Brandywine Realty Trust

Good day and thank you for standing by. Welcome to the Brandywine Realty Trust first quarter 2023 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. Instructions will be given at that time. Please be advised that today's call is being recorded. I would like to hand the call over to your speaker today, Jeffrey Sweeney, President and CEO. Please go ahead.

Michelle, thanks. Actually, Jerry Sweeney, but that's quite all right. Good morning, everyone, and thank you for participating in our first quarter 2023 earnings call. On today's call with me, as usual, are George Johnstone, our Executive Vice President of Operations, Dan Palazzo, our Senior Vice President and Chief Accounting Officer, and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed during our call today 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 filed with the SEC. So to start off with our prepared comments, we'll review first quarter results and progress in our 2023 business plan. Tom will then review first quarter financial results and frame out some of the key assumptions driving our 2023 guidance for the balance of the year. Then after that, Dan, George, Tom, and I are certainly available to answer any questions. The first quarter has gotten the year off to a very solid start. Results are in line with our 2023 business plan. During the quarter, we executed 357,000 square feet of leases, including 179,000 square feet of new leasing activity. For the first quarter, we posted rental rate mark-to-market of 14.9% on a gap basis and 4.2% on a cash basis. Our full-year mark-to-market range remains at 11% to 13% gap and 4% to 6% cash. As outlined in our 23 operating plan, we did have 109,000 square feet of negative absorption for the quarter due to known move out and early termination activity. While quarterly gap same store outperformed and cash same store slightly underperformed our business plan ranges, we're keeping our ranges in place based on leases executed but not yet commenced, as well as some forecasted activity. First quarter capital costs were in line with our business plan, about 8% this first quarter, which was excellent for us. Tenant retention of 45% was slightly below the bottom end of our full-year forecast, fully anticipated, so we're maintaining our existing range at our forecasted levels. Core occupancy and lease targets were in line with our business plan. Spec revenue remains $17 to $19 million. with 12.8 million or 71% at the midpoint achieved. The speculative revenue range represents approximately 1.1 million square feet of which 628,000 square feet is done. So we're 57% complete on that metric. From an occupancy and leasing standpoint, our Washington DC portfolio continues to underperform. Conversely, Our Philadelphia CBD, University City, Pennsylvania suburbs, and Austin portfolios, which cover 94% of our NOI, are 91% occupied and 92% leased. So fundamentally, the operating platform is solid with a stable outlook. We have reduced our forward rollover exposure through 24 to an average of 6.6%, and through 26 to an average of 7.4%. We continue to see the quality curve thesis play out as our physical tour volume has been very, very encouraging. First quarter physical tours exceeded our 2022 quarterly average by 40% and also exceeded our pre-pandemic levels by 27%. So more tenants are in the market looking for quality space, and we think that portends great things for our portfolio going forward. Additionally, during the first quarter, 126,000 square feet were a direct result of this spike to quality. Tenant expansions continue to outweigh tenant contractions in the quarter, and we are projecting, as we had in 2022, a positive expansion to contraction ratio. Our total leasing for the quarter is up 23% from last quarter, and our pipeline stands at 3.3 million square feet. That pipeline has broken down between 1.3 million square feet on our existing portfolio, so up about 100,000 feet, and 2 million square feet on our development projects, which is up 200,000 square feet from last quarter. The 1.3 million square foot existing portfolio pipeline includes approximately 138,000 square feet in advanced stages of lease negotiation. Also, for the pipeline, about 30% of that new deal pipeline are prospects looking to move up the quality curve. In looking at our EBITDA, our first quarter net debt to EBITDA increased from the fourth quarter, but again, in line with our business plan, and its occupancy increases during 2023. we anticipate this ratio will decrease to our business plan range. And as we always note and specify in our SIP, this ratio is transitionally higher due to development spend and debt attribution from our joint ventures. And to further amplify that point, our core EBITDA metric, which is our operating portfolio excluding joint venture debt attribution and development and redevelopment spend, ended the quarter at 6.4 times within our targeted range. With economic uncertainty and rate volatility at the top of mind, leasing and liquidity remain our key focal points. And as Tom will touch on on the liquidity front, since year end, we made significant progress, raising over $315 million of proceeds. In January, as previously disclosed, we closed a five-year $245 million dollar secured financing, collateralized by seven wholly owned properties. This note, while secured, has flexible release provisions and prepayment provisions after March 2025. And as we noted in our previous call, we took the secured route solely due to pricing differences between the secured and unsecured market, as we do plan to remain an unsecured investment-grade borrower. And then during February, we executed a $70 million unsecured term loan to further bolster our liquidity. As a result of these and other financings done late last year, our consolidated debt is 93% fixed at a 5.1% rate, and we have no consolidated debt maturities until our October 2024 $350 million bonds. We continue to have full availability on our $600 million unsecured line of credit and approximately $97 million of unrestricted cash on hand. And as noted on page 13 in our SIP, based on development spend projections, business plan execution, after fully funding remaining development spend and dividends, all TI and leasing costs, we project that full availability on our line of credit at year end 23. In terms of the dividend for the quarter, at the guidance midpoint, our 76 annual dividend, or 