Brandywine Realty Trust

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Good day, and welcome to the Brandywine Realty Trust third quarter 2022 earnings 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. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Jerry Sweeney, President and CEO. You may begin.

Michelle, thank you. Happy Friday morning, everyone, and thank you for participating in our third quarter earnings 2022 earnings call. On today's call with me today are George Johnson, our Executive Vice President of Operations, our Vice President, Chief Accounting Officer, Dan Palazzo, 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. So during today's call, Tom and I will review third quarter results, provide an update on our 22 business plan, And after that, Dan, Tom, George, and I are available for any additional questions. Looking back at the quarter, certainly record inflation, interest rate increases, capital market uncertainty, recessionary fears have significantly changed the operating and financing landscape. The stability of our operating portfolio, evidenced by low forward rollover, protection from operating expense increases on 81% of our leases, will position us on the operating margin front, and we will certainly continue to focus on margin improvement as we enter the 23 budget cycle. And we are pleased that our 22 operating and development plans remain on target. The macro environment, however, certainly impacted our capital program, and while we will continue to select planning and approval efforts, future development starts are on hold unless they are fully pre-leased and until the existing pipeline posts more leasing traction. During the quarter, we also terminated several potential acquisitions and accelerated our refinancing and interest rate management programs that Tom and I will review during the course of our conversation. From an operating standpoint, we continue to experience higher fiscal occupancy, now 60% overall, with a high of 70% to 75% in the Pennsylvania suburbs. Hybrid attendance, as you might expect, continues in all of our markets, Tuesday through Thursday being the most common in-office days. On those high peak days, we're experiencing closer to 70% to 75% attendance from most tenants. Tenant interest in high-quality work environments remains the order of the day. We see that every day in our tour levels, lease negotiations, and deal executions. In fact, 41%, which is up from 32% last quarter, of the new deals in our operating portfolio pipeline are from tenants looking to upgrade from lower quality, less amenitized buildings. During the third quarter, we actually did 513,000 square feet of leases, including 300,000 square feet of new leases. We also posted rental rate mark to market of 16.5% on a gap basis, and 6.9% on a cash basis. Our full-year mark-to-market range remained 16% to 18% on a GAAP basis and 8% to 10% on a cash basis. Absorption for the quarter was 176,000 square feet. Tenant retention was 90%, and we ended the quarter slightly below 91% occupied and 91.8% leased. Further worth noting that in our Philadelphia CBD, University City, the Pennsylvania suburbs, and Austin markets, which cover 93% of our portfolio NOI, we're a combined 93.8% leased and 93% occupied. Our spec revenue range remains in the $34 to $36 million range, with $35 million or 100% to midpoint achieved. The speculative revenue range represents approximately 1.8 million square feet, of which 1.7 million, or 94%, is already executed. The portfolio is stable, and our forward rollover exposure through 2024 averages 6.5%, which ranks us third out of 17 office REITs. Further, our annual rollover exposure through 2026 is 7.3%, also ranking us third out of 17 REITs, and we continue efforts to reach out into the maturity curve on a daily basis. We did post FFO of $0.36 per share, which was $0.02 above consensus estimates. We beat those estimates primarily due to the combination of improved operating results, lower interest costs, and a higher-than-anticipated gain on the 3151 Market Street formations. So while exceeding consensus estimates for the quarter, we're keeping our FFO range unchanged at 136 to 140 per share, primarily due to the unstable interest rate environment and the impact of any potential sales. Based on 2022 leasing activity and higher EBITDA, our third quarter net debt to EBITDA decreased to 7.2 times on a combined basis, And based on our development activity, we are projected to be at the upper end of our current range of 6.6 to 6.9 at the end of the year. Our core EBITDA metric of a range of 6 to 6.3 focuses on operating portfolio by eliminating joint venture and active development and redevelopment projects. We continue to believe this is a more accurate measure of how we manage our core portfolio. And those metrics are noted on page 31 of our SIP. In looking at leasing activity, velocity remained encouraging during the third quarter. Our total leasing pipeline is 4.8 million square feet, broken down between 1.5 million square feet on the operating portfolio and 3.3 million on the development project. The 1.5 million square foot existing portfolio pipeline is up 430,000 square feet from last quarter, with approximately 208,000 square feet in advanced stage of lease negotiations. Also, as I mentioned, 41% of that new deal pipeline are prospects looking to move up the quality curve. The 3.3 million square foot leasing pipeline on our development projects increased over 300,000 square feet during the quarter. Deal conversion rate in the second quarter was 40%, up from 38% last quarter, and in line with pre-pandemic levels from the fourth quarter of 2019. Another good sign is tenants continue to accelerate their decision timeline. This past quarter, the median deal cycle time improved by an additional four days and is now equal to pre-pandemic levels. In looking at liquidity and dividends, we currently have $350 million availability under our $600 million line of credit. With our targeted development spend and absent any other financing sources, we anticipate having over $300 million of that line available at the end of 2022. Our 76 cents per share dividend is well covered with a 53% payout ratio. We know there is a focus on near-term maturities, so Tom and I will address them during our comments. We have a $350 million bond maturity in February of 23. We are confident we could refinance this bond in the investment-grade market and continue to explore shorter-dated maturity bond options