Ladies and gentlemen, thank you for standing by, and welcome to the Brandywine Realty Trust Fourth Quarter 2019 Earnings Call. At this time, all participants lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Jerry Sweeney, President and CEO. Sir, you may begin.

Krystal, thank you, and good morning, everyone, and thank you for participating in our fourth 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 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. So after a very brief review of our 2019 results, I’ll provide an update on the status report of our 2020 business plan, Tom, then will provide an update of – on our financial results for the year and a look ahead to the balance of 2020. And then after that, all four of us are certainly available for any questions. We closed 2019 on a very strong note. We exceeded our business plan metrics on cash and GAAP mark-to-market, tenant retention and achieved many of our other targets, including ending the year at 95.5% leased. We achieved our speculative revenue target, which you may recall, we increased twice during the course of the year. We did come up a bit short on our occupancy target, primarily due to several tenants not having completed their tenant-directed fit-out and a minor bankruptcy. Our fourth quarter and full-year FFO was $0.38 and $1.43 per share, respectively, and both were at the upper-end of our guidance ranges. Fourth quarter operating performance…

Thank you, Jerry. Our fourth quarter net income totaled $16.7 million, or 0.09 per diluted share and FFO totaled $67 million, or $0.38 per diluted share, which were at the upper-end of our guidance estimates. Some general observations regarding the fourth quarter results. Operating results were generally in line with our third quarter guidance. Some – one highlight is our operating expenses did benefit from lower tenant reserves, while our G&A was negatively impacted by some one-time transactional and professional costs. And other income was below our forecast also for the fourth quarter due to some timing of anticipated transactions. Our fourth quarter same-store GAAP NOI growth was negatively impacted by some tenants that had some substantial completion delays and tenant leasing slides, all of which will commence in the first quarter of 2020. Our fourth quarter fixed charge and interest rate coverage ratios were 3.7% and 4.1%, respectively. Both metrics improved as compared to the fourth quarter of 2018 and were better than our forecasted results. Our fourth quarter annualized net debt-to-EBITDA decreased to 6.1 times and at the lower-end of our 6.0 times to 6.3 times guidance. The ratio benefited from improved operating income and higher-than-expected year-end cash balances. The increase in cash was primarily due to the delay of our acquisition of a land parcel in Radnor, Pennsylvania, which we anticipate will close during this quarter and sales proceeds from the joint venture interest in Charlottesville, Virginia. Looking forward to the first quarter of 2020, we have the following general assumptions. Portfolio operating income will total approximately $84 million and will be sequentially lower by $1 million, primarily due to increased operating expenses. FFO contributions from our unconsolidated joint ventures will total about $2.5 million for the first quarter, which is down about $400 million from the…

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

Thank you. [Operator Instructions] And our first question comes from James Feldman from Bank of America. Your line is open.

Great. Thank you and good morning.

Good morning.

I just wanted to start with just kind of the financing side. So two questions. One is, can you just talk more about the potential JV partners or just kind of what you’re lining up in terms of magnitude and size and maybe even your fees for some of these larger developments? And then secondly, I know you didn’t include any sales and guidance, but it sounds like you could be doing sales if you start some of these developments. So maybe if you could talk about the earnings impact on that, or is that not going to be meaningful?

Yes. Jamie, thanks for the question. On the joint venture side, that – we – the one that we’re in very advanced discussion was related to our projects at Schuylkill Yards. And frankly, they’re very consistent with what we have indicated before. The objective would be for Brandywine to remain a 35% partner in those transactions, the equity source would wind up providing 60% of the equity. We will line up construction and mini-perm debt financing through our banking syndicate. There would be market-rate development fees and their leasing fees, obviously, property management fees for Brandywine. And we do expect that the structures we’re contemplating right now will be reflected in the final documentation. So we feel very good about how those discussions are going. As we focus on the Broadmoor development, we certainly have a wide range of institutions, who we are talking to about a variety of financial structures at Broadmoor, ranging from participating in a couple of the earlier phases to providing infrastructure funding. All of those, we think will progress over the next couple of quarters. And again, if you think about the comments, Tom and I made, we’re really gearing up starting the first vertical construction and site work at Broadmoor very early in the second-half of 2020. So our goal would be to finalize those venture structures sometime by mid-second quarter of this year and have a lot more clarity we can share with our investor base. I think we – as we’ve been indicating, we do think that one of the sources of capital for these production level assets are going to be some of the smaller asset sales. And we do believe in our plan that the timing of those sales will have negligible impact on 2020 guidance. And that’s been kind of the model we set forth in the last several years. We would expect that to continue as well.

