Brandywine Realty Trust

Ladies and gentlemen, thank you for standing by, and welcome to Brandywine Realty Trust's second quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press the star, then the one key on your touch-tone telephone. Please be advised that today's conference is being recorded. If you recall operating systems, please press star, then zero. I would now like to hand the conference over to your speaker host today. This is Jerry Sweeney, President and CEO. Please go ahead, sir.

Olivia, thank you very much. Good morning, everyone, and thank you for participating in our second quarter 2021 earnings call. On today's call with me are George Johnstone, our Executive Vice President of Operations, Dan Palazzo, our Vice President and Chief Accounting Officer, and Tom Worth, our Executive Vice President and Chief Financial Officer. Prior to beginning today's call, certain information we discussed during this call may constitute forward-looking statements within the meaning of the federal securities law. And 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 facts 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. So first and foremost, we hope that you and yours continue to be safe, healthy, and engaged as we return the economy to normal. And while certainly the COVID-19 situation remains volatile with daily news breaking, there is much more optimism among our tenants as the economy trends towards a full reopening. We're hearing that directly from both large and small tenants, Our portfolio occupancy as of late June increased to approximately 33 percent, which represents a significant increase from where we were in April, where we reported between 15 and 20 percent occupancy levels. The predominance of tenants returning has expanded beyond just small employers, as occupancy for tenants 50,000 square feet and below is over 45 percent. During our comments today, we'll review our second quarter results. discuss progress on our 2021 business plan, and update all of you on our recent capital activity. Tom will then provide a financial overview. After that, Dan, Tom, George, and I are available for any questions. First, just a general update on the COVID-19 impact on our business. As previously noted on earlier calls, each building of ours has a customized return to workplace presentation. And our property teams are doing an excellent job guiding our tenants to return to a safe work environment. Based on an updated tenant survey that was completed in late June, we found a couple of interesting things. First, there's a growing need for space planning services, which as we expected is, I think, a good sign. Forty-eight tenants representing about 1.2 million square feet have requested assistance from our internal space planning team, and we have engaged with them. We also got a lot of feedback on an increased need for parking due to near-term public transportation concerns, which we certainly believe are short-term in duration. But about 103 of our tenants representing almost 3 million square feet expressed an interest in parking. And actually, during the quarter, we entered into 167 new monthly contracts and saw a 30% increase in our parking lot occupancies. From a portfolio management standpoint, we've been very much focused on tenants whose spaces expire in the next two years. Those efforts have been successful. We have reduced our forward rollover exposure to an average of 6% over the next three years and is noted on page two of our SIP to 7.1% from 22 to 24. So, our forecasted rollover exposure is below 10 percent annually in each year through 2026. So, over the last several quarters, we have significantly improved our intermediate-term portfolio stability. Revenue and earnings growth remain a top priority. We do believe we have some key near-term earnings drivers. First, we have, as you all know, some several key vacancies that upon lease-up over the next eight quarters, will generate between $0.07 and $0.10 of additional revenue per share. That is in both our wholly owned and joint venture inventory. We are also projected at $4.05 Colorado and $3,000 market, stabilized in 2022 as we bring those development projects online. And we're seeing clear trend lines of tenants requiring higher-quality space, which we believe positions our portfolio extremely well. And that's really evidenced by what we're hearing, but also by a 23 percent increase in our development pipeline, Q2 over Q1. In looking at the numbers for the second quarter, we posted FFO of 32 cents per share, which was in line with consensus estimates. We made excellent progress on all of our 2021 business plan metrics. And during the quarter, we had 20,000 square feet of positive absorption. Given increased leasing visibility through the balance of the year, we did increase our speculative revenue target by midpoint by $500,000 and reduced