Good day, ladies and gentlemen, and welcome to the Brandywine Realty Trust Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Jerry Sweeney, President and CEO. Please go ahead.

Chris, thank you. Good morning, everyone, and thank you all for participating in our second quarter 2019 earnings call. On today's call with me, as usual, are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our 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 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. We are in great shape, and after a brief review of our second quarter results and the 2019 business plan update, Tom will provide a synopsis of our financial results. And then after that, Tom, George, Dan and I will be available to answer any questions you may have. The business plan is very straightforward. We continue to take advantage of strong market conditions to lease space at increasing net effect of rents by controlling capital costs, delivering positive mark-to-market rental spreads and meeting all of our business plan objectives. To respond to client and market demand and accelerate earnings growth, as we look forward to 2020 and '21, we do plan to place more land into active development. Sources of capital will include proceeds from appropriately timed asset sales and selective JVs on large development undertakings, like Schuylkill Yards. We anticipate being able to accomplish our development funding needs without earnings dilutive asset sales or exceeding our balance sheet targets. And looking at 2019, we're 99% done…

Thank you, Jerry. Our second quarter net income totaled $6.2 million or $0.04 per diluted share and FFO totaled $62.2 million or $0.35 per diluted share, which met consensus estimates. In addition, we did narrow the guidance range by $0.02 per share and our midpoint remained unchanged at $1.42 per share as compared to initial and first quarter guidance. Some general observations about the second quarter results. As outlined in our first quarter call, our second quarter estimates included $1.5 million of land gains and we estimate several second half sales will result in the full year land gains of about $3.2 million. Our second quarter fixed charge and interest coverage ratios were 3.5 and 3.8, respectively. Both metrics improved as compared to second quarter 2018. We increased several full year operating metrics in our 2019 business plan based on strong first half results. While our net debt to EBITDA did increase to 6.6 times, we do anticipate the metric coming down during the second half of the year. G&A expense was $16.4 million and higher than our projected $8 million, primarily due to the timing of expenditures. We still anticipate 2019 G&A to approximate $31 million. Looking forward to the third quarter 2019, we have some of the following general assumptions. Portfolio operating income we expect to total about $84 million and will be incrementally about a $1.5 million higher than the second quarter. FFO contribution from our unconsolidated joint ventures were $3 million and is $0.5 million below the second quarter, primarily due to projected lower NOI from our MAP joint venture. Our G&A expense for the third quarter will decrease from $8.4 million in the second quarter to $7 million. The incremental decrease is due to expected timing of expenses and lower stock compensation expense recognized during…

Great, Tom. Thank you very much. With that, we're delighted to open the floor for questions. As we always do, we ask that in interest of time, you limit yourself to one question and a follow-up. Chris?

[Operator Instructions] And our first question comes from the line of Manny Korchman with Citi. Your line is now open.

Just thinking about the conversation on equity that you had. Can you just remind us, given that this sort of positive trends in both Austin and Philly, how you think about selling off JVs in the stabilized existing portfolio rolling then into the higher yield new development projects rather than giving away sort of the higher yields you're able to get on with developments?

Sure, Manny. Tom and I will tag team that. I mean, look, we have a number of assets in the market for sale now. Not really any large assets, but deals ranging in the $20 million to $40 million range, where we think that that will be able to provide some additional liquidity to the Company as we move forward over the next couple years. And then certainly as we're looking at our - at developing our 2020 plan, we're very much focused on looking at what assets we could sell or joint venture existing assets and the timing of those to meet our development spend targets as we're looking out over the next couple years. Certainly, from the Company's perspective, we recognize that creating new assets at 8% to 9% yield threshold, where - when those - once those new assets come online, their net operating income equals cash flow for a period of time because of the upfront capital investment in tenanting the - bringing the original tenants in the building. We're certainly very conscious of doing everything we can to make sure that we look at all other potential sources of capital, whether it's a sale or a JV, to ensure that we retain significant ownership, if not complete ownership, of the vast majority of our development projects. The one exception we have talked about is Schuylkill Yards, where those projects are long tenured and very large in scale. And as I mentioned in my comments, we are currently evaluating several joint venture financing proposals. And what I can share with you is that those proposals all incorporate significant developer promote structures that will enable us to maintain a significant economic stake. Obviously, subject to performance in those ventures that when we take a look at that - the size of those developments through the lens of current capital market conditions, primarily our stock price, we're very cognizant of where we can generate the highest return on each capital dollar we deploy. I don't know if that answers your question on point or not.

