Brandywine Realty Trust

Good day and thank you for standing by. Welcome to the Brandywine Realty Trust 4th Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker 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 2023 earnings call. On today's call with me are George Johnston, 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 that will be 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. First and foremost, we hope that you and yours are well and are looking forward to a successful and ever-improving 2024. During our prepared comments, we'll briefly review our fourth quarter results and then spend time outlining the key assumptions of our 2024 business plan. After that, Dan, Tom, George, and I will be available to answer any questions. And looking at 2023, we posted fourth quarter FFO of $0.27 per share. and full year FFO of $1.15 per share. Our combined leasing activity for the quarter totaled 550,000 square feet. During the quarter, we executed 240,000 square feet of leases, including 66,000 square feet of new leases in our wholly owned portfolio. In our joint venture portfolios, we achieved 312,000 square feet of lease executions, including 140,000 square feet of new leasing activity. Our quarterly rental rate mark-to-market was 13.4% on a gap basis and 7.5% on a cash basis. Our full-year mark-to-market was 13.5% on a gap basis, which outperformed our business plan, and our full-year cash mark-to-market was at 4.8% within our range. We ended the quarter 88% occupied and 89.6% leased. 100 basis points below our previously announced targets, that occupancy and lease percentage was lower due to two things. We anticipated December move-ins that slid until January. That was about 50 basis points of that change. And the anticipated portfolio sale that we had under agreement did not come to fruition. That was an under-leased portfolio, and that impacted our occupancy by 50 basis points. On the other hand, occupancy in our core marks at Philadelphia, CBD, University City, Pennsylvania suburbs, and Austin, which comprise 93% of our NOI, are 89% occupied and 91% leased. In looking just at our PA urban and suburban operations, we are 93% leased. As we highlight in our supplemental package on page four, Eight of our wholly owned properties comprise over 50% of our overall vacancy, impacting our occupancy numbers by almost 500 basis points. Plans are well underway to address each of these projects, range from accelerated leasing and capital investment programs, as well as continuing to explore sale and conversion opportunities. Our 23-spec revenue was $17.1 million. at the bottom end of our range. The metric was at the lower end of this range due solely to lower leasing volumes in our Austin, Texas operation. The operating portfolio does remain in solid shape. Our forward rollover exposure through 24 is now an average of 6.4%, and through 26, an average of 6.2%. Several points to amplify in green shoots, if you will. The increase in physical tours has been very encouraging. Fourth quarter physical tours exceeded third quarter tours by 54%, exceeding our trailing four-quarter average by 55%, or over 200,000 square feet per quarter. And also, our tour activity remains above pre-pandemic levels by 42%. On a wholly owned basis, 55% of our new leasing activity was a result of a flight to quality. Tenant expansions continue to outweigh tenant contractions. And our total leasing pipeline is up for the third consecutive quarter and stands at 4.2 million square feet. That pipeline is broken down between 2 million square feet in our wholly owned portfolio, which is up 300,000 square feet from last quarter. Then we have 2.2 million square feet on our development projects, which is up 150,000 square feet from last quarter. The 2 million square feet in our existing portfolio pipeline includes approximately 250,000 square feet in advanced stages of lease negotiations, and also about 41% of our operating portfolio New Deal pipeline are prospects looking to move up the quality curve. So while the timeline for lease execution remains more protracted than we would like, tour velocity and the composition of those tours which, as you know, is the starting point for the leasing cycle, continues to improve. In terms of staging through the portfolio, proposals that we have outstanding are up 200,000 square feet quarter over quarter, and leases and negotiations are up 170,000 square feet from last quarter. Turning to the balance sheet, our year-end net debt to EBITDA was 7.5 times, which is up a tenth of a point from the third quarter, primarily due to our delay in anticipated reduction in debt attribution from our unconsolidated joint ventures, asset sales being below our 23 target, and a slight increase in our development and redevelopment spend. As a counterbalance to that, our core EBITDA metric, which excludes joint venture debt attribution and development and redevelopment spend, ended the year at 6.3 times within our targeted range. Looking at liquidity, On the liquidity