Brandywine Realty Trust (BDN)

BDN 
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Brandywine Realty Trust (BDN)

Q1 2013 Earnings Conference Call

April 25, 2013 09:00 ET

Executives

Jerry Sweeney - President and Chief Executive Officer

George Johnstone - Senior Vice President, Operations

Gabe Mainardi - Vice President and Chief Accounting Officer

Howard Sipzner - Executive Vice President and Chief Financial Officer

Tom Wirth - Executive Vice President, Portfolio Management and Investments

Analysts

Brendan Maiorana - Wells Fargo Advisors

George Auerbach - ISI Group

Rich Anderson - BMO Capital Markets

Josh Attie - Citi

Jordan Sadler - KeyBanc

Michael Knott - Green Street Advisors

Mitch Germain - JMP

Bill Crow - Raymond James & Associates

Presentation

Operator

Good morning. My name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the conference over to Mr. Jerry Sweeney, President and CEO. Mr. Sweeney, please begin.

Jerry Sweeney - President and Chief Executive Officer

Felicia, thank you very much. Good morning, everyone and thank you all for participating in our first quarter earnings call. On today’s call with me are George Johnstone, our Senior Vice President of Operations; Gabe Mainardi, our Vice President and Chief Accounting Officer; Howard Sipzner, our Executive Vice President and Chief Financial Officer; and Tom Wirth, our Executive Vice President of Portfolio Management and Investments.

Prior to beginning, I would like to remind everyone that certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities laws. Although we believe the estimates reflected in these statements are based on reasonable assumptions we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports filed with the SEC.

So, to start off our prepared comments, as is our normal practice, I will provide an overview on three key business plan components; of operations, balance sheet and investments as well as provide some color on recent transactional activity. George and Howard will then discuss our operating and financial results, and certainly Gabe and Tom are here to answer any questions on their areas.

We have had a very active and productive first quarter. Operational performance was strong and the 2013 plan is on target. Our recent equity offering strengthened our balance sheet and created financial capacity, and our investment objectives are also very much on track. Macroeconomic concerns remained at the forefront of tenant decision-making processes, but during the quarter, we continue to benefit from an ongoing flight-to-quality landlords and product.

In looking at specific operating performance benchmarks, we had a strong leasing quarter activity through the portfolio average 268,000 square feet per week. And our overall pipeline that is traffic that has resulted in us issuing a proposal stands at 2.9 million square feet, up slightly from our February call. Positive pricing dynamics dominates several of our key markets with continued strong performance in Philadelphia’s CBD and University City, the Crescent markets of the Pennsylvania suburbs in Austin, Texas. Just as importantly, we saw higher levels of activity to our Richmond, Virginia, New Jersey, and Metro DC portfolios, and George will provide additional color on that traffic.

Our mark-to-market rental rate spreads were very strong and we had our best performance since 2007. During the quarter, we experienced an 11% increase on our renewal rental rates, a 5.7% increase on new lease expansion rental rates, both of those on a GAAP basis. And on a cash basis, we had a 3.4% combined growth rate. Capital costs remained moderate. We averaged $2.21 per square foot per lease year for the first quarter, very much in line with our business plans, with a resultant CAD payout ratio of 65.2%, our strongest in the past 11 quarters. We also had positive same-store growth rate on a GAAP basis of 3.4% and 6.3% on a cash basis continuing to build on the leasing progress from prior quarters.

Looking ahead for 2013, we had 1.5 million square feet program to renew. We are already 80% executed on that renewal square footage and 93% on the spec revenue target associated with renewals. Looking further ahead to 2014 and ‘15, we have continued to reduce our remaining lease expirations, where we now are at 1.9 million square feet or only a 5% role in 2014 and 2.5 million square feet or an 8.5% roll in 2015. We have lease proposal there for much of this remaining roll over and continue to make significant progress.

The only cloud on our strong operational performance was the anticipated impact of the Intel move out in Austin. As a result of that move out, our retention rate during the quarter was 52.7% with negative absorption of about 120,000 square feet. As we previously discussed we have already released about 90% of Intel’s vacancy with occupancy scheduled for the next several quarters. We remain confident we will be 90% occupied and 92% leased by yearend 13. And as noted in the press release, we are currently 87.6% and 90.8% pre-leased and over 300 basis points positive leasing spread reflecting strong leasing momentum.

In looking our balance sheet, subsequent to quarter end we took advantage of favorable market conditions and raised approximately $182 million of net proceeds through the offering of 12.65 million shares. This unplanned equity issuance accelerated our deleveraging program, improved our credit metrics and provided greater liquidity and financial flexibility.

As a result of this offering, we are currently carrying cash balances of approximately $200 million, those cash balances are currently invested in depository accounts with numerous banks, and our current financial plan with Howard will elaborate on contemplates maintaining these cash balances and does not reflect the impact of any accelerated debt pay downs or liability management efforts. We will of course continue to evaluate all of our options.

From a broader standpoint, reducing leverage levels below 40% and achieving a 6.5 times EBITDA by year end 2014 is a core objective. On a pro forma basis, this recent equity offering contributed greatly to that goal achievement reducing our net debt to gross assets to approximately 40.7% and our net debt to EBITDA to 6.7 times. Longer term, the goal is to continue to run the company to mid-30s leverage and an EBITDA multiple below six times. We are also very much on track with that objective. Continued occupancy gains, and a corresponding net operating income growth combined with our investment program will put us in a great position to achieve these targets. So, from a liquidity standpoint, the company has significant financial capacity and tremendous flexibility. Our next maturity is not until November of 2014, so to wrap up the balance sheet discussion, our balance sheet progress continued and our objectives remain very much on track.

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