in that investment-grade market. We are also, however, actively pursuing several other more flexible financing options including secured and unsecured property and portfolio financings through the bank and other traditional institutional financing sources. This $350 million bond in February is our only wholly owned balance sheet maturity until our next bond matures in October of 2024. We do have two joint ventures with non-recourse loans maturing in 2023. We are already underway with extension discussions and exploring other financing sources for those loans as well. The first is a $208 million loan on our Commerce Square joint venture. This is a very low-leveraged financing with over an 11% debt yield on income in place. We are already in discussions with the existing lender for an extension as well as exploring other financing sources. The second maturity in the joint venture framework is in August of 2023. and refinancing and discussion efforts are underway there as well. From a capital allocation standpoint, we continue to assess forward capital spend. In addition, we are marketing an additional $200 million of properties for sale as part of our ongoing price discovery process. In looking at our development opportunity set, as I mentioned earlier, other than fully leased build-to-suit opportunities, all future development starts are on hold pending more leasing on the existing pipeline, and certainly more clarity on the cost of debt capital and cap rates. We also terminated two potential acquisitions that we had underway since the quarter end. When you look at our development pipeline, our remaining total Brandywine net funding obligation on all of our wholly owned and joint venture development projects is $115 million, which includes $11 million remaining to fund on our 3151 market project and $17 million for remaining tenant improvement spend on our now 96% leased 405 Colorado. As you'll note on that page in the sub, our equity requirements on Schuylkill Yards West and Uptown ATX Block A are fully funded. We also announced as part of our press release the commencement of our 155 King and Prussia Road project. This 145,000 square foot project is 100% leased to Arkema and will serve as their North American headquarters. We anticipate the project stabilizing in the fourth quarter of 24. We are already proceeding on a 60% loan to cost construction loan to help finance this project. And based on that, as of quarter end, we only have $18 million left to fund on this project, which again is included in the above $115 million total forward spend obligation. Our 250 King of Pressure Road project in Radnor is now over 53% leased, having signed 28,000 square feet of leases this quarter. The current pipeline totals 254,000 square feet, And again, our remaining $20 million spend on this project is included in the $115 million forward spend noted on that schedule. In looking at University City, our B-Labs project is doing extremely well and has leased to 15 different companies. A number of these companies are already expressing needs for additional space. So building on this success, We do plan to convert another floor totaling approximately 27,000 square feet to meet existing incubator demand. And in addition, as noted on previous calls, feasibility studies remain underway to add another 78,000 square feet of life-size capable space through Floor 9, including space being vacated by an existing tenant. Looking at Schuylkill Yards, our 3025 JFK project which is a life science residential tower, remains on time and on budget for Q3 23 delivery. We currently have an active pipeline totaling just shy of 400,000 square feet, which is up 73,000 square feet from last quarter. The pipeline is expected to continue as construction progresses. In fact, now with the superstructure nearing completion, we have done over 100 hardhat tours for prospects and their representatives. As I noted earlier, our $56.8 million equity commitment is fully funded. Our partners' equity investment is also fully funded, and the first funding of our construction loan has commenced. As you know from our supplemental package in Schuylkill Yards, we can develop another 3 million square feet of additional life science space. And as another step in the execution of that plan, our 3151 market project which is a 441,000 square foot dedicated life science building, is on schedule and on budget. That project will be completed in the second quarter of 24. On that project, we have a leasing pipeline of about 400,000 square feet, and we plan on obtaining a construction loan in the 50% loan-to-cost range early in 23 as funding of that construction loan is not required until the third quarter of next year. Construction is also on time and on budget at Block A at our uptown ATX development. In addition, as noted in our announcement, during the quarter we did close on our construction loans totaling $207 million. On the office component, which is 348,000 square feet, Our leasing pipeline is 1.5 million square feet. When we take a look at our development pipeline, the key phrase with that forward pipeline is timing flexibility, as evidenced by low land basis per FAR and product diversity. Of the 14.2 million square feet we can build, we can do about 3 to 4 million square feet of total life science space and over 4,000 multifamily units. And our overlay approvals, particularly at Schuylkill Yards and Uptown ATX, give us the degree of flexibility to further adjust that mix to meet market demand. As evidence of the low land basis per FAR, you will note in our statements that we did record an $8.7 million land gain on the land contribution to our joint venture. In looking at other capital components, While our 22 business plan did not and does not specify a dollar volume of property dispositions, we have been active on this front as well. As I mentioned, we have over $200 million of assets in the market for price discovery. We do anticipate continuing to sell select non-core land parcels during 23 as we did in 22. We do have approximately $110 million of assets under firm agreements of sale that we do expect to close prior to year end. We also further expect that sales of select properties out of our existing joint ventures will occur over the next four quarters. And dollars generated from these activities will certainly be used to reduce leverage, fund our development pipeline, and look for higher yielding growth opportunities. Tom will now provide an overview of our financial results.