front, controlled capital spending and our refinancing efforts have enabled us to maintain excellent liquidity as we closed out 23 and look forward to 24. For 23, we achieved our goal of having full availability on our $600 million unsecured line of credit. We also closed the year with approximately $58 million of unrestricted cash on hand. More importantly, as noted on page 13 of our SIPP, Based on our 2024 business plan, we expect to have full availability on our line of credit at year-end 2024. During the quarter, we also bought back $10 million of our 24 unsecured bonds at a slight discount. We did complete $25 million of sales during the quarter. We did end the year about $78 million of sales, which was below our business plan range. While we received good investor interest, the lack of attractive lender financing resulted in pricing levels below our expectations. And given our strong liquidity position, we decided to postpone several sales until market conditions improved. As Tom will touch on, our consolidated debt is 96% fixed at a 5.1% rate. We do continue to assess our options to refinance our 24 bond maturities. We're evaluating a secured mortgage financing on several of our properties or an unsecured offering. We expect to finalize that plan in the next 90 days, and our 24 business plan does assume this refinancing occurs by 6-30-24 at a mid-8% interest rate. As noted on page 38 of our SIP, we do have four operating joint ventures with loan maturities during the first half of 24. Our ownership stake in those ventures ranges between 15 to 50%. All of these loans are secured solely by the real estate and are non-recourse with no obligation for either our partner or Brandywine to fund any additional money. That being said, we do believe these ventures present a valuable opportunity as the debt and real estate markets recover. As such, along with our partners, we are engaged in productive conversation with each lender. And while these discussions are progressing slower than we originally anticipated, we do expect a full resolution on each of these ventures within the next 90 to 120 days. And given the nature of those discussions, we still do anticipate our overall joint venture debt attribution will be reduced by over $100 million. Looking at our dividend, we closed out the 23 with full year FFO and CAAT payout ratios well covered at 63% and 80% respectively. As we noted in our supplemental package, we did record impairment charges totaling $151 million during the fourth quarter. That wholly owned impairment charge is really based on several assets located in our DC operation, really representing shorter hold periods which is evidence of our intention to sell those assets as soon as permitted by market conditions. And then given certainly the unresolved loan renegotiation status on several of our unconsolidated operating joint ventures, we are recognizing impairment on several of those ventures on assets located in Virginia, Maryland, and suburban Pennsylvania. Looking at our 2024 business plan. We are providing 24 guidance with an FFO range of $0.90 to $1 per share with a midpoint of $0.95 per share. The primary drivers of this guidance is additional interest expense equal to $0.15 per share represents the full impact of refinancing done in 23, both on our consolidated and our joint ventures, and the anticipated refinancing of our $350 million 24 bonds. We will also, with two of our residential projects entering the lease-up phase, we will recognize charges against earnings of $0.05 a share during 2024. That's really based on, as you know, once residential projects are delivered, capitalization ceases, and we'll be recognizing those operating carry losses during the lease-up. There were several other items, including one-time items in 23. We don't expect to occur in 24. Slightly higher G&A expenses offset by additional land sales and other items that comprise the remaining one cent. In looking at the operating metrics, our 2024 GAAP NOI will approximate 23 levels. Our core portfolio year end occupancy is expected to remain flat year over year. We do have several known move outs during the year, so our average occupancy during will be slightly below our average occupancy in 23. Our cash mark-to-market range will be between 0% and 2%. Gap mark-to-market range will be between 11% and 13%. While the cash range is lower than our 23 levels, it is driven purely by the regional composition of our projected 24 leasing activity. Our mark-to-market in CBD and University City and the Pennsylvania suburbs will perform above our business plan range, while Austin will be below that targeted range. We do expect spec revenue will range between $24 and $25 million, which is up 43% from 23 levels. We are currently 19 million, or 79%, at the midpoint achieved. That midpoint level is above our historical averages, and we believe that puts our operating plan in excellent shape looking at the current year. Occupancy levels were between 87% and 88%. Lease levels