Welcome to the Brandywine Realty Trust Second Quarter 2022 Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session.

Hilda, thank you very much. Good morning, everyone, and thank you for participating in our Second Quarter 2022 Earnings Conference 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 assure 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. Since our last call, our economy has seen record inflation, continued global supply chain disruption, and a dramatic increase in baseline interest rates. These conditions have created significant cost increases and uncertainty in the equity and debt financing market, at least in the near term. Our portfolio stability, evidenced by our low forward rollover, provides protection from operating expense increases on 81% of our leases and positions us as best as possible for this changing environment. Our operating and development plan remains strong and very much on target. While overall return-to-work has been slower than we would like, we are benefiting from a strong tenant focus on quality. We continue to experience higher physical occupancy across our portfolio, with the highest level of density being in our Pennsylvania suburbs and D.C. operations. Tenant interest in high-quality work environments is accelerating. We see that every day in our tour levels, lease negotiations, and deal execution. In fact, 32% of the new deals in our operating portfolio pipeline involve tenants looking to upgrade from lower quality, less amenitized buildings. During the call this morning, Tom and I will review second quarter results, provide an update on our 2022 business plan, and our guidance. After that, Dan, George, Tom, and I are available to answer any questions. During the second quarter, we executed 686,000 square feet of leases, including 423,000 square feet of new leasing activity. We also posted rental rate mark-to-market at 18.4% on a GAAP basis and 7.8% on a cash basis. Our full year mark-to-market range remains at 16% to 18% on a GAAP basis and 8% to 10% on a cash basis. Absorption for the quarter was positive, and tenant retention was 70%. Second-quarter capital costs were in line with our business plan range, core occupancy and leasing targets were also within forecasted ranges, and we ended the quarter at 92.1% leased and 89.6% occupied. It's further worth noting that our Philadelphia CBD, University City, Pennsylvania suburbs, and Austin portfolios, which comprise 93% of our NOI, are combined 93.8% leased and 91.9% occupied. Our spec revenue target remains in the range of $34 million to $36 million, with $33.7 million, or 96% of the midpoint, achieved. This speculative revenue range represents approximately 1.8 million square feet, of which 1.6 million has already been leased—89% done on that metric. The portfolio is stable, and our forward rollover exposure through 2024 averages 7.2%, ranking sixth out of 17 office routes. Further, our annual rollover through 2026 is below 10%, ranking seventh out of 17 office routes. From an FFO standpoint, we posted first quarter results of $0.35 per share, which was $0.01 above consensus estimates. Looking at our 2022 guidance, Tom will articulate in greater detail, but the bottom line is our original 2022 business plan projected interest expense between $70 million and $72 million. We have met that assumption for the first half of the year. However, looking to the second half, due to the rapid increase in short-term rates, our interest expense, including our share of joint ventures, will increase by about $0.03 per share. So while our operating plan remains fully on track, based on the rise in interest rates, we are narrowing and adjusting our FFO range from $137 to $145 per share to $136 to $140 per share. As I mentioned, Tom will provide more detail on that in a few moments. Based on our 2022 leasing activity and development spend, we continue to project our debt-to-EBITDA range will be between 6.6 and 6.9 times. That leverage increase is primarily transitional, coming through debt attribution, particularly on the development side. To amplify that point, our core EBITDA range remains between 6.0 and 6.3 times by limiting our joint venture and active development/redevelopment projects, as we mentioned in the last call. We believe this is a more accurate measure of how we manage our core stabilized portfolio. Looking ahead, despite the ongoing skepticism on forward office demand drivers, our leasing philosophy remains fairly encouraging. During the second quarter, physical tour volume equaled first quarter levels, with overall volume up over 30% from the previous year. Virtual tour volume was up 27% from the first quarter. Our total leasing pipeline is 4.8 million square feet, broken down between 1.4 million square feet on our operating portfolio and 3.4 million square feet on our development project. The 1.4 million square feet leasing pipeline on the existing portfolio is up 100,000 square feet from last quarter, with approximately 130,000 square feet in advanced stages of lease negotiation. As an example of building velocity, out of last quarter's pipeline, we executed 430,000 square feet of leases while adding over 500,000 square feet of new prospects to the current pipeline. Additionally, 32% of our new deal pipeline includes prospects looking to move up the quality curve. We did experience this trend in terms of leases executed during the second quarter, where 67% of the new leasing activity executed replaced the quality of tenant. The leasing pipeline on our development projects stands at 3.4 million square feet and has increased over half a million square feet, or 