19 cents per quarter, represented a 66% FFO payout ratio and an 81% CAD payout ratio. We had a great quarter controlling capital spend. To be conservative for now, we are keeping our CAD range in place. our business plan projects $100 to $125 million of sales activity that may generate additional gains. With liquidity needs substantially addressed, our sale activity on target, conservative underpinnings to our coverage ratios, we kept the dividend at the 19 cents for the first quarter. Certainly, as our business plan progresses, the board will closely monitor capital market conditions, overall liquidity, sale activity progress, and our payout levels as they evaluate the dividend going forward. We also, from additional liquidity enhancement, plan to enter into two construction loans this year, one in our 100% fully leased 155 King and Prussia Road, and our life science project in Schuylkill Yards later this year. On the joint venture front, as disclosed in the SIPP, we have two non-recourse loans maturing during 23. We are well underway with our refinancing efforts for those loans. The first is a $200 million loan in our Commerce Square joint venture. This is a lower levered financing with over a 12% current debt yield. We have received a short-term extension from the existing lender and anticipate closing the new financing during the second quarter. The second maturity occurs in August of 23. Again, it's non-recourse. in a joint venture that we are 50% partner in, and refinancing efforts are underway there as well. In looking at our development pipeline, we currently have $1.2 billion under active development. Of that, our wholly owned development pipeline of $302 million is 30% life science and 70% office. This wholly owned development portfolio is 83% leased. with a remaining funding requirement of $77 million, which is built into our 23 capital plan. Our joint venture development is 31% residential, 41% life science, and 28% office. Brandywine has now fully funded our equity position with $52 million of equity remaining to be funded by our partners. Furthermore, other than fully leased build-to-suit opportunities, as I mentioned on the last call, future development starts are on hold, pending both more leasing to our existing joint venture pipeline and also to the point more clarity on the cost of debt capital and cap rates. Looking ahead, though, given the mixed-use nature of our master plan communities, primarily at Schuylkill Yards and Uptown ATX, and as identified on page 14 of our SIF, Our expected forward pipeline product mix is 21% life science, 36% residential, 27% office, and 16% support retail and other uses. And over time, and certainly subject to capital market conditions and tenant demand drivers, we do plan to develop about 3 million square feet of life science space. Upon that completion, we'll have about 7.5% of our portfolio square footage and life science when the existing projects are completed. And our objective is to grow our life science platform to about 21% of our square footage. Just a quick review of our specific development projects. $2340 is 92% pre-leased. $33 million of remaining funding is in our capital plan. 250 King and Prussia Road in our Radnor Life Science Center. remained 53% leased. We have $28 million of remaining funding. We have a strong pipeline of over 220,000 square feet for the remaining space, and that pipeline is 100% life science, and we are still projecting a stabilization date in Q1 2024. 3025 JFK, our life science office residential tower, is on time and on budget for delivery in the second half of this year. We have a current active pipeline totaling 625,000 square feet on that project, which is up 153,000 square feet from last quarter. That's obviously for the life science and office components. The project continues to see great activity as the construction progresses. Superstructure now complete. Lobby finishes are going in. We've done over 134 hardhat 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 as well. Our dedicated life science building at Schuylkill Yards, 3151 Market. We have a pre-leasing pipeline of 423,000 square feet, again, up from last quarter. That project will be delivered in the second quarter of 2024, and we have plans underway to obtain a construction loan in the 50% loan to cost range later this year. Our Block A construction at Uptown ATX is also on time and on budget. On the office component, our leasing pipeline is 538,000 square feet. This pipeline is up from last quarter and is noted on our last call With some larger tenants putting their requirements on hold, we're also very much focused on smaller multi-tenant floor prospects. That approach is beginning to bear fruit as our pipeline now has five prospects in the 30,000 to 60,000 square foot range. During the quarter, we also start the next phase of our B-Labs expansion at Sierra Center by beginning the conversion of our ninth floor to graduate lab space. That project will be completed in the first quarter of 24. Total cost is $20 million. The expected yield is about 11%, and we're already at 28% pre-lease. Our 2023 business plan also includes $100 to $125 million of property dispositions. We're making good progress in a challenging market earlier than expected, but we still expect the bulk of the sales activity to occur in the second half of the year. We have $200 to $300 million of assets in the market for price discovery, as I mentioned. Right now, we have $50 million moving through contract negotiations and about $75 million nearing the end of the bid solicitation process with several active bidders. We do continue to sell non-core land parcels during the year. And on our joint venture operating projects, as I noted in the discussion on EBITDA, we have about $470 million of debt, or 18% of our total debt levels coming from our JVs, with about $420 million of that coming from our operating JVs. We have discussions underway. and plan to recapitalize several of these joint ventures later in 2023 with the goal to reduce that attributed debt from operating joint ventures by $100 million or 24%. Dollars generated from these liquidity activities will be used to fund our remaining development pipeline, commitments to reduce leverage, and redeploying to higher growth opportunities including stock and debt buybacks on a leverage neutral basis. At this point, Tom will now provide an overview of our financial results.