And earlier in your remarks, you'd commented on your 2020 projection for Philly CBD. You said you'd give us the rest at the next earnings call, but any other markets that we should think about being either outsized, positive or negative growers next year?

Manny, good morning. This is George. I mean, I think the two - Jerry gave some information on Philadelphia. We're seeing the same - similar dynamic in Austin. Remember the assets there that we bought out of the DRA venture become same store assets in 2020 and we'll provide additional width to that metric next year.

And our next question comes from the line of James Feldman with Bank of America Merrill Lynch. Your line is now open.

I was hoping you could talk more about just the leasing pipeline and tenant interest for both Broadmoor and Schuylkill Yards.

Sure, Jamie. Happy to. Pipeline for both projects, as I mentioned, is very healthy. For Schuylkill Yards, it ranges from tenancies in the 25,000 square foot range up to over 300,000. It's a very good mix of both in and out of market companies. I also mentioned that we're seeing a fairly significant upswing in the demand for life science tenants, so seen that pipeline continue to grow and we think that there is some additional activity coming online in the next couple quarters. Down at Broadmoor, where we have commenced marketing efforts on the projected first start of the office building of about 300,000 square feet, the pipeline there is - consists of a couple of existing in-market tenants with large expansion requirements. Couple of those requirements are looking at the Broadmoor development from other submarkets in Austin. So, we remain very encouraged, even though it's early in terms of the depth of demand there. We do think that the - a differentiating factor for us at Broadmoor is obviously drafting off the amenity base that's in place at the domain, but also that the prospect of expanding the rail line certainly seems to be resonating across a broader pool of target audience members in Austin. I mean, some of the recent statistics came out of Austin did reinforce Austin as one of the most congested cities in the country in terms of traffic. So certainly, as we look down the road, the optionality of providing mass transit access to that section of the market we think will start to get broader appeal as our marketing efforts continue to accelerate.

And then how do you think about what percent you want pre-leased before you would start either one of those projects?

Well, I think in terms of the office building at Broadmoor, we're targeting kind of between 35% and 50% pre-lease. But again, depending upon where demand goes in the Schuylkill Yards development, we're targeting, again, in that 35% to 50% range for the east tower which is primarily office.

And then can you give an update on the Commerce Square spaces and just how leasing progress is going there?

Okay. George...

Yes. Jamie this is George again. Several inquiries, probably two dozen tenants have inquired about it. We've had probably 15 tours through the space. We've issued a couple of proposals ranging from 15,000 square feet, which is a full floor on that upper bank. Remember, it's six storeys in the upper bank each floor being 15,000 square feet. Largest proposal we’ve issued thus far was about 45,000 square feet. So early stages, Macquarie gives the space back next July. I think when we kind of look at where we are on 1676 and the fact that we’re now close to LOI about three months before the move out, we kind of see a similar pattern, when we look back at how that pipeline started down in Tysons, we're seeing similar production timeline appear in Philadelphia. The Reliance space that’s 1231 of 21 and that obviously is just a little bit further optimal not seen as much activity on that space just yet.

And our next question comes from the line of Craig Mailman with KeyBanc Capital Markets. Your line is now open.

Just want to circle back, you guys are going to have north of $200 million outline by the end of the year. You guys in past years you were pretty good about keeping that cut fully available and I know coming with the equity prices a little bit hard in these days but with that in mind, can you just give some sense of maybe expected timing on some JVs to kind of alleviate that and give yourselves a little liquidity. I know you guys want to balance kind of leverage in dilution?

Yes, will very much lengthy and I think we’ll be successful in accomplishing both of those goals. I guess, Craig, short term as I mentioned we have a couple of smaller assets that we view as slow growth and large capital consumers in the marketplace now and I think we are getting some pretty good response on that City. And I hope we would be able to actually on some of those over the next couple of quarters. We do have a several joint venture discussions underway on assets, primarily based in the Philadelphia region, which again we’ll see how that all works its way through over the next several months. But as we’re looking, more importantly I think as we are looking forward to 2020 and 2021, we’re taking a look at the bulk of our development pipeline which we should all recall, most of those projects, Schuylkill Yards excluded are in the you know, $40 million to $75 million range in terms of total capital cost. Those projects will come online over seven to nine quarters. So, their impact per quarter will be fairly small given the balance sheet our size. So our investment team and the development folks are working very closer together to sink up the source and use of both development spend and asset sales in JVs to ensure that those timing of those asset sales dovetails with the expenditure of funds, so we do have as at the time alluded to you earlier keep our debt to EBITDA within our target range.

That’s helpful. I guess, I was just trying to get at you know, you’ve been talking about joint ventures for a couple of quarters. I mean, it’s just like a late 2020 for a significant one to be signed or could it be earlier than that?

