Brandywine Realty Trust

Good day, and thank you for standing by. Welcome to the Brandywine Realty Trust fourth quarter 2021 earnings conference call. At this time, all participants 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 is being recorded. If you require any further assistance, please press star and then zero. I would now like to hand the conference over to your host today, Jerry Sweeney, President and CEO, please go ahead.

Michelle, thank you very much. Good morning, everyone, and thank you for participating in our fourth quarter 2021 earnings call. On today's call with me are George Johnstone, our Executive Vice President of Operations, Dan Palazzo, Vice President and Chief Accounting Officer, Tom Worth, 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 these estimates are based on, reflected in the 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. So first and foremost, we hope that you and yours had a wonderful holiday season and are looking forward to a very successful 2022. And in our world, certainly after some reopening delays related to the latest variant, we have stronger tenant interest in high-quality office space as tour activity, lease negotiations, and deal executions remain on a very positive trend line. A definitive trend and one that we believe will accelerate is that tenants are requiring very high-quality workspaces, and we believe this trend positions our existing portfolio and our development portfolio extremely well. During our prepared comments, we'll briefly review fourth quarter results, outline our 2022 business plan, and provide color on recent activities, both on the development and transactional side. Tom will then review our 2021 results, and frame out the key assumptions driving our 2022 guidance. After that, Tom, George, Dan, and I are available to answer any questions you may have. So, looking back to 2021, we closed the year on a very strong note with many business plan objectives achieved. We exceeded our speculative revenue target by $1 million, raising guidance twice during the year. Our executed lease volumes remained in line with last quarter. and our operating portfolio leasing pipeline increased by 120,000 square feet. For the fourth quarter, we posted a rental rate mark-to-market of 8.1 percent on a GAAP basis and 2.6 on a cash basis, with our full-year mark-to-market being very strong at 16.2 percent on a GAAP basis and 10.3 percent on a cash basis. In addition, We had 116,000 square feet of positive absorption during the quarter. Our full-year 2021 cash same-store numbers came in below our revised business plan, primarily due to lower parking revenue, bad debt related to one retail tenant, and free rent for a backfill tenancy. Full-year capital costs, however, were in line with our business plan range. Tenant retention was 53%, which was at the top end of our full-year forecast. and core occupancy and lease targets were also within our forecasted range, where we ended 2021 93% leased, and actually 93.9% leased within our core markets. We posted fourth quarter FFO of 35 cents per share, which is in line with consensus estimates, and full year 2021 FFO of $1.37 per share, which was a penny above consensus. For 2022, We're providing guidance with an FFO range of $1.37 to $1.45 per share for a midpoint of $1.41 per share. Our early renewal efforts, expense control programs, forward near-term pipeline visibility, and our recently executed transactions established a clear pathway for growth. Our 2022 plan is headlined by two operating metrics, that demonstrate the underlying strength of our core markets and foretell excellent growth potential. Our cash mark-to-market range is between 8 and 10 percent. Our GAAP mark-to-market range is between 16 and 18 percent. Our GAAP same-store NOI growth for both cash and GAAP is between 0 and 2 percent. And we expect all of our regions will post positive mark-to-market results on both the cash and GAAP basis. In looking at a moment at our cash same-store NOI range of 0 to 2 percent, it's impacted by the timing of rollover and the subsequent backfall from leases already executed. So, for example, in Philadelphia, we renewed 120,000-square-foot tenant commencing February 1st of 22. the free rent in that 16-year deal will last a balance of 22. In addition, we had 110,000-square-foot tenant vacate Sierra Center in 21. We've already leased 75 percent of that square footage with a commencement in July. And those lease structures on those replacement tenants are 10 years in term and incorporate free rent for the balance of 22. Just those two transactions represented 3.1% cash same-store impact. We believe, based on leases we already have executed and visibility into our near-term pipeline, that portfolio is well-positioned to deliver much better same-store growth in 2023. Our spec revenue range is between $34 and $36 million, with 25.6 million, or 73%, at the midpoint achieved. That speculative revenue range represents approximately 2 million square feet of leasing velocity, which compares to leasing velocity of 1.2 million square feet in 2020 and 1.4 in 2019. Other key highlights, occupancy levels remain between 91% and 93%, lease levels between 92% and 94%. We expect a retention rate between 58% and 