Brandywine Realty Trust (NYSE:BDN) Q1 2024 Earnings Call Transcript April 18, 2024
Brandywine Realty Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Brandywine Realty Trust First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised 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: Kevin, thank you very much. Good morning, everyone, and thank you for participating in our first quarter 2024 earnings call. On today’s call with me are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, Senior Vice President, Chief Accounting Officer; 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 we filed with the SEC.
First and foremost, we thank you for participating and hope that you and yours are well and looking forward to a successful and ever-improving 2024. During our prepared comments, we’ll briefly review first quarter results and the progress in our ’24 business plan. Tom will then briefly review first quarter financial results and frame out the key assumptions driving our 2024 guidance. After that, Dan, George, Tom and I are available for any questions. But prior to addressing the quarter and our ’24 business plan in any detail, we did want to address the key themes that guide our thinking every day. From a business risk management standpoint, our focus is really on three key areas: liquidity, development lease up and portfolio stability. First on liquidity, as we will outline in both my comments and Tom’s, our recent bond issuance cleared the decks on any additional bond maturities through 2027.
As such, we do anticipate maintaining minimal balances on our line of credit over the next several years to ensure continued ample liquidity for the company. On our operating joint ventures, we have several non-recourse mortgages still in negotiations. While those discussions are taking longer than we originally planned, we do anticipate constructive outcomes that will improve both our balance sheet and our revenue stream. Second, on development lease up, we are within several quarters of having our entire development pipeline fully delivered. As I will note later, the pipeline on all projects continues to build with both number of tours and issued proposals increasing during the quarter. Each of these projects are top of their market, attracted to a broad range of customers and we remain confident of hitting our target of return on cost.
We certainly recognize both the earnings drag and the balance sheet impact of carrying $260 million of non-revenue producing capital and continue our aggressive marketing efforts on every project. To the upside, upon stabilization, these projects will generate approximately $54 million of additional GAAP NOI or a 15.5% increase to our existing revenue stream, so they do remain a key growth driver for our company. Finally, looking at portfolio stability, continued strong operating metrics reflect the underlying stability of our core portfolio. While our 80% occupied Austin portfolio will face near-term challenges, fundamental growth dynamics in that market remain and we will be a strong participant in that market’s recovery. Philadelphia, which has one of the lowest vacancy rates among largest cities in the country continues to perform well and our 94% leasing level and occupancy level of 91% reinforce that point.
Looking ahead, we have less than 6% of annual rollover through 2026. Our 2024 revenue plan is running ahead of schedule, our mark-to-market capital ratios and same store numbers all continue to perform at relatively strong levels as they have done over the past couple of years. We fully recognize the challenges facing the commercial real estate space and have taken and will continue to take the steps necessary to ensure strong performance on our ’24 business plan as well as achieving our longer and intermediate term growth objectives. With that overview, the first quarter has gotten the year off to a great start. Results were in line with our ’24 business plan. A few quarterly highlights. We posted first quarter FFO of $0.24 per share in line with consensus.
Our speculative revenue range of $24 million to $25 million is 98% complete at the midpoint. As noted, we did resolve our ’24 bond maturity and as Tom will elaborate, recently we completed a $400 million five-year unsecured bond offering. Proceeds will pay off our outstanding bond due October 2024, repay the small amount outstanding on a line of credit and provide additional forward liquidity. Our combined leasing activity for the quarter totaled almost 500,000 square feet. During the quarter, we executed 359,000 square feet of leases, including 101,000 square feet of new leases within our wholly owned stabilized portfolio. Based on recent efforts, with two of our joint ventures, we have eliminated $61.6 million of debt attribution during the quarter, which contributes towards our goal of eliminating $100 million of venture debt attribution by year end ’24.
And as noted on page 13 of our SIP, our ’24 business plan anticipates having full availability of our line at year end 2024. Consolidated debt is 94% fixed at 6.1% rate. Quarterly rental rate mark-to-market was 16.9% on a GAAP basis and 3.3% on a cash basis. We did end the quarter 87.7% occupied and 89% leased, sequentially down from year end, but very much in line with our business plan expectations. Page 4 of the supplemental highlights the high occupancy of the majority of our portfolio, it does identify seven properties that do comprise over 50% of the company’s vacancy. As noted on that page, these properties affect our occupancy numbers by over 400 basis points. We are implementing plans on each of the projects we outlined on that page, ranging from accelerated leasing initiatives, capital investment programs and conversion and sale opportunities.