will be between 88% and 89%. Retention will be impacted by a couple move-outs during the year, and we targeted the range of improvement over 23%, but still in the 51% to 53% range. Same-store cash NOI growth will be 1% to 3%. We anticipate it being between negative 1% and 1% on a GAAP basis. Capital control will remain a key focus point, and we anticipate that our capital spend as a percentage of lease revenues will be about 12%, slightly above our 23 result. Based on increased 24 leasing activity The continued development and redevelopment spend, we do project our net debt to EBITDA to be in the 7.5 to 7.8 range. The $0.60 per share dividend will represent a 63% payout ratio and a 92% CAD payout ratio at the business plan midpoint. Our business plan does project $80 to $100 million of sales activities to occur in Q4 with the minimal dilution. And while that CAD ratio is slightly above the 23 levels, it is well covered, particularly as additional development revenue comes online. Looking at some financing, certainly with a more favorable tone to the interest rate and financing climate, we do expect investment sales market to improve as the year progresses. As such, we do plan to have a number of assets in the market for price discovery. and have built $80 to $100 million of sales into our capital plan, with, again, as I just mentioned, those sales occurring primarily in the fourth quarter. We are targeting sales in the Met DC and Pennsylvania suburban markets. We also anticipate continuing to sell non-core land parcels. In looking at our developments, as noted earlier, our development leasing pipeline stands at 2.2 million square feet, That's up 5% from last quarter. While we only executed several leases during the quarter, we did see the pipeline of that – I'm sorry, we did see the status of that pipeline advance. As of now, we have about 120,000 square feet of leasing under early negotiations, 800,000 square feet of proposals outstanding, and 240,000 square feet of space undergoing test fits. Tour velocity does continue to pick up. Our objective is certainly to get our prospects across the finish line while continuing to build that pipeline. We opened 2024 with the commercial components of one uptown and 3025 JFK delivered. So we do anticipate activity levels to continue to increase. However, given the length of time to complete space plans, obtain permits, and then construct the space, our 24 financial plan does not include any spec revenue coming from these two projects. To accelerate revenue recognition, we are building one to two floors of spec suites in each building that will be completed by mid-year. When we take a look at our total development pipeline, from a cost standpoint, that pipeline is 31% residential, 41% life science, and 28% office. As we noted in the supplemental package, Our remaining funding obligation on this entire pipeline is only $11 million. And looking at specific projects, 3025 JFK, which is our residential office life science tower, as I mentioned, delivered late Q4 23. On the commercial component, we're currently 15% leased with an active pipeline totaling 770,000 square feet. which is up 88,000 square feet from last quarter. The delivery of additional residential units continues with the balance phasing in over the next quarter. Activity levels remain good. Tours are occurring daily, and we currently have 83 leases executed for about 25% of the project, and 73% of those leases have taken occupancy. We do project the residential component of that project will be between 80% and 85% leased by year end 24. In looking at 3151 market, our 440,000 square foot life science building, that is again on schedule and on budget. The building is scheduled for delivery in very late Q2 24. We have a pipeline totaling 357,000 square feet with about 120,000 square feet in early lease negotiations and 90,000 square feet at the proposal stage So a good advancement of that pipeline in the last quarter. We do continue to seek a construction loan, the 55% loan, the cost range, and expect that to close sometime by mid-year. Looking at our Texas projects, Uptown ATX Block A construction is also on time and on budget. Our leasing pipeline there includes a mix of prospects ranging from 5,000 to 200,000 square feet. We did commence a floor of spec suites and during the quarter executed a 12,000 square foot lease. We are also proceeding on building out an additional floor of spec suites. The multifamily component of 341 units will begin phasing in during the third quarter of 24 and we anticipate that residential component will be 50% leased by the end of 24. Our next phase of B-Labs expansion on the ninth floor is now complete. That is also 100% occupied. We have now shifted focus and commenced construction on the eighth floor of 27,000 square feet, and we have three active prospects in the very advanced stages of lease negotiation there as well. So with that, I'll now turn the presentation over to Tom to provide an overview of our financial results.

