Brandywine Realty Trust

Ladies and gentlemen, thank you for standing by, and welcome to the Brandywine Realty Trust fourth 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 and then one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star and 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 fourth quarter 2020 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 today's call, certain information discussed during the 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 filed with the SEC. Well, first and foremost, all of us at Brandywine sincerely hope that you and yours continue to be safe, healthy, and engaged. And while we remain optimistic about the accelerating vaccine deployment and the path to recovery, the pandemic still continues to disrupt all of our lives and every business. And unfortunately, the duration of the recovery cycle still remains a bit unclear. Our portfolio remains about 15 to 20 percent occupied, which is comparable to our occupancy levels as of our October call. And as noted in the SIPP, most of the jurisdictions where we have properties still have significant return-to-work restrictions in place. Additional details on our COVID-19 approach are outlined on pages one to five of our supplemental package. During our comments today, we'll briefly review fourth quarter results, discuss our 21 business plan, and provide color on our recent transactions and developments. Tom will then provide a brief review of 2020, discuss our 21 guidance, and update you on our strong liquidity position. After that, certainly Tom, Dan, George, and I are available for any questions. We close 2020 on a very strong note. Many of our revised 20 business plan objectives were achieved, despite the protracted nature of the recovery. We exceeded our speculative revenue target by $400,000, executed lease volumes, increased quarter over quarter, and our pipeline increased by 229,000 square feet. For the fourth quarter, we posted strong rental rate mark-to-market of almost 19% on a gap basis and 11% on a cash basis. For the full year 20, our mark-to-market was a very strong 17.5% on a gap basis and 9.3% on a cash basis. In addition, we had 59,000 square feet of positive absorption during the quarter, which included 33,000 square feet of tenant expansions with no tenant contractions. Our full-year 2020 same-store number did come in below our revised business plan, primarily due to the JV sales activity that we'll discuss, several COVID-related occupancy delays and parking revenues that were well below our original forecast due to the slower return to the workplace. Our tenant cash collection efforts continue to be among the best in the sector, and we have collected over 98% of fourth quarter billings, and our January collection rate continues to track very well with 98.5% of office rents collected as of yesterday. Our capital costs for 20 were better than our targeted range, due to very good success in generating short-term lease extensions with minimal capital outlay. Tenant retention came in at 52 percent, slightly above our full-year forecast, and our core occupancy and lease targets were below our ranges simply due to pandemic-related delays in targeted move-ins and lease executions and negotiations sliding into early 21. We did post FFO of 36 cents a share, which was in line with most consensus estimates. A general update on COVID-19 impact is, first, consistent with all applicable state and local CDC guidelines, we do remain in a doors-open-lights-on condition in all of our buildings. As we noted, most large employers have yet to return to the workplace for a variety of factors, primarily public policy mandates, employer liability concerns, mass transit, virtual schooling, and safety concerns. However, we're seeing more small and mid-sized companies beginning to return more employees to their various workspaces. Portfolio stability remains top of mind, and our progress on several key factors can be found on pages one to three of the SIP. We do continue to stay in touch with our tenants to understand their concerns and their transition plans. A key priority of ours has been to work with those tenants whose spaces roll in the next two years. Those efforts have resulted in 79 active tenant renewal discussions, totaling about 750,000 square feet, and to date have resulted in 62 tenants aggregating 500,000 square feet actually executing leases. These leases had an average term of 30 months with a roughly 4% cash mark to market. and 4 percent capital ratio. An important point to note is that this early renewal activity, when we exclude the large known rollouts at $2340 and the retirement of 905 Broadmoor, we've reduced our remaining 21 rollover to just 4.2 percent. So, looking at 21, we are providing 2021 earnings guidance. Frankly, not an easy call given the overall economic and pandemic picture. However, our early renewal efforts, expense control programs, near-term visibility into our forward pipeline, and the recently executed transactions we think have established a solid operating plan with a