Brandywine Realty Trust

Good day, and thank you for standing by. Welcome to the Brandywine Realty Trust fourth quarter 2022 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. Please go ahead.

Thank you very much. Good morning, everyone, and thank you for participating in our fourth quarter 2022 earnings call. On today's call with me, as usual, are George Johnstone, our Executive Vice President of Operations, Dan Plaza, our Vice President, Chief Accounting Officer, and 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. Well, first and foremost, we hope that you and yours had a wonderful holiday season and are looking forward to a successful 2023. During our prepared remarks this morning, we'll briefly review fourth quarter results, provide color on recent transactions, and outline our 23 business plans. Tom will then review our 22 results and frame out the key assumptions driving our 23 guidance. After that, certainly Dan, George, Tom, and I are available to answer any questions. So quickly reviewing our 22 results, we posted fourth quarter FFO of 32 cents per share in line with consensus and full year FFO of $1.38 per share, which exceeded consensus estimates by one cent per share. During the fourth quarter of 22, we executed 226,000 square feet of leases. including 142,000 square feet of new leasing activity. For 2022, we leased 1.8 million square feet of space, which compares favorably to both our volumes in 2021 and 2000. More specifically, looking at 2022, our new leases that we executed during the year exceeded our 21 new leasing activity by 11%. It was equal to pre-pandemic levels that we experienced back in the fourth quarter of 2019. We also posted rental rate mark to market of 21% on a gap basis and 12.5% on a cash basis. Our full year mark to market was just shy of 19% on a gap basis and just shy of 10% on a cash basis. Absorption for the quarter was negative by 123,000 square feet. Now, half of this negative absorption was the result of a tenant default in Austin, while the other half were known tenant move outs, which resulted in a quarterly retention rate below our annual run rate. So for the year, we did post a retention above our business plan guidance at 64%. We did end the quarter at the 89.8% occupied and 91% leased, which were below our targets. And the previously mentioned tenant default accounted for about 50 basis points on each of those metrics. And occupancy was generally a little bit lower due to anticipated December move-ins that slid into January and the sale of our Ford Tower Bridge property. From an occupancy and leasing standpoint, our DC portfolio continues to underperform. And as such, it's worth noting that our Philadelphia, Pennsylvania suburbs, and Austin portfolios, which comprise about 93% of our NOI, are 91.7% occupied and 92.7% lease. Spec revenue of $35.7 million exceeded the midpoint of our $34 to $36 million range. As we look at it, the portfolio is solid with a stable outlook. As we noted in the supplemental package, we have reduced our forward rollover exposure through 24 to an average of 6.2% and through 26 to an average of 7%. Physical tour volume has also been encouraging. Fourth quarter physical tours exceeded third quarter tours by 50% and was also ahead of our fourth quarter 21 tour volume by 12%. For the full year 22, our tour volume was over 1.2 million square feet. We also continue to experience tenants taking advantage of opportunities to move up the quality curve. During 2022, Over 600,000 square feet of leasing activity was the result of this flight to quality. In addition, looking at our portfolio, tenant expansions continue to outweigh tenant contractions. As a point of reference, in 2022, expansions totaled 325,000 square feet, while contractions totaled 132,000 square feet, so almost a 2.5 to 1 ratio of expansions over contractions. Our leasing pipeline of 3 million square feet is about 1.2 million on our operating portfolio and 1.8 million on our development projects. On our operating portfolio, it includes about 184,000 square feet in advanced stages of lease negotiations. Also, 41% of that pipeline are prospects looking to move up the quality curve. And in fact, during the fourth quarter, 58% of the new leases we executed were flight to quality tenants. Looking at some financial metrics, based on increased 2022 leasing activity and higher EBITDA, our fourth quarter net debt to EBITDA ratio decreased to 7.0 times from the 7.2 in the third quarter. And as we've discussed, this ratio was transitionally higher due to our development spend and the debt attribution from our joint venture activity. The more meaningful metric we track is our core net debt to EBITDA, which ended the year at the midpoint of our range of 6.2 times. And certainly in times of rate volatility and economic uncertainty, leasing and liquidity are our two key benchmarks. So since our last call, we've made significant progress on both the financing capital recycling fronts by raising over $745 million of proceeds. As previously announced in December, we completed a five-year, $350 million unsecured bond offering at a 7.5% coupon. Those proceeds were essentially to retire our February bond maturity. In January, we did complete a five-year, $245 million secured