Brandywine Realty Trust ( BDN)

Q3 2011 Earnings Call

October 27, 2011 9:00 am ET

Executives

Gerard Sweeney – President, Chief Executive Officer

Howard Sipzner – Executive Vice President, Chief Financial Officer

George Johnstone – Senior Vice President of Operations

Tom Wirth – Executive Vice President, Portfolio Management

Analysts

Josh Addy – Citigroup

Jordan Sadler – KeyBanc

Anthony Paolone – JP Morgan

Jamie Feldman – Bank of America

Brendan Maiorana – Wells Fargo

Mitch Germain – JMP Securities

Rich Anderson – BMO Capital Markets

Dave Rogers – RBC Capital Markets

Michael Knott – Green Street Advisors

Gabriel Hilmo (phon) - UBS

Presentation

Operator

Good morning. My name is Latangie and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust Third 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. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you. I would now like to turn the conference over to Mr. Gerry Sweeney, President and CEO of Brandywine Realty Trust. Please go ahead, sir.

Gerard Sweeney

Latangie, thank you. Good morning everyone and thank you for participating in our third quarter 2011 earnings conference call. On today’s call with me are Gabe Mainardi, our Vice President and Chief Accounting Officer; George Johnstone, Senior Vice President of Operations; 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’d like to remind everyone that certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the 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 releases as well as our most recent annual and quarterly reports filed with the SEC.

The third quarter represented a solid continuation of our 2011 business plan execution. Highlights from the quarter: our business plan continues to run better than earlier projections, leasing activity was strong and we saw a continued improvement in our mark-to-market, our leasing pipeline stands at 3.7 million square feet, generally in line with previous quarters, and even with the change in economic climate since our last call, we continue to see good leasing activity levels and a customer base still motivated to execute transactions.

Occupancy levels also improved and we increased our revenue targets again. We continue to see a flight up the quality curve and towards well capitalized landlords that has clearly benefited our portfolio. Our market-driven leasing strategy will continue to vary by submarket. In some markets, we have pushing rents and in others we continue to buy occupancy.

We had strong tenant retention during the quarter. We are also increasing our projected 2011 core occupancy percentage to 86.7%, an improvement over last quarter’s projection and 100 basis points over year-end 2010 levels. Our same store numbers have improved from our original forecast and again from last quarter.

We are rebuilding occupancy at a challenging point in the market cycle, so we expect capital costs to be higher. To compensate, we have continued to increase lease terms from the 5.3 year average in 2010 to the 6.3 years today, a 19% increase, and we’re also incorporating annual rental rate steps in most of our leases.

Based on that and as you’ve seen, we’ve had an increase in third quarter capital costs. While the key metric we monitor, that is leasing costs on a per square foot per lease year basis, actually declined to $2.23 a foot from $2.94 last quarter, the absolute amount of dollars we spent increased due to our accelerated level of current leasing activity and early prepayment of future leasing costs.

We are currently 88.5% leased and are maintaining about a 290 basis point spread in our lease versus occupied percentage. We will hold this 88 to 89% forward leasing level through year-end.

As a result of our leasing success and good expense management during the year, we are increasing our 2011 guidance to a range of $1.36 to $1.39 per share FFO versus our previous range of $1.32 to $1.36 in FFO.

A few other comments on our balance sheet and investment program – in looking at our balance sheet, an investment rating upgrade coupled with continued leverage reduction and debt maturity management remain key objectives. During the quarter, we continued to build the strength of our unencumbered pool and paid off our $60 million 1 Logan Square mortgage loan and also prepaid without penalty our $34 million Concord Airport Plaza mortgage. The total of $94 million was funded off our line of credit.

In looking at our line, our $600 million line of credit and our $183 million term loan mature on June 29 of 2012. In addition, we have $152 million bond maturity expiring on April 1 in 2012. We have commenced the process of re-syndicating the $600 million line of credit. That process is going very well. We would expect pricing levels and terms consistent with those achieved by other investment-grade REITs.

Additionally, we plan to refinance the $183 million term loan and are evaluating a potential upsizing to our term loan capacity with a laddered maturity schedule. Bank response on this initiative has also been very strong. We’ll be holding a bank group meeting in the next few weeks, expect to finalize commitments before year-end with a closing in the first quarter of 2012. We anticipate that any increased capacity provided by the expanded bank facility will provide another source to repay our April 2012 bond maturities.

In looking at investments, we had a quiet quarter but continue to have a lot of work in progress. We are in the market undertaking price discovery with a variety of properties. These assets, as we’ve reported in previous quarters, are non-core either from a locational, future NOI growth or capital consumption standpoint. We have $30 million under contract with closings scheduled in the next 30 days. These properties are in New Jersey and the Pennsylvania suburbs and will trade for a blended 7.4% cash cap rate. We also have a number of additional properties aggregating at about $160 million in the market with good investor interest.

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