Brandywine Realty Trust

Good day and thank you for standing by. Welcome to Brandywine Realty Trust third quarter 2024 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. Instructions will be given at that time. Please be advised, 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 all for participating in our third quarter 24 earnings call. On today's call with me, as usual, are George Johnson, 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 on the calls today may constitute forward-looking statements within the meaning of federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports that we file with the SEC. Well, first and foremost, we hope that you and yours are well, and with summer now behind us, we are looking forward to an ever-improving end to 2024. During our prepared comments today, we'll briefly review third quarter results in our 24 business plan. Tom will then briefly review our financial results for the quarter and frame out the key assumptions driving our fourth quarter 24 guidance. After that, Dan, George, Tom, and I are available for any questions. Well, similar to last quarter, I want to start off by addressing the key themes that guide our business plans. Our focus remains on three key areas, liquidity, development lease-up, and portfolio stability. First on liquidity, look, we're really in excellent shape with no unsecured bond maturities for over three years. We anticipate maintaining minimal balances in our line of credit over the next several years to ensure that ample liquidity continues. And our forecast liquidity does include proceeds from our asset sale program, During the quarter, as you noted in our SIP, we did sell a Class B portfolio located in the Pennsylvania suburbs for a little more than $65 million. We have several other transactions in progress, and as such, we did raise our 24 sales target to a midpoint of $150 million. I'll review some detail on that in a few moments. The majority of our operating joint ventures, which we spoke about earlier in the year, have been restructured. We have no operating joint venture debt maturities for quite some time as well. And this combined activity has reduced our operating JV debt attribution by $159 million since the beginning of the year, and I'll touch on that in a few moments as well. Second, on development lease-up, which remains a top priority for the organization, the pipeline on each project continues to build. Tour volume and issued proposals increase during the quarter. At Schuylkill Yards, we remain in an advanced stage of negotiation with over 200,000 square feet of prospects, with continued advancement in the ever-building strong pipeline. The residential component continues to perform on pro forma in terms of absorption and rent. The office component at our uptown ATX pipeline numbers now stand at over 600,000 square feet, with tenant sizes ranging between 6,000 and 200,000 square feet. The Schuylkill Yards residential project, which we call Avira, has met our year-end target of being over 80% leased. We obviously hope to make more progress in the ensuing two months. At Uptown Residential, we opened in September and we'll be delivering finished units through December, and we're already about 15% leased. As I noted in the past, these projects remain top of market. They're attractive to a broad range of our customer targets, and we remain confident of hitting our pro forma returns. We certainly recognize both the earnings drag and balance sheet impact of carrying this non-revenue producing capital and continue our aggressive marketing efforts on each project. To the upside, upon stabilization, these projects will generate revenue about a 15.5% increase to our existing income stream, so they do remain a key growth driver for the company. We do anticipate in time we'll touch on that with interest capitalization periods expiring on two of these office projects, the interest treatment on residential deliveries, and the expensing of our preferred returns in those development joint ventures, there will be increased expenses attributed to this pipeline before stabilization. And the final third leg of the tripod is portfolio stability, which again remains a top priority. The strong operating metrics we posted again this quarter reflect the underlying stability of that core portfolio. Austin continues to face near-term challenges, but intermediate-term growth prospects or dynamics of that market remain strong. Activity levels have picked up. And our product is quality and will be a strong participant in that market's eventual recovery. Philadelphia, which has one of the lowest vacancy rates among large cities in the country, continues to perform very well for us. And our wholly owned portfolio leasing level and occupancy levels are about 94%, and that reinforces the strength of our product in Philadelphia. Looking ahead, we have only a 5% annual rollover through 2026. Again, one of the lowest in the office sector. Our 24 revenue plan has finished ahead of schedule. We have increased our spec revenue range to $26.3 million and also raised our annual retention range. Our 24 spec revenue target is up $1.8 million or 7.4% over our original 24 business plan. Our mark-to-market capital ratios and same-store numbers all performed at strong levels as they have done for the last several quarters. With that said, the momentum we think we have built has led to our operating results to perform in line with or above our 24 original business plan. Just a few quarterly highlights. We did post second quarter FFO of 23 cents per share. As I mentioned, our original spec revenue target of $26.3 million is up from 25 to 26 million last quarter. and is 100% executed. Our combined leasing activity for the quarter totaled 558,000 square feet. During the quarter, we executed 298,000 square feet of leases, including 125,000 square feet of new leases within our wholly owned portfolio. Total leasing activity, wholly owned leasing, and new leasing all exceeded second quarter levels So good signs of continued recovery in our various markets. Based on our efforts, as I touched on a moment ago, during the first nine months of the year, we have eliminated $159 million of debt attribution from our joint ventures. So that significantly exceeded our targeted $100 million target for 2024. Consolidated debt is 94% fixed at 6.2% rate. Our quarterly rate mark to market was 14.9% on a GAAP basis and 8.9% on a cash basis. Our new leasing mark to market was a