financing with a 8.75% coupon that's collateralized by seven wholly-owned properties. The note has flexible release and prepayment provisions after about two years. And it's important to note, we took this secured route solely due to pricing differences between the secured and unsecured debt markets, as we do plan to remain an investment-grade unsecured borrower. Also, during the fourth quarter, we did actually two sales generating $113 million of proceeds. The cap rates on those two sales were below 6%. The team also swapped our $250 million unsecured term loan to its June 27 maturity date at roughly 5%. So the results of all these combined transactions significantly improved our liquidity. Our consolidated debt is 96% fixed at essentially a 5% rate. We have no consolidated debt matures until our October 24 $350 million bond. We also now have full availability on our $600 million unsecured line of credit and approximately $30 million of unrestricted cash on hand. As we noted on page 13 in our SIP, based on our full development spend projections, our 2023 business plan execution, after fully funding our remaining development spend, all TI leasing and capital costs, we expect to have about $590 million of available capacity at year end 23. So based on our business plan, only $10 million of net usage during the year. So very strong liquidity position. Turning quickly to 23, we are providing 23 earnings guidance with an FFO range of 112 to 120 per share for midpoint of 116 per share. At the midpoint, the 23 FFO projection is 23 cents per share below our 22 FFO. The primary drivers are as follows. Our 23 NOI will exceed 22 levels by $20 million, or about 10 cents a share. Those improved operating results include contributions from 405 Colorado, 250 King and Prussia Road, and $23.42, as well as higher same-store results. This NOI growth, though, is offset by $33 million, or 19 cents per share, due to increased interest expense on the recently completed financings. We also have about 8 cents per share decrease in our contribution from joint ventures, primarily due to higher interest rates and initial projected losses from several development projects coming online and not being stabilized until after 23. We also anticipate about a 4% per share decline in other income, as well as a $0.02 per share decrease in projected land gains over the activity in 2022. And Tom can certainly amplify those points in more detail. Our 23 plan is headlined by two key operating metrics. Our cash mark to market range is between 4% and 6%. and gap mark to market is between 11 and 13. While these ranges are lower than our 22 levels, they certainly remain very strong, and it's primarily driven by the composition of our projected 23 leasing activity. For example, during 2022, we had much higher leasing revenue contributions from CBD, University City, and the Pennsylvania suburbs. For 23, higher leasing volumes have shifted Austin, Texas, given the high levels of occupancy in our core Pennsylvania and Philadelphia markets. Our mark-to-market in CBD and University City will perform above our business plan ranges, while Austin, given current market conditions and demand drivers, are anticipated to perform below those ranges. Spec revenue will be between $17 and $19 million, with $10 million or 56% done at the midpoint. The occupancy levels will be between 90% and 91%, leasing levels between 91% and 92%. Retention rate will be between 49% and 51%. We do anticipate same-store NOI growth will range from 0% to 2% on a GAAP basis and between 2.5% to 3.5% on a cash basis. Capital will run about 12% of revenues, which is lower than the 2022 results. And based on increased 2023 leasing activity and the continued development and redevelopment spend, we do project our net debt to EBITDA to be in the range of 7.3 with our core leverage between 6.2 and 6.5. At the guidance midpoint, our current dividend of 76 cents per share represents a 66% FFO payout ratio and a 100% CAD payout ratio. Our business plan, as we'll talk in a few moments, does project between 100 and 125 million of sales activity that could generate additional gains. And more importantly, with liquidity needs substantially addressed, this targeted sale activity represents We believe conservative underpinnings to our coverage ratios. We are keeping the dividend at current levels. Certainly, as the business plan progresses and we get more clarity on the economic outlook, the Board will, as they always do, continue to monitor both our coverages and the dividend payout levels. In addition to the financing activities that we already completed, we are actively engaged and plan to enter into a construction loan on our 155 King of Pressure Road project, which is fully leased, and our 3151 Market Street project here at Schuylkill Yards during the first half of the year. During 2023, we also have two joint ventures with non-recourse loans maturing. We are already well underway with the refinancing discussions for these loans as well. The first one is a $200 million loan on our Commerce Square joint venture. This is a very low levered financing with a significant current debt yield, and we're currently in the market to refinance that mortgage. We currently have over 15 lenders reviewing this