Brandywine Realty Trust

Good day and thank you for standing by. Welcome to the Brandywine Realty Trust third quarter 2023 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. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising 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.

Liz, thank you very much. Good morning, everyone, and thank you for participating in our third quarter 2023 earnings call. On today's call with me today is George Johnson, our Executive Vice President of Operations, Dan Palazzo, Senior Vice President and Chief Accounting Officer, and Tom Worth, 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 assurances 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 this morning, during our prepared comments, as we always do, we'll review quarterly results and provide an update on our 2023 business plan. Tom will then review third quarter financial results and frame out the remaining key assumptions that drive our 23 guidance. After that, Tom, Dan, George, and I are available for any questions. So the third quarter saw additional progress on our 23 business plan. Our combined leasing activity for the quarter totaled 624,000 square feet. During the quarter, we executed 351,000 square feet of leases, including 118,000 square feet of new leasing within our wholly owned portfolio. Our joint venture portfolio achieved 273,000 square feet of lease executions including 108,000 square feet of new leasing activity. Also, while the third quarter mark-to-market results were below our annual targets, based on executed leases, we expect our full-year mark-to-market range to be between 11% to 13% on a gap basis and 4% to 6% on a cash basis. As I noted in last quarter's call, our mark-to-market will vary by region. With Philadelphia CBD, University City, and the Pennsylvania suburbs leading the way, we certainly continue to expect that given current market conditions, our mark to market in Austin for the balance of the year will remain negative on both the cash and GAAP basis. As we did anticipate in our business plan, we had negative absorption this quarter, primarily related to tenants moving out in our Pennsylvania Plymouth meeting portfolio. a tenant in Austin, Texas, and a 42,000-square-foot firm vacating the lower bank here at CIRA Center. And at CIRA, as I'll touch on later, this space is part of our life science conversion within that lower bank, and work is already underway. Overall, we are 88.3% occupied and 90.4% leased based on 256,000 square feet of four lease commitments. As a result of delayed occupancy on executed deals, primarily due to slower build-out approvals, and frankly, the slower pace of leasing in Austin, we are reducing our year-end occupancy range from 90% to 91% down to 89% to 90%. We are, however, based on activity, maintaining our lease percentage range of 91% to 92%. Our core markets at Philadelphia CBD, University City, And Pennsylvania suburbs and Austin, which comprise 92% of the company's NOI, is 90% occupied and 92% leased. We did add a new page in our supplemental package, page four, which highlights how well the majority of our portfolio occupancy is. We did highlight on that page eight of our wholly owned properties comprise 50% of the company's vacancy. Number of these properties are either being marketed for sale or undergoing analysis for conversion opportunities. But those properties do affect our occupancy numbers by 450 basis points. And plans are underway to address each of these projects, ranging from increased leasing outreach programs as well as what I just mentioned, sale and conversion opportunities. Both GAAP and same-store outperformed our business plan ranges during the quarter. and we are increasing both ranges for the year. The GAAP same store range has increased from zero to two to two to three percent, primarily due to approximately 500,000 square feet of positive blend and extend leases that were done. Notably, none of these blends and extends involved a contraction by the renewing tenant. You'll note that this activity brought down our forward rollover exposure, which I'll touch on in a few moments. cash change store is increasing from 2.5 to 4.5%, which was a previous range, to 5 to 6%, primarily due to proactive cost reduction initiatives resulting in lower utility, janitorial costs, reduced real estate taxes, all net of tenant reimbursement, as well as the continued burn off of some free rent. Third quarter capital costs were in line with our business plan range. However, Based on year-to-date results and projected fourth quarter activity, we are reducing our leasing capital ratio from 11% to 13% down to 9% to 10%. So as evidenced by our positive mark-to-market results, this lower capital ratio, we will continue to generate positive net effect of rents in most of our markets. Tenant retention for the quarter was 44%, again, in line with our plan. but below the bottom end of our full-year forecast. It was driven primarily by those vacates I previously mentioned, but we are maintaining our existing range of 49% to 51% based on forecasted Q4 activity. Our spec revenue range remains in the $17 million to $19 million range, about 94% done at the midpoint. We expect to be able to reach the midpoint of that range by the end of the year. Our operating portfolio is solid with a stable outlook. We have reduced our forward rollover exposure through 24 to an average of 6.3% and through 2026 to an average annual rate of 6.7%. We do feel very good about our portfolio quality, our management services delivery platform, and our sub-market positioning. We do believe the quality curve thesis remains intact. as evidenced by the overall pickup and leasing activity that we continue to see. Additionally, overall tour velocity, which is really a starting point for our leasing cycle, continues to improve. So just several points to amplify. The increase in physical tour volume has been very encouraging. Our third quarter physical tours exceeded second quarter tour volume by 29%. but also exceeded our trailing four quarter average by 69%, and our tour activity level remains above pre-pandemic levels by 18%. So good traction through the entire portfolio. On a wholly owned basis, during the third quarter, 62,000 square feet of new leases, or 53% of all new leasing activity, were a result of this flight to quality thesis. Tenant expansions continued to outweigh tenant contractions during the quarter. And the market recovery does continue, albeit at a slower pace than we would like. But our total leasing pipeline is up 20% for the second consecutive quarter and stands at 3.8 million square feet. That pipeline is broken down between 1.7 million square feet in our wholly owned portfolio, which is up from last quarter, and stability within our development project portfolio. The 1.7 million square feet existing portfolio pipeline includes approximately 100,000 square feet in advanced stages of lease negotiations. Also, 46% of our operating portfolio new deal pipeline are prospects looking to move up the quality curve. That's up from 31% last quarter. Turning to the balance sheet, as expected, our second quarter Net debt to EBITDA ratio decreased to 7.4 from 7.6, primarily from increased EBITDA offset by increased development and redevelopment costs. We anticipate this ratio to decrease to our business plan ranges with sales in the fourth quarter and achieving our target of reduction in joint venture debt attribution. As we noted in the SIP, this ratio is higher due to development spend and debt attribution from our joint ventures. If both of these items were removed from our 7.4 metric, our leverage would be a full turn lower at 6.44 times. To amplify this point, our core EBITDA metric, which is our operating portfolio excluding joint venture debt attribution and development and redevelopment spend, ended the quarter within our range at 6.3 times. On the liquidity front, We continue to make progress in our asset sales and financings. We have a short-term extension with the lender on our non-recourse leasehold mortgage in our MAP joint venture through December 23, December 1 of 23. The current outstanding balance of that loan is $181 million. The extension is providing additional time to finalize a recapitalization strategy with both the leasehold lender and the fee owner and discussions to date have been very constructive. In August, as we noted in the release, we completed a $50 million construction loan financing on our 155 King of Prussia Road property. That loan bears interest at 250 basis points over SOFR. In August, we also completed the sale of our three Barton Skyway projects in Austin, Texas. That sale price was $53.3 million. or $307 per square foot, which represented a cap rate in the high 6% range. Other than the recently financed Commerce Square joint venture, on our other operating JVs, we have $68 million invested, with $624 million of non-recourse mortgages maturing in 24 before any extension options. $113 million of that debt is attributed to Brandywine. Our ownership stake ranges between 15% to 20%. We are working closely with all of our partners and lenders on loan extensions and recapitalization efforts and would expect to report additional progress in the coming quarters. As Tom will touch on, our consolidated debt is 93% fixed at a 5.2% rate, and we have no consolidated debt mid-shortness until our 2024 $350 million bond, which Tom will also amplify our strategy there. At quarter end, there's no outstanding balance in our $600 million unsecured line of credit, and we have approximately $48 million of unrestricted cash on hand. As noted on page 13 in our SIP, based on remaining asset sales, development spend projections, our business plan projects that we'll have full availability on our line of credit at the year end 23. In September, our Board of Trustees did decrease our quarterly dividend by $4 a share, from 19 cents to 15 cents a share. And while our cash flow numbers are solid and our payout ratio is strong and remains well covered, and we continue to forecast, as I just mentioned, full availability in our line of credit, the Board felt we needed to reduce the dividend to account for both the challenges, but more importantly, simply the ongoing volatility