Brandywine Realty Trust

Good day and thank you for standing by. Welcome to Brandywine Realty Trust's second quarter 2024 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 will 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 11 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.

Gigi, thank you very much. Good morning, everyone, and thank you for participating in our second quarter 2024 earnings call. On today's call with me 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 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 file with the SEC. Well, first and foremost, we hope that you and yours are doing well. Your summer's off to a great start and are looking forward to a successful and ever-improving second half of 2024. During our prepared comments, we'll briefly review our results for the quarter. and progress in our 2024 business plan. Tom will then briefly review second quarter financial results and frame out the key assumptions driving the balance of our 24 guidance. After that, Dan, George, Tom, and I are available to answer any questions. Well, similar to last quarter's call, we want to start off by addressing the key themes that guide our thinking every day. Our focus remains on three key areas, liquidity, development lease-up, and portfolio stability. First, on liquidity. Our recent bond issuance cleared the decks on any bond maturities through November of 2027. During the quarter, we fully redeemed our October 24 bonds. As such, we anticipate maintaining minimal balances on our line of credit over the next several years to ensure ample liquidity and believe that that liquidity will be further enhanced by our asset sales program and other deleveraging initiatives. On our operating joint ventures, we have resolved two of our non-recourse mortgages. On our Sierra Square JV, we refinanced our existing mortgage that was matured this month with a new $160 million mortgage, which now expires in June of 29. Each partner funded a provided share of the equity required to reduce the outstanding mortgage balance and put that project in a cash flow positive position. On our MAP joint venture, a few items to highlight. We have reduced, restructured, and extended the existing leasehold mortgage. The mortgage was reduced by $26 million and extended through March of 2029. In addition, the amended loan provides the lender receives a 95% participation in the operating results, reducing our economic interest to 5%. The combined activity of the leveraging on Sierra Square and the restructuring of the MAP joint venture reduced our debt attribution by $101 million. To facilitate that restructuring on MAP and to provide capital for the debt pay down of $26 million, Brandywine and the fee owner formed a joint venture to purchase 14 flex and industrial properties. This new entity is completely unencumbered and we are currently marketing that portfolio for sale we anticipate being self be able to sell those properties over the next several quarters second on development lease up the pipeline on all projects continues to build with the number of tours and issued proposals increasing during the second quarter versus the first quarter we are in the advanced stages of lease negotiations with approximately 200 000 square feet of tenants with a strong pipeline building behind that the residential components continue to perform on pro forma in terms of both absorption and rents. Each of these projects are top of market, attractive to a broad range of customers, and we remain confident of hitting our targets. We certainly recognize that both the earnings drag and balance sheet impact of carrying this non-revenue producing capital and continue our aggressive marketing campaign on each project. To the upside, upon stabilization, These projects will generate approximately $50 million of gap and $45 million of cash NOI, or a 15.5% increase to our existing income stream. So they do remain a key driver to our company, and we're crisply focused on having those projects reach their stabilization. And on to stability, certainly our portfolio stability is always top of mind. The strong operating metrics we posted again this quarter reflect the underlying stability of the core portfolio. And while certainly our 80% occupied Austin portfolio still faces near-term challenges, fundamental growth dynamics in that market remain. In fact, activity levels in Austin have picked up. A second consecutive quarter of positives works in that marketplace, and we plan to be a strong participant in that market's recovery. Philadelphia, which is one of the lowest vacancy rates among large cities in the country, continues to perform well as evidenced by our 94% leasing level and occupancy level of 91%. Looking ahead, we have less than 6% annual rollover through 2026, one of the lowest in the office sector. Our 2024 revenue plan is running ahead of schedule. As such, we have increased our speculative revenue range by a million dollars and also raised our annual retention range. Our mark-to-market capital ratios and same-store numbers all continue to perform at relatively strong levels as they have done over the last several years. We fully recognize the liquidity and valuation challenges facing our sector, in fact, the entire commercial real estate space, and continue to take steps necessary to ensure performance on our business plan and achieving all of our growth objectives. With that background, the momentum from the first quarter continued into the second quarter and the years off to a very solid start. All operating results are in line or above our 2024 business plan. A few highlights. We posted second quarter FFO of 22 cents per share in line with consensus. Our speculative revenue range, as I mentioned, of $24 to $25 million has been increased to $25 to $26 million, with $25.6 million already executed. Our 24 bond maturity has been fully redeemed. Our combined leasing activity for the quarter totaled 500,000 square feet. During the quarter we executed 164,000 square feet of leases, including 101,000 square feet of new leases within our wholly owned portfolio. Based on our efforts during the first six months of the year, we have eliminated $163 million of debt attribution from our joint ventures, which exceeds our $100 million target. And as noted on page 13 in our SIP, our business plan does anticipate having full availability on our $600 million