Yes, it could be earlier, again we haven’t rolled that 2020 guidance and we are still looking forward to a couple of things happening in 2019 but I think the governing principles which you touched on are maintaining earnings momentum for us and managing our balance sheet levers. So, as we’re getting busy building on the timing of some of these development starts, I think that will drive the pace at which will be able to recoup liquidity from either outlet sales or joint ventures.

And then there’s one quick one for Tom, can you reconcile, so you guys are kind of ahead on cash same-store and I know that you are going to get the drag in the back half of the year, kind of behind on GAAP, how are those two things kind of reconcile, are they go in the different ways? And how do you pick up the --GAAP I guess, what’s the drag on the back half of the year?

Yes. I think, well, the GAAP is going to be - so I guess couple of things. I think on the GAAP side, Craig, one of the things that’s happening is in the cash side and so we have had some - we expect that there’s probably just three rent funding office. So, we do see cash rents stalling up A, by their steps but B, there’s some role, some leases there having a free rent burn off. Obviously on the GAAP side, we’ve already factored those into our GAAP numbers. So, we’re just - what lets me to take up more on the leasing side and we don’t see that. We see more leasing but not affecting the back half of the year significantly enough to affect same-store. So, I think it’s really the cash rents are moving up and the GAAPs have already been put in place. And any leasing we do going forward, the GAAP could have minimal impact this year.

Great. And I guess, you need to pick up 200 basis points on GAAP. I guess one question is, is the full-year kind of the pool the same as kind of what you're reporting on the negative 1% for the year-to-date or they kind of applicable, in terms of how we should look at the progress?

No. Those are the same pool. We may update the quarterly pool but when we get that range that is on a year-to-date basis. So, as we see our lease, as we see the occupancy going left for the balance of the year that will certainly help the GAAP same-store catch up. But the delta is pretty much due to the rents, not being - we are having the GAAP and already hit, its flat as oppose to the right steps on the free rent burning off on the cash side. But that same store, it will increase from the back half of the year as occupancy comes up.

And our next question comes from the line of John Guinee with Stifel. Your line is now open.

Filling little on your land inventory theory. I am looking to page 16. I am looking to your balance sheet. I think your balance sheet shows 89 million of land, your land inventory shows the value of about 129 million, but I think you mentioned that you already spent 80 million on Schuylkill Yards. Is that the right way to look at it 129 million, value 80 million the Schuylkill Yards?

John, the land - we have prepaid ground leases which is the vast majority of the delta because as you when we took down the parcels for East and West tower, we prepaid those ground leases for the full 99 year term. So hopefully that reconciles you pretty closer. We can provide additional detail offline.

And then just talking a little bit about the East and West tower and maybe Broadmoor also what would be your all in development cost per square foot and what kind of growths in that rents do you need to achieve to hit your performers and attract JV equity capital?

Yes. I mean I think we are - for broad numbers we haven’t published the budgets yet. So, I want to make sure the right caveat that were the number so far. But the range per square foot will be between $600 and $650 all in. And we’re targeting range on a triple net basis in the high 40s to mid-50s depending upon the stack and the delta.

That’s Schuylkill Yards.

Yes. That’s correct.

Does Broadmoor the same total numbers or are a little bit less?

Broadmoor is little less. Broadmoor we’re factoring all at the structured pluck gain, the overbuild et cetera we’re in that $450 to $500 a square foot and the rents would be targeting down on the low 30s triple net.

And our next question comes from the line of Steve Sakwa with Evercore ISI. Your line is now open.

I heard an update on just kind of the IBM situation down and I know you have sort of been talking about kind of a large validation and that kind of might affect some of the development to do down there. So, any update there and any more comment you can provide on the residential parcel on that type.

I am sorry, Steve. You cut off with the first part of your question.

Sorry can you hear me?

I can hear you now, yes. I am sorry.

Sorry, the question was around IBM. I know you had talked to them about potential consolidation into new building and that might sort change kind of the way the project ultimately laid out. I was just wondering if there was any update on IBM. And then secondly kind of anymore update on the timing of the residential parcel at Broadmoor?