financing opportunity. The second maturity is in August of 23, and refinancing efforts with our partners are underway there as well. As I touched on, During the year, we are including a range in our business plan of between $100 to $125 million of dispositions. We anticipate those occurring in the second half of the year. And we anticipate to generate those proceeds, we'll have between $200 to $300 million of properties in the market for price discovery. In looking at development, we currently have $1.2 billion under active development. Of that, our wholly owned development aggregates $302 million and is 30% life science and 70% office. This portfolio is 83% leased with the remaining funding requirement, as we've outlined in the SIP, of $91 million. On the joint venture front, our development pipeline approximates $930 million with a brandywine share of $500 million. At full cost, This pipeline is 31% residential, 41% life science, and 28% office. Brandywine's remaining funding obligation on this entire pipeline is $4 million, with $68 million of equity remaining to be funded by our joint venture partners. Furthermore, as I mentioned on the last call, other than fully leased build-to-suit opportunities, our future development startups are on hold, pending more leasing on the existing joint venture pipeline, and more clarity on the cost of debt capital and cap rates. Looking ahead, though, we do plan to develop about 3 million square feet of life science space. And upon completion of the existing properties, we will have approximately 800,000 square feet of life science space in operation, representing about 8% of our portfolio. As we identified on page six in the SIPP, our objective is to grow our life science platform to about 21% of our square footage. Just a quick review of specific projects. 2340, our redevelopment project is now 92% leased with $45 million of remaining funding and a mid-year coming online of those leases. 250 King of Pressure Road in our Radnor sub-market remains 53% leased with a strong pipeline of over 200,000 square feet. You will note in the SIP we have increased our costs on this project as our original pro forma assumed a 50-50 office and life science split. The pipeline is now 100% life science, which, while requiring more capital, is also generating longer-term leases at a higher return on cost. And given the extended build-out of the pipeline of several key prospects for life science space, we have also slid the stabilization to Q1 of 24. 3025 JFK, our life science residential tower, is on time and on budget for delivery in the second half of the year. We currently have an active pipeline totaling 472,000 square feet, which is up about 75,000 square feet from last quarter. The project continues to see more activity as construction progresses, and the superstructures now complete the window wall systems halfway up the building. We've done over 120 hard hat tours. We also expect to start delivery of the first block of residential units in the second half of this year, so all remains on schedule there. 3151 Market, our 440,000 square foot dedicated life science building is also on schedule and on budget. We have a leasing pipeline totaling over 400,000 square feet, which again is up from Q3. And as I touched on, we anticipate we will enter into a construction loan on this project in the second half of 23. Uptown ATX Block A construction in Austin is also on time and on budget. On the office component, our leasing pipeline there is 500,000 square feet. That pipeline is down from last quarter, primarily due to two larger users putting their requirements on hold. Our focus up to this point has really been on full building users. We're now shifting to a multi-tenant marketing program, so expect that pipeline to build as the quarter progresses. And to wrap up our commentary on the development pipeline, the key phrase in our forward pipeline is timing flexibility. We have a low land basis in product diversity. Of the 13 million square feet that we can build, only about 25% is hard to be office. the ability to do between three and four million square feet of life science and over 4 000 apartments our overlay approvals do give us flexibility to further adjust that next to meet market demands our 23 business plan does include as i mentioned the 120 uh 100 to 120 million of property dispositions we expect they'll occur in the second half of the year While not really including many in our plan for 23, we do anticipate continuing to sell non-core land parcels. And looking at our joint ventures, $458 million of our debt levels, or about 19% of our total debt, is coming from our joint ventures, with about $416 million of that coming from our operating JVs. Our 2023 plan anticipates recapitalizing several of those JVs So our plan assumes we will reduce attributed debt from operating JVs by about $100 million or 24% by the end of the year. Certainly any dollars generated from these activities will use to improve our existing strong liquidity, fund our remaining development pipeline, reduce leverage, and redeploy into higher growth opportunities, including as liquidity permits stock and debt buybacks on a leverage neutral basis. Tom will now provide an overview of our financial results.