clear pathway to execution. That plan is based on a gradual return to work environment beginning in the second quarter through the balance of the year. So our approach was to be conservative, but as transparent as possible, to frame out a defined operating plan with all key metrics quantified, and present the 21 earning guidance range as a platform to build from. And with the 21 plans set, we do remain focused on revenue and earnings growth, whether that be through accelerated leasing, margin-improving cost controls, or working with institutional partners to seek investments in capital structures where we can create value. The 21 plan is really headlined by two key operating metrics that we think demonstrate excellent growth potential. Our cash mark-to-market range is between 8 and 10 percent, and our GAAP mark-to-market range is between 14 and 16 percent. For 2021, we do expect all of our regions will post positive mark-to-market results on both the cash and GAAP basis. We do have several larger blocks of space to fill, particularly at Barton Skyway, in Austin 1676 International, in Tysons, and several others. But looking forward, achieving our leasing objectives on those spaces can be significant revenue boosters, and our 21 plan only has about $1 million of revenue coming in from those larger spaces. Our GAAP same-store NOI growth of 0 to 2 percent and our cash same-store of 3 to 5 percent is primarily driven by Austin up about 8 percent, Pennsylvania suburbs close to 5 percent increase, and Philadelphia around 2 percent. Our metro D.C. region will continue to be negative while the 1676 international drive continues through its reabsorption phase. With that renovation now complete, our overall leasing activity has really accelerated. and our pipeline is up significantly to about 600,000 square feet this quarter versus around 370,000 square feet last quarter. As we noted in the press release, our same-store forecast does not include $2,340, which is fully vacant and being placed into redevelopment very similar to our 3,000-market street renovation, and also we will be retiring 905 Broadmoor permanently as part of our Broadmoor master plan development. Other key operating highlights, spec revenue will range between $18 and $22 million. We have $14.7 million achieved, or 74 percent achieved at this point. This is the first time we're providing a spec revenue range versus a dollar target, but given the lack of real forward visibility on the acceleration of leasing, we felt that it was warranted. Occupancy levels we think will be between 91 and 93 percent at year end. and with leasing percentages being between 92 and 94 percent. Capital will run about 11 percent of revenues, which is below our 2020 target range, and we are forecasting a debt-to-EBITDA being between 6.3 and 6.5 times, and Tom will certainly talk about that. Our leasing pipeline has picked up. It stands at 1.3 million square feet. including about 88,000 square feet in advanced stages of negotiations. And as I mentioned before, that pipeline is up about 230,000 square feet. Interestingly, too, knowing that physical tours have yet to fully return for a variety of pandemic-related reasons, we have launched a virtual tour platform for all of our availabilities. And to date, we're generating close to 300 tours per month with over 500,000 square feet being inspected. So we think that's an early harbinger of tenants begin to really look at their office space requirements going forward. From a liquidity standpoint, we're in great shape. We anticipate having $562 million on our line of credit available year-end. We have no unsecured bond maturities until 2023. And with the recent secured mortgage payoffs, we have a fully unencumbered, wholly owned asset base. The dividend remains extremely well covered with a 53% FFO and 68 percent CAD payout ratio. Now, looking at our investment and development opportunities, during the fourth quarter, we completed several investment transactions. We did execute a joint venture with an institutional partner on 12 properties totaling 1.1 million square feet. These properties are located in suburban Philadelphia and Rockville, Maryland. The portfolio was vetted $193 million. we retained a 20 percent ownership stake. In addition to the $121 million first mortgage financing we put in place, we also elected to provide seller financing in the form of a $20 million preferred equity position that has a 9 percent current pay. As a result of that, we did receive about $156 million of net cash proceeds. And as with all of our ventures, we will generate and attracted fee stream by retaining property and asset management, as well as leasing and construction management services. On our previous calls, we had highlighted that we had about $250 million of remaining non-core assets in our wholly owned pool. This portfolio had been our primary target and leaves us with very few assets that are not considered core holdings. This partnership, similar to others we have done, did create a different capital structure that more than doubles our