60%. And capital for 2022 will run about 14 percent of revenue, and that's above 2021, primarily due to several of those very large long-term leases commencing during the course of the year. Based on our 2022 leasing activity and higher development and redevelopment spend, we project our net debt to EBITDA to be in a range on a combined basis between 6.6 to 6.9 times. We view this leverage increase as purely transitional while we are in a period of investing significant capital into construction without recognizing any NOI. As income recognition occurs, this leverage will decrease significantly. To amplify this point, we have segmented our EBITDA metrics between core and combined. On page three of the SIP, if you look at that, we've included another leverage metric that focuses just on our core portfolio, by eliminating our joint venture non-recourse debt and our active development and redevelopment spend. We believe that our projected core leverage range between 6.0 and 6.3 provides a more accurate measurement of how we're managing our core operations, as it eliminates our more highly leveraged joint ventures and eliminates the volatility associated with the timing of spending project capital, which increases leverage, and the subsequent delay in income recognition. Over the last couple of years, we've reduced our forward rollover through 2024 to an average below 8 percent. Further, looking further out, our rollover exposure is below 10 percent annually through 2026. So, value creation and earnings growth remain a top priority. Key near-earning drivers for us are we have key vacancies that many of you are familiar with that will generate between 7 and 10 cents a share upon lease-up. We continue to make progress on leasing up those spaces, but our 2022 plan only includes approximately 2 cents per share of revenue from those vacancies, of which 20 percent has already been executed. In looking at our activity levels, our overall leasing pipeline stands at 3.8 million square feet. broken down between 1.4 million square feet on our operating portfolio and 2.4 million square feet on our development projects. The 1.4 million square feet leasing pipeline on the existing portfolio increased by 120,000 square feet during the quarter and is 14 percent higher than our pre-pandemic levels from the fourth quarter of 2019. The leasing pipeline on our development projects of 2.4 million square feet also increased during the quarter by 100,000 square feet. In looking at our liquidity and dividend, we have excellent liquidity. And even with our anticipated development spend and absent any other financing sources, we anticipate having $383 million on our line of credit available by year end 22. We also do anticipate renewing both our line of credit and our $250 million term loan during the first half of the year at similar terms to the existing instruments. The dividend is very well covered with a 54 percent FFO payout ratio at the midpoint. Our CAD ratio has migrated to about 90 percent and above recent years, primarily due to our elevated leasing activity, which is that 2 million square feet we plan on leasing, and in addition, For 2022, we did include all JV capital spend in our CAD calculation. Regardless of whether those dollars are financed through good news funding at our JV level secured mortgages, and that did have an impact of 5 cents a share, about 5.5% of our CAD ratio. We do anticipate that coverage improving significantly as leases commence and we recognize revenue. From a capital allocation standpoint, we made progress on many fronts. We liquidated our final property in our all-state joint venture and recognized the gain of $3 million. We also continued selling non-core land parcels during the course of the year. In fact, in January, we sold one parcel for $1.4 million, generating a $900,000 gain. In looking at our development opportunity set, 250 King and Prussia Road, in our Radnor sub-market is scheduled for delivery in the second quarter of 22. The project will be the first delivery in our Radnor Life Science Center, which consists of more than 300,000 square feet of life science space in what we consider to be the region's best performing sub-market. The current pipeline on that project is north of 260,000 square feet. including 86,000 square feet in lease negotiations. 405 Colorado in downtown Austin, that project is now complete and is 48.3 percent leased with a growing and very active pipeline. We have a leasing pipeline right now of 144,000 square feet, of which 31,000 square feet are in lease negotiations, and we're working through a 26,000 square foot expansion. Our D-Labs incubator at Cirrus Center, it consists of 240 seats. That opened in January and is 95 percent leased to 12 companies. Well ahead of our plan, and based on that success, we're planning to add another floor totaling approximately 27,000 square feet by year-end 22, and we additionally have plans underway to add another 78,000 square feet of life science capability through Floor 9. Just taking a look at an update on Schuylkill Yards and Uptown ATX. In Schuylkill Yards West, our life science office residential tower is on time and on budget for a Q3 23 delivery. We currently have an active pipeline totaling 410,000 square feet for the life science and office space component. That pipeline is up 70,000 square feet from last quarter, and we do expect it to continue to grow as construction progresses. Our $56.8 million equity commitment is fully funded, and our partners' equity investment is currently being made, and the first funding of our construction loan will occur in the second quarter of 22. 