I have you now. We continue to work with IBM in a very constructive and positive way. They continue to evaluate their long-term options as you know from previous conversations one option is consolidating into new building and other option is kind of renewing in their existing in place inventory in the buildings, we’re in. For our third combination, there is no true final visibility yet other than that the conversations are accelerating and that I think everyone is encouraged with their commitment to the Broadmoor development, but as of right now no definitive news to report. On the residential side, we are planning two different sites one is as we call Block A which would be 300,000 - Block A would be 300,000 square feet of office along with several 100 apartment units that planning is moving forward. And one other separate block which would be about 300 apartment units. We have selected a residential development partner. We have not yet resolved the financial terms of that in terms of whether it will simply a key developer or an equity partner. We’re evaluating that in the context of the entire land - capital landscape of Brandywine. We are projecting the office start and at least one residential start in the first half of 2020.

And then just kind of follow-up just on 405 Colorado just sort of the incremental demand that you're seeing I know you’re about 35% leased today. Sort of what your expectation in terms of the future lease up of that asset and have you expected that to sort of full relative to the completion date?

Yes, well we have a very good pipeline of deals well over a 0.5 million square feet. So, we got good coverage on the remaining square footage. We have very active advanced discussions with several tenants. So, we would certainly expect that project to be substantially fully leased by the time we open up the doors at the end of next year given the demand that we’re seeing now. And our ability to continue to move rents upward from the anchor tenant lease.

And our next question comes from the line of Daniel Ismail with Green Street Advisors. Your line is now open.

There is a few potential - few reports of the couple potential new office development in the Philadelphia CBD. Are any of these competitive with Schuylkill Yards from a tenant demand standpoint?

I think in our market we recognize that anything that would start would be competitive with anything we want to try and do as well. So certainly, there is rumors of a couple of projects starting within the close in suburbs within CBD Philadelphia. There have been a couple of life science towers that have been put forward by both public and private competitors. So, we always anticipate that landscape will be very competitive and that’s why we work so hard and make sure that we present a right design efficiency and location on the economic package to the tenant marketplace.

And appreciate the updated guidance on same-store growth expectations to the market, but can you give an update on where portfolio rents stood relative to market?

I am sorry Daniel I didn’t catch the tail end of that.

Just an update on where current in-place portfolio rents - relative to market rents?

Really almost entirely across the board with the exception of few suburban Pennsylvania markets. We are in-place rents are below market and we’re also below in Northern Virginia, but our Houston probably is on average probably 15 percentage points below market CBD Phil about 6%. And then in our Crescent markets about 4.7%.

And we do have a follow-up question from the line of John Guinee with Stifel. Your line is now open.

Jerry, we had talked earlier about these persistent big move-outs which in the office building business you just can't ignore. And I think KPMG you're going to redevelop International Drive. What other move-outs do you have coming that are going to result in just selling the asset. And if there is anything else, we should be aware of on your top 20 list besides KPMG and Macquarie?

I think the near term one John is we are losing a tenant out of another building in Tysons that’s our Plaza 1900 building. And we do have that in the market for sale now and we would expect to be able to get some good business and pricing on that the next month or so at the closing by the end of this year. We have a couple of smaller buildings down the Pennsylvania suburbs as well that we have not necessarily immediate rollover risk but rollover over the next couple of years where I mean frankly as we’re evaluating where the best places are to deploy capital. We’re coming to conclusion that the best thing to do with those assets is to sell those versus taken the time to re-tenant. Conversely, we have a property in the King of Prussia markets they are called 650 Park which is a 1970s vintage building, split core, narrow footprint, bad window lines all those things that you know are not so well. That we’ve decided to demo that building. We received approvals from the local by township to build a brand-new 100,000 square foot building that will be steady or efficient for a place we’ll be incorporating outdoor space into the building as well the good enmity base and that building. So, there is an example of where we sat there and said instead of selling that building sits on a great piece of ground - with that we could re-densify incur the cost to demo the building. And then move forward with the design development the approval process that we’ve been introducing new project to the market. And finally given the success we had at 933 First Avenue which we completed last year - like two years ago another 100,000 square foot building that we constructed that was fully leased to a tenant at a high yield. And then our 500 North Gulph Road redevelopment we completed last year where we leased that whole building to our CSL Behring. We decided to move forward 406 Park. So, we take anytime we have a big role we take a real hard quantitative and qualitative look at it. Can we generate value here and is the value we can generate work the amount of time that we put into it and have that return fare based what alternative deployment of capital is? We’re fortunate where we had a really strong forward development pipeline with a lot of good potential activity that certainly we’re very bias towards moving dollars from lower cash flow producing assets into higher yielding new construction lower capital going forward cost projects like our development pipeline.

Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Jerry Sweeney, President and CEO for any further remarks.

Great, thank you everyone for joining us for the call. And we look forward to updating you on third quarter results later this year along with introducing our guidance for 2020. Everyone enjoy the rest of the summer, enjoy time with your families. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect and everyone have a great day.