Thank you, Jerry, and good morning. Our fourth quarter net loss was $157 million, or $0.91 a share. And our results were impacted by several non-cash impairment charges, totaling about $153 million, or $0.89 a share. Our fourth quarter FFO totaled $47.2 million, or $0.27 per diluted share. And our full-year FFO totaled $198.3 million, or $1.15 per share. and was within our range of $1.15 to $1.17 guidance range. Some general observations regarding the fourth quarter. During the quarter, we had several moving pieces and several variances to highlight. The contribution from our joint ventures was $2.2 million below reforecast, primarily due to increased costs to commence the lease-up of our multifamily project at Schuylkill Yards and a one-time charge at one of our joint venture properties. that's non-recurring interest expense was six hundred thousand below we forecast primarily due to some higher capitalized interest we also forecasted two vacant land parcel sales to generate a million dollars of earnings of uh one of those land parcels has been delayed to 2024 close on impairments as jerry mentioned we recorded impairments on both our wholly owned properties and joint ventures the wholly owned impairments were based on short and anticipated hold periods primarily in the D.C. metro area, and the joint venture impairments were based on the uncertain outcome related to the recapitalization of those partnerships. However, we do believe the ultimate success and recoverability of those investments. Our fourth quarter debt service and interest coverage ratios were 2.5 and 2.6, respectively, and net debt to GAV was 43.4%. Our fourth quarter annualized core net debt EBITDA was 6.3 times and was within our range that we had given. And our combined net debt to EBITDA was 7.5, two times above our 7.1 to 7.3 high end of our range. Our leverage was within our target range. We didn't achieve that due to 2023 business plan sales targets, the debt attribution we had anticipated being reduced due to some of the recapitalization events that we hope to take place in the first half of 24, and continued capital spent on the development projects. During the quarter, 23.4 dollars was stabilized and added to our core portfolio. On the financing side, we remain focused on the 24 bonds and continue to evaluate funding on both the secured and unsecured financing markets. with an objective of completing the financing in the first half of the year. We're exploring some property level secured financing options, including another wholly owned CMBS transaction. We anticipate our ongoing sales and joint venture liquidation strategy will also generate additional capacity. As we've discussed in the past, we prefer to remain an unsecured borrower, and we'll continue to monitor the unsecured market as well. Given the above, we have seen improved pricing for both secured and secured financings since our first call. We will continue to seek the most efficient capital source with a bias towards the unsecured market. Regarding the upcoming joint venture maturities, as Jerry mentioned, we are working with our partners on the 2024 maturities to potentially extend those current maturity dates with our existing lenders and commence marketing efforts with some new lenders on certain properties for sale to help lower JV leverage. Going to 24 guidance at the midpoint, our net loss of $0.31 per diluted share and FFO will be $0.95 per diluted share. Based on our 24 guidance range, this is a decrease of $0.20 per share. It's primarily driven by our interest expense going up, and they're on both the wholly owned and JV side. Our 24 range is built on some general assumptions. Overall, portfolio operations remain very stable with property level gap NOI totaling roughly 300 to 5 million or an increase of around $5 million compared to the prior year. Full year impact of 2340 Dulles and 405 Colorado will benefit us about $6 million. We continue to see the lease up of 250 King of Prussia generating several million dollars. 155 King of Prussia will commence operations in the fourth quarter and generate about $1 million. Offsetting that is about $4 million of reductions due to the 23 sales activity, including losing the state of Texas. So that $4 million is income that was in 2023 that will not be in 24. There will also be a modest increase in the same store portfolio. FFO contribution from joint ventures. will total a negative $8 to $10 million. This loss is primarily driven by our multifamily lease up on stabilization, up to stabilization, and will total about $9 million. Also, higher interest costs on the operating portfolio in 23 that are anticipated to occur in 24. G&A expense will be between $35.5 and $36.5 million. Total interest expense, including $4.5 million of deferred financing