28%, during the second quarter. Deal conversion rates in the second quarter were up to 38% from 33% last quarter. Another positive sign is that tenants continue to accelerate their decision timeline. This past quarter, the median deal cycle time improved by an additional week and is now within five days of our pre-pandemic levels. From a liquidity standpoint, even with our targeted development spend and absent any other financing or sales sources, we anticipate having $300 million available under our line of credit. Along those lines, during the quarter, we did renew both our $600 million line of credit and our $250 million term loan on very similar terms to those that were previously existing. Our $0.76 per share annual dividend is well covered and offers a very attractive yield in our current stock price, accompanied by a 54% FFO payout ratio. In looking at capital allocation, we made progress on several fronts. We continued to sell non-core land parcels during the quarter. Last quarter, we sold a land parcel in the riverfront district of D.C., generating a $3.4 million gain. We also sold nine core buildings and lands in New Jersey, generating an incremental $800,000 gain. In considering our development opportunity set, our remaining Brandywine net funding obligation on all of our active development projects is approximately $110 million. Our equity requirements on Schuylkill Yards West and Uptown ATX, Block A, are fully funded. We have $24 million to fund on our new store, 3151 Market. The balance of those remaining funding requirements is tied directly to leasing activity. During the quarter, we commenced the redevelopment of 2340 Dulles Corner. That property is 85% leased under an 11-year lease, and we anticipate completing that project by the fourth quarter of 2023. 405 Colorado made progress during the quarter, and we're now 91% leased based on the 22,000 square feet of leases signed during the quarter. Two fund leases are out for final execution that will completely fill the building. We expect to deliver that project at our original anticipated yield. 250 King of Prussia Road, our first life science delivery in the Radnor submarket, is now over 36% leased. The current pipeline totals 237,000 square feet, and we're making significant progress in that building as it approaches final delivery. In looking at our development of Schuylkill Yards and Uptown ATX, Schuylkill Yards West, our life science office residential tower, is on time and on budget for Q3 2023 delivery. This project will deliver a 7% blended yield. As I mentioned earlier, our entire equity commitment is fully funded. Our partners' equity investment is also fully funded, and the first funding of the construction loan recently commenced. You may recall in Schuylkill Yards, we plan to develop 3 million square feet of life science space. This is another step toward realizing that vision. We are excited to announce the start of our 3151 Market Street project, a 440,000 square foot dedicated life science building. The building has an estimated cost of $308 million, will deliver a 7.5% yield, and we are targeting a second quarter 2024 completion. Currently, our leasing pipeline on that project exceeds 400,000 square feet. We have obtained an equity commitment from our existing institutional partners. The Schuylkill Yards and the 3151 structure align with our Schuylkill Yards West project, with Brandywine having a 55% ownership stake, and our partner holding a 45% ownership position. Looking at Uptown ATX, Block A, the first phase of our 66-acre development is underway. Construction is on time and on budget, and we certainly anticipate that this project will generate additional leasing activity as we progress through the development pipeline. In fact, even at this early stage, our leasing pipeline stands at 1.6 million square feet. In addition to those ongoing developments, we have seen an uptick in tenant interest in several of our build-to-suit projects. We are exploring opportunities in both the Pennsylvania and Austin regions. Two key points to highlight in closing our development discussion are our low land basis per SAR and our product diversity. Of the 14.2 million square feet that we can build, only about 25% is office, with the ability to develop between 3 to 4 million square feet of lifestyle space and over 4,000 apartment units. Furthermore, the overlay approvals we have on both of those Master Plan communities give us flexibility to adjust that mix to meet market demand drivers. Thus far, our key takeaways on the development pipeline include very attractive funding basis, low carrying costs, demand driver flexibility, and product diversity. In terms of generating additional liquidity, while our 2022 business plan does not factor in any additional dispositions, we anticipate remaining active in those fronts, especially in selling select non-core land parcels. Despite recent volatility in the debt markets, we believe that we have ongoing opportunities to harvest profits from the sale of several properties. Consequently, we are currently testing the investment market with several assets for sale. While volatility in the debt markets over the past 45 days has slowed that process, we remain confident in our ability to generate additional liquidity over the next several quarters. We also anticipate the sale of select properties out of some of our existing joint ventures over the next four quarters. Dollars generated from these activities will be used to fund our development pipeline, reduce leverage, and redeploy into higher growth opportunities. Tom will now provide an overview of our financial results.