Thank you, Jerry. Our fourth quarter net income totaled $29.5 million, or $0.17 per diluted share, and FFO totaled $55.7 million, or $0.32 per diluted share, in line with consensus estimates. Some general observations regarding the fourth quarter. While our fourth quarter results were in line with consensus, we had a number of moving pieces and several variances compared to our third quarter call guidances. A portfolio income was up by $900,000 above our third quarter guidance call, primarily due to overall portfolio performance being better throughout the portfolio. Termination and other income totaled $2.7 million. It was $800,000 below our third quarter forecast, primarily due to budgeted other income items that will occur in 2023. Interest expense totaled $20.5 million. or $2 million below our third quarter guidance, primarily due to the higher capitalized interest and our slower capital spend, so our line of credit balance at the end of the year was below where we thought it would be, X the bond deal transaction. G&A expense totaled $9.1 million or $1.1 million above our third quarter guidance. The increase was due to a $1.8 million one-time charge for the write-off of acquisition pursuit costs, partially offset by lower personnel costs. We forecasted one land sale to generate $800,000 gain in the quarter, which did not occur. We anticipate that transaction to occur in the first quarter. Our fourth quarter debt service and interest cover ratios were 3.3 and 3.5, respectively, and net debt to GAV was slightly below 40%. Our fourth quarter annualized net debt was and one-tenth of a turn above the high end of our guidance, which was 6.6 to 6.9. As far as the portfolio changes we expect this year, we do expect that we will have 405 stabilized and become part of our core portfolio during 2023. On the financing activities, Jerry outlined, since our last call, we have made significant progress on our financing and capital recycling fronts. In December 22, we did complete the five-year $350 million unsecured bond offering at 7.55% coupon. And in January, completed the five-year $245 million secured financing at 5.875 and is collateralized by seven wholly owned properties. Those two financings raised $595 million at a blended rate of 6.7%. Prior to the secured financing, our wholly owned portfolio was completely unencumbered, and we anticipate that we will remain an unsecured borrower on future financings. We also swapped our $250 million unsecured term loan through its June 27 maturity date, and our consolidated debt is now 96% fixed at just over a 5% rate. Only our line of credit and trust preferred securities are floating rate on the balance sheet. Regarding joint venture debt, we are currently working on the 2023 maturities, including active marketing of our Commerce Square property. We also are already working on our 24 maturities with our partners to possibly extend the current maturity dates with existing lenders. We're also considering some asset sales to lower leverage. 2023 guidance. At the midpoint, our net loss is $0.08 per share on a loss basis, and FFO will be $1.16 per diluted share. Based on the midpoint, FFO has decreased $0.22 per share. As Jerry mentioned, the primary drivers being GAAP and NOI being up. We do expect a small increase in management fees, but we do expect other income to be lower, interest income to be lower as a result of the sale of 1919. Market Street in Philadelphia and our JV. Interest expense is going to be up $33 million. Our land gains are down $5 million, and the JV FFO is down 16.8, which is primarily interest expense that we anticipate happening due to higher rates, but also some of our liability management in terms of caps and swaps that will burn off. We do also anticipate some initial losses, primarily on the opening of our residential project at Schuylkill Yards West. Our 2023 range was built on some of the following assumptions. Gap NOI will be $304 million, an increase of $20 million. Most of that is due to 2340 and 405 Colorado having incrementally higher NOIs as we go through the year. We expect continued leasing of our life science development at 250 King of Prussia to be about $5 million. And we do expect about $3 million of net increase the improvement on the same store portfolio our ffo contribution from joint ventures