strong 18% and 2.9% on a GAAP and cash basis, respectively. We ended the quarter right in line with our 2024 business plan expectations. So the business plan remains in very, existing portfolio remains in very solid shape. Ford rollover through 25 has been further reduced to about 4.6%, and the 26 average through about 5.2%. More importantly, we do not have any tenant lease expiration greater than 1% of revenue through 2026. So we're in very good shape from that standpoint. And along those lines, to give you a little bit more color on the market, we do continue to see encouraging signs on the leasing front. certainly evidenced by the stats I just mentioned, but also by these metrics. The increase in physical tours has been very positive. Third quarter physical tours exceeded second quarter tours by 7%, which also exceeded our trailing four-quarter average by 22%. Also, tour activity remains above pre-pandemic levels by 36%. On a wholly owned basis during the third quarter, 62%, of all leases, all new leases, were results of this flight to quality. For 2024, flight to quality deals represented 60% of our new leasing activity. Executed renewal and expansion activity has enabled us to, again, raise our retention target by 300 basis points, so up from our original 51% to 53% range to now 62% to 63%. Total leasing pipeline through the company remains strong. The operating portfolio leasing pipeline stands at 2 million square feet, and that includes about 218,000 square feet in advanced states of negotiations. Development project pipeline, again, remains strong, and 32% of our operating portfolio new deal pipeline are prospects looking to move up the quality curve. In terms of looking at some of our leverage metrics, our third quarter net debt to EBITDA ratio decreased to 7.5 times, which benefited, Tom will touch on, from our third quarter operating results and sales activity, partially offset by increased investment in our development projects. Our core EBITDA metric, which we monitored very closely, ended the quarter at 6.6 times within our targeted range. Based on our operating results for the first three quarters of the year, we are adjusting and narrowing our 24 FFO guidance to 89 to 92 cents per share. The change in our FFO guidance is based on a change in our guidance for 2024 land sales, which we did anticipate to be about three cents a share for 24, based upon a couple of deals not coming to fruition. We now anticipate no further land gains in 2024. In looking at our liquidity and sales activity, our initial business plan projected $80 to $100 million of sales activity occurring in Q4 with minimal dilution. During the quarter, we did sell a non-core Class B portfolio in the Pennsylvania suburbs for a little more than $65 million. To facilitate that sale, we did take back about $15.5 million of seller financing at initial rate of 8.25% with subsequent rate increases over its term. In addition to that sale, we have a number of other sales that we believe will close during the fourth quarter. Therefore, as we noted in our supplemental package, we have increased our sales target to a midpoint of $150 million. None of the additional contemplated sales will require any seller financing. In addition, if these transactions close as currently contractually anticipated, we expect $150 million to occur at a blended 8% cap rate. Properties in the sale pool are in the Pennsylvania and Austin suburbs. In looking at our developments, as I noted, our development pipeline remains strong. We are very focused on getting some of the leases in negotiation across the finish line. Tour velocity continues to pick up, particularly at Uptown ATX and 3025 JFK. Looking at our developments, we have about a billion dollars under active development. Of that, our wholly owned development in Radnor, which is about $80 million in cost, is 100% leased. fully funded, and the tenant is in the process of taking occupancy during the fourth quarter. Looking ahead, given the mixed-use nature of our master plan communities, we are expected for development pipeline product mix is about 27% life science, 42% residential, 22% office, and 9% support retail, entertainment, and hospitality. Any further development sorts are conditioned purely upon us leasing up the existing pipeline, as well as overall market and capital market conditions. Specifically looking at some of the projects, 3025, our residential office, residential tower, is fully delivered. On the commercial component, we're currently 23% leased with an active pipeline of well over 200,000 square feet. including leases and negotiation. We continue to see steady traffic and leasing activity for a VERA or a residential component. We currently have 278 leases executed for about 80% of the project, which is up from 237 leases or 73% leased on our last call just about three months ago. We're also seeing very good renewal rates for some of our existing tenants. where we're in excess of a 60% renewal rate and an average increase in the high double digits. We have already met on Avira our year-end lease target of being between 80% and 85%, but we're certainly continuing to push for more leasing activity in the ensuing months. For Uptown Block A Residential, which we call Solaris House, we did have some last-minute permitting delays. So we did not open up units for occupancy until late September. That being said, we currently have 52 leases executed. We're at 15.3% of the project, which is up from about 6% on the last call. We are still projecting, even with the delayed opening, that the residential component will be between 20% and 25% leased by the end of this year. 3151 market or life science project is scheduled for delivery. in this quarter. We have a leasing pipeline there, including some leases under negotiation, which we are working to get across the finish line. Uptown ATX has a leasing pipeline that remains approximately more than double the space we have available. That does include a mix of prospects, ranging from a low of 6,000 square feet to a high of about 200,000 square feet. We did recently complete a floor of spec suites and are in the process of leasing those suites up. Our next phase of B-Labs expansion on the eighth floor here at Sears Center is nearly complete, and we're in the final stage of negotiations with several tenants for these graduate lab opportunities. So with that, let me turn the floor over to Tom to review our financial results. Thank you, Jerry, and good morning.