Thank you, Jerry. Our second quarter net income totaled $44.5 million, or $0.03 per diluted share, and FFO totaled $60.5 million, or $0.35 per diluted share and $0.01 above consensus estimates. Regarding our second quarter results, we were above consensus. We had some moving pieces and several variances from the first quarter guidance. On G&A, we were $1.7 million below that forecast, primarily due to the timing of expenses, and we have not changed our range for the full year. Portfolio operating income totaled approximately $69.2 million, slightly below our first quarter guidance of $70 million. Land gains were above forecast by $600,000 due to a higher gain on the sale of our New Jersey portfolio. Our second quarter fixed charge and interest coverage ratios were 3.7 and 4.0, respectively, and sequentially below the first quarter results, but in line with forecasted results. Our first quarter annualized net debt-to-EBITDA was 7.4, above the high end of our range; however, we are not changing that range at this time. Looking at our guidance for the rest of 2022, as Jerry mentioned, we narrowed our guidance ranges for both net income and FFO by $0.04 a share. In addition to narrowing our guidance, we also reduced the midpoint of the guidance by $0.03 per share. The reduction is due to higher interest expense compared to when we issued guidance. The interest rate forecast at that time for the third and fourth quarters were 71 basis points and 92 basis points respectively. Current rates are higher by approximately 175 basis points in the third quarter and 240 basis points in the fourth quarter. Through this, we have anticipated floating rate debt averaging $500 million in the third quarter and $695 million in the fourth quarter, which includes about $148 million of JV floating rate debt in the third quarter and $125 million in the fourth quarter. The increase in floating rate debt in the fourth quarter is primarily due to the $250 million term loan, which is fixed through mid-October 2022 and floating thereafter, partially offset by caps in our joint venture properties. We believe there will be opportunities to mitigate some of the floating rate interest through hedging and potentially asset sales that will lower our line of credit balance. Looking to the third quarter of 2022, we have the following assumptions. Our portfolio operating income is expected to approximate $71 million, which we anticipate will be above the second quarter as we expect net absorption to continue to the end of the year. FFO contribution from our consolidated joint ventures will be $6.5 million for the third quarter. G&A will remain unchanged at roughly $8 million. Total interest expense will increase to $19 million, primarily due to the anticipated higher rates, and capitalized interest is expected to be approximately $2 million. Term fee and other income will be around $2 million. Net management fee and development income will be about $3.5 million. We do anticipate a land gain sale and tax provision that will net around $1.5 million over the land sale. Regarding refinancing activity, as Jerry mentioned, we did recently refinance the $600 million line of credit through June 2026, and our $250 million term loan for June 2027, under terms similar to the current facility. Looking at our capital plan, it is fairly straightforward: for those $200 million, our 2022 CAD payout ratio will continue to be 84% to 95% and likely be at the higher end of that range. The 2022 range is above our historical run rate, primarily due to higher capital costs associated with increased leasing activity in our wholly-owned and joint venture portfolio. Uses of funds for the remainder of the year include $74 million for development and redevelopment projects, $65 million for common dividends, $30 million for revenue maintenance, $20 million for revenue-generating CapEx, and $10 million for net equity contributions to our joint ventures. Primary sources for this include $90 million from cash flow after interest, $81 million from using the line of credit, and $29 million in cash on hand. Based on the outlined capital plan, we expect our line of credit balance to total approximately $300 million at the end of the year, leaving $300 million available. This needs to be adjusted in our SIP, where we have $330 million to be adjusted and reposted. We also project our net debt-to-EBITDA range to fall between 6.6 and 6.9, but the main variable will be timing and scope of our development activities. With regard to liquidity, we have ample capacity through our line of credit. We do expect to invest an additional $96 million in our active development projects after 2022. Our plan is to complete targeted asset sales later this year and into 2023 to lower the line of credit balance. We anticipate our fixed charge ratio to be approximately 3.5, and our interest ratio would be 3.8, a slight decrease from the prior quarter, while our net debt to GAV will remain between 40% and 41%. We believe these ratios are elevated due to our growing development and redevelopment pipeline, but we consider them transitory. Once these developments are stabilized, we project a return to lower levels. To further illustrate how the investment in future development impacts our current leverage metrics, as outlined in our development page, we currently have $397 million invested in development projects that are producing little or no earnings in 2022. That $397 million investment has a 1.4 times increase in leverage at the end of the quarter. We expect these projects to eventually generate $57 million of cash NOI over time and are confident in their estimated yield. Once these active projects stabilize, we forecast leverage to return to the low six range. As mentioned above, we plan to partially offset the current development leverage with targeted sales in 2022 and 2023. While this development activity unfolds, we have included an additional metric of core net debt-to-EBITDA, which was 6.6 at the end of the quarter, excluding our joint ventures and fully-owned development. I'll turn the call back over to Jerry.