in the equity and debt markets. We believe this reset dividend level will serve as a solid foundation for which to grow our dividend in the future as capital market recovers and leasing continues to accelerate. This level covers our taxable income and will generate approximately an additional $28 million of free cash flow to the company. Based on the $0.60 per share annual dividend and the midpoint of our guidance, Our CAD payout ratio for 23 is projected to be 75%, and our FFO payout ratio is projected to be 52%. Both of those payout ratios are very much in line with our historical averages. To spend just a few moments on looking at our development, we have $1.2 billion under active development. On the wholly owned pipeline of roughly $200 million, that's 95% pre-leased. The remaining funding For these wholly owned developments, it's only $22 million, which is built into the capital plan that shows our line of credit being unused. And that's primarily for tenant improvement dollars related to our $2340 property in Herndon, Virginia. On a joint venture side, at full cost, that pipeline is 30% residential, 32% life science, and 38% office. The remaining funding on this pipeline is less than $10 million. As you may recall, last quarter, we did increase some of the project costs to simply reflect the higher rate environment, and in some cases, a slight delay in targeted stabilization dates. Going forward, we may see some additional cost increases related to higher TI costs, but even with these increases, we are targeting and plan to maintain yield equivalency on all of our joint venture developments. I guess furthermore, given the volatility in the capital markets, while we'll continue planning on several projects, other than fully leased build-to-suit opportunities, future development starts are on hold pending both more leasing in our existing pipeline, but also more clarity on the cost of debt capital and where cap rates will be. Looking ahead, given the mixed-use nature of our master plan, communities are expected for development pipeline is 27% life science, 42% residential, 22% office, and 9% support retail, entertainment, and hospitality. And as we identified on page six, our objective is to grow that life-size portfolio and platform to over 23% of our square footage as market conditions allow, and that would be built on land that we already own or control. Just a quick review of specific projects. $2340 is 92% pre-leased That project is moving into full operations in the very near future. 250 King of Prussia Road in our Radnor Submarket is now complete. It does remain at 53%, at least as it was in the previous quarter. We've had $18 million of remaining funding. Pipeline remains very strong. That pipeline is 100% life science, and we have projected a stabilization date in Q2-24. The increased remaining spend on that project It's really the cost to do some additional tenant leasing, but as we indicated last quarter, we anticipate higher rents will leave our current yield intact as this project moves into operation. Pipeline activity and our development projects continue to build. We're actually pleased with the overall and continual increase in both tours and prospect activity as a true reinforcement of the quality thesis I mentioned earlier. We have a number of advanced discussions underway, but none quite yet across the finish line. As I mentioned last quarter, primary reasons for the delay in tenants making decisions really seem to be driven at this point more by macro considerations rather than specific real estate concerns. Construction of our 3025 JFK project, our life science office and residential tower, is on time for a Q4 23 full delivery. We're currently 15% leased on the commercial portion with an active pipeline that's almost 700,000 square feet for the life science and office component. We have done over 160 tours. We did deliver the first residential units with the balance phasing over the next quarter and a half. Activity levels are very good, and we currently have 62 leases executed. We're about 19% of the project. Fifty-seven of those leases have already taken occupancy, and the rental rates that we're achieving are very much in line with pro forma, particularly now that the amenity floor just recently opened. 3151 Market, our 441,000-square-foot life science building in Schuylkill Yards, again, is on schedule and budget. The topping-off ceremony occurred yesterday, and the project's profile in the market continues to improve. The leasing pipeline there is roughly 400,000 square feet. and tour activity now that the steel is up is beginning to increase as well. Uptown ATX Block A construction is also on time and on budget. Block A consists of 348,000 square feet of office, excuse me, and 341 residential units, 15,000 square feet of ground floor retail. On the office component, the pipeline remains strong in advance of building delivery, which will be later this year. The pipeline includes a mix of prospects ranging from 5,000 square feet to 200,000 square feet, and the multifamily component of 341 units will begin phasing in during the third