3151 market. Our 424,000-square-foot life science building is fully designed and priced. We have a leasing pipeline totaling about 270,000 square feet, which is up from 150,000 square feet in the third quarter, and our goal remains being able to start that project this year. At Uptown ATX, we've had a very productive 90 days at this 66-acre community, which has a development capacity approaching 7 million square feet. We rebranded the project from Broadmoor to Uptown ATX, recognizing it can create a new center of gravity within the city of Austin. We broke ground on Block A, which consists of 348,000 square feet of office, 341 residential units, and 15,000 square feet of ground floor retail. As part of this, we are delighted with our 50-50 venture with Canyon Partners. That structure is similar to our 3025 Schuylkill Yards West project, with Canyon providing 50 percent of the equity on a preferred basis. We are currently in the process of obtaining a 65 percent construction loan, which we expect to close before the close of Q1. As we discussed in the past, these preferred structures enable Brandywine to retain a significant portion of value creation upon stabilization. Under our preferred structures, Once the partners in Brandywine receive the accrued return, a significant value accretion comes to Brandywine after that. So, based on our stabilized underwriting, that creates an incremental 400 to 500 basis points lower cost of third-party equity capital than a traditional joint venture. We also anticipate the completion of that office component in 3Q23 and the residential component in 3Q24. We have a pipeline on the office component right now of about 300,000 square feet. But since announcing the project, we've received inquiries aggregating just shy of 1.3 million square feet. So a lot of activity on that project now that it's finally coming out of the ground. We also had a groundbreaking for the train station that we'll be building through a 50-50 public-private partnership with CAT Metro, which is the regional rail authority in Austin. That station, as we've outlined before, will provide uptown ATX direct access to downtown Austin and the northern suburbs, and they're expected to open for service during 2024. We further anticipate that we will be starting the first phase of Block F, which is 272 apartment units, under the same format with Canyon in the second quarter of 22. One final note. While our 2022 business plan does not incorporate any dispositions or acquisitions, we do anticipate being active on the capital recycling front. We do anticipate continuing to sell select non-core land parcels. Also, with the office recovery underway and premium pricing being paid for well-leased assets, we believe we will have several opportunities to harvest profits with low cap rate sales. We also anticipate sales of select properties out of our existing joint ventures. So the dollars generated from these activities will be used to certainly fund our development pipeline, continue to reduce leverage, and certainly redeploy dollars into higher growth opportunities. With that, Tom will now provide an overview of our financial results.

Thank you, Jerry. Our fourth quarter net income totaled $4.5 million or 3 cents per diluted share, and FFO totaled 60.4 million or 35 cents per diluted share, and in line with consensus estimates. Some general observations on our fourth quarter results. While fourth quarter results were in line with consensus, we had a number of moving pieces and several variances to our second quarter guidance. Portfolio operating income approximated 70 million and was in line with our third quarter guidance. and our portfolio did experience 116,000 square feet of positive absorption. We forecasted two land sales generating $1.3 million of gains, which did not occur. These two land sales have been delayed until 22, and one sale is already closed in January, generating a $900,000 gain. Termination and other income totaled $4.2 million and was $1.7 million above our third quarter forecast, primarily due to unbudgeted one-time insurance income. G&A expense totaled $8.1 million, or $1 million above our estimate. This increase was primarily due to higher employee-related costs and professional fees. Our fourth quarter fixed charge and income ratios were 4.2 and 3.9, respectively, and better than our third quarter and year-end forecasts. Both metrics benefited from lower-than-forecasted capital spend. Our fourth quarter annualized net debt to EBITDA was 6.5 and met the high end of our 6.3 to 6.5 guidance. Regarding cash collections, overall collection rate for the fourth quarter continues to be over 99%, as in previous quarters, and there were no significant tenant write-offs during the quarter. Portfolio changes, as we mentioned last quarter, based on the completion of 3,000 markets, That was added to our core portfolio during the fourth quarter and is 100% leased life science building to Spark Therapeutics. On the financing activity, we restructured and extended our current loan, encumbering our joint venture at 4040 Wilton, lowering our average borrowing cost by approximately 100 basis points, generating minimal initial proceeds but allowing for increased borrowings to complete the leasing of the vacant office space. Turning to the 22 guidance, at the midpoint, net income will be 21 cents per diluted share, and FFO will be $1.01 per diluted share, and our range is built with some of the following assumptions. Our portfolio operating results for GAAP NOI will be about $290 million, an increase of $17 million from last year. We have the full effect of 3,000 market and 405 Colorado, totaling $5 million. 