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Text: Although we believe these estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.
Well, first and foremost, we hope that you and yours, continue to be safe, happy, healthy and engaged; and I think, looking at our business despite reopening delays related to the delta variant, the office market continues to improve, tour activity, lease negotiations and deal executions, remain on a positive trend line.
Our portfolio occupancy has increased to approximately 35%, the predominance of tenants returning has though expanded beyond just small employers, as occupancy for tenants 50,000 square feet and below is now over 50%.
During our prepared comments we'll review our third quarter results, discuss progress in our business plan and update you on our recent capital and development activity.
Tom will then also provide a financial overview and after that Dan, George, Tom and I are available to answer any questions you may have.
From a portfolio management standpoint, we remain focused on reducing forward rollover and providing a solid platform for growth.
These efforts have been successful.
We have reduced our forward rollover exposure through 2024 to an average of 6.8%, a slight improvement over last quarter.
Our forecasted rollover exposure is now below 10% annually, through 2026.
Revenue and earnings growth remain a top priority.
Key near-term earnings drivers for us are, as you all know, we have several key vacancies, that upon lease-up will generate between $0.07 and $0.10 per share of growth and we're delighted to report that we have now leased about 46% of that targeted square footage and achieved about 45% of that forward revenue growth, at an average mark to market of 12% cash and 19% GAAP and that income will be substantially in place by the third quarter of 2022, which can create a good growth opportunity for us.
Some notable components of that during the quarter, the last 38,000 square feet vacated by [Indecipherable] in Austin has been leased and we've also signed a replacement lease for the 42,000 square foot tenant in Radnor, Pennsylvania.
And lastly we did sign three new leases at Commerce Square, totaling just shy of 29,000 square feet.
We do see clear trend lines of tenants requiring higher quality space, which we do think positions our portfolio extremely well.
From a financial standpoint, for the third quarter, we posted FFO of $0.35 per share, which is 1% per share above consensus estimates, which Tom will walk you through.
We've also made excellent progress in all the other components of our 2021 business plan.
We do anticipate about a 100,000 square feet of positive absorption during the fourth quarter, and we will achieve our year-end occupancy and lease percentage guidance ranges.
And to reinforce our leasing progress to date, we are increasing our speculative revenue target by $500,000 from our mid-point range of $25.5 million to $21 million and we are over 99% complete on that revised target.
It's important to note that that $21 million target that we're now circling is about 15% above the bottom end of our original range and it does reflect ever improving office market conditions.
Looking at some other operating statistics.
We've also posted great results there for the quarter as well, tenant retention was above our 2021 business plan range.
Of the 59 new deals that we signed this year, the weighted average lease term is 7.8 years, 68% of those lease terms are longer than four years and our medium lease term has remained fairly consistent with what we are able to achieve in 2018, '19, and in 2020.
Third quarter capital cost came in below 8% of generated revenue, so well within our business plan range.
Cash mark to market was a positive 12% and our GAAP mark to market was a positive 16%.
Our year-to-date mark to market results are above our full year ranges.
However, as we noted on last quarter's call, based on leases already executed and commencing this in the fourth quarter, with lower mark to market results, we will finish the year 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 this year.
Our third quarter GAAP same store NOI was 2% and year-to-date results were within our '21 range.
Our third quarter cash same store NOI was 5.5% and above our 2021 range of 3% to 5%.
But again, similar to our mark to market dynamic, tenants scheduled to take occupancy later this year will accelerate same-store growth, will enable us to achieve our 2021 business plan ranges.
We are still forecasting a 21 year end debt to EBITDA in the range of 6.3 times to 6.5 times.
And looking at leasing velocity we know that everyone is keenly focused on recovery data points and we have several encouraging signs to report.
The Philadelphia suburban market produced more than 350,000 square feet of leasing activity in the second quarter, it was at 42.7% increase quarter-over-quarter.
The CBD market also posted 181,000 square feet of leasing activity, and Philadelphia generally is making a strong recovery from the pandemic in comparison to a number of other major American cities.
Our vacancy rate is lower than the national average and based upon a major brokerage report Philadelphia is in the top 10 of all American cities for pandemic recovery, as measured by recovery rates and employment, vaccination and leasing activity.
During the quarter, we had a total of over 1,500 virtual tours and inspected over 758,000 square feet in line with second quarter results.