Thank you, Jerry, and good morning. Our first quarter net loss totaled $5.3 million, or 3 cents per share, and FFO totaled $50.8 million, or 29 cents per diluted share, and in line with consensus estimates. Some general observations regarding the first quarter results. While the results were in line with consensus, we had several moving pieces in several variances compared to our fourth quarter call guidance. Our termination and other income totaled $2.4 million and was $400 million above our fourth quarter forecast, primarily due to some one-time income items. Interest expense totaled $23.7 or $800,000 below our fourth quarter guidance, and that is primarily due to higher capitalized interest. Our management leasing and development fees totaled $3.4 million, and was $900,000 above fourth quarter projections, primarily due to leased commission income. And we forecasted land sales to generate $1.5 million of gain. One of those transactions was delayed. However, we anticipate that transaction to occur in the second quarter. And our first quarter debt service and interest coverage ratios were 2.9 and 3.1, respectively. And net debt to GAB was 41.1%. Our first quarter annualized core net debt to EBITDA was 6.4 times within our 23 range. And our annualized combined net debt to EBITDA was 7.4 and one-tenth of a turn above our guidance range of 7 to 7.3. As far as portfolio changes, we anticipate that we will bring 405 into the core portfolio in the second quarter as it stabilizes. And on the financing side, as Jerry outlined, we continue to make progress on the financing front. In addition to the previously announced transactions, we closed on a $70 million term loan that matures in 24 months, including an extension option. The execution of the term loan provided some additional liquidity to ensure that the $600 million line of credit remains undrawn where the development and redevelopment projects commence operations and begin to provide us incremental cash and a lot. While we were successful in obtaining this financing, we continue to see challenges within the financing market. In the traditional banks, we see them allocating very little to new originations in the new office loan market, except for certain situations, such as fully leased, bill-to-sue properties. We think some lenders will begin to be flexible and will provide loan extensions on performing portfolios. With the Silicon Valley Bank and Signature Bank concerns, the CMBS market has been very slow. However, activity has picked up and transactions are focused on lower level loan to value office assets. Life companies have also been selective in underwriting new loans. with a focus on lower loan-to-value and a preference for longer weighted average lease terms. Regarding our joint venture debt, we currently are working on our 23 maturities, including an active completion of our Commerce Square loan, which we expect to close later this quarter. We are also working with our partners on the 24 maturities to possibly extend the current maturity dates with our existing lenders while also considering some asset sales to lower leverage. For 23 guidance, our general assumptions for the business plan is the property sales, as Jerry mentioned, scheduled to occur in the second half of the year with minimal dilution this year, no property acquisitions, no anticipated ATM or share buyback activity, and the share count will approximate 174 million diluted shares Looking more closely at the second quarter, we have the following general assumptions. Our property level operating income should total about $76 million and will be $3.4 million ahead of the first quarter, primarily due to the occupancy in grains at 405 Colorado, 250 Canning of Prussia, and the balance from the portfolio. FFO contribution from our unconsolidated joint ventures will total $3.3 million for the second quarter, The sequential decrease is primarily due to the forecasted higher interest expense, primarily due to the anticipated refinancing at Commerce Square. G&A for the second quarter will be $9 million, slightly below the first quarter. Total interest expense will approximate $24.7 million, and capitalized interest will approximate $3.5. Termination and other fee income will total half a million dollars. a $1.5 million decrease from the first quarter, primarily due to several first quarter one-time items that we had highlighted on the last call. Net management fee and leasing development for the quarter will be $2.5 million. This sequential $1 million decrease is primarily due to lower leasing commission volume. And our land sale gains and tax provision will net at half a million dollars. Looking at our capital plan, we experienced a better than forecasted CAD payout ratio of 81%, primarily due to leasing capital costs being below our business plan range. While we experienced some first quarter movement that was lower, our annual 2023 CAD range remained at 95% to 105%. Our capital plan is very straightforward for the balance of the year. It's comprised of $130 million of development and redevelopment, $99 million of common dividends at the current rate, $22 million of revenue maintained capital, $40 million of revenue created capital, and $19 million of equity contributions to our joint ventures. The primary sources will be $148 million of cash flow after interest payments, $42 million use of current cash on hand, and $120 million of land and property sales. Note that we have no cap. Based on the capital plan outlined above, we project having full line availability by year end. We also project that our net debt to EBITDA will be in the range of 7 to 7.3, with an increase primarily due to the incremental capital spent on development projects. Our JET to GAV will be in the range of 40 to 42. And our core net debt, David Dobbs, 6.2 to 6.5 at the end of the year, excludes our joint ventures and our active development projects. We continue to 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 projects... are elevated on a growing development pipeline, and we believe once these developments are stabilized, our leverage will decrease back towards our core leverage ratio. We anticipate our fixed charge and interest coverage ratios will approximately 2.7 for the year, which represents a sequential decrease, but that's primarily due to higher interest rates. With that, I'll turn it back over to Jerry.