Brandywine Realty Trust

Ladies and gentlemen, thank you for standing by. And welcome to the Brandywine Realty Trust first quarter 2021 earnings call. At this time, all participant 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, Terry Sweeney, President and CEO. Please go ahead.

Sarah, thank you very much. Good morning, everyone, and thank you for participating in our first quarter 2021 earnings call. As per our normal process on today's call with me are George Johnstone, our Executive Vice President of Operations, Dan Palazzo, our Vice President and Chief Accounting Officer, 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 follow with the SEC. First and foremost, we hope that everyone continues to be safe, healthy, engaged, and looking forward to a return to some semblance of normalcy. The pandemic continues to disrupt, but with the vaccine deployment being accelerated, we are on a path towards that normalcy. There's more optimism about the economy opening up, and we're hearing that directly from many of our 1,200 tenants. Our portfolio right now still only remains about 15% to 20% occupied, and the predominance of tenants that return thus far are the small to medium-sized employers. What's interesting, though, is many restrictions imposed by governmental agencies are being gradually loosened by state and local governments, That happened just recently here in Pennsylvania and Philadelphia, and we believe that those changes will definitely accelerate the return to the workplace. So during our prepared comments today, we'll review our first quarter results, discuss progress on our 21 business plan, and update you on our recent transaction development activity. Tom will, after that, provide a detailed financial review, and subsequent to that, Dan, George, Tom, and I are available for any questions. First, I guess a general update on COVID-19's impact. Consistent with all applicable guidelines, our buildings have remained in a doors-open, lights-on condition. Each of our buildings has a customized return-to-workplace presentation that's been distributed to our tenants, and our property teams are in active discussions with many tenants on coordinating a safe return. These discussions have enabled us to understand the tenants' concerns and aid them in their transition plans. We have heard from about a third of our tenants directly in the last several weeks, and the trend lines from those are indicating three basic milestone dates, July 1st, Labor Day, and then the fourth quarter of 21. We've heard from, again, from about almost 400 tenants, and clearly the small and the mid-sized tenants are look to be returning to the workplace first before the larger tenants. As we look at our business plan, certainly from a revenue standpoint, our key priority has been to focus on tenants whose spaces roll in the next two years. And those efforts have been very successful, and they've significantly reduced our forward rollover exposure to an average of only 6% for the period of 21 through 23 years. or 8% annual rollover for the years 22 to 24. We do remain focused on revenue and earnings growth, and key near-term earnings drivers for us are leasing up our key vacancies that we anticipate will be absorbed in the next 24 months, and we do anticipate that those leases will generate around a 10% cash and gap mark to market and could generate between 7 to 10 cents per share in additional earnings. We do have 405 Colorado and 3,000 markets stabilizing next year. And the continued performance of our early renewal program, and to add to the earlier rollover stats, when we look at our company from 21 through 26, we are, through the efforts of our leasing teams on the early renewals, we're below 10% annual rollover in each year through 26. So looking at first quarter results, we did post FFO in line with consensus. We've made very good progress on many of our 21 business plan objectives. We achieved a 90% target on our speculative revenue range midpoint. And as anticipated in our business plan, we did have 165,000 square feet of negative absorption during the quarter. However, we've already leased 72% of that, at an average cash mark-to-market of over 19 percent. Rent collections continue to be among the best in our sector, and we have collected over 99 percent of first-quarter billings. First-quarter capital costs also remain well below our historical averages and within our 21 business plan range as we continue to have good success in generating short-term extensions that require minimal capital at lay. and certainly George is available to answer any detailed questions on that front. Tenant retention came in at 52%, and our portfolio lease percentage remained within our business plan range. First quarter cash mark-to-market was positive 5%, and our gap mark-to-market was a positive 8.3%. Both of those results are below our full-year ranges. However, based on leases already executed with higher mark-to-markets, we will be within our business plan ranges for 21. We also expect all of our regions will post positive mark-to-market results on both a cash and a GAAP basis. Looking at same store, our first quarter GAAP same store was 0.9% negative below our 0% to 2% range, and our cash same store was 1.4% negative below our range of 3% to 5%. Similar to the mark-to-market, tenants taking occupancy later this year will enable us to achieve our 21 business plan targets. It's also important to note that with the exception of METDC, all of our regions and operations are expected to post positive same-store results. METDC will remain negative while 1676 International continues through its lease-up phase and But during the quarter, we did execute a 75,000-square-foot lease with a large professional service firm for a 10-year term with 2.5% bumps, and that represents about 30% of our current vacancy. In addition to that, and maybe more importantly, our overall leasing and tour activity is accelerating, and our pipeline remains about 600,000 square feet. Tom will give us more detail on the balance sheet, but we are still forecasting a debt to EBITDA multiple in the range of 6.3 to 6.5 times, depending upon the timing of some future development starts for the balance of the year. We have to keep in mind that we are in the beginning phases of a transition in the return to work journey, and we know everyone's looking for data points. We believe it will take three quarters or