Our third quarter net loss turned $165.5 million, or $96 million. cents per share and third quarter FFO totaled 39.8 million or 23 cents per delivered share. Our third quarter net income results were impacted by several impairment charges totaling 161.4 million or 93 cents per share. Our third quarter FFO results were one penny per share below consensus estimates and some general observations for the third quarter. G&A totaled 12.6 million $3.6 million above our second quarter re-forecast, primarily due to higher non-cash equity compensation amortization. The increase is due to higher-than-forecast investing, and we expect this amount to decrease in the fourth quarter. Interest expense was $1.2 million below our re-forecast, primarily due to higher capitalized interest, primarily due to the delay in commencing our multifamily development in Austin, partially offset by higher projected borrowings on our unsecured line of credit. FFO contribution from our unconsolidated joint ventures was projected to be negative $2 million and ended up being basically break even. The improvement was due to the timing on commencing operations for our multifamily project in Austin and some improvement in the operating portfolio. Our third quarter debt service and interest coverage ratios were 2.4 times slightly above projection, with net debt to GAV of 47.3%. Our third quarter annualized core net debt to EBITDA was 6.6 times, and this is within our 2024 range. And our annualized combined net debt to EBITDA was 7.5 times, also within our guidance range. Our leverage ratios were basically improved based on a higher portfolio and joint venture changes. Our wholly owned core portfolio was reduced in the third quarter by the sale of our campus in the PA suburbs. Our joint venture portfolio now includes 4.1 million preferred investment for the recapitalization of our DK joint venture. We anticipate adding 155 King of Pressure Road to our core portfolio in the fourth quarter. we anticipate the tenant will take occupancy during the quarter and the property is 100 percent leased financing activity as jerry highlighted earlier we've eliminated any uh material near-term maturity risk with no unsecured bonds maturing until november 2027. our wholly owned debt is now 93.9 percent fixed with a weighted average maturity of 3.9 years uh Looking more closely at fourth quarter FFO guidance components, our operating portfolio level operating income will total approximately $72.5 million and will be roughly $1.3 million below our third quarter, primarily due to reduced NOI related to our asset sales in the third quarter and projected sales in the fourth quarter. The FFO contribution from our unconsolidated joint ventures will total a negative $2.5 million. The increased loss is primarily due to 3025 JFK office being operational for more than 12 months, ending capitalization, and commencing operations of our multifamily project in Austin, Texas. Our fourth quarter G&A will approximate $9 million due to lower equity compensation amortizations. Total interest expense will increase to $33.5 million, primarily due to lower capitalized interest, totaling about $3.2 million. The lower capitalized interest is partially due to joint venture and wholly owned development projects becoming operational. Termination fee and other income will total roughly $6 million for the fourth quarter, which includes some incremental transaction income. Net management and leasing and development fees should be about $3 million. Land gains, which were going to be $5 million for the year, is now projected to be zero. Interest and investment income will be $0.8 million, and our share count should approximate 176.5 million diluted shares. As Jerry outlined previously, we have lowered the midpoint of our guidance by three cents, primarily due to the anticipated land gains totaling $5 million that will no longer be included in our business plan. While we plan to continue to monetize our non-core land holdings, none will close in 2024. For run rate guidance, as our development projects transition to operating properties, we will lose the ability to capitalize certain costs that will now be included in future earnings. While we will provide further guidance with our 2025 business plan, we anticipate that certain fourth quarter run rates will continue into 2025. Interest expense, with the development projects becoming operational, our capitalized interest will decrease and future interest expense will be consistent with our projected fourth quarter run rate. FFO contribution from our joint ventures, with certain developments becoming operational and others increasing NOI to release up, our JV joint venture contribution on a quarterly basis will be consistent with our projected fourth quarter level. On our capital plan, which totals $109 million. For the first nine months, our 2024 CAD payout ratio was 95.5, and our full year range remains 90 to 95. Uses for our capital for the 2024 fourth quarter, $35 million of development, $26 million of common dividends, $14 million of revenue maintained, $9 million of revenue create, and $25 million contribution to our joint ventures, primarily related to Commerce Square. Primary sources are $28 million of cash flow after interest payments, $85 million of land and other sales, and $12 million of construction loan proceeds. Based on the capital plan outlined above, cash on hand should increase $16 million, and our line of credit is expected to be undrawn at the end of the year. Our projected cash balances at the end of the year have been positively impacted by the increased sales activity partially offset by our seller financing and planned additional contribution to Commerce Square. We also project our net debt to EBITDA ratio will range between 7.5 and 7.8, and our net debt to GAV approximately 47%. Our additional metric of core net debt to EBITDA will range between 6.5 and 6.8, which does exclude primarily just our joint ventures, as our active development projects will be complete. We believe that our 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. We anticipate our fixed charge and interest coverage ratios will approximately 2.2 by the end of the year, which is slightly below our third quarter results. I'll now turn the call back over to Jerry. Hey, great.