Great, Tom. Thank you very much. To wrap up, key takeaways: we're very mindful of the tone on the office market and the impact of return to work in hybrid work schedules. We're working on that battle every day. However, I do think we are seeing some encouraging signs that reflect quality. The real focus among many large and small employers is ensuring they provide the right physical platform to execute their business plans. Our portfolio is in solid shape, with excellent visibility for forward growth. As I mentioned earlier, our average rollover is quite low through 2024, and even through 2026, with strong mark-to-market, manageable capital expenditure, and accelerating leasing velocity. Our forward growth drivers continue to focus on increasing NOI out of our existing portfolio and executing our development pipeline. We wish all of you and your families well and hope you enjoy the summer. We're delighted to open up the floor for questions. As always, we request that you limit yourself to one question and a follow-up. Thank you very much.

Thank you. We will now begin the question and answer session. And we have a question from Anthony Paolone from J.P. Morgan. Please go ahead.

Thanks. Good morning. My first question relates to Jerry. You mentioned 32% in the pipeline looking for what I guess is improved space or highly amenitized space. Can you talk a bit more about specifically what they're looking for? And perhaps the type of space they're coming out of and whether they're keeping the same footprint or shrinking? What exactly is changing there?

Yes. George, do you want to pick up on that?

Yes. Tony, happy to. We're seeing the predominance of that, like the quality coming more from the inventory in downtown Philadelphia, kind of taking the leap from B inventory up to trophy buildings. But even in the suburbs, we're starting to see tenants taking advantage of space opportunities that we have in Radnor, Conshohocken, even Plymouth Meeting, moving out of some of the second-tier submarkets. I think it's not only related to building management, but also the building systems like elevators, HVAC systems, and technology within the building. Overall, I believe the majority of those tenants are likely dialing back space a little bit, but nothing significant—maybe a 5% to 10% reduction in footprint. The typical build-outs saw our second quarter spatial analysis trend as roughly 65% workstations and 35% offices. During the second quarter, we noticed a slight shift to 60/40; so not a dramatic change between workstations and offices, but more focus on space planning for pathways and turning radius.

Yes, I want to add to that, Tony. Certainly, the volume of landlords, the location of buildings are key, along with a demonstrated track record of capital reinvestment in the project. Some highlighted items, in addition to what George mentioned, include a keen focus on HVAC, vertical transportation systems, and even a more pronounced emphasis on interior daylighting, often resulting from higher ceilings and more glazing, as well as some level of indoor/outdoor component. Our new development projects featuring full-service amenity programs are very attractive to both office, life science, and residential tenants. Structured parking is becoming a key issue as well, leading tenants to prefer buildings with covered parking. These factors are increasingly prevalent in portfolios like ours and are critical parts of each one of our development projects. Those elements, as well as our landlords' recommendations, are integral decision points influencing their final choices.