Physical tours were down slightly over the second -- from the second quarter and we attribute this really more to the summer months as third quarter physical tours outpaced first quarter tours by over 13%.
Our overall pipeline stands at 1.6 million square feet, which increased by about 600,000 square feet during the quarter.
Another good sign of more tenants entering the marketplace.
And while these recovery data points are encouraging.
They also do compare favorably to the pre-pandemic leasing trends.
So our pipeline today is 7% better than our third quarter '19 results.
Deal conversion rate was on par with previous quarter results as well.
Now as you might expect and we've reported last quarter, median deal cycle time continues to trail pre-pandemic levels by approximately 30 days.
But on a very positive note, during the quarter, we executed 464,000 square feet of leases, including 347,000 square feet of new leasing activity.
We also continue to see two favorable trends that we think positively impact our portfolio.
First, quality product does matter, since the beginning of the pandemic approximately 100,000 square feet of deals have moved up in the Brandywine buildings versus lower quality competitors.
Secondly, we have seen approximately 20 tenants expand their premises by approximately 122,000 square feet since the beginning of the pandemic.
In looking at our liquidity and dividend coverages, as Tom will report, we have excellent liquidity and anticipate having approximately $515 million available on our line of credit by the end of the year.
We have no unsecured bond maturities until 2023, have a weighted average effective rate of 3.73% as a fully unencumbered wholly owned asset base.
Our dividend remains extremely well covered with a 54% FFO and 81% CAD payout ratio and as we noted, our five year dividend growth rate has been 5.3% while our five year CAD growth rate has been just shy of 8%, well in excess of our core peer averages.
From a capital allocation standpoint, it was frankly another quiet quarter, but we continue to make progress on many other fronts.
As part of our land recycling program we did sell three non-core land parcels, generating just shy of $11 million of proceeds and at a $900,000 gain.
Also, as we noted in our supplemental package, during the quarter, at $50 million preferred equity investment in two office properties in Austin, Texas were redeemed.
We did record a $2.8 million incremental investment income during the quarter due to that early redemption, that $50 million preferred equity generated just shy of a 21% internal rate of return during the whole period.
Taking a quick look at our development opportunity set.
250 King of Prussia Road, which we note in our supplemental package, is a 169,000 square foot project under renovation in the Radnor Submarket, that was started in the second quarter and will be wrapped up by the second quarter of '22.
The project will accommodate heavy life science as well as office use.
Our cost did increase quarter-over-quarter due to the additional -- some additional MEP [Phonetic] work to facilitate broader life science penetration, as well as this adding an additional generator for our redundant -- for power redundancy.
Those two items did impact our targeted yields by reducing it about 20 basis points.
The project, as we noted before, is really the first delivery in our Radnor Life Science Center, which will consist of more than 300,000 square feet of life science space, and one of the region's best performing submarkets, our current pipeline for 250 King of Prussia Road totals more than 200,000 square feet, including 51,000 square feet in lease negotiations.
Looking at Schuylkill Yards, our Schuylkill Yards west project is on time, on budget for Q3, '23 delivery.
That project will be delivered -- a 7% blended yield, as you may recall, it consists of 326 apartment units, 200,000 square feet of commercial and life science space and 9,000 square feet of street level retail.
We have an active pipeline continuing to build on that project and our $56.8 million equity commitment is fully funded.
Our partners' equity investment is currently being made and the construction loan that we closed recently really will not have its first funding until the first quarter of 2022.
Looking at 405 Colorado and Austin, Texas; this project is now complete.
During the quarter we did increase our lease percentage from 24% to 44%.
We do have a growing an active pipeline now that that building has been fully delivered.
We did slide our stabilization date a couple of quarters to reflect the timing of these new lease signings, as well as the timing of our targeted pipeline.
The 522 space garage did open during the summer and is currently just shy of about 12% occupied and we have signed already 102 monthly contracts since we opened the garage.
3000 Market Street in University City, Philadelphia, is a 91,000 square foot life science renovation as part of our Schuylkill Yards neighborhood, base building construction is complete.
The building is fully leased for 12 years at a development yield of 9.6%.
The redevelopment did include increasing the building size from 64,000 to about 91,000 by converting below grade space into labs.
This property was placed in the service on October 1st.
Cira Labs, which we announced a couple of quarter agos, where we partnered with PA Biotech Center to create a 50,000 square foot, 239 seat life science incubator, within the CIra Center Project, that will be completed later in the fourth quarter and will open January 1, 2022.
