset deferred rent that is repaid beyond 2020. Uses for the remainder of the year is $185,000, comprised of $25 million in development and redevelopment, $33 million of common dividends, $8 million of revenue-maintained capital, $10 million of revenue-create capital, and the repayment of the mortgages at 2 Logan and 4 Tower Bridge, as well as the acquisition of 250 King of Crusher Road, Primary sources will be cash flow after interest of 45 million, use of the line of 68 million, use of our current cash on hand at the end of the quarter of 62 million, and 10 million in land sales. Based on the capital plan outlined above, our line of credit balance will be about 68 million. We also project that our net debt to EBITDA will remain in a range of 6.3 to 6.5. In addition, our net debt to GAV will approximate 38%, which is down sequentially from the 43% in the prior quarter, primarily due to the Commerce Square joint venture. In addition, we anticipate our fixed charge ratio will continue to approximate 3.9 on interest coverage and will be 3.9 on debt service fixed charge and 4.1 on interest coverage. I will now turn it back over to Jerry.