will total 8 to 10 million and that is primarily due to lower income due to the higher interest expense gn expense will be 34 to 35 million and consistent with 2022 as we talked about with uh total interest expense will be about 105 million we do forecast some use of the line of credit throughout the year but as we have the asset sales hit In the later part of the second half of the year, we do expect that to bring the line down, but there will be incremental interest expense during that time. Capitalized interest will increase to $12 million as we continue our development and redevelopment projects, and we have $2 to $4 million of land sales program for this year. We do anticipate further progress on selling non-core land parcels, and those numbers can change as we go through the year as well. Termination and other income, 5 to 6 million, which is below 2022 due to several anticipated one-time items and normal recurring activity in 22 that we don't see happening in 23. Net management fees will be between 15 and 16 million. And we do have the property sales Jerry mentioned at the second half of the year between 100 and 125 million. There are no property acquisitions in our model. There's no ATM or share buyback activity in the model. and we anticipate a construction loan on 155 King and Prussia Road. Our share count will be approximately 174 million shares. As we look at the first quarter of the year, general assumptions are that we'll have about 73 million of property NOI. The FFL contribution from our joint ventures will total 5.5 million. G&A will increase to 9.5 million. This is normal for the first half of the year. as we have sequential increases due to how our compensation expense is recognized. And total interest expense will be $24.5 million. Termination fees should be about $2 million, and we expect land gains to be about $1.5 million. From a capital plan perspective, our plan is about $465 million. Our CAD range, as Jerry mentioned, between 95% and 105%. The main contributor to the higher range is primarily due to lower earnings, partially offset by reduced leasing costs. Those uses are going to be $105 million for development and redevelopment. The primary uses are going to be for 405 Colorado, 250 King of Crusher Road, 2340 Dulles, and some work on Broadmoor infrastructure. Our common dividend is $132 million. Revenue maintained should be about $34 million. $60 million of revenue create capital. Equity contributions to our joint ventures, some of that will be the development joint ventures, but we also anticipate some capital contributions to our operating joint ventures, including Commerce Square. We had $54 million to retire the balance of our bonds in January. And the primary sources are going to be cash flow from operations of $175 million, the secure term loan, which did close and generated $236 million of proceeds, $18 million of our cash on hand, and about $120 million between the land sales as well as the program sales between $100 and $125 million. Based on that capital plan, our line of credit balance will decrease by approximately $84 million. at the end of the year, leaving almost full availability. We also projected our net debt to EBITDA will range between 7.0 and 7.3, and the increase is primarily due to the incremental spend on our development projects, which will have minimal income by year end. And our net debt to GAV will be in the 40% to 42% range. Our additional metric of core net debt to EBITDA will be 6.2% to 6.5% by the end of the year. That excludes our joint ventures and active development projects, but will include closed projects such as 405 Colorado. We believe this core metric better reflects the leverage of our core portfolio and eliminates our more highly leveraged joint ventures and our unstabilized development and redevelopment projects. We believe these ratios are elevated and due to growing development pipeline. And we believe that as these developments are stabilized, our leverage will decrease back towards the core leverage ratios. We anticipate our fixed charge and interest coverage ratios will approximate 2.7 times, which represents a sequential decrease in those coverage ratios, primarily due to the capital spend, but also the higher interest rates. I will now turn the call back over to Jerry. Tom, thank you very much.