the range or narrowed the range, rather, from 18 to 22 million to 20 to 21 million. And as reported, we're now 98 percent complete at that revised range. Rent collections continue to be very strong and one of the best in the sector, as we've collected over 99% of our second quarter rents. Our July receipts continue to track towards that same level. Tenant retention was 58%. Our lease percentage remains within our business plan range. Second quarter capital costs were 12.8% of generated revenues, slightly above our 10% to 12% business plan range. Our average lease term was 8.5 years, which exceeded our seven-year business plan target. Cash mark-to-market was a positive 14 percent, and our gap mark-to-market was also positive 22 percent. All of those results are above our full-year published ranges. However, as we mentioned last quarter, based on leases already executed and commencing later this year with lower mark-to-market results, we will be within our business plan ranges. We also expect that every region will post positive mark-to-market results on both the cash and GAAP basis for 2021. Our second quarter GAAP same-store NOI was 0.5%, and year-to-date is below our 2021 range of 0 to 2%. Second quarter cash same-store NOI was 1.8%, again, below our 2021 range of 3 to 5%. Again, very similar to the mark-to-market dynamics, Tenant schedule take occupancy later this year will accelerate same-store growth and enable us to achieve our 21 business plan range. With the exception of our MetDC operation, all of our regions are expected to post positive same-store results, and our MetDC region will remain negative while 1676 International continues through its lease-up phase. We are still forecasting 21-year end debt to EBITDA in the range of 6.3 to 6.5. As we've always cautioned, that does depend on the timing of future development starts for the balance of the year. And just a couple comments on leasing velocity, because I know everyone's looking for recovery data points just like we are, and we think there are some encouraging signs, at least what we've seen in the last quarter. A lot of tenant prospects... with the pandemic, one of virtually tour spaces before committing to an in-person tour. We continue to see this trend evolve during the quarter. We had a total of over 1,500 virtual tours with almost 800,000 square feet being targeted. That led to a 46% increase in physical tours over Q1. Our overall pipeline stands at up 1.4 million square feet, with approximately 200,000 square feet in advanced stages of lease negotiations. Our overall pipeline increased by just shy of 600,000 square feet during the quarter. And while these recovery points are encouraging, we do believe it will take several quarters to assess the full impact on the office business from the pandemic. So to gain some insight, we looked at our leasing metrics from the second quarter of 2019, so pre-pandemic, same quarters we're in now. Those data points we thought were also encouraging. On a comparable set of properties, the pipeline today is up 7% compared to the second quarter of 2019. Leases that we executed this quarter are also up 13% from the second quarter of 2019. Deals at the proposal stage are up 20%, including new and expansion proposals being up 13 percent over that comparative period. There are two additional benchmarks we looked at that demonstrate that we're clearly still in the recovery phase, but overall, we're surprisingly good compared to the second quarter of 2019. Our deal conversion rate, it was down 6 percent to 28 percent in the second quarter of 21 versus 34 percent in the second quarter of 19. And as you might expect, given where we are in this recovery phase, the median deal cycle time is up 27 days to 104 days this past quarter versus 77 days in the second quarter of 19. So we're hoping that as the economy continues to rip and we'll see condensing of that deal cycle time, as that's what really is where the rubber meets the road in terms of revenue generation. In looking at liquidity, We have excellent liquidity, anticipate having $460 million of line of credit availability by the end of the year. As Tom will touch on, we have no unsecured bond maturities until 2023 and have a fully unencumbered, wholly owned asset base. Our dividend is extremely well covered. at 57% of FFO and 81% of CAD at the midpoint of our guidance. Our five-year dividend growth rate has been 5.3% versus a peer average below 4%. And we have grown our CAD during that same five-year period close to an 8% annual rate versus a peer average, again, below 4%. From a capital allocation standpoint, it was a fairly quiet quarter. We continued to make progress on many fronts, and subsequent to quarter end, as part of our land recycling program, we did sell two small non-core land parcels and posted a small gain on that. Looking at development, as we always