1676 will be about $4 million. The completion of our life science and redevelopment of the 250 King of Prussia Road will start to generate income and will be $2 million. We will have increase in our residential income of about $2 million, and the balance being a net increase from the same store portfolio. Our contribution from unconsolidated joint ventures will total about $28 to $29 million. And G&A will be between $34 and $35 million, excluding a one-time credit in 2021. That represents an increase of $1.9 million. Total interest expense, including deferred financing costs, will increase to approximately $70 to $71 million. That's going to be due to the higher forecasted spend on our line of credit, We're also forecasting higher interest rates as well. Capitalized interest will increase to about $7 million. That's due to the current developments ongoing as well as some of our anticipated development starts later in 22. And our land sales, as Jerry mentioned, we have about $4 to $5 million of land sales anticipated. This is selling non-core land parcels, and as mentioned, one's already closed in January. Termination and other income of $11 million, which is above 22, again, due to some one-time special items we expect to have occurring during the year, transactions, I said. Net income, leasing and development fees will be between $15 and $16 million. As Jerry mentioned, we have no property acquisitions or dispositions in our guidance. We plan no ATM or share buyback activity at this time. and we anticipate refinancing our line of credit and $250 million term loan during the first half of 2022. Our share count will approximate 174 million diluted shares. Taking a closer look at the first quarter guidance, we're expecting portfolio income of about $72 million, That will be sequentially higher by $1 million, and that's primarily due to 3,000 market, the 116,000 square feet of absorption that occurred in the fourth quarter, and that will be partially offset by several known move-outs, a majority of which has already been released later in 2022. FFO contribution from our unconsolidated joint ventures will total $6.5 million for the first quarter. G&A for the first quarter will increase from 8.1 to 9.5, and that sequential increase is consistent with prior years and is primarily due to the timing of compensation expense recognition. A total interest expense will approximate 17.5, with capitalized interest of $2.5 million, and termination fees will total about $3.5 million. and net management fee and development fees will also total $3.5 million. And we have land sales, besides the one we already announced, another $400,000 occurring to total $1.3 million. Our capital plan is very straightforward and totals about $445 million. As Jerry mentioned, the CAD range of 84 to 95 is higher than normal. But when we do take a look at going out beyond this year, we do see that number coming back towards our range in 2020. Looking at the sources and uses, 190 million of development, 131 million of common dividends, revenue maintain of about 55 million, revenue create of about 40, and 29 million of contributions to our joint ventures during the year. Primary sources is going to be $190 million of cash flow after interest payments, $193 million for the line of credit use, cash on hand of $27 million, and $35 million of proceeds from land sales and other. Based on that capital plan, our line of credit will increase by $217 million, leaving $383 million available. We also project that our net debt to EBITDA will range from 6.7 to 6.9, with the main variable being the scope of our development activities and the spend. Our net debt to GAV will approximately 40% to 41%. In addition, we anticipate our fixed charge ratio will approximately 4.0, and our interest coverage will be 3.8, which represents sequential decreases, but again, primarily due to the capital spend we expect during the year. We've also included a new metric looking at our core net debt to EBITDA, which at the end of the year was 5.9. And that does exclude our joint ventures and our active development pipeline. We believe this is a better measure of how you should look at how we're monitoring our leverage on our core portfolio, as we do expect over time the development projects to come online, as well as Jerry mentioning that we will be looking to sell some of our joint ventures potentially over the next year or so. With that, I will turn it back over to Jerry. Great. Thanks, Tom.