The operating portfolio remains in very solid shape. Our forward rollover exposure through ’25 has been further reduced to less than 6% and through 2026 is down to an average of 5.8%. And by renewing one of our largest near-term expiring tenants, we now have no tenant lease expiration greater than 1% of revenues through 2026. So our portfolio quality, service delivery platform and submarket positioning remain key competitive advantages. And similar to recent quarters, the quality curve thesis continues to gain strength as reflected in the overall pick-up in our leasing activity. And we do continue seeing encouraging signs on the leasing front as evidenced by the following metrics. Physical tours increase has been very positive. First quarter physical tours exceeded fourth quarter tours by 20%, also exceeded our trailing four quarters’ average by 48% and also tour activity remains above pre-pandemic levels by over 38%.
On a wholly owned basis during the first quarter, 55% of all new leases were the result of this flight to quality. Tenant expansions continued to outweigh tenant contractions during the quarter. Our executed renewal and expansion progress has enabled us to raise our annual retention target by 600 basis points. So from 51% to 53% as a range to 57% to 59% as a new range. Our total leasing pipeline is up for the fourth consecutive quarter and stands at 4.9 million square feet. Our leasing pipeline is up 400,000 square feet last quarter and stands at 2.4 million square feet on our wholly owned portfolio. On the development projects, our pipeline is up 310,000 square feet from last quarter and stands at 2.5 million square feet. The existing portfolio pipeline also includes approximately 300,000 square feet in advanced stages of lease negotiations.
Also 38% of our operating portfolio new deal pipeline are prospects looking to move up the quality curve. And in terms of pipeline staging, which is clearly very important, proposals outstanding are up 153,000 square feet over last quarter. So that 900,000 square feet of outstanding lease proposals and we have leases and negotiations that are up 59,000 square feet up from the last quarter as well. So very good positive trend lines on the leasing and deal conversion front. Looking at our leverage, our first quarter net debt to EBITDA was up 7.9 times, up from our fourth quarter number, primarily due to an increase in development and redevelopment costs and as we always expected, higher first quarter G&A and lower other income. Our core EBITDA metric ended the quarter at 6.8 times and currently within our targeted range.
Looking quickly at our joint ventures, as I mentioned, we did reduce our investment balance at year end in one joint venture and at year end another joint venture, our basis was reduced to the scheduled first quarter cash distribution. As such, we’ve now eliminated both joint ventures from our operating reporting metrics and will record no further operating results. This also eliminates the corresponding non-recourse debt attribute — of non-recourse debt, lowering our debt attribution by, as I mentioned previously, $61.6 million. And as we noted on page 37 in the SIP, we do have two other operating joint ventures with loan maturities during the first half of ’24. Both of those loans are secured solely by the real estate and are non-recourse with no obligation for our partner or Brandywine to fund any additional money.
That being said, we do believe the ventures present valuable opportunity as the debt and real estate markets recover and as such, along with our partners, we continue to be engaged in productive conversation with each lender. While these discussions are progressing slower than we originally anticipated, we do expect a full resolution within the next quarter. We did, as a side note, receive a three-month extension from our lender on Cira Square and are working with our partners to refinance that property during the extension timeframe. In terms of guidance, as Tom will elaborate further, but as a result of our bond financing occurring three months early and being $50 million above our business plan target, we forecast an additional $0.03 per share of interest expense.
Based on that higher expense, we have it reduce the upper end of our FFO guidance by that $0.03. So our revised FFO guidance is now $0.90 to $0.97 per share, as opposed to our initial FFO range of $0.90 to $1 per share. And based on that — based on that revised range, our $0.60 per share dividend, our FFO and CAD payout ratios were at 63% and 86%, respectively. At the midpoint, our first quarter coverage ratios were better than our 2024 business plan forecast. We do still continue to expect that between $80 million and $100 million of sales during the year. As I mentioned last quarter, we do expect those sales to occur in the fourth quarter with minimal dilution. And during the year, we do plan to have about $200 million to $300 million of sales in the market for price discovery.