Great. Thank you. I guess, just a follow up. So it sounds like Schuylkill Yards is probably one partner, and am I right, Broadmoor maybe multiple partners depending on the building? Is that the right way to think about it?

Well, I think so. But please give us latitude as some of these discussions involve. I think our focus in at Schuylkill Yards is quite candidly on the first two buildings. And I think we’re talking to a couple of groups, but really one primary partner on both of those buildings. Where at Broadmoor, I think, Jamie, we’re still in the process of vetting through a number of expressions of interest in advanced discussions on how that will ultimately lay out, whether it’s above an institutional partner that helps us on the residential side or the mixed-use side or some of the retail and infrastructure developments.

Okay. All right. Thank you.

You’re welcome.

Thank you. Our next question comes from Craig Mailman from KeyBanc Capital Markets. Your line is open.

Hey, guys.

Good morning.

I wanted to circle back on the occupancy piece. Back in October, you guys seemed pretty confident, you’re going to hit the target for the year. And I know, Jerry, you mentioned kind of construction delays and the bankruptcy. Could you just elaborate a little bit more about kind of – some specifics about what really – it seemed like a big miss relative to your confidence back in October?

Yes. I’m not sure we categorized a big miss by any stretch. But, George, let me defer it to you and kind of walk through some of the detail there.

Yes. We had a – we really kind of had three moving pieces, Craig, the smallest of which was a 20,000 square foot bankruptcy in Austin, that kind of came out of nowhere. So we ended up getting that space back in early December. And we feel good about the space that we got back and have it incorporated into our plan to relet in 2020. The other two components really where tenants not substantially completing their tenant fit work. These are conditions, where the tenants building out the space and Brandywine is not. And so, our policies to date have been that, if that space isn’t substantially complete and we’re not recognizing income on it, we don’t reflect it as occupied and that was about 50 basis points when it was all said and done. And then the third piece were just some leasing slides themselves that we felt confident back on the October call that we were going to get them papered. They were quick move-ins, because the space was, in fact, ready for tenancy and those occupancies slid into January and they have subsequently to year-end occupied. So those were really the three pieces.

Yes. Let me just add on to George’s observation on the tenant-directed fit-out. These are leases that have commenced. They’re executed. Tenants are there. The tenant is behind schedule on completing their tenant fit-up and based upon the revenue recognition rules, because that space is not “ready” for its intended use. We cannot recognize revenue. So we had this a number of – we have a number of quarters, where from our perspective, the lease is signed, the tenant is either in free rent period, or in some cases, actually paying us cash rent. But they’ve yet to complete their fit-out, and therefore, we can’t recognize revenue. So, as George touched on that, that’s an ongoing struggle we have, because to the extent that a tenant wants to do their own fit-out, we certainly are happy to have them do that subject to trigger dates on the lease commencement, so that we know that any of their delay, it doesn’t affect the commencement date of lease.

Got it.

The vast majority of times tenants complete their space well ahead of schedule they’re in. There’s always cases, where there’s – where that does not occur.

And what industry was the bankrupt tenant in Austin?

They were a small mortgage lender.

And then just on the Macquarie and Reliance spaces, any update there on progress in backfilling?

Yes. Craig, it’s George, again. We’re seeing most of the activity on the Macquarie spaces, obviously, because they come back to us first, but seeing activity on both. We’ve got proposals out on about 40% of that space already and we’ve got a handful of inquiries and tours, not yet at the proposal stage, but we’ve got a pipeline that actually exceeds the 150,000 square feet that we’re getting back from Macquarie. Reliance, again, those are contiguous floors and we have seen a couple of inspections by some larger tenants that have either a 2021 or maybe even a first quarter 2022 occupancy event and they’re just kind of out seeing what the opportunities are. And, again, we don’t get that space back from Reliance until 12/31 of 2020.