costs, will approximate $122.5 million due to the refinancing of the bonds, which Jerry outlined, will increase quarterly interest expense by roughly $4 million. Forecasted higher use of our line of credit to fund development until our speculative second half asset sales takes place. and forecasted higher interest rates compared to 23. Capitalized interest will total about $6 million, will decrease about $6 million to $10 million as current development redevelopment projects are completed and become operational. Land sales and tax provisions we estimate between $4 and $6 million as we anticipate further progress on selling non-core asset parcels. Termination and other fee income will be between $10 and $12 million, which is slightly below our 23 levels due to some one-time activities in the 23 results. Net management, leasing, and development fees will be between $11 and $12 million. Slight decrease due to lower forecasted third-party fees. Expected property sales, $80 to $100 million, will take place primarily in the second half of the year with no material dilution. anticipated we anticipate no property acquisitions we anticipate no use of the ATM or buyback activity and we believe our share count will be roughly a hundred and seventy four million shares looking at first quarter guidance property level operating income will total approximately seventy four million will be below the fourth quarter operating number by two million two million dollars primarily due to some of the fourth quarter asset sales and and higher operating costs in some of our portfolios. FFO contribution from our joint ventures will total a negative $1 million for the first quarter. That's, again, primarily due to the ramp-up of leasing at our multifamily project here at Schuylkill Yards. G&A expense for the first quarter will total about $10 million. That sequential increase is consistent with prior years. and is primarily due to the timing of deferred compensation expense recognition. Total interest expense will approximately $26 million. Capitalized interest will be about $3 million. Termination fees and other income will total about $2.5 million. Net management fee and development fees will be about $1.5 million. And we have no land gain sale projected for the first quarter to be material. Turning to our capital plan, it's pretty straightforward. It's about $660 million. Our 2024 CAD range will be between 90 and 95. The main contributors to the higher range is primarily higher interest rates and interest on the loss and losses on our joint ventures. Looking at the larger uses, we saw about $110 million of development spend, which includes spend on 155 King of Prussia Road. We have $105 million of common dividends, $35 million of revenue-maintained capital, $30 million of revenue-creating capital, $40 million of equity contributions to our joint venture partners. That's both for capital but also for some recapitalization of the joint ventures that we expect to occur in the first half of the year. And then $340 million bond redemption. The sources for those are going to be $145 million of cash flow after interest payments, $343 million of net loan proceeds, either secured or unsecured. That will decrease our cash by about $50 million, as mentioned at the midpoint, $90 million of proceeds coming from land and other sales, and $32 million of construction loan proceeds to offset the spend at 155 King of Prussians. Based on the capital plan above, our line of credit is expected to end the year undrawn, leaving full availability. We also projected our net debt to EBITDA will range between 7.5% and 7.8%, with increase primarily due to the incremental capital spend on our development projects with minimal project income forecasted by the end of the year. Our debt to GAV will approximate 45%. Additional metric of core net debt to EBITDA should be 6.5 to 6.8 times. As of 12-31, it will primarily exclude our joint ventures as all of our active development projects will be forecasted to be complete. We believe the core leverage metric better reflects the leverage of our core portfolio and eliminates our more highly leveled joint ventures and our unstabilized development and redevelopment projects. We believe these ratios will be elevated through the development pipeline, and we believe that once these developments begin to stabilize, our leverage will decrease back towards the core leverage. We anticipate our fixed charge and interest coverage ratios will be roughly 2.2, which represents a sequential decrease from this year, again, due to some higher interest costs. We continue to see stabilization within our joint venture developments this year. And we hope that the leverage will then begin to improve as we go into next year. I will now turn the call back over to Jerry.