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Text: So, first and foremost we hope that you and yours continue to be safe, healthy and engages as we return the economy to normal, and well certainly the COVID-19 situation remains volatile with the daily news breaking.
There is much more optimism among our tenants as the economy trends toward a full reopening.
We're hearing that directly from both large and small tenants.
Our portfolio occupancy as of late June increased to approximately 33%, which represents a significant increase from where we were in April where it reported between 15% and 20% occupancy levels.
The predominance of tenants returning to expanded beyond just small employers as occupancy for tenants 50,000 square feet and below is over 45%.
During our comments today we will review our second quarter results, discuss progress on our 2021 business plan and update all of you on our recent capital activity.
Tom will then provide a financial overview, After that, Dan, Tom, George and I are available for any questions.
First is the general update on the COVID-19 impact on our business.
Based on an updated tenant survey that was completed in late June, we found a couple of interesting things.
First is a growing need for space planning services, which as we expected, is I think a good sign, 48 tenants representing about 1.2 million square feet have requested assistance for more internal space planning team and we have engaged with them.
We also got a lot of feedback on an increased need for parking due to near-term public transportation concerns, which we certainly believe are short-term in duration, but about 103 of our tenants representing almost 3 million square feet expressed an interest in parking, and actually during the quarter we entered into 167 new monthly contracts and saw a 30% increase in our parking lot occupancies.
From a portfolio management standpoint, we've been very much focused on tenants whose space expire in the next two years.
Those efforts have been successful.
We have reduced our forward rollover exposure to an average of 6% over the next three years, and as noted on page 2 of our SEC to 7.1% from 2022 to 2024.
So, our forecast of rollover exposure is below 10% annually in each year through 2026.
So, over the last several quarters, we have significantly improved our intermediate term portfolio stability.
Revenue and earnings growth remain a top priority.
We do believe we have some key near-term earnings drivers of first, we have, as you all know some several key vacancies that upon lease-up over the next 8 quarters will generate between $0.07 and $0.10 of additional revenue per share, that is in both our wholly owned and joint venture inventory.
We are also projecting that 405 Colorado and 3000 Market stabilize in 2022 as we bring those development projects online, and we're clear we're seeing trend lines of tenants requirements higher quality space, which we believe positions our portfolio extremely well, and that's really evidenced by what we're hearing, but also by a 23% increase in our development pipeline of Q2 over Q1.
In looking at the numbers for the second quarter, we posted FFO of $0.32 per share, which was in line with consensus estimates.
We made excellent progress on all of our 2021 business plan metrics, and during the quarter we had 20,000 square feet of positive absorption.
Given the increase in leasing visibility through the balance of the year, we did increase our speculative revenue target mid point by $500,000 and reduce the range --narrow the range rather from $18 to $22 million to $22 to $21 million, and as reported we are now 98% complete at that revised range.
Rent collections continued to be very strong, one of the best in the sector as we've collected over 99% of our second quarter rents.
Our July receipts continue to track toward that same level.
Tenant retention was 58%.
Our lease percentage remains within our business plan range.
Second quarter capital costs were 12.8% of generated revenues, slightly above our 10% to 12% business plan range, but average lease term was 8.5 years, which exceeded our 7-year business plan target.
Cash mark-to-market was a positive 14%, and our GAAP mark-to-market was also positive 22%.
All of those results are above our full year published ranges, however, as we mentioned last quarter, based on leases already executed commencing later this year with lower mark-to-market results, we will be within our business plan ranges.
We also expect that every region will post positive mark-to-market results on both a cash and GAAP basis for 2021.
Our second quarter GAAP same-store NOI was up 0.5% and year-to-date is below our 2021 range of 0% to 2%.
Second quarter cash same-store NOI was 1.8%, again below our 2021 range of 3% to 5%.
Again, very similar to the mark-to-market dynamics tenant schedule take occupancy later this year will accelerate same-store growth and enable us to achieve our 2021 business plan range.
With the exception of our Met DC operation, all of our regions are expected to post positive same-store results, and our Met DC region will remain negative while 1676 International continues toward its lease up phase.
We are still forecasting 21 year and debt-to-EBITDA in the range of 6.3 to 6.5 as we've always cautioned that it does depend on the timing of future development starts for the balance of the year.
Just a couple of comments on leasing velocity, because I know everyone is looking for recovery data points, just like we are, and we think there are some encouraging signs, at least what we've seen in the last quarter.