But in addition to that, Craig, we also – the team has done a great job and kind of forward planning exactly what selective demo we want to do. We’ve got programs in place to upgrade some of the common areas. So the expectation would be similar to what we did frankly at 1676. As soon as that tenant vacates, we’ll be in there, the plan will be, with them locked and loaded, we will have all the permits in place to go and immediately commence work. So we can accelerate delivery of some to that space. And certainly, as you know from previous discussions, the bifurcation of that space between smaller floor plates, upper tower and baseline really gives us a range of options to present to the tenant market. So even the larger floor plates, we’re – we’ll be pre-building some spaces, including putting some furniture in order to try and accelerate the potential occupancy dates of those floors.

Gotcha. And just one quick follow-up on Jamie’s question on the financing piece. It sounds like you guys are still trying to figure out the optimal structure. But how much is kind of pricing playing into the discussions at this point? Are you guys close to your partners on expectations, or is that kind of more of a sticking point on – than maybe just the correct structure?

No, no, I wouldn’t say their pricing is an issue at all.

Okay. Thank you.

You’re welcome.

Thank you. Our next question comes from Jason Green from Evercore. Your line is open.

Good morning. I appreciate the color on the fiscal year 2020 move-outs. I guess, if you’re able as we look out over 2021 and 2022, we know Reliance is leaving space greater than 100,000 square feet. I thought it was in 2021, but you guys just mentioned at the end of 2020. But I guess, outside of Reliance, are there any other kind of 100,000 to 150,000 or greater square foot tenants that we should be thinking about and modeling in 2021 and 2022 that are likely to move out?

Well, at this point, we think we’re going to have a major roll out down in Northern Virginia with Northrop Grumman. And I think George will work on a couple of other ones.

No, most of all is set, but we do have a few more variables.

Yes, large roll over with IBM in Austin that we’re confident of Radnor there. In Philadelphia, we’ve got a large law firm that we’re already in active discussions with about Radnor and then Reliance was the other. I mean, those – that’s really the inventory of kind of the six-figure square footage type tenants

Okay. And then just curious, this might be a little bit of overanalyzing on our part. But looking at the Schuylkill Yards page in the supplemental, we noted that it no longer refers to opportunity zones. Is there any reason for that? And then just more broadly with some of the news going on about opportunity zones, if there’s kind of any opinion that you guys can share about what’s going on?

It should say opportunity zone.

Yes, if we change the bullet…

I know, actually, hey, Jason, it’s the fourth bullet down under overview.

Okay.

Yes. So it’s still there. Yes, we do have a federal opportunity zone Look, I will tell you a number of the equity partners that we initially talked to on Schuylkill Yards, we’re very interested in federal opportunities. And I think some of those discussions took sometime, because there was some debate in Washington on what the actual final regulations would be. And I think it was – there was some points of debate in the tax and investment community of what those requirements would be. I think that dust has settled. And certainly, we continue to have surprisingly good reaction from investors, who are focused on opportunities to invest in very high-quality real estate. And I think one of the things that we have learned to these opportunity zone discussions is that where the federal regulation was – is directed towards getting money into areas that have been lacking in investments. Our location next to the train station and universities, I think has given a lot of the investors we have spoken to, a lot of comfort that the investment thesis has been proven because of the work we’ve done at Cira Center with Spark Therapeutics; the main post office building, FMC Tower; et cetera. So I think we’ve resonated well from both the federal opportunity zone standpoint, but also and probably more importantly, that the execution level and the real estate has gone very well.

Got it. Thank you very much.

You’re welcome.

Thank you. Our next question comes from Manny Korchman from Citi. Your line is open. And we’re going to take our next question from Omotayo Okusanya from Mizuho. Your line is open.

Yes, good morning, everyone.

Good morning.