Since we announced, we have had great leasing success announced and just shy of 50% -- about 49% leased, with 118 of that 239 seats leased and a pipeline with 17 additional proposals, aggregating more seats than we have available capacity.
So very excited about delivering that project on a substantially pre-leased basis.
And just looking at some future development at Schuylkill Yards and Broadmoor, within Schuylkill Yards the life science push really continues.
We can develop that 3 million square feet of life science space.
We've already delivered 3000 Market, the Bulletin Building, 3151 Market, which is our 424,000 net rentable square foot life science building, is fully designed, ready to go and with a strong leasing pipeline, and our goal remains to be able to start that project in early 2022 [Technical Issues] assuming market conditions permit and the pipeline continues to build.
At Broadmoor, Block A, which consists of 363,000 square feet of office and 341 apartments at a total cost of $321 million, will be starting later in the fourth quarter.
We are finalizing documentation including construction financing with our partner.
The first phase of Block F, which is a 272 apartment units will be starting in the same venture format in Q1 of '22.
And on the office leasing component, our leasing pipeline right now is slightly over 500,000 square feet with about an additional 1.5 million square feet of inquiries.
Just one additional note related to our third quarter earnings cycle, as we outlined last quarter, we would normally have provided '22 guidance for earnings in our business plan and FFO during the third quarter cycle.
However, consistent with what we did last year and based on the continued uncertain business climate, we will announce our '22 guidance on our fourth quarter earnings call.
Tom will now provide an overview of our financial results.
Our third quarter net income totaled 900,000 or $0.01 per diluted share and our FFO totaled 61.1 million or $0.35 per diluted share and that was $0.01 above consensus estimates.
Some general observations about the third quarter, while our results were above consensus, there were a number of moving pieces and several variances to our second quarter guidance.
Portfolio operating income at $68.5 million was in line with our guidance for the second quarter.
Interest and investment income totaled $4.5 million and was $2.5 million above our $2 million guidance number.
As Jerry mentioned this variance was due to the early termination of a $50 million preferred equity investment, which resulted in the acceleration of some fees, totaling about $1.5 million, and to make whole interest, on the investment income side of about $1.3 million, that's all was recorded in the third quarter.
We forecasted 2.3 million in land gains and tax provisions, which was $1.4 million below our actual results, two land sales were delayed and we believe they will both close in the fourth quarter.
As a result of those two that nets to a $0.01 increase to the reason we're above consensus.
Interest expense of 15.2 was below our second quarter forecast, by $800,000 and that was primarily due to higher than anticipated capitalized interest on our 405 Colorado.
Termination of other income totaled $1.8 million and was 400,000 above second quarter forecast, primarily due to the timing of some anticipated transactions, G&A was $7.1 million, 400,000 below our $7.5 million second quarter guidance.
And that was primarily due to lower employee costs.
Our third quarter, fixed charge and interest coverage ratios were 4.3 and 4.1 respectively, both metrics improved from the second quarter, primarily due to the higher investment income.
Our third quarter annualized net debt to EBITDA decreased to 6.5 and is currently at the high end of our 6.3 to 6.5 guidance.
This metric also benefits from the increased investment income.
On the additional reporting, as we look at cash collections, they were over 99%, continue to be very strong.
We did have some net operating write-offs of tenants, that totaled about 700,000 and did lower our portfolio operating income for the quarter.
For portfolio changes 3000 Market, based on Brandywine completing our base building obligations 3000 Market will be added to our core portfolio during the fourth quarter as it's 100% life -- 100% leased life science to Spark Therapeutics [Phonetic].
Looking at fourth quarter guidance for 2021, we anticipate the fourth quarter results to improve compared to the second -- to the third quarter and we have some of the following assumptions.
Portfolio operating income will total $70 million and would be sequentially higher in the third quarter, that's due to the approximately 212,000 square feet that's going to be moving in during the quarter at a positive mark to market and will commence, and in addition to 3000 Market.
FFO contribution from unconsolidated joint ventures will total about $6.1 million for the fourth quarter, relatively flat compared to the third quarter.
G&A will total roughly $7.1 million again sequentially flat to the third quarter.
Interest expense will be approximately 15.5 with approximately $2 million of capitalized interest.
Termination fees and other incomes should total about $2.5 million.
Net management fees will be about $3 million and interest in other -- interest and investment income about $400,000.