note, we have a number of production development projects that can be completed in four to six quarters. that cost between $40 and $70 million. The pipeline on those four production assets grew 40% since the first quarter, which is a good sign, again, I think, of tenants entering the market but also looking for high-quality space. And along those lines, we did start the renovation program for 250 King of Prussia Road. That is a 169,000-square-foot project located in the Radnor sub-market. that we acquired for approximately $120 per square foot as part of an overall transaction with Penn Medicine. We've designed that project to accommodate a significant life science component. The renovation started in the second quarter and we wrapped up within the next four quarters. This project will be the first component of our Radnor Life Science Center, which will initially consist of this project, and our planned 155 Radnor ground-up 150,000-square-foot development. And these two projects will deliver more than 300,000 square feet of life science and office space to one of the region's best-performing long-term submarkets. In looking at the existing development projects, Scoopy Yards West is very much on pace and on schedule. That's a life science residential and office project we commenced on March 1st. The project will be built to a 7 percent blended yield and consists of 326 apartment units, 100,000 square feet of life science space, 100,000 square feet of innovative office space, and street-level retail. Still have an active pipeline comparable to last quarter. We did close our 65 percent loan-to-cost construction loan at a floating rate equal to three-quarters percent. However, given the front load of the equity commitment from both us and our partner, even with Brandywine's $55 million equity commitment, of which $46.5 million is already invested, the first funding of that construction loan won't occur until the first quarter of 2022, but it does complete the capital stack for that project. Looking at our 405 Colorado project in Austin, that project is now complete. We're scheduling a grand opening in the fall. During the quarter, our lease percentage did increase to 24%, and we currently have a pipeline of 527,000 square feet, including about 40,000 square feet in final lease negotiations. 3,000 market is our life science renovation within Schuylkill Yards. That project is fully leased. The construction will finish later this year. And we're projecting the lease commencing fourth quarter 21 at a development yield of 9.6 percent. Sierra Labs, which we announced last quarter, is a 50,000-square-foot incubator that we are partnering with Pennsylvania Biotechnology Center. B Labs will open in the fourth quarter of 21. Since the announcement, we have entered the marketing pipeline and built a significant amount of interest with proposals outstanding for roughly 78 percent of that space. Just a couple more updates on Schuylkill Yards and Broadmoor. Within Schuylkill Yards, the life science push continues. As we've cited previously, we can deliver about 3 million square feet of life science space, which we believe creates an excellent opportunity to establish a corollary research community to all the other great activity over here in University City. 3151 Market Street. Our dedicated life science building is fully designed and ready to go. We have a leasing pipeline on that still in the 400,000 square foot range. It is advancing, advancing slowly, but I think with a high degree of confidence. And our goal remains being able to start that later this year, assuming market conditions permit. At Broadmoor, we are progressing with Block A in the first phase of Block F. to recant that scope of that is 350,000 square feet of office and 613 apartment projects at a total cost of about $367 million. We are a go mode on all those components. We are moving forward through final documentation with our selected equity partner on Block A and Block F residential and are soliciting bids now on construction financing alternatives. We anticipate a third... quarter closing date on both Blocks A and F. Our plan remains to start the residential component of Block A, which is 341 units at $119 million cost in the fourth quarter of 21. And on Block A office, we are actively in the pre-leasing market and would plan to start that as market conditions permit. Just one final note before I turn the call over to Tom to review financial results. And it relates to our third quarter earnings cycle. As you may recall, we would normally provide 22 earnings and business plan and FFO guidance during our third quarter 21 earnings cycle. However, consistent with what we did in 21 and based on the continued uncertain business climate, we will announce our 22 guidance on our fourth quarter earnings call. So Tom will now provide a review of our financial results.