Got it. Thanks for all that. And then for Tom. You outlined the floating rate debt and the cost impact on guidance. But thinking bigger picture, where do you think you should be over time in terms of the amount of your debt floating? And also, considering that you have some bonds coming due where do you see us as we move into next year?

Yes. Regarding the floating rate debt base, I believe that we will look to increase our fixed rate debt, especially concerning the term loan. That's a priority for us. I think we should aim for at least 90% of our debt to be fixed. We will likely remain in the same range for our joint venture portfolio, which will continue to float as we have development in this regard. We've made some efforts to mitigate this through joint ventures and hedging already in place. Regarding the bonds, we'll likely consider refinancing them, possibly not with 10-year bonds, though—this will be market dependent, but we will certainly monitor the situation.

Okay. Thanks for the insight.

Thanks, Tony.

Thank you. Our next question comes from Jamie Feldman from Bank of America. Please go ahead.

Great. Thanks, and good morning. Can you talk more about the development and redevelopment starts? What gives you conviction here? I know you've had good leasing in redevelopment, but can you elaborate on what gives you confidence in starting projects in terms of leasing outlook and the cost outlook? Additionally, what measures have you taken to hedge against inflation risk?

That's a great question, Jamie. First, regarding the costs, we don't start anything without being fully prepared and confirmed on costs. For example, at 3151, we've executed a guaranteed maximum price contract with a reputable general contractor. We're about 89% sourced at the sub-trade level. We also build contingencies into our contracts to accommodate unforeseen circumstances. We emphasize rigorous project pricing two to three times before finalizing plans. Tom has indicated nearly $4 million is earmarked for development investments, including some for design development work on projects in the queue to ensure we nail down the costs. Regarding the conviction for project starts, we base that on various factors. We have strong market knowledge and solid insight into what we believe to be robust current and prospective pipelines. For instance, the decision to redevelop 2340 was influenced by the successful completion of an 85% lease agreement. We're focused on creating a valuable capital opportunity with that building. Moreover, our projects like 3151 benefit from a diverse pipeline catering to both established institutions and public companies targeting timely delivery timelines that our starts facilitate. We also consider forward supply pipelines and aim to preempt potential competitive starts, particularly when considering current market dynamics. Uptown ATX remains significant, and with our clear development capacity, we are evaluating whether to break buildings down into single-floor tenants or wait for larger tenants, which tend to require more time as they assess their options.

Yes, thank you very much. And it sounds like you're considering some asset sales. How should we think about the potential impact on earnings for the latter half of this year and possibly into 2023? Will you be able to mitigate dilution, or does that pose potential downside to your numbers?

Our goal is to minimize dilution through these actions. We do have several assets we're marketing for value discovery, which may yield low cap rate sales. Some may transition to users, and we may see a selective joint venture sell-off too. The plan is to manage the sales sequence as effectively as we can while optimizing pricing and liquidity generation.

Okay, all right. Thank you.

Thank you.

Thank you. The next question comes from Michael Griffin from Citi. Please go ahead.

Hey, it's Michael Bellman here in place of Michael Griffin. Jerry, I wanted to step back and think about the enterprise as a whole. You mentioned lease rollover, which is more or less than peers. You've also highlighted development driving accretion. However, on the right hand side of your balance sheet, you have $1.8 billion of gross debt rolling over in the next two and a half years, of which your share is $1.1 billion. Can you elaborate on that? You also mentioned concerns about your interest rate exposure. How should investors assess the risk that this presents to the enterprise today?

Hey, Mike, it’s Tom. To start, we do have two bonds coming due—$350 million—and we will look closely at how the markets evolve. Rates have increased significantly, and spreads have actually expanded, so we have to monitor the market closely. Those bonds are maturing below 4%, and we’ll likely refinance them at around 5%. I believe we can manage our way through refinancing both bonds with new public debt. As for other maturing debts, such as Commerce Square ($200 million), that one is performing well and we’re actively looking at refinancing options. We are confident we will manage it well and swiftly, addressing joint ventures as we move forward. Yes, I've noted that hindsight is 20/20, and perhaps we should have considered more proactive steps in previous years when rates were low. Nonetheless, we believe we can still refinance effectively and minimize potential dilution.