return on invested equity from a mid-single-digit return to mid-teen return on our remaining invested capital and also avoids about a $20 million of direct capital investment by Brandywine. It's interesting as well, too, with this transaction, we now have over 80% of our revenue stream coming in from sub-markets that are ranked A-plus, or a double plus by Green Street's recent office market snapshot. We'd also made a preferred investment in 90% leased two-building portfolio, totaling 550,000 square feet in Austin near the airport. That preferred investment totaled $50 million, also has a 9% current pay, excellent cash coverage, and a several-year term. And this was similar to the type of transaction we did a number of years ago at Commerce Square here in Philadelphia. This investment increases our revenue contribution from Austin towards our 25 percent goal and really enabled us to take advantage of the market knowledge and position we have to create a structured, well-covered financial instrument. And also, as we announced early this morning, we are delighted that we have entered into a joint venture arrangement with a global institutional investor. to commence our Schuylkill Yards West project, which is a combination life science office and residential tower. Our partner will have a 45 percent preferred interest in the joint venture, with Brandywine holding the remaining 55 percent equity interest. The project will be built to a 7 percent blended yield. It will consist of 326 apartment units, 100,000 square feet of life science, and 100,000 square feet of innovative office, along with underground parking and 9,000 square feet of street-level retail. We do have an active pipeline totaling over 300,000 square feet for the life science and office space component of this project. And based on this level of interest, we do plan a construction start in March of 21. We are currently sourcing construction loan financing and plan to have a loan in place in the next 90 days at a target of 55 to 60 percent loan to cost. And given the front loading of the equity commitment of about $115 million, assuming a 60 percent loan to cost construction financing, the first funding of the construction loan wouldn't occur until April of 22. Our share of the equity will be about $63 million, of which about $35 million is already invested. In looking at our production assets, they all remain ready to go subject to pre-leasing. As we've noted every quarter, each of these projects can be completed within four to six quarters and cost between $40 million to $70 million. The pipeline on those production assets is around 450,000 square feet, and we are continuing actively our marketing efforts along those lines to hopefully get some pre-leasing done there as the market recovers. In looking at the two existing development projects, 405 Colorado is on track for a Q1 21 completion. We have a pipeline that has built since our last call that approaches 360,000 square feet, including 53,000 square feet in advanced discussions. To be conservative, given the pace of the recovery in the market, we have extended the stabilization until Q1 22. We've increased our cost by approximately $6 million primarily due to additional TI and leasing commissions, a bit longer absorption schedule, which has resulted in our target yield being reduced to 8 percent. Three thousand market construction is underway on this building, which will be fully occupied by Q4. The building is fully leased for 12 years and will deliver a developed yield of 9.6 percent. The commencement date did slide one quarter due to COVID-related construction delay. but we have increased our yield on the project by 110 basis points due to some design scope modifications and success on the buyout. A couple other quick comments on Schuylkill Yards and Broadmoor. We do continue our strong life science push at Schuylkill Yards. The overall master plan is about 3 million square feet could be life science space, so we can really build on the work we've done at 3000 Market, the Bulletin Building, and now Schuylkill Yards West. Plans for 3151, which is our 500,000 square foot life science dedicated building, is well underway. We do have a leasing pipeline of over 500,000 square feet for that project, and the goal would be to start that later this year, assuming a pre-lease and market conditions permit. We have started constructing to convert several floors within Sierra Center to life science use, and that program is moving along per our plan. In Broadmoor, We are advancing blocks A and F, which is a total of 350,000 square feet of office and 870 apartments. Block A has $164 million, 350,000 square foot office as part of that phase, along with 341 multifamily units at a cost of $116 million. We are heavily engaged in joint venture partnership selection process. That process is going very well. with discussions well underway with several parties, and we hope to be able to start the residential component of Block A by the third quarter of 21. Tom will now provide an overview of our financial results.