Thank you, Jerry. For the first quarter, net loss totaled $300,000, or less than one penny per diluted share. And FFO totals $55.9 million, or 32 cents per diluted share, and in line with consensus estimates. Some general observations regarding our second quarter results. While our second quarter results were in line, we had a number of moving pieces and several variances to the first quarter guidance. Portfolio operating income totaled 67 million, which was below our estimate by $1 million. Residential and parking revenue were below budget as a result of the restrictions that were in place for most of the quarter in Philadelphia, negatively impacting those results. Interest expense totaled $55.5 million and was below our first quarter forecast due to higher interest capitalization on our 405 Colorado project. Termination and other income totaled $2.7 million and was $1.7 million above our first quarter forecast, primarily due to two insurance claims generating approximately $1.1 million of other income. We recorded no land gains and minimal tax provision compared to our $1.1 million income guidance for the first quarter. Two land sales were delayed from this quarter into the next quarter. One transaction, as Jerry mentioned, is already closed subsequent to quarter end, and we anticipate the second transaction closing later this quarter. G and A totaled $8.4 million, or $200,000 above our $8.2 million first quarter guidance. The increase was primarily due to employee and medical benefit costs. FFO contribution from unconsolidated joint ventures totaled $6.8 million, or $1.3 million above our first quarter estimate. The higher FFO contribution was primarily due to lower net operating costs from expense savings and a $600,000 termination fee at Commerce Square. Our second quarter fixed charge and interest coverage ratios were four point and 3.8, respectively. Both metrics decreased slightly from the first quarter. Our second quarter annualized net debt to EBITDA increased to 6.9 and is currently above our guidance range, an increase primarily due to the forecasted lower NOI. The increase was forecasted, and we expect the metric to improve during the second half of the year from higher forecasted NOI. Additional reporting item on cash collections, as Jerry mentioned, we had a very strong quarter of 99%, and tenant write-offs totaled less than $100,000 for the quarter. Portfolio changes, as we noted, 905 is now completely out of all of our metrics, as that building has been taken out of service related to our Broadmoor Master Plan. Looking at third quarter guidance, We anticipate the third quarter results to improve compared to the second quarter based on executed leasing activity and have some other assumptions. Our portfolio operating income, we expect that to total $6.85 million and be sequentially higher during the second quarter. Part of that will be due to the $107,000 square foot of forward leasing activity anticipated to commence during the third quarter and should generate a second consecutive quarter of positive absorption. FFO contribution from our unconsolidated joint ventures would total $5.8 million for the third quarter, a $1 million sequential decrease from the second quarter primarily due to a non-recurring termination fee and incrementally higher net operating expenses. G&A for the third quarter will decrease from $8.4 to $7.5. The sequential decrease is primarily due to the annual equity compensation vesting during the second quarter, that will not occur in the third quarter. We expect interest expense to approximate $16 million, with capitalized interest of $1.5 million. Termination and other income, we expect to total $2.1 million for the third quarter. Net management and leasing will total $3.2 million, and interest and investment income $2 million. For land gains, we expect about $2.3 million for the quarter based on the two previously mentioned closings and one additional non-core land sale generating total proceeds of $16.7 million. Our 21 business plan also assumes no new property acquisitions or sales activity, no anticipated ATM or share buyback activity, and no financing or refinancing activity We did close on the $186.7 million construction loan at Schuylkill Yards and is at the initial rate of 3.75 percent. While we have no other financing or refinancing activity in our 2021 plan, we continue to monitor the debt markets ahead of our 2023 unsecured bond maturity. Looking at our capital plan, our second quarter CAD was 95 percent of our common dividend, which is above our stated range. The increase was due to several large tenant allowance payments, which we anticipated occurring during 2021. So the timing of those payments were significant to the quarter, but anticipated for a full year range. And our CAD range remains unchanged. Our second half 21 capital plan is very straightforward and totals about $245 million, with $120 million of development, $65 million of dividends, $20 million of revenue-maintained capital, $30 million of revenue-created capital, and $9 million of equity contributions to our joint ventures, primarily Schuylkill Yards. The primary sources are cash flow after interest payments of $95 million, $82 million use of our line of credit, using the cash on hand totaling $48 million, and again $20 million roughly in land and other sales. Based on that capital plan outline, our line of credit balance will be approximately $140 million, leaving $460 million of line availability. The increase in the projected line of credit balance is partially due to the build-out of our incubator space as well as our development. We still project our range to be 6.3 to 6.5, but as Jerry mentioned, that will be predicated on how our development starts to occur. and we still see net debt to GAV between 42% and 43%. In addition, we anticipate our fixed charge coverage ratio to be approximately 3.7, and our interest coverage ratio to be about 4.0. I will turn the call back over to Jerry.