We do anticipate land sales and tax provision to be about $1.3 million mainly based on the slides from the land sales that didn't occur in the third quarter, and this will generate about $6 million in net cash proceeds.
On other business plan assumptions there will be no property acquisitions, we did note one JV sale in our all state portfolio, which should generate about $12 million of net cash proceeds, no anticipated ATM or share buyback activity, no financing or refinancing activity in the quarter and our share count will be about 73.5 million diluted shares.
On the financing front, as previously mentioned, we did close on our construction loan at Schuylkill Yards, which represents a 65% estimate to -- estimated cost -- loan to cost.
Initial interest rate will be about 3.75% based on our current capital plan we will start drawing on that during the fourth quarter of 2022.
We plan to restructure and extend our current line -- our current loan, encovering our joint venture and 4040 Wilson [Phonetic] and that will lower our borrowing costs by about 100 basis points, generate minimal initial proceeds but allow for increased borrowings to complete the leasing of the vacant office space.
While we have no other financing or refinancing activity in our plan, we continue to monitor the debt markets ahead of our 2023 secured bond maturity.
Looking at our capital plan, our second quarter CAD was 65% of our common dividend and year-to-date coverage is within our range.
Our fourth quarter 2021 capital plan is very straightforward at 140 million, and includes $70 million of development and redevelopment activity, $33 million of common dividends, $15 million of revenue maintained and $15 million of revenue create capital expenditures and contributions to our joint ventures totaling about $5 million.
The primary sources will be cash flow from interest payments of -- after interest payments of $38 million, $42 million used as the line of credit, $42 million cash on hand and cash -- other sales and land totaling about $18 million.
Based on our capital plan, we will have about 558 available in line of credit.
The increase, in our projected line of credit, is partially due to the build-out of our incubator at Cira Center and we also project the net debt to EBITDA to fall within the 6.3 to 6.5 range with a big variable being this timing and scope of capital development payments that could reduce cash.
Our net debt to GAV will be 39% to 40%.
In addition, we anticipate our fixed charge ratios to approximate 3.6 on interest coverage and will approximate 3.9% -- Sorry fixed charge of 3.6 interest coverage at 3.9 which represent sequential decrease, again primarily due to some of the investment income that we received in the thirrd quarter.
So the key takeaways, as we wrap up our prepared comments, the portfolio and operations are in excellent shape.
We've made some really good progress on both building the pipeline as well as beginning the process of significantly filling some of those larger vacancies we have, that will be a great growth throughout to look at over the next couple of years.
And also the leasing pipeline certainly continues to increase as tenants return to the workplace, that pace is not as fast as any of us would like, but we certainly are seeing a lot of green shoots in terms of more tenancies coming into the market.
And along those lines.
We actually do expect, as we're beginning to see now, a compression of decision timelines later in the year and into early '22 and we are certainly anticipating a continuation of positive mark to markets, driven by improving market conditions, as well as the necessity of having a higher rents based on escalating construction prices.
Safety, health and amenity programs both in design and execution are remaining a top priority of all prospects, large and small, and based on that we really do believe that new development and our trophy inventory stock will remain in a very positive position.
We are very much focused on our two forward growth drivers, both delivering additional products within Schuylkill Yards, leasing up what we have under development and are delighted to be moving forward on the first phase of Broadmoor later this year and into the first quarter of '22.
The success we've had added 3000 Market, the Bulletin Building just reported results on Cira Labs, as well as a focus on starting 3151 early next year.
We'll have over a million square feet of life science space operating under construction, which starts to build that base of revenue diversification that we've talked about.
We certainly are very focused on continuing to grow cash flow and our attractive CAD growth over the last five years has really resulted in a well covered and attractive dividend that's poised to grow as we increase earnings.
And then just a final comment on financing and capital availability, private equity remains readily available at very effective pricing as well as we all know with a very competitive and advantageously priced debt market.
Strong operating and development platforms like Brandywine have significant traction for project level investments as certainly as evidenced by -- what we've demonstrated thus far Broadmoor and Schuylkill Yards, so we really do believe there is readily executable attractive financing available for our development at very attractive third party equity cost of capital.
We do ask that in the interest of time you limit yourself to one question and a follow-up.

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compname reports q3 earnings per share of $0.01.
q3 earnings per share $0.01.
q3 ffo per share $0.35.

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