We are targeting sales in the Met D.C. and Pennsylvania suburban marketplaces, and we’ll also continue to sell non-core land parcels that we did last year. And looking at our developments, as I noted, our development leasing pipeline is 2.5 million square feet, which is up 14% from last quarter. We also saw an increase in the status of that pipeline. So as of now, we have 122,000 square feet under early lease negotiations, 900,000 square feet of proposals outstanding, and 300,000 square feet undergoing space planning. Tour velocity continues to pick up, the commercial components of One Uptown and 3025 JFK are now delivered, and those activity levels continue to increase. However, given the length of time to complete space plans, obtain permits and construct the space, our ’24 financial plan does not include any spec revenue coming from these two projects.
To accelerate revenue recognition, however, we are building two floors of spec suites in each building that will be completed by mid-year. In looking at the project specifically at 3025 JFK, on the commercial component, we remain 15% leased but with an active pipeline totaling approximately 650,000 square feet. The delivery of the residential units continues, activity levels on the residential front remain good, tours are occurring daily, and we currently have about 43% of the project leased, which is a nice step-up from last quarter. 3151 Market, that building is scheduled for delivery later this year and we have a leasing pipeline that’s up slightly from last quarter with 120,000 square feet in early lease negotiations. Uptown ATX Block A construction is on budget.
We did slide the completion date into Q1 ’24 due to a slight delay in some perimeter infrastructure work that needed to be done and affected building accessibility. Our leasing pipeline is approximately 700,000 square feet., which includes a mix of prospects ranging from 5,000 square feet to 300,000 square feet. We did commence the floor of spec suites and have a second floor under advanced stages of design. The Multi-Family component of that project of 341 units will begin phasing in during the third quarter of ’24 and we do anticipate the residential component will be about 50% pre-leased by year end. Our next phase of B.Labs expansion at Cira Center is underway and nearing completion. And we are in the final stages of lease negotiation with a single tenant for the entire eighth floor.
Tom will now provide an overview of financial results.
Tom Wirth: Thank you, Jerry, and good morning. Our first quarter net loss totaled $16.7 million or $0.10 per share and first quarter FFO totaled $41.2 million or $0.24 per diluted share. Our FFO results met consensus and we have some general observations regarding the first quarter of ’24 highlighting two variances compared to our fourth quarter guidance. Contributions from our joint ventures was $1.2 million above our re-forecast, primarily due to a onetime pickup at one of our joint venture projects. Our G&A totaled $11.1 million — $1.1 million above our re-forecast, primarily due to higher compensation expense recognition. This quarterly variance continues to be a timing variance and we anticipate the full year number to be relatively consistent with guidance.
Our first quarter debt service and interest coverage ratios were 2.5 and net debt to GAV was 44.1. Our first quarter annualized core net debt to EBITDA was 6.9 and our annualized combined net debt was 7.9. Also, it was just above our range of 7.5 to 7.8. Portfolio and joint venture changes. While we made no changes to our core portfolio this quarter, we have removed two of our joint ventures from our reporting metrics to reflect recent accounting treatment. The accounting treatment for those two ventures was based on the following considerations as of 12/31, we wrote off our existing investment balance. Because of the write-off, we will not recognize any future income or loss from those joint ventures and that debt is non-recourse. For financing activities as Jerry highlighted earlier, we completed a $400 million bond offering that closed on April 12 and the — and with this issuance we were able to eliminate a material near-term maturity risk with no subsequent bond maturities until November 2027, improved liquidity by increasing the bond issuance to $400 million from our anticipated $350 million, enforcing our goal of remaining an unsecured borrower and the higher proceeds helped support our objective to have our outstanding line of balance close to zero.
We maintain a high percentage of our wholly owned portfolio to be fixed. And after this issuance, we have 96% of our debt fixed at 6.1% with a weighted average maturity of 4.6 years. We’re in the process of tendering for our 2024 bonds and we’ll know those results this coming Friday. The balance of the bonds that are not tendered will then be redeemed in the next five to six weeks. While the bond pricing was in line with our 2024 business plan, we increased the — we increased– this will increase interest expense by about $5 million or $0.03 per share, primarily to account for the timing of the new bond issuance and the increase of the interest rate curve for our floating rate debt. As such, we lowered the upper end of our FFO guidance by $0.03.