quarter of next year. Moving back to University City, our next phase of B-Labs on the 9th floor of Sears Center is nearly complete. That's a 27,000 square foot expansion. This conversion of that office space to graduate lab space is now 81% pre-lease, with a lease out for the remainder of the space. That full conversion will be completed in Q124. The total costs remain on target for $20 million, with an expected yield of about 11%. So to wrap up commentary on development activity, the key phrases on our forward pipeline is timing, flexibility, low basis per FAR, and product diversity. Of the square feet we can build, only about 25% is office, with the ability to do between three and four million square feet of light science space and over 4,000 apartments. And the overall overlay approvals we have on our master plan developments give us the flexibility to adjust that mix further to meet market demands. Looking at the sales activity, Look, there's no question that the pricing and pace of office sales has been impacted by the challenging rate environment and the pullback by lenders in commercial real estate and certainly the negative macro tones on office. Despite that this is previously highlighted, we did sell to $53 million in Austin, and based on our existing pipeline and transactions and process, we're still maintaining our $100 to $125 million sales target by year end. We do have about $200 million in the market for sale. Those properties are in our MetDC and Pennsylvania suburban operations, and we also have several joint venture properties in the market as well. Several of those properties are moving through the contract negotiations and maintenance at some level of short-term bridge seller financing. In general, we continue to see a good list of bidders with the primary challenge being getting those acquisitions financed. Certainly, dollars generated from all these sales and joint venture restructurings will be used to fund our remaining development pipeline commitments, further reduce leverage, and redeploy into higher growth opportunities, including debt and stock buybacks on a leverage-neutral basis. With that, Tom will now provide an overview of our financial results.

Thank you, Jerry, and good morning. Our third quarter net loss totaled $21.7 million, or $0.13 million. and our results were negatively impacted by a non-cash impairment charge totaling $11.7 million, or $0.07 per share. Third quarter FFO totaled $50.6 million, or $0.29 per diluted share, and $0.01 above consensus estimates. Some general observations regarding the third quarter. Being above consensus, we had several moving pieces and several variances compared to our second quarter guidance. Management, leasing, and development fees were up $700,000 above our re-forecast, primarily due to higher leasing commission income. Interest expense was $500,000 below re-forecast, primarily due to higher capitalized interest and no borrowings on our line of credit. We forecasted two vacant land parcel sales to generate $1 million of land gains during the quarter, and they were both delayed until the fourth quarter. Our third quarter debt service and interest coverage ratios were both 2.7, and net debt to GAV was 41.6. Our third quarter annualized core net debt to EBITDA was 6.3, and within our 2023 range, and our annualized combined net debt to EBITDA was 7.4, and 1% above the high end of our 7.0 to 7.3 guidance Any further reduction will be based on timing, size, and pricing of our fourth quarter asset sales. Regarding portfolio changes, during the quarter we removed two properties located in Austin totaling 225,000 square feet from our portfolio. Both properties will not be available for lease and were located in our uptown ATX developments. We anticipate adding $2340 quarter to our core portfolio during the fourth quarter as well. On the financing activity, as Jerry outlined, we closed on a construction loan for 155 King of Prussia Road in Radnor, Pennsylvania. The loan bears interest at 250 basis points over SOFR, and we anticipate drawing on that facility during the fourth quarter as our equity is now fully funded. We remain focused on our 2024 bond maturity in October and continue to evaluate funding in both the secured and unsecured financing markets. As you know, the traditional banks are allocated little to none to new originations on new office loans, except for certain situations as fully leased bill-to-sue properties. However, we will continue to explore term loans from our syndicate banks as we did earlier this year to execute on a $70 million term loan. We are exploring some property level secured financing options as well, including another wholly owned CMBS transaction. We anticipate our ongoing sales and joint venture liquidation strategy will also generate additional capacity. As we discussed in the past, we prefer to remain an unsecured borrower and will continue to monitor the unsecured bond market as well. Given the above, we will seek the most efficient capital source with a bias towards the unsecured market. Regarding our upcoming 2024 joint venture debt maturities, as Jerry