Brandywine Realty Trust

Good day and thank you for standing by. Welcome to the Brandywine Realty Trust fourth 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 11 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.

Jerry Sweeney Needy, thank you very much. Good morning, everyone. Thank you for participating in our fourth quarter 2024 earnings call. On today's call with me, as usual, are George Johnstone, our Executive Vice President of Operations, Dan Palazzo, our Senior Vice President Chief Accounting Officer, and Tom Worth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed on the call today may constitute forward-looking statements within the meaning of the Federal Securities Law. Although we believe the 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 follow at the SEC. Well, first and foremost, we hope that you and yours are doing well. And with 2024 now behind us, we're looking forward to continued real estate market improvements into both 25 and 2026. During our prepared comments today, Tom and I will briefly review our 2024 results and frame out the key assumptions driving our 2024 guidance. After that, Dan, George, Tom, and I are available for any questions. Well, from an operating and portfolio management and liquidity standpoint, 2024 was a solid year. We posted strong operating metrics again this quarter, reinforcing the high-quality nature of our portfolio. Our wholly-owned core portfolio is 87.8% occupied and 89.9% leased, which is improvement sequentially over the last quarter. We exceeded our 2024 business plan spec revenue target by 8%, generating $26.4 million. We also exceeded our tenant retention target, which ended at 63%, compared to our original business plan target of 51% to 53%. Leasing activity for the year approximated 2.3 million square feet. During the quarter, we exceeded 783,000 square feet of leases, including 486,000 in our wholly owned portfolio and 297,000 square feet in our joint ventures. This quarterly activity was the highest in 2024 and 42% above the corresponding fourth quarter in 2023. Looking ahead, we have less than 5% annual rollover through 26, one of the lowest in the office sector. On an annual basis, on a GAAP basis and 1.8% on a cash basis, both within our business plan expectations. Our new leasing mark to market was strong at 18% and 4% on a GAAP and cash basis respectively. Fourth quarter physical tours exceeded third quarter by 7% with tours in 2024 exceeding 2023 by 22%. Tour activity remains well above pre-pandemic levels For the quarter on a wholly owned basis, 62% of leases were the result of flagged equality. During 2020, to work for the full year, flagged equality deals represented 60% of new leasing activity. We also importantly note that we do not have any tenant lease expirations greater than 1% of revenues through 2026. Our operating portfolio leasing pipeline remains strong at 1.8%. 3,000 square feet in advanced states of negotiations. So the take-out operations is stable, solid operating performance with limited rollover risk for several years, good capital control, improving markets, and an expanding leasing pipeline. Another key component of our business plan is continually improving liquidity. During 2024, we significantly exceeded our liquidity goals and completed over $300 million of dispositions. This was well above our $150 million 2024 midpoint, revised midpoint, and our $90 million original guidance. These efforts result in our having $90 million of cash on hand and no outstanding balance on our $600 million unsecured line of credit at year end. We also, and Tom will get into more detail, have no unsecured bond matures until November of 27, and going forward, Our business plan is predicated on maintaining minimal balances on our line of credit over the next several years to ensure ample liquidity. And our only real maturity in 2025 is a $70 million unsecured term loan that we're evaluating the process of extending. During 2024, we also recapitalized or exited several operating joint ventures. Our 24 goal, you may recall, was to streamline these operating joint venture relationships and reduced debt attribution by $100 million. We achieved that goal, and during 2024, we reduced debt attribution by $229 million. Despite these strong operating metrics and significant progress on further strengthening liquidity, we did fall short of our FFO targets. FFO results were $0.17 for the fourth quarter and $0.85 for 2024. The fourth quarter annual results were were negatively impacted by three cents a share reduced other income from a one-time transaction that we did anticipate in the fourth quarter, one cent per share net dilution due to the increase in accelerated disposition activity, and several other points that Tom will walk through as well. From a broader perspective, however, the real estate markets are improving. We're seeing that every day. During the year, we laid a solid operating foundation in capitalizing these improving office market dynamics. In Philadelphia, there are encouraging signs of stabilization. Philadelphia's office market is seeing a clear shift towards high-quality space, with Class A properties accounting for 66% of all lease deals signed in 2024. Our overall CBD portfolio is 93% leased. The CBD recorded one million square feet of transactions during 24, demonstrating the sustained demand for high quality workspace. Of that activity, Brainy Wine captured 49% of all office deals. In addition, the city's life science sector, while still recovering, continues to be a driver of future growth backed by strong regional healthcare ecosystem that includes 15 major healthcare systems. Austin, which continues to be a magnet for corporate expansion, leasing momentum there remains positive, with Austin recording two consecutive quarters of net absorption, and over 81 tenants currently and actively seeking more than 2.5 million square feet of space. Positive momentum during the fourth quarter was driven by revitalization of the tech sector, and there's also Finally, a notable trend towards, encouraging trend towards return to work on a full-time basis. So we are optimistic that Austin will see increased leasing activity in 2025. With tenants having a clear preference for premium office environments, branding line is demonstrated by 2024 leasing results is well positioned to capture increasing demand in both Philadelphia and Austin. Well, throughout 24, liquidity, portfolio stability, and our lease-up