Yeah, a lot of tenant prospects with the pandemic one to virtually tour spaces before committing to an in-person tour.
We continue to see this trend evolve during the quarter.
We added total of over 1500 virtual tours with almost 800,000 square feet being targeted.
That lead to a 46% increase in physical tours over Q1.
Our overall pipeline stands at a 1.4 million square feet with approximately 200,000 square feet in advanced stages of lease negotiations.
Our overall pipeline increased by just short of 600,000 square feet during the quarter.
And while these recovering points are encouraging we do believe it will take several quarters to assess the full impact on the office business from the pandemic.
So, to gain some insight we looked at our leasing metrics from the second quarter of 2019, so, pre-pandemic same quarters where we are now.
Those data points we thought were also encouraging.
On a comparable set of properties, the pipeline today is up 7% compared to the second quarter of 2019.
Leases that we executed this quarter are also up 13% from the second quarter of 2019.
Deals at the proposal stage are up 20% including new and expansion proposals being up 13% over that comparative period.
There are two additional benchmarks we looked at that demonstrate that we're clearly still in the recovery phase, but overall we're surprisingly good compared to the second quarter of 2019.
Our deal conversion rates, it was down 6% to 28% in second quarter of 2021 versus 34% in the second quarter of 2019.
As you might expect, given where we are in this recovery phase, the median deal cycle time is up 27 days to 104 days this past quarter versus 77 days in the second quarter of 2019.
So, we're hoping that as the economy continue to revere mostly convincing of that deal cycle time, and that's really is where the rubber meets the road in terms of revenue generation.
In looking at liquidity, we have maximized the liquidity and tends to having $460 million of line of credit availability by the end of the year.
As Tom will touch on we have no unsecured bond maturities until 2023 and have a fully unencumbered wholly owned asset base.
Our dividend is extremely well covered at 57% of FFO and 81% of CAD at the midpoint of our guidance.
Our 5-year dividend growth rate has been 5.3% versus the peer average below 4% and we have grown our CAD during that same 5-year period close to an 8% annual rate versus the peer average again below 4%.
From a capital allocation standpoint, it was a fairly quiet quarter.
We continue to make progress on many fronts, and subsequent to quarter end as part of our land recycling program we did sell two small non-core land parcels and posted a small gain on that.
Looking at development, as we always note, we have a number of production development projects that can be completed in 4 to 6 quarters that cost between $40 and $70 million.
The pipeline on those four production assets grew 40% since the first quarter, which is a good sign, again I think of tenants entering the market, but also looking for high quality space.
And along those lines we did, so as the renovation program for 250 King of Prussia Road that is 169,000 square foot project located in the Radnor Submarket that we acquired for approximately $120 dollars per square foot as part of an overall transaction with Penn Medicine.
We designed that project to accommodate a significant life science component.
The renovation started in the second quarter and will be wrapped up within the next four quarters.
This project will be the first component of our Radnor Life Science Center, which will initially consist of this project, and our planned 155 Radnor ground up 150,000 square foot development, and these two projects will deliver more than 300,000 square feet of life science and office space to one of the region's best performing long term submarkets.
In looking at the existing development projects, Schuylkill Yard West is very much on pace and on schedule.
That's the life science residential and office project we commenced on March 1st.
The project will be built to a 7% blended yield and consists of 326 apartment units, a 100,000 square feet of life science space, 100,000 square feet of innovative office space and street level retail.
It still have an active pipeline comparable to last quarter.
We did close our 65% loan to cost construction loan at a floating rate equal to three quarters per cent.
However, given the front loaded the equity commitment for both us and our partner, even with Brandywine $55 million equity commitment, of which 46.5 has already invested, the first funding of that construction loan won't occur until first quarter of 2022, but it does complete the capital stack for that project.
Looking at our 405 Colorado project in Austin.
That project is now complete.
We're scheduling a grand opening in the fall.
During the quarter, our lease percentage did increase to 24% and we currently have a pipeline of 527,000 square feet including about 40,000 square feet in final lease negotiations.
3000 Market, is there a life science renovation within Schuylkill Yards.
That project is fully leased.
The construction will finish later this year and we're projecting the lease commencing in four quarter 2021 at a development yield of 9.6%.
Cira Labs, which we announced last quarter is a 50,000 square foot incubator that we are partnering with Pennsylvania Biotechnology Center.
B Labs will open in the fourth quarter of 2021.