mentioned, we are working with our partners on the 2024 maturities to potentially extend the current maturity dates with our existing lenders, commence marketing efforts for new lenders, and make certain property level sales to lower JV leverage. Regarding our MAP joint venture, we hope to agree to a recapitalization ahead of the current December 1st, 2023 extension date. We are a 50% partner in a joint venture which owns leasehold positions and a portfolio of assets, and we are working with the lender to potentially recap the joint venture with the ground owner. Looking at 2023 guidance, we narrowed the guidance by two cents and maintain a midpoint of 116, and the range is is mainly attributable to the variability of our asset sales program, both in terms of volume and timing, as well as our projected land sale and related gains. On our 2023 business plan continues, we have the following general assumptions as is property level sales with 153.3 million complete. The balance of our guidance is expected to occur in the fourth quarter, so dilution should not be very significant. no new property acquisitions, no anticipated ATM or share buyback activity, and the share count will approximate 173.5 million shares. Our fourth quarter guidance, looking more closely, we have the following general assumptions. Property level operating income will total approximately $74 million and will be about $3 million below the 3Q range, primarily due to lower revenue, from several known moonouts we discussed, and incrementally higher operating expenses, primarily due to fourth quarter seasonality and higher R&M. FFO contribution from our joint ventures will break even for the fourth quarter. The sequential decrease is primarily due to the residential component of Schuylkill Yards West becoming operational. And during the fourth quarter, we will recognize higher operating losses, lower capitalized interest, and increased preferred equity costs. These losses will decrease over the next four to five quarters as the residential operation fully stabilizes. In addition, our MAP FFO contribution decreased about $700,000, primarily due to higher interest expense. Our fourth quarter G&A will remain consistent with the third quarter at $8.1 million. Our interest expense, including deferred financing costs, will approximately $26.5 million, and capitalized interest will approximate $3 million. Termination and other fee income will total $6 million, which primarily consists of an anticipated one-time real estate transaction generating about $4.5 million of income. Net management leasing and development fees will be $3 million as we forecast sequential lower third-party lease commission income after a higher third quarter level. Land gain and tax provision will total about $1.1 million of income representing two forecasted land sales that didn't occur in the third quarter. On the capital plan, we experienced better than forecasted third-party CAD payout ratio of 76%, primarily due to leasing capital costs being below our business plan range and improved operating results. Based on a revised annual dividend of 60 cents per share, our pro forma 2023 coverage ratio is projected to be 75%. As outlined on page 14 of the supplemental package, our fourth quarter capital plan is very straightforward. and totals $95 million. Most importantly, we continue to prioritize liquidity and still project no borrowings on our $600 million unsecured line of credit at the end of the year. Uses during the fourth quarter are comprised of $36 million of development and redevelopment, $26 million of common dividends, $8 million of revenue maintained, $10 million of revenue created, and 15 million contributions to our joint ventures. The primary sources are going to be capital after interest payments totaling $50 million, 10 million of construction loan proceeds for 155 King of Crusher Road, and 50 million of net cash proceeds from property, land, and other sales. Based on the capital plan outlined above, we project a $15 million increase in cash during the quarter. We are also maintaining our net debt to EBITDA range of 7 to 7.3 and will be partially dependent meeting that range based on the timing of the fourth quarter sales as I mentioned previously. Also, that will be impacted by any GAV recapitalization or sales during the quarter as well. Our debt to GAV will be in the 40 to 42% range. Our core net debt to EBITDA range is 62 to 65. This range excludes our joint ventures and our active development projects. We continue to believe this core leverage 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 that our Leverage ratios are elevated due to our development pipeline, and we believe once those developments are stabilized, our leverage will decrease back closer to this core leverage ratio. We anticipate our debt service and interest coverage ratios to approximate 2.6 by year end, which represents a slight sequential decrease from the coverage ratios in the third quarter, primarily due to the additional development spend and higher interest rates. I will now turn the call back over to Jared. Great, Tom, thank you very much.