First – good morning, Jerry. First question, Discovery Labs, the large development that’s happening in King of Prussia for life sciences. I mean, do you look at that and think that’s going to be competitive against what you’re doing is Schuylkill Yards, or is it kind of because it’s so far away or 30 minutes away, you don’t really see it as competing product?

Yes, excellent question. And I guess and we certainly attract that development, and I think two reactions. One is, I think, it’s wonderful, because I think what it really speaks to is the real accelerated emergence of a growing life science sector here in Philadelphia, driven a lot by the cell therapy technologies, the tremendous research being done by the Wistar Institute, the pharma companies, organizations like obviously Spark Therapeutics and now Roche Children’s Hospital. So from our perspective, it’s been a really strong independent validation of that this market really is primed for accelerated life science development. So that’s very, very good news for us. Relative to competition, I think we’ve always operated on the standpoint that, we compete against everybody. And we’ll be challenged to present Schuylkill Yards as a preferred location and efficiency module compared to any other location within the regional marketplace. But we’re – but fundamentally, even recognizing that competitive threat or potential, I think, we’re just really excited about the fundamental demand drivers that we’re seeing in this market segment. So what – we talked about the conversion of 3000 Market. That’s really been totally focused and driven by the fact that our leasing team is seeing a tremendous number of emerging life science companies with good financial sponsorship and great research capacity, who kind of have a short timeline to actually start to plant a flag. And we thought that 3000 Market could provide an excellent opportunity to capture some of that near-term demand. And as those companies implement their research capacity and start going through trials and raise more capital, that we could capture their growth at Schuylkill Yards. So…

And then just another quick one, if you don’t mind. The Northrop Grumman lease, when does that expire?

That expires in January?

January of 21.

Yes. And on that building, we have plans underway to do one of two things, either significantly renovated and/or sell our joint venture. So we’re pretty far along in the thought process there.

Okay.

Thank you. Our next question comes from Daniel Ismail from Green Street Advisors. Your line is open.

Great. Good morning.

Good morning.

With respect to the leasing pipeline in Philadelphia, are these mostly tenants in the markets, or are you noticing any new outtowners taking a look at Philadelphia as a destination?

Yes. I think when we look at the pipeline, it’s probably broken down by about 50% outside the city, 50% inside the city. But what’s inside the city, they’re all growth. So it’s net growth, not just share shuffling. So I think we feel pretty good about the kind of region-wide in Northeast quadrant marketing program. I will tell you a number of the life science, excuse me, companies are really from outside the area. So I think there’s a little bit of this feeling there. And the major office or traditional tenants that we’re tracking down, I think, are pretty evenly split between kind of in and outside of market companies.

Okay. And staying on Philly, we’ve seen tenants to densify into their space this cycle. Do you think your tenants have mostly gone through that phase, or is there still more to go?

I’m sorry, Daniel, your question cut out a little bit on us here.

Oh, sorry. Yes, I was referring to densification and the trend that we’ve seen this cycle has been that tenants have been – have densified, call it, 20% or so into their space. Do you think that trend still has some more legs to go or do you think we’re mostly gone through that trend?

Look, I think it’s going to be an ongoing trend. And I think that’s really where our properties are well-positioned versus our competitive set. I mean, what we’re seeing in – due to the tight labor market, focus on employee culture, talent attraction, the really well-appointed buildings with a full amenity package like we have tend to rise to the top of the prospect list. So we do think that, that evaluation of efficiency of space design will be – is a secular trend in our business. We also think that, maybe to your core question, is that I think the original densification targets that a lot of companies sets, or have been reevaluated upward, where we take the initial push was to densify down to 100 to 225 extra square feet per employee. We’re not seeing that at all. We’re basically seeing kind of almost a reversion to that 150 to 200 square feet per range, because what we’re really seeing is, where there may be a higher percentage of open floor plans, or kind of interior core offices, you’re seeing wire circulation areas, you’re seeing a much more focus on space collaboration within 10 spaces creation a more common area gathering points. So we look at some of the major tenancies that we’ve done recently and filling even on our development projects, we’re seeing a pretty stable outlook on how many square feet per employee tenants will have. In fact, in a number of discussions, we’re really driving a little bit away from square – the rental rate per square foot and beginning to focus very much on the occupancy cost per employee. So it tends to be a much significant positive selling point for us that we’re able to present much more efficient floor plates, column-free 10-foot finished ceilings, et cetera, that are delivering a much higher value proposition to our tenant base.