Since the announcement we have entered the marketing pipeline and build a significant amount of interest with proposals outstanding for roughly 78% of that space.
Just got a couple more updates on Schuylkill Yards and Broadmoor.
Within Schuylkill Yards the life science push continues as we've cited previously we can deliver about 3 million square feet of life science space, which we believe creates an excellent opportunity to establish an corollary research community to all the other great activity over here in University City.
3151 Market Street, our dedicated life science building is fully designed and ready to go.
We have a leasing pipeline on that still in the 400,000 square foot range.
It is advancing, advancing slowly, but I think with a high degree of confidence, and our goal remains being able to start that later this year assuming market conditions permit.
At Broadmoor we are progressing with blockade in the first phase of Block F to recap, the scope of that 250,000 square feet of office and 613 apartment projects at a total cost of about $367 million.
We are a go-mode on all of those components.
We are moving forward through final documentation with our selected equity partner on Block A and Block F residential and is soliciting bids now on construction financing alternatives.
We anticipate third quarter closing date on both blocks A and F. Our plan remains to start the residential component of Block A, which is 341 units at $119 million cost in the fourth quarter of 2021, and on Block A office we are actively in the pre-leasing market and would plan to start that as market conditions permit.
As you may recall, we would normally provide 2022 earnings and business plan and FFO guidance during our third quarter 2021 earnings cycle.
However, consistent with what we said we did in 2021 and based on the continued uncertain business climate, we will announce our 2022 guidance on our fourth quarter earnings call.
So, Tom will now provide a review of our financial results.
The first quarter net loss totaled $300,000 or less than one penny per diluted share and FFO totaled $55.9 million or $0.32 per diluted share and in line with consensus estimates.
Some general observations regarding our second quarter results, while our second quarter results were in line, we had a number of moving pieces and several variances to the first quarter guidance.
Portfolio operating income totaled $67 million, which was below our estimate by $1 million.
Residential and parking revenue were below budget as a result of restrictions that were in place for most of the quarter in Philadelphia negatively impacting those results.
Interest expense totaled 55.5 million and was below our first quarter forecast due to higher interest capitalization on our 405 Colorado project.
Termination and other income totaled $2.7 million and was $1.7 million above our first quarter forecast, primarily due to two insurance claims generating approximately $1.1 million of other income.
We recorded no land gains and minimal tax provision compared to a $1.1 million dollar income guidance for the first quarter.
Two land sales were delayed from this quarter into the next quarter.
One transaction, as Jerry mentioned, is already closed subsequent to quarter end and we anticipate the second transaction closing later this quarter.
G&A totaled $8.4 million or $200,000 above our $8.2 million first quarter guidance.
The increase was primarily due to employee and medical benefit cost.
FFO contribution from unconsolidated joint ventures totaled $6.8 million or $1.3 million above our first quarter estimate.
The higher FFO contribution was primarily due to lower net operating cost from expense savings, and a $600,000 termination fee Commerce Square.
Our second quarter fixed charge and interest coverage ratios were 4.0 and 3.8 respectively, both metrics decreased slightly from the first quarter.
Our second quarter annualized net debt to EBITDA increased to 6.9 and is currently above our guidance range, an increased primarily due to the forecasted lower NOI.
The increase was forecasted and we expect this metric to improve during the second half of the year from higher forecasted NOI.
Additional reporting item on cash collections as Jerry mentioned, we had a very strong quarter of 99% and tenant write offs totaled less than $100,000 for the quarter.
Portfolio changes, as we noted 905 is now completely out of all of our metrics as that building has been taken out of service related to our Broadmoor Master Plan.
Looking at third quarter guidance, we anticipate the third quarter results to improve compared to the second quarter based on executing leasing activity and have some other assumptions, our portfolio operating income, we expect that to total $6.85 million and be sequentially higher during the second quarter.
Part of that it will be due to the 107,000 square feet of forward leasing activity anticipated to commence during the third quarter and should generate a second consecutive quarter of positive absorption.
FFO contribution from our unconsolidated joint ventures were totaled $5.8 million for the third quarter, a $1 million sequential decrease from the second quarter, primarily due to a non-recurring termination fee and incrementally higher net operating expenses, G&A for the third quarter will decrease from 8.4 to 7.5, the sequential decrease is primarily due to the annual equity compensation vesting during the second quarter that will not occur in the third quarter, we expect interest expense to approximate $16 million with capitalized interest of $1.5 million.