so to fully play out. And we know everyone is looking for recovery data points, and we have several encouraging signs we'd like to share. Recently published reports indicate that 80% of tenants wanted tour spaces virtually before committing to an in-person tour, at least at this point in the cycle. We experienced the same trend within our portfolio. So during the quarter, we had a total of 1,500 virtual tours inspecting over a 725,000 square feet of space. We think that was a contributing factor that led to a 40% increase in physical tours over the fourth quarter of last year. Our overall pipeline stands at 1.2 million square feet, with approximately 165,000 square feet in advanced stages of lease negotiations, and the overall pipeline did increase by over 400,000 square feet during the quarter. We are clearly seeing from the pipeline additions that the return to work movement will accelerate, and the flight to quality, higher quality office buildings, is becoming increasingly clear. From a liquidity analysis and dividend coverage standpoint, we have excellent liquidity, and as Tom will touch on, anticipate having just shy of a $470 million line of credit availability by the end of the year. We have no unsecured bond maturities until 2023 and have fully encumbered our wholly owned asset base. Our dividend is extraordinarily well covered with a 56% FFO and a 70% CAD payout ratio. Our five-year dividend growth rate has been 5.3%. versus a peer average of 3.6 percent. And we have grown our CAD during that same five-year period at a 7.8 percent annual rate versus a peer average of less than 4 percent. In quickly looking at some investment activity, during the first quarter we made two announcements. We are very excited to have been selected by the University of Maryland as an exclusive developer for a five-acre mixed-use development located within the university's discovery district. This project will consist of innovation research, life science, and multifamily residential units. Prior to commencing any development, we need to obtain local zoning approvals and complete the design development process. We also would target 50% pre-lease before we start the first phase. Design development is underway now. We hope to receive approvals by the second half of 2022. And the first phase, again, subject to the pre-leasing standard and market conditions, consists of about 250,000 square feet of space. In addition, we made another announcement. that in order to meet the growing need for immediate lab space delivery in University City, Philadelphia, we have partnered with the Pennsylvania Biotechnology Center to create a 50,000 square foot life science incubator that will be located at CIRA Center. The project is named B-Labs and will open in the fourth quarter of 21. Since the announcement just a few weeks ago, we've already built a pipeline for about 35% of that space. From a production asset standpoint, all of our Garza 4.650 Park 155 King of Pressure Road are all approved, priced, ready to go, subject to pre-leasing, and we continue to see increasing demand for those types of products. In looking at our existing development pipeline, for Schuylkill Yards West, that project commenced construction on March the 1st. The project will be built to a 7% blended yield, It will consist of 326 apartment units, 100,000 square feet of light science space, 100,000 square feet of high bay innovative office, and street retail. We have a very active pipeline for this project for both the light science and the office components. As we noted in the supplemental package to the press release, we are proceeding down the path on a construction loan financing package and expect to close that in the next 90 days at a 65% loan to cost. And given the front-loading of the equity commitment of the $100 million, we don't really expect the first construction loan draw to occur until the tail end of the first quarter of 22. On 405 Colorado, that project has achieved substantial completion. We currently have a pipeline of just shy of 300,000 square feet of space. Activity is definitely picking up. We've had four new tours in the last week alone and are under an LOI for full floor users that we hope to convert to a full floor lease in the next 30 days. 3,000 market, which is our 64,000 square foot life-size renovation of Schuylkill Yards. That project will finish construction later this year. The building, as is disclosed, is fully leased. for 12 years with a lease commencing in Q4-21 at a development yield of 9.6%. Just some further amplifications on Schuylkill Yards and an update on Broadmoor. Within Schuylkill Yards, the strong life science push continues. As we've noted, the overall master plan can accommodate about 3 million square feet of life science space. Our plans for 3151 market Our 500,000-square-foot life science building is well underway. Pricing is done. Design development is complete. Active marketing is underway, and we have a very healthy pipeline and are in discussions with several key tenants. Our goal does remain being able to start that project, assuming market conditions permit, later this year. And then another note on Scuba Yards, as we previously mentioned, we are converting – Floors 2 through 9 in our Sierra Center building to life science. That's a total of about 188,000 square feet. The incubator will take about 50,000 square feet of that. We've already leased about 47,000 square feet of that to other life science tenants. So we have about 91,000 square feet of near-term life science space delivery that we can also achieve within Sierra Center. On Broadmoor, We are advancing Block A and the first phase of Block F that aggregates 350,000 square feet of office and 613 apartment units at a total cost of about $360 million. As we mentioned on the previous call, we are looking for a partner on that project. We have received excellent responses from very high-quality institutions, and we'll make an We'll make a selection in the next week or so and then proceed through documentation and debt financing shortly thereafter. Our plan remains to start the residential component of Block A, which is 341 units at a cost of about $119 million by Q321. And the office start of 350,000 square feet is targeted to commence upon achieving a pre-lease. And we have decent activity that we're focused on there. So with that, Tom will now provide an overview of our financial results.