That’s helpful. Thanks.

Thank you. Our next question comes from Manny Korchman from Citi. Your line is open.

I think that’s better. Sorry about that. Just as we think about Schuylkill and Broadmoor and the large office components you’re building there, are you completely dual tracking the process there, talking to tenants, trying to find anchor tenants getting ready to go live with those buildings, or do you need to find a capital source first to make those projects sort of live?

Manny, very much a dual tracking. In fact, I mean marketing is usually at tip of the sphere. So we – that’s why we amplified during the commentary about – I mean, 2019 for us on the development front was really getting through all the approvals. I mean, there are a lot of them as you all well know, getting completely through the design development process down the construction documents for most of the projects, getting final pricing done, because that really particularly had time with escalating construction costs, you need to kind of know what your platform is. And we’ve got that done. While we’re doing that, we’re still marketing, but you want to get to the point where we’ve got quantitative certainty of what you – what the cost of delivery will be. So what it was on projects like Garza or Four Points or the suburban properties in Philadelphia or Schuylkill Yards or Broadmoor, mission critical was getting everything framed out. We’ve done that. The marketing process on every one of those projects, i.e., the floor production assets in the Schuylkill Yards and Broadmoor. All those marketing efforts have been launched. We’ve got big prospects going, discussions are going on. As I mentioned, we’ve got a prospect pipeline on the development – on the production assets of almost 1.8 million square feet. So our perspective [indiscernible] has been the more we can demonstrate market demand drivers at our targeted rental rate levels, the more constructive those financing discussions are. We’d always rather be in a position where we’re – we’ve mitigated some of the lease-uppers by the pipeline, because that facilitates a much more constructive discussion with the financing sources.

If we think about that same-sort of concept then, if you get closer, if you land a pre-lease, are you still on the track to do a JV on the development project, or would you then consider maybe selling your JV in one of your stabilized assets instead?

Well, I think, the immediate near-term is we’re looking at over the next several months, I think, given the – given that dynamic and focusing on Schuylkill Yards, I think, the bias would still be to do a joint venture, at least, on those first two buildings.

Thanks, guys.

Thank you.

Thank you. And we do have a follow-up question from James Feldman from Bank of America. Your line is open.

Great, thank you. I just wanted to follow-up on your comments on Northrop. So is – can you just tell about – like talk about the building, I think, looking at your top tenants list, it’s like a number eight tenant. Is that – are they moving out of that entire space? I just think we want more color on exactly the story there.

Yes. They do plan on vacating the building, which we think they’ve been there about 15 years. It’s a great project in our Dallas Corner development, and we fully expect to have a very successful renovation. We’re successful still there. So we’re going to take one of those two paths as we look forward to 2021.

When do they expire, exactly?

At the end of the year.

January of 21.

Yes, January of 21.

January of 21. Okay. And it’s 250,000 square feet?

Right. Correct.

And do you have – like are you in any talks, early talks with anyone else to backfill it, or do you think that sale is more likely is how are you guys thinking about it?

Well, I think there’s – I mean, there’s certainly been a tightening of large blocks of space in that market. A team has identified a couple of replacement tenants. We think that there’s a very good mark-to-market there. And I think, Jamie, we would be in a position by kind of the next quarter call to really frame out with the final plan as we have – we’ve had renovation plans pulled together and price for the building, which are very exciting. But we also want to evaluate what the best financial outcome for Brandywine as well.

Okay. What are they paying in rent, or like, where do you think their mark-to-market is?

Their mark-to-market is north of 20%.

Okay. All right. And then it looks like as you look at your kind of speculative development, or say speculative leasing pipeline, it looks like DC is kind of lagging the other markets. Can you just talk about what’s in that number? And what you – is it like a couple of large leases that you need to hit and maybe that’s why is it chunkier, or is DC just kind of slower than what you did in some of the other markets? I know it’s slower, but slower than you thought?