It raises concern to have significant amounts of debt rolling over at a time of rising interest rates. It seems risky to have higher exposure when refinancing could lead to significant impacts on earnings. It's puzzling how you allowed yourself to be in this position when so many companies have been proactive over the past couple of years. Can we expect the development accretion to offset the dilution that refinancing might cause? How should we interpret this when evaluating the enterprise’s health?

Looking at the debt maturing within the next 24 months, I wouldn't characterize our situation as being backed against the wall. Just a few months ago, we found ourselves in stable coverage ratios, allowing us to approach refinancing opportunities confidently.

So given your excess leverage, how are you ensuring liquidity and access within your line of credit?

Regarding liquidity, we have maintained our line of credit with minimal balances historically. Our goal is to remain proactive and monetize capital, identifying potential sales that can help strengthen our funding strategy throughout the next few years.

Thank you. The next question comes from Brian Spahn from Evercore ISI. Please go ahead.

Hey, thank you. Jerry, you've talked about physical occupancies, with the highest utilization levels in Philadelphia suburbs and D.C. As you talk to tenants, what are your expectations for utilization levels in the back half of the year? Do you think this number has plateaued given hybrid work adoption?

Yes, George and I can address that. It's interesting; the conversations we have with tenants seem to be more encouraging regarding them bringing people back three or four days a week. We have yet to see interest in a hotelling concept, though there's a clear desire for stronger space layouts, which George has touched upon. We are witnessing an uptick in people returning to the offices. In fact, Austin, Texas, with a high concentration of tech companies, has been slowest to return, while financial services and healthcare companies are already adapting. I think we'll see more CEOs initiating office returns after Labor Day, prompting sector-wide movement in that direction.

The most significant week days tend to be Tuesday through Thursday right now, as expected, with lower occupancy on Mondays and Fridays. Companies pushing for a voluntary return to the office are beginning to witness a gradual uptick in overall occupancy. While occupancy levels fluctuate, I believe September will serve as a pivotal moment, particularly after Labor Day, as company leaders start reinforcing norms for return.

Okay, thanks. And regarding the incubator, could you remind us if there are plans for expansions? How are you assessing the health of tenant activity and their appetite to expand amidst the pullback in funding?

We are monitoring our incubator tenants diligently, and most appear to be managing well. However, we are aware of risks associated with the pullback in venture capital, and we maintain constant evaluation of their performance—assessing trials, capital reserves, and burn rates, supported by our partnerships with biotech firms that provide deeper insight. We indeed plan to expand the incubator; our timing largely hinges on relocating existing tenants with leases expiring halfway through 2023.

Good morning, everyone. Could you talk a bit about the built-to-suit opportunities? Where is the demand coming from, particularly in the life sciences? How big of an opportunity do you anticipate in the near term, and what approach will you take from a funding perspective?

Certainly. The built-to-suit opportunities primarily lie within our production assets, sized typically around 100,000 to 150,000 square feet. These projects tend to involve full-building users on 10 to 15-year leases. Such development is inherently driven by market demand, and we are targeting a significant prospective life science company looking to expand. Urban consolidation and relocating from aging spaces to modern builds are key trends we'd like to leverage as we develop.

Good morning. Could you offer insights regarding the pipeline of life science buildings in Philadelphia? Is there a risk for overbuilding considering the challenges smaller companies face in financing?

Looking at the life science pipeline, several properties are under development, and while multiple projects have been announced, the ability for these properties to secure financing and progress to construction remains uncertain. Presently, there are about four to five core competitive projects within University City and the surrounding areas, typically lower-rise structures emphasizing manufacturing over laboratory spaces. We closely monitor the situations; life science shows clearer demand drivers than the traditional office, leading some office developers to pivot toward life science opportunities. Our excellent location near key transit and institutions inspires confidence in the ongoing demand for our life science developments. To ensure we cater to these prospects' needs, we're introducing advanced technical features such as enhanced HVAC capacity, vibrations control, and rapid elevators at our upcoming projects, including 3151—potentially leading us to outperform competitors.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by for debrief.