Thank you, Jerry. Our first quarter net income totaled $6.8 million, or $0.04 per diluted share, and FFO totaled $60.2 million, or $0.35 per diluted share, and in line with consensus estimates. Some general observations for the first quarter. While the results were in line, we did have a number of moving pieces and several variances to our fourth quarter guidances. Portfolio operating income totaled about $68.5 million and was below our fourth quarter estimate. The main reasons for that was lower parking revenue as work guidelines restricted people coming back to work and recommended working from home. Residential was below our expectations. Our operations, primarily FMC, remained soft, primarily from the results of both UPenn and Drexel being primarily virtual. Also, snow, we had some snow removal costs that were above forecast. While we do get very good recovery, we did experience higher net operating costs. Termination and other income totaled $2.1 million or $1.9 million below our fourth quarter guidance The results were negatively impacted by one transaction that we anticipated to be classified in other income was actually recorded as a reduction to G&A expense. Land gain and tax provision totaled about $2 million or $1.5 million above our fourth quarter guidance. We recorded a land gain associated with our contribution to of our interest to the Schuylkill Yards West Joint Venture, and that was not forecasted. We had a forecasted land gain of a half million dollars that didn't occur and was delayed and will now, we anticipate, occurring in the second quarter. G&A expense totaled 6.6 or 1.4 million below our $8 million fourth quarter guidance. Decrease was primarily due to the reduction in our other income guidance, which I just mentioned. And that was partially offset by higher professional fees at year-end. FFO contribution from our unconsolidated joint ventures totaled $6.3 million, slightly below our fourth quarter guidance. And our cash and gap same-story yields, as Jerry mentioned, came in below our targeted range, partially due to a tenant move-out in the suburbs, but also due to the reduced parking costs. That tenant has been backfilled and will take occupancy later this year. Our first quarter fixed charge and interest coverage ratios were 4.1 and 3.8 times respectively. Both metrics remain consistent with the fourth quarter. Our first quarter annualized net debt to EBITDA increased to 6.5 and is above our current 6.1 to 6.3 range. And the increase is due to lower NOI, sequential NOI from the fourth quarter. We do expect this metric to improve with increasing NOI during the second half of the year. As far as other reporting items, Jerry did mention collections has been excellent at roughly 99%. Less than 100% of deferrals was in our results for the first quarter. Portfolio changes, 2340 Dulles Corner, as previously discussed with Northrop move out, we have placed this property into redevelopment, and we will include it on our redevelopment page in the second quarter supplement as we complete our final plans and underwriting. 905 Broadmoor, with the expiration of the IBM lease, we have taken this building out of service, and it will be demolished at a future date as part of our overall Broadmoor master plan, As a result of that, we did have Broadmoor taken out of our same store and leasing statistics as a 1-1 of this year. Looking more closely at the second quarter guidance for this year, we anticipate the second quarter results will be lower than the first quarter, primarily due to some of the one-time items mentioned previously, as well as the move out of 9-0-5 from our leasing as it gets retired. We have some general assumptions. Portfolio operating income will be about $68 million and will be sequentially flat from the first quarter, while primarily due to lower operating expenses, including snow, which will be offset by the Broadmoor building being taken out of service. SFO contribution from Arkansas joint ventures will total $5.5 million for the second quarter. 1.3 sequential decrease primarily due to some leasing at Commerce Square and our MAP joint venture. G&A, our second quarter G&A expense will increase from $6.6 million to $8.2 million. The sequential increase is primarily due to the one-time first quarter decrease. Interest expense will approximate $16 million and capitalized interest will approximate $1.7 million. Termination fee and other income will total about $1 million for the second quarter. Net management and leasing and development fees will be about $3 million. The $700,000 decrease from the first quarter is primarily due to the timing and volume of leasing commission income. Interest and investment income will total $1.7 million consistent with the first quarter. Land sale and tax provision will be about $1.1 million, generating proceeds of about $12 million. The 21 business plan also assumes no new property acquisition or sales activity, no anticipated ATM or share buyback activity, and no finance or refinance activity. Our capital plan remains fairly straightforward. Our CAD remains unchanged at 75% to 81% range, and then we have a common dividends of about $98 million, revenue maintained capital of $30 million, revenue create of $35 million. Based on the capital plan outlined above, our line of credit balance will be approximately $132 million. leaving $168 million of line availability. The increase in our projected line of credit is partially due to the build-out of the remaining. From last quarter, our increased line of credit is primarily due to the announced incubator at Serocenter. We also project that net debt divot guide will remain at a range of 6.3 to 6.5. Main variable between timing is the development activity. In addition, our Debt to GAV will be in the 42% to 43% range, and we anticipate our fixed charge ratios will remain at 3.7% and our interest coverage around 4%. I will turn the call back over to Jerry.