development. While significant progress was made on liquidity and portfolio stability, we have remaining work to do on development leasing. As we'll discuss in a few moments, 2025 is a transitional earnings year for us, impacted by the expensing of our preferred coupon payments and the interest expense charges relating to our two residential projects, and 3,025 JFK and one uptown. While leasing momentum continues to accelerate, the lease update is taking longer than originally anticipated. As such, 2025 is an earnings drop due to the items I just mentioned a moment ago. Stabilizing these development projects remains a top priority for the organization. The pipeline of each property continues to build. Tour volume and Issued proposals increased during the fourth quarter. But to be conservative, we are not projecting on the commercial properties any additional incremental I&Y being generated toward 2025. In looking at each project, on our 3025 office project at Schuylkill Yards, we did execute 117,000 square foot lease with the FS investments for their new expanded global headquarters. This four-floor lease brings the office component to 83% lease with just over one floor remaining to lease with a very healthy pipeline behind that. We do anticipate this project component will stabilize in Q126 upon that tenant's occupancy. Looking at the residential side of Vera, which is the residential component of 3025, it continues to perform on pro forma in terms of absorption of rents and sits at 84% leased. Since we launched that marketing campaign, we have leased 306 leases, We're also seeing very good, as we're into the renewal program now, very good renewal rates for some of the existing tenants. We're in excess of a 55% renewal rate and an average rate increase in the high double digits. We do expect this project to stabilize, this component of the project to stabilize in Q2 25. 3151 Market, which is our life science project in Schuylkill Yards, was substantially delivered at year end 24, with some remaining work to do, and will remain in the capitalization period through 2025. The pipeline on that project has grown significantly during the last quarter, and stands at about 800,000 square feet, with several advanced discussions underway. We do anticipate this project will stabilize in Q3 26. At Uptown ATX, the pipeline for the office component now stands at over 500,000 square feet, with tenant size ranging between discussions with several sizable users. Given the composition of this pipeline, after accounting for tenant build-out and approval periods, we expect this project to stabilize in Q2 26. At Uptown Residential, known as Solaris House, we have delivered all 341 units. We are currently 30% occupied for 102 units and 32% leased. Our wholly owned office commenced in November of 24. As noted in the past, these development projects remain top of market. We remain confident in their success and will continue our aggressive marketing efforts on each one. The earnings impact, as Tom and I will walk through in a few moments, of carrying these non-revenue producing capital projects is a major driver impacting 2025 guidance. And along those lines, we did introduce 2025 guidance. We do view our 2025 business plan as being a transitional bridge here for us, highlighted by solid core portfolio performance with strong leasing activity, significant balance sheet liquidity with no significant debt maturities, and certainly reflecting the earnings impact of our development JVs moving off their capitalization periods. We did provide in our release yesterday 2025 FFO guidance with the range of 60 to 72 cents per share for a midpoint of 66 cents. At the midpoint, the 25 FFO guidance is 19 cents per share below our 24 FFO of 85 cents per share. The primary drivers for this are highlighted in the FFO reconciliation on page one of our SIP and primarily relate to the expense of any uptown ATX commercial development, and the continued lease up of our Solaris residential project, partially offset by the projected stabilization of our viewer project. Looking at other metrics, our 2025 gap NOI will be approximately $18 million below 24 levels, primarily due to the asset sales activity partially being offset by the 155 King of Pressure Road being fully operational in 25. We do anticipate actually doing some delayed land sales activity, which will generate some additional gains. Tom will review all these items in more detail and several other factors. From an operating standpoint, spent revenue for 25 will be between $27 and $28 million, up 4% from 24 levels. We are currently at 22.9, or 83% achieved at the midpoint. Our cash and gap mark-to-market range is lower than 24, primarily due to the regional composition of our leasing activity in 2025. Our gap mark-to-market ranges are also below those levels, which is mainly driven by, again, the regional composition of our 2025 leasing activity. And we did actually two large renewals with no capital costs that impacted the mark-to-market for 2025. Occupancy levels will be incrementally higher between 88% and 89%. Our lease level loss will be incrementally higher between 89% and 90%. We anticipate a retention rate of 59% to 61%. Same-store analyte growth will range 1% to 3% on a cash basis and negative 1% to positive 1% on a gap basis. Capital control will remain in very good shape. We're about 10% of revenues below our 24% result. Our business plan projects $50 million of additional sales activity that occurs later in the fourth quarter of 25 with minimal dilution. Our dividend payout ratios for 24 were 71.4% and slightly more than 100% on CAD. For 25, the FFO and CAD payout ratios are above our historical averages and above our preferred levels. However, As development JVs grow occupancy and we embark on several recapitalizations, we anticipate growing our FFO and CAD results through 26 and bringing our dividend payout ratios back to historical levels without reducing the current $0.60 dividend. It's also important to note that as we highlighted on page 3 of the SIP, our 25 capital spend is included in CADs. is impacted by approximately $23 million, or 14 cents a share, of deferred tenant allowance payments for leases that were done between 2020 and 2023. I also want to note that our 9% to 11% 25 projected capital ratio range is one of the lowest we've had in the past five years. So with that, let me turn the floor over to Tom to review our financial results for 24 and summarize our 25 outlook.