Thank you, Jerry. Our fourth quarter debt income totaled $18.9 million, or 11 cents per diluted share, and our FFO totaled $61.4 million, or 36 cents per diluted share. Some general observations regarding the fourth quarter results, they were generally in line with a couple of exceptions. Portfolio operating income totaled about $75.5 million and exceeded our $74 million previous estimate, primarily due to lower operating costs benefited by lower tenant physical occupancy. Termination and other income totaled $1.6 million or $3 million below our third quarter guidance, The results were negatively impacted by several one-time transactions that we anticipated occurring in the fourth quarter that are now anticipated to close in the first half of 2021. FFL contribution from unconsolidated joint ventures sold 6.3 million, or 1.2 million below our third quarter guidance number, primarily due to some co-working tenant write-offs, and that was slightly offset by the JV announced at the end of the year. Our cash and GAAP same-store results came in 120 basis points lower, again, due to lower parking revenue and some tenant leasing slides, all of which have commenced. Our fourth quarter fixed charge and interest coverage ratios were 3.8 and 4.1, respectively. Both metrics improved as compared to the third quarter. Our fourth quarter annualized net debt to IFIDA decreased to 6.3. At the lower end of our 6.3 to 6.5 range, the ratio has benefited from improved operating income and higher than expected year-end cash balances due to our recent fourth quarter transactions. Two additional points on cash collections, our overall collection rate, continues to be very strong, above 98 percent. Additionally, our fourth quarter deferred billings were less than $100,000. So, our core collection rate would essentially remain unchanged for those deferrals, and our write-offs in the fourth quarter on the wholly owned portfolio were minimal. For cash saved stores outlined on page one of our supplemental, we have included $4.1 million of rent deferrals and our year-to-date results. While not built, we feel this presentation will more accurately represent our current same-store metrics. And subsequently, we have collected roughly 30 percent of those deferrals. Looking at 21 guidance, At the midpoint, net income will be 37 cents per diluted share, and FFO will be $1.37 per diluted share. And that includes roughly 4 cents of dilution related to the fourth quarter transactions we announced. Our 21 range was built with the following general assumptions. Portfolio operating income, property level gap income will be roughly $285 million, or a decrease of about $30 million compared to 2021 due to the following items. $2340 quarter and the retirement of 905 Broadmoor will generate about $10 million reduction from 20 to 21. The Mid-Atlantic portfolio, JV, results in another $17 million decrease The full-year effect of Commerce Square results in a $19 million decrease. Those are partially offset by the full-year effect of one Drexel Park and Bellet building being about $4 million. The 2021 completions of 405 Colorado and 3000 Market for about $3 million and about $3 million increase in our same-store portfolio gap NOI. FFL contribution from our unconsolidated joint ventures will total $20 to $25 million. That increase is primarily due to the full-year effect of Commerce Square, as well as the transaction with the Mid-Atlantic portfolio. G&A will be between $31 and $32 million. Investments, there is no new property acquisition or sales activity in our guidance. Interest expense will decrease to approximately $67 to $68 million. That's primarily due to the payoff of our two remaining mortgages at higher interest rates. Capitalized interest will approximate $4 million as we complete the 405 Colorado building but also commence Schuylkill Yards West. Investment income will increase to $6.5 million, primarily due to the new structured finance investment at Austin, Texas. Land sales and tax provision will net to about $2 million, as we anticipate selling some non-core land parcels. Termination and other income, totaling $7.5 million, which is above the $20 million. 20 amount primarily due to one-time items that, again, were being moved from the fourth quarter of 2020 into the first half of 21. Net management leasing and development fees will be $16 million, which is just above our 2020 actual due to the full year effect of Commerce Square and the JV for the Mid-Atlantic properties. In addition, we anticipate that we will get some development fees from Schuylkill Yards West once we commence operation there with the development. No anticipated ATM or share buyback activity. Looking more closely at the first quarter, we anticipate portfolio property NOI totaling about $70 million and will be sequentially about $5.5 million lower, primarily due to 23.4 dollars. as well as the mid-Atlantic JV. FFO contribution from our unconsolidated joint ventures will be $6.5 million. G&A for the first quarter will increase from $6.3 to $8 million. The sequential increase is consistent with prior years and primarily timing of compensation expense recognition. Interest expense will approximate $16 million. Capitalized interest will be roughly $1.5 million. Termination and other income, we continue to anticipate that to be $4 million with some of those transactions moving to 21. Net management fee and development fee income will be $4.5 million with investment income being $1.6 million. We expect some land gains potentially in the first quarter of about half a million dollars. Our capital plan is very straightforward and totals $350 million. Our 2020 CAD ratio is between 75 and 81 percent. The main contributors to the lower coverage ratio is going to be the property level and the Y reductions, as well as anticipated lease up in the upcoming, with the upcoming rollovers. Using that as a guide, our uses in 2021 will be $145 million of development and redevelopment. That does include the additional cash that's going to be necessary to complete our equity contribution into Schuylkill Yards West. $130 million of common dividends, $35 million of revenue maintained, and $40 million of revenue create CapEx. The primary sources will be $185 million of cash flow after interest payment, $99 million used to the line, $46 million of using the cash on hand, and roughly $20 million in proceeds from land and other sales. Based on the capital plan outline, our line of credit balance will be roughly $500 million. We have projected that our net debt to EBITDA range is 6.3 to 6.5, with the main variable being timing and scope of our development activities. In addition, our net debt to GAV will approximate 40%. In addition, we anticipate our fixed charge ratio to be 3.7 and our interest coverage ratio to be 3.9. I will now turn the call back over to Jared. Thank you, Tom.