line of credit at year-end 24. Along those lines, our consolidated debt is 95% leased I'm sorry, 95% fixed at a 6.2% rate. Our quarterly rental rate marked to market was 10.8% on a gap basis and negative 0.4% on a cash basis. It's worth noting this metric for the quarter was impacted by a larger lease renewal we did in Austin with a roll down in rental rate, which we accepted in lieu of any tenant improvements. Our new leasing mark to market was a strong 28% and 15.5% on a gap in cash basis, respectively. We ended the quarter at 87.3% occupied and 88.5% leased, sequentially down from last quarter, but right in line with our 24 business plan projections. So the operating portfolio remains in solid shape. Our forward rollover exposure through 25% has been further reduced to 5.8% and is noted through 26 through down to 5.7%. Also, we do not have any tenant lease expirations greater than 1% of revenue through 2026. So we believe our asset quality, service delivery platform, and sub-market positioning remain a key competitive advantage. Similar to prior quarters, the quality Curve thesis continues to gain strength as reflected in the overall pickup and leasing activity. In addition, given some of the stress our competitive landlords are facing, we have in several submarkets seen our competitive set shrink and the quality operating and financial stability of our platform has continued to separate us from the pack, both in the minds of prospective customers, existing tenants and brokers. Along those lines, we continue to see encouraging signs on the leasing front as evidenced by the following metrics. The increase in physical tour activity has been very positive. Second quarter physical tours exceeded first quarter by 22%, also exceeding our trailing four-quarter average by over 11%. Also, tour activity remains above pre-pandemic levels by 27%. On a wholly owned basis during the second quarter, 68%, 68% of all new leases were a result of this flight to quality. Tenant expansions continued to outweigh tenant contractions during the quarter. Our executed renewal and expansion activity has enabled us to raise our annual retention range by 150 basis points from 57% to 59% to 59% to 60%. The total leasing pipeline continues in a strong position. The operating portfolio leasing pipeline is up 100,000 square feet from last quarter and stands at 2.3 million square feet. This includes approximately 282,000 square feet in advanced stages of negotiations. Our development pipeline remains at the same levels as last quarter, and also 32% of our operating portfolio New Deal pipeline our prospects looking to move up the quality curve. Looking at EBITDA, our second quarter net debt to EBITDA remained at 7.9 times. Compared to the first quarter at the same level, as increased investment in our development projects was offset by our JV recapitalizations, our core EBITDA metric ended the quarter at seven times, slightly above our current targeted range. Based on our operating results for the first half of the year, we have narrowed our 2024 FFO guidance from $0.90 to $0.97 per share to $0.91 to $0.96 per share. And also looking at the dividend, based on our $0.60 per share dividend, our second quarter FFO and CAD payout ratios were covered at 68% and 97% respectively. And at the midpoint, our first six-month CAD payout ratio was better than our 2000 business plan projection. Looking at sales activity, our business plan does contemplate us executing between 80 and $100 million of sales. We had targeted those to occur in the fourth quarter. We have about $200 million of properties in the market for price discovery. Given the reaction to that activity thus far, we do anticipate posting actual results within our targeted range. And while we will also anticipate continuing to sell non-core land parcels, We did have several land agreements terminated during the quarter through the buyer's inability to obtain financing. In looking at our developments, the development pipeline remains strong. As of now, we have approximately 200,000 square feet in active lease negotiations, 900,000 square feet of proposals outstanding, and 300,000 square feet of space undergoing test fits. Tour velocity continues to pick up. and activity levels have continued to increase on our recently delivered project at 1 Uptown. Given the length of time to complete the space plans I noted last quarter, we still need to obtain permits, construct space. Our 24 financial plan does not include any spec revenue coming from either 1 Uptown or 3025 JFK. To accelerate revenue recognition, however, we're nearly finished building out two floors of spec suites at 1 Uptown, and one floor spec suites at 3025. Looking at 3025, that property is fully delivered. On the commercial component, we're currently 15% leased with an active pipeline and, again, 100,000 square feet or so under active lease negotiations. On the residential component, we continue to see steady traffic and leasing activity for that residential component, which we call Avira, has 237,000 leases executed, or just shy of 73% of the project. That's up significantly from last quarter's call. About 151 of those leases have taken occupancy. That's pro forma rental rates. We still project this residential component will be between 80% and 85% leased by year-end 24. We have begun pre-leasing for one uptown's block A residential component called Solaris House and continue to see steady traffic. We have 22 leases executed. No lease have taken occupancy yet as the first move-ins are scheduled for later in August. And we continue to project that project will be between 20% and 25% leased by year-end 24. 3151 Market is... scheduled for delivery in the fourth quarter of this year. We have a leasing pipeline of over 350,000 square feet on that, with 110,000 square feet in lease negotiations. Uptown ATX, the office component, we have that in a joint venture, and our leasing pipeline there approximates 1.2 million square feet, with prospects ranging from 3,000 to 300,000 square feet. As I just said, we did complete a floor of spec suites with the second floor underway, and things are moving on track there as well. Our next phase of B-Lab on the eighth floor of Cirrus Center is well underway, and we remain in the final stage of negotiating a lease with a single tenant for that entire floor. Tom will now provide an overview of our financial results.