Termination and other income, we expect to total $2.1 million for the third quarter.
Net management and leasing will total $3.2 million and interest in investment income of $2 million.
For land gains, we expect about $2.3 million for the quarter based on the two previously mentioned closings and one additional non-core land sale generating total proceeds of $16.7 million.
Our 2021 business plan also assumes no new property acquisitions or sales activity, no anticipated ATM or share buyback activity and no financing or refinancing activity.
We did close on the $186.7 million construction loan at Schuylkill Yards at the initial rate of 3.7%.
While we have no other financing or refinancing activity in our 2021 plan we continue to monitor the debt markets ahead of our 2023 unsecured bond maturity.
Looking at our capital plan, our second quarter CAD was 90% of our common dividend, which is above our stated range.
The increase was due to several large tenant allowance payments, which we anticipated occurring during 2021.
So, the timing of those payments were significant to the quarter, but anticipated for our full-year range, and our CAD range remains unchanged.
Our second half 2021 capital plan is very straightforward and totals about $245 million with a $120 million of development, $65 million of dividends, $20 million of revenue maintain capital, $30 million of revenue create capital and $9 million of equity contributions to our joint ventures, primarily Schuylkill Yards.
The primary sources are cash flow after interest payments of $95 million, $82 million used of our line of credit, using the cash on hand, totaling $48 million, and again, $20 million roughly in land and other sales.
Based on that capital plan outlined, our line of credit balance will be approximately $140 million, leaving $460 million of line availability.
The increase in the projected line of credit balance was partially due to the build-out of our incubator space as well as our development.
We still project our range to be 6.3 to 6.5, but as Jerry mentioned that will be predicated on how our development starts occur, and we still see that debt to GAV between 42% and 43%.
In addition, we anticipate our fixed charge coverage ratio to be approximately 3.7 and our interest coverage ratio to be about 4.0.
So, just in wrapping up, I think the key takeaways are our portfolio and operations are really in solid shape.
We have great team of people on both the operating, the leasing and the marketing front, and we really get excellent visibility into our tenant base.
Information has been key, so, the level of conversation with all of our customers has been significantly enhanced during this cycle.
And I think we're very pleased that our annual rollover through 2024 is only 7% a year.
I think that's a low watermark for the company in terms of portfolio role.
Leasing pipeline continues to increase, certainly not as fast as we would like, and certainly, I know a lot of folks on the call are looking for more visibility as well, but tenants are returning to the workplace.
We think the green shoots we're seeing in terms of their space requirements are good signs, and we do expect a compression of decision timelines later this year and a continuation of positive mark-to-markets driven by improving market velocity, stable overall market conditions and escalating construction prices.
Safety and health both in design and execution are really our tenants top priorities.
We are well positioned to meet their concerns, and we believe that new development in our trophy stock will benefit from this trend.
As I mentioned earlier, our development project pipeline increased by about 23% during the quarter.
We still are very excited about our forward growth drivers.
We have two fully approved mixed use master plan sites that can double our existing portfolio, diversify our revenue stream and drive significant earnings growth, and when you take a look at even it's Schuylkill Yards assuming a start of 3051 markets through with the other projects we have in operation or under construction, that will represent about 5% of our portfolio square feet.
So, a measurable contribution building from a diversification of our revenue stream.
And, in addition to life science, our Schuylkill Yards and Broadmoor developments with existing approvals in place can accommodate about 5,000 multifamily units.
As Tom touched, we've had a very attractive CAD growth rate over the last 5 years.
We think we've created and established stability to a well covered and attractive dividend that we believe is poised to increase as we grow earnings.
And from a financing standpoint, certainly given the continued dislocation the public marketplace, there's always a concern about the best way to finance these properties.
What I can tell you is private equity is more than abundant, the debt markets as we've seen with the Schuylkill Yards West construction loan are extremely competitive.
Strong operating platforms and well conceived projects like Brandywine continue to gain significant traction for project level investments, and we're confident that there is executable financing available for our entire development pipeline in today's marketplace.
So, as usual we'll end where we start in that we really do wish you are all doing well, enjoying the summer, and that you and your families are safe and engaged.
We add for the interest of time, you limit yourself to one question and a follow-up.

user
compname reports q2 ffo per share of $0.32.
q2 ffo per share $0.32.2021 speculative revenue range narrowed to $20.0-$21.0 million.

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