No, I think, as Jerry outlined, there’s still 125,000 square feet at 1676 in that leasing plan left to achieve. And then we’ve got some additional leasing in our suburban Maryland portfolio and the remaining – and the other buildings that we have in Tysons at 8260 Greensboro and 8521 Leesburg Pike. So…

So I guess, is there anything that’s kind of falling out of bed since you made your first outlook, or everything is kind of going as expected?

No, I think everything is kind of going as expected, because 1676 was program for the third and fourth quarter. The pipeline that we have is still tracking towards the – that timeline. And the other spaces and the other buildings, we’re really kind of 10,000 to 15,000 square foot tenancies that, again, I think just, start to lay in as the year progresses.

Okay. And then what are your big picture thoughts on supply in Austin? I know there’s a lot of demand, but are you – there’s certain pockets you guys think are starting to get a little risky?

Well, certainly – we’re feeling very – continue to feel incredibly bullish on the Southwest, primarily due to some of the barriers to new construction. So I think we’re seeing tremendous pipeline of deals in our Garza development down to Southwest. Look, I mean, there’s a lot of square footage under construction in Austin. I think the last numbers I saw where they were at about 60% pre-leased. The demand drivers still there seeing very good. So, our Four Points development kind of up in the Northwest, that’s what we’re really tracking in terms of competitive supply, Jamie. But certainly, we feel good about our position with four or five and feel extremely good about what we can convert down at Garza.

Okay. And then finally, for me kind of big picture on Northern Virginia, I mean we keep hearing about the impact of the JEDI contract and what that will mean for office demand, or maybe there’s just optimism it’ll pick up off this demand. I’m curious what you guys are seeing on the ground? And what – if you think about the next kind of year or so in that market, do you think you’ll see a change in demand or just fundamentals?

Yes. Look, I think from – if you take a look at the Northern Virginia posted 4 million square feet of absorption, one of the best years they’ve had since, I think, 2006. With kind of a pretty strong tech and cybersecurity demand, 71% of the job growth in the Met D.C area kind of floated into Northern Virginia. The – so we’ re actually – we’re seeing rents being pushed on the new development projects, which is great. Yes, that’s one of the things and we take a look at 2340, where, given that large mark-to-market that George indicated. And really not many large blocks of space available, particularly buildings that have the high-level of structured parking that we have at that building. We think that there’s a lot of green shoes that will further drive demand. With the JEDI contract, I mean, between Microsoft and Amazon web search, they are looking for more space in the market. You’ve seen a number of other major tenants kind of focus on the Toll Road Corridor. I think anecdotally, what we’re seeing, Jamie, even with the redevelopment of 1676, there’s a lot of big requirements. For many, we’ve got proposals out. The number of proposals we’ve had are over 100,000 square feet. So I think that marketplace from a demand perspective in terms of velocity of tenants and additional square feet looking for new homes, is a much better landscape than it was last year, how that translates into net effective rent growth in the concession patch, I think, still remains to be seen. But the little window we have in through 1676 is our pro forma rent targets are being met, we’re keeping our capital cost right in line with our projections. And we anticipate being able to drive that to, as I mentioned earlier, a 9% return on cost.

Does this motivate you to get bigger there? I know you just did a big sale there to shrink. But is it like market changed and you made that call?

No, I think, we’re happy with our platform right down there. Now I think we continue to talk to capital sources and other companies about other things to do in that marketplace. But right now, the major focus in that market for us is to execute the Rockpoint joint venture efficiently and profitably, saw the 1676 absorption pace for 2020. And really, as we get that done, take a look and see what we plan on doing for future years.

Okay. All right. Thank you.

Thank you.

Thank you. And I am showing no further questions from our phone lines. And I’d like to turn the conference back over to Jerry Sweeney for any closing remarks.

Great. Well, look, everyone, thank you very much for participating in the call. We look forward to updating you on our 2020 business plan progression in our April first quarter call. Thank you very much.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.