Thank you, Jerry, and good morning. Our second quarter net income totaled $29.9 million, or $0.17 per share. and second quarter FFO total 38 million or 22 cents per diluted share. Our second quarter net income results were impacted by a 53.8 million dollar or 31 cent per diluted share one-time non-cash income gain from the restructuring of our MAP joint venture. Our FFO results met consensus and we have some general observations regarding our second quarter highlighting a couple variances compared to our first quarter guidance. Interest expense was $2.2 million below our reforecast, primarily due to higher capitalized interest and lower projected borrowings on our unsecured line of credit. G&A totaled $8.9 million, $600,000 above our reforecast, primarily due to compensation expense. This quarterly variance continues to be a timing variance and we still anticipate the full year number to be consistent with our guidance. Our first quarter debt service and interest coverage ratios were 2.2 and net debt to GAB was 45.2, both in line with projections. Our first quarter annualized core net debt to EBITDA was 7.0 and is two tenths of a turn above our range. And our annualized combined net debt to EBITDA was 7.9, just above the high end of our range of 7.5 to 7.8. Regarding portfolio and joint venture changes, we have made no changes to our wholly owned core portfolio in this quarter. Financing activity, as Jerry highlighted, we completed a $400 million bond offering that closed on April 12th. And with this closing, we've eliminated a near-term maturity risk with no unsecured bonds maturing until November, 2027. Our wholly owned debt is now just under 95% fixed with a weighted average maturity of 4.2 years. Regarding our 2024 joint venture maturities, as Jerry mentioned, we have made progress with our partners and lenders on the 2024 maturities. We've refinanced our loan with Cirrus Square and setting that maturity date till 2029. We recapitalized the MAP joint venture by acquiring our partner's interest, reducing the existing loan by $24.5 million, and then executing a new loan through 2029. These transactions continue our goal of reducing our investment exposure to our operating joint ventures and, just as importantly, also reducing the net debt attributed to these ventures by well over $100 million in this quarter. In addition, in connection with the MAP recapitalization, we formed a 50-50 partnership with the current ground owner and acquired the leasehold interest in 14 property portfolio located in Richmond, Virginia, totaling approximately 642,000 square feet for $44 per square foot. That is over 99% occupied. Portfolio is primarily flexed industrial properties with a weighted average lease term of 7.5 years. Portfolio is 44% occupied by S&P 500 biotechnology company. We intend to market this portfolio for sale, and based on the profile of the portfolio assets, we expect to sell the assets within the next couple of quarters. The joint venture portfolio is unencumbered. Looking more closely at our third quarter of 2024, we have the following general assumptions. Our portfolio operating income will total approximately $75 million and roughly $1 million above our second quarter operating income number. FFO contribution from our unconsolidated joint ventures will total a negative $2 million, which again approximates our second quarter results. Our G&A for the third quarter will be up sequentially, although it will be flat, sorry, at $9 million. Our interest expense will approximate $33 million with capitalized interest of $3.5 million. Termination and other income will approximate $7.5 million in the third quarter. The sequential increase is due to anticipated transactional income that we forecasted in our full-year guidance, which was $11 million. Net management, leasing, and development fees will be $3 million for the quarter. We don't expect any land or tax provision to be material. Interested investment income will total $300,000, or $1.2 million sequentially below the second quarter. The second quarter had excess cash from the timing of the April bond offering, the bond tender, and the final June bond redemption. Our share count will approximate 176 million shares. And for our capital plan, Our capital plan is fairly straightforward, $180 million. Our CAD range remains at 90 to 95. Uses for this remainder of the year is $55 million for development and redevelopment projects, $52 million for common dividends, $28 million of revenue-maintained capital, $20 million of revenue-create capital, and $25 million of equity contributions to our joint ventures. The primary sources are 77 million of cash flow after interest payments, 90 million of land sales, and 17 million of construction loan proceeds related to 155 King of Prussia Road. Based on the capital planned out line above and cash on hand, we should have $4 million of cash on hand and our line undrawn at the end of the year. We also project to have that debt to EBITDA ratio ranging between 7.5 and 7.8, and our debt to GAV will approximately 45%. Our additional metric of core net debt to EBITDA is still ranging between 6.5 and 6.8, and excludes primarily just our joint ventures as all of our active development projects will be complete. We 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. During 2025, our core net debt to EBITDA should begin to equal our consolidated net debt to EBITDA as our wholly owned development projects reach stabilization and we continue to reduce our exposure to the current joint ventures. We anticipate our fixed charge and interest coverage ratios will approximately be 2.2, which is equal to the second quarter. I will now turn the call back over to Jerry. Great.