With the bond transaction complete, at this point, we are not pursuing a secured financing transaction. Regarding our 2024 joint venture debt maturities, as Jerry mentioned, we’re working with our progress on our partners on the 2024 maturities to potentially extend the current dates with our existing lenders. We commenced marketing efforts with other lenders and have put certain properties on the market for sale to lower JV leverage. We did extend our maturing Cira Square mortgage 90 days through July 1st. Looking more closely at the second quarter of 2024, we had the following general assumptions. A portfolio operating company, our portfolio level operating income will total approximately $74 million and be roughly in line with our first quarter results.
Our FFO contribution from our unconsolidated joint ventures will total a negative $2 million in the second quarter. The sequential reduction is due to the onetime income pickup in the first quarter and commencing late in the quarter, our ATX residential operations. G&A for the second quarter will decrease to $9.5 million. The sequential improvement is consistent with our prior years and is primarily due to the timing of deferred compensation expense recognition. Total interest expense will approximate $33 million, capitalized interest will be $3 million. Termination fees and other income will total roughly $2 million. Quarterly NOI from our net management leasing and development fees will be roughly $3 million. And we do expect interest and investment income will total approximately $1.2 million.
That increase coming from the excess cash we will hold until the ’24 bonds are paid. On tender we generate — we believe we’ll generate a one-time net gain totaling roughly $802million, buying the bonds back at something less than par. Land sales gains tax provision will be not material and our share count will approximate $176 million diluted shares. Our capital plan is fairly straightforward and totals $580 million and our CAD range remains at $90 million to $95 million. For our capital plan, the primary uses are going to be $70 million of development and redevelopment costs, $80 million of common dividends, $35 million of revenue maintaining, $30 million of revenue creating CapEx, $25 million of contributions to our joint ventures and the $340 million unsecured bond redemption.
Primary sources for those will be $105 million of cash flow after interest, $391 million net secured loan proceeds from our bond offering, land sales at the midpoint of $90 million and $25 million of construction loan proceeds related to 155 King of Prussia Road. Based on the capital plan outlined, cash on hand should increase roughly $31 million and our line of credit is expected in the year undrawn, leaving full availability. We also project that our net debt to EBITDA will fall within the range of 7.5 to 7.8, with an increase primarily due to incremental capital spend on development projects with minimal project income by year end. Our net debt to GAV will approximate 45%. In addition to our core net debt, our metric of net debt to EBITDA, our core net debt range is 6.5 to 6.8 for the year and excludes primarily our joint ventures as well as all of our active development projects that will be completed shortly.
We believe the 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 development projects reach stabilization, and we continue to reduce exposure to our current joint ventures. We anticipate our fixed charge and interest coverage ratios will approximately 2.2, which represents a decrease from the first quarter, primarily due to the higher forecasted interest expense from our recent unsecured bond issuance, projected capital spend, and the stabilization of our joint ventures. I now turn the call back over to Jerry.
Jerry Sweeney: Great. Tom, thank you very much. So I guess the key takeaways, portfolio remains in solid shape, very minimal annual rollover exposure through ’26, I think presents a very solid foundation. We anticipate having strong mark-to-markets, continue to manage our capital spend effectively, and we do anticipate accelerating leasing velocity in both our development and our operating portfolio. So we’re executing a baseline business plan that continues to improve liquidity as evidenced by our actions in the past 30 days, keeps our portfolio — operating portfolio in a very solid footing. Recognizing the challenge in leasing space, we have a great team of people both on the leasing the property management front that are in touch with our customers every day and the pipeline continues to build and a clear focus on leasing up our development projects to generate forward earnings growth.
So as usual and where we started and that we wish you and your families well. And with that, we’re delighted to open up the floor for questions. We ask that in the interest of time, you limit yourself to one question and a follow-up. So Kevin, we’re prepared to answer questions at this point.
Operator: [Operator Instructions] Our first question comes from Steve Sakwa with Evercore ISI. Your line is open.
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