Thank you, Jerry, and good morning. Our fourth quarter net loss is 43.3 million or 25 cents per share, and our fourth quarter FFO is about 29.9 million or 17 cents per share. Our quarterly net income results were impacted by several non-cash impairment charges totaling 23.8 million or 14 cents per share related to two of our non-consolidated joint ventures located in the D.C. area. Our fourth quarter FFO results were 3% below our guidance and 6% below the consensus estimates, partially as a result of timing and some general observations for the quarter. Our other income, we did anticipate receiving one-time transactional income, rolling about $6 million for just over 3 cents a share. We now anticipate that income being received in the first quarter of 2025. Property level gap NOI, our gap NOI was 68.5. This was reflective of our higher than anticipated and earlier than anticipated asset sales activity and slightly higher operating expenses. G&A totaled $10.1 million, $1.1 million above our third quarter re-forecast. That's primarily due to some higher non-cash equity amortization. The increase is due to higher forecast investing. That will continue into 2025. Total interest expense was 1.2 below our pre-forecast, primarily due to higher cash proceeds from the asset sales, which lowered our line of credit balance, and we had slightly higher capitalized interest. Looking at our debt metrics, fourth quarter debt service and interest coverage ratios were 2.1, slightly below our 2.2 projections. Our fourth quarter and annualized consolidated core net debt to EBITDA were 7.9 and 7.2 times, respectively, with both metrics above our range primarily due to the lower fourth quarter income. Portfolio and joint venture changes. We did add 155 King of Pressure Road to our core portfolio during the quarter as our tenant took occupancy and the property is 100% occupied. Liquidity. Due to the asset sales, our year-end cash position increased to $90 million, $75 million above our third quarter projection. And as Jerry highlighted earlier, we have a $170 million term loan maturing in 2025 and no unsecured bonds maturing until November 2027. Our wholly owned debt is 95.4% fixed with a weighted average maturity of 3.7 years. Our full year 2024 payout ratio is 103.4. This was negatively impacted by the lower than anticipated fourth quarter income. And if that income did come in, we would have been below the 100%. Going into our 2025 guidance as a midpoint, our net loss will be 54 cents per share. Our 2025 midpoint guidance for FFO will be 66 cents per diluted share. a stable wholly-owned portfolio. This reset of FFO, we believe, is temporary, impacted by our portfolio reshaping efforts to the disposition of non-core assets and the development project stabilization. Our fourth quarter, our FFO contribution from our unconsolidated joint ventures developments will be a loss of 25.2 million, or 11 cents a share, As our development projects are completed but not yet stabilized, we are incurring interest expense and preferred equity costs and overall negative operating income within those joint ventures. The result is losses totaling approximately $32.6 million or $0.18 a share during 2025 compared to a loss of $12.2 or $0.07 a share in 2024. Our 2025 construction loan interest and partner preferred equity returns total $43.8 million, or 24 cents a share. We expect to recapitalize these capital projects into lower debt and equity costs as the projects stabilize. We will also receive $7.4 million of non-recurring cash income from the development joint ventures in the first half of 2025. To offset the development joint venture losses, we do expect our operating joint venture portfolio to generate approximately $9 million for five cents a share of FSL. As Jerry noted, we will look to recapitalize the residential developments as they approach stabilization and recapitalize the commercial developments as leases are executed and our lease percentage approaches 80% to 90%. We believe that will have minimal effect potentially in this year and have significant effect on our 26 results. Operating portfolio, operations are expected to remain very stable with operating gap NOI totaling roughly 290 million, roughly flat on the same store basis as compared to 2024, with core occupancy increasing slightly at the midpoint. Our 2025 fully owned core portfolio would be reduced on a comparable basis by the third quarter sale of our campus in the PA suburbs and the fourth quarter asset sales in Austin, Texas, and Richmond, Virginia. The impact of those results will reduce our NOI by roughly $15 to $18 million. Full-year impact of 155 king of pressure will be about $6 million, and once the lease up to 50 occurs, we will generate an additional $3 million. We call G&A. We expect G&A to be between 42.5 and 43.5, which approximates our for results. Our interest expense, including for financing costs and capitalized interest, will approximate $135 million, with the midpoint representing a $14 million increase. That increase represents $9 million of reduced capitalized interest from the developments becoming operational, and $4 million of interest, which is the full-year effect, of the April 2024 unsecured bond issuance. Termination of the fee income will be between $7 and $9 million as compared to $13.7 and $24. Net management fee and development fees will be between $8 and $10 million. $5 million reduction, again, due to lower development fees from recently delivered joint venture projects. And we do expect to do $50 million of speculative sales. Weighted towards the second half of the year, We project these sales will occur later in 2025 and have minimal dilution. We anticipate no property acquisitions. We anticipate no use of the ATM or buyback activity, and we believe our share count will be roughly 178 million shares. Looking closer at the first quarter, We see property level NOI of approximately 69 million. Again, this will have the full quarter effect of 155 King of Prussia, but also have the full quarter effect of our fourth quarter asset sales activity. Our FFO contribution from our joint ventures will total negative one million for the first quarter. That's primarily due to the ramp up of leasing in our multifamily. one uptown ATX coming online. However, that number is also inclusive of a $6 million non-recurring income. In the previous quarter, we had thought that would be a consolidated pickup. That pickup will occur in the joint ventures in the first quarter. G&A expense for the quarter will be about $17 million. That's roughly 40% of our G&A for the year, and that increase is really resulting from timing of compensation expense being recognized in the company. Total interest expense will approximate $33 million. Capitalized interest will be about $2.5 million. Termination and other fee income will be about $2 million. Net management fees and development fees will total about $2.5 million. We incrementally feel more positive about executing our land sales program this year and have reintroduced 4 to 6 million of land sales, which were delayed from 2024. These sales will take place later in the year, and there are no anticipated closings of any land sales in the first quarter of 2025. Turning to our 2025 capital plan, the plan is much simpler than in prior years as our wholly owned development and redevelopment project are fully construction or nearing completion. As our CAD payout ratio will be 120 to 150, we recognize this is elevated compared to historical averages and our long-term targets. However, as we complete our recent developments, we should see CAD levels rise and increase going into 2026, based on the trajectory of the leasing and occupancy taking effect. In addition, as Jerry noted, we have over $23 million of revenue-maintained capital spend for lease design between 2020 and 2023. While there is always a delay, this is an unusually high year, and it was tied to a number of large renewals done in the past. Looking at larger users of our cash, $60 million for development, which includes one zero last expansion. We have $105 million of common dividends, $35 million of revenue maintained capital, $30 million of revenue create, and $25 million of equity contributions to fund recent tenant leases in our joint ventures. Sources of this will be $130 million of cash flow after interest payments, $50 million of speculative asset sales, and $10 million of construction loan proceeds on 155 King of Prussia. Based on that capital plan, we anticipate using approximately $60 million of our $90 million of cash on hand, but we do expect to end the year with full availability of our line of credit. We also project that our net debt to EBITDA range will be 82 to 84. The increase is primarily due to the losses of the joint ventures, and our debt to GAD will approximate 48%. Additional metric of core net debt to EBITDA should be 77 to 79. By year end 2022, our core net debt to EBITDA should really equal our consolidated net debt to EBITDA since we will have no developments going on and it will only exclude our joint ventures. Again, we believe those ratios are temporarily impacted by revenue coming along in our development completions, and we are confident that once those completions are stabilized, our leverage levels will decrease back towards core levels. sequential decrease from this year, again, due to joint venture losses, and we anticipate the leverage will then begin to improve as we go into next year. I will now turn the call back over to Jerry. Tom, thank you very much.