Brandywine Realty Trust

Good day and welcome to the Brandywine Realty Trust first quarter 2025 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Jerry Sweeney, President and CEO. Please go ahead.

Michelle, thank you. Thank you very much. Good morning, everyone. Thank you for participating in our first quarter 2025 earnings call. On today's call with me, as usual, are George Johnstone, our Executive Vice President of Operations, Dan Palazzo, our Senior Vice President and Chief Accounting Officer, and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information that we'll discuss on the call today may constitute forward-looking statements within the meanings of the federal securities law. 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 that we file with the SEC. Well, first and foremost, we hope that you and yours are doing well. To the extent that we can, we are closely monitoring the rapidly evolving macro environment including the impact of tariffs, interest rates, credit spreads, and other public policy issues as we move forward with executing our 2025 business plan. So during our prepared remarks today, we'll briefly update you on first quarter results and provide an update on our 2000 business plan. After that, Dan, George, Tom, and I are available to answer any questions. So moving into the presentation, our first quarter FFO was 14 cents per share, and you'll hear more on that from Tom in a few moments. We posted solid operating metrics again this quarter, reinforcing our portfolio's high quality and strong market positioning. At the midpoint, we have now executed 92% of our 25-spec revenue target. Our quarterly retention rate was 55%. Our leasing activity for the quarter approximated 340,000 square feet, including 235,000 square feet in our wholly owned portfolio and 105,000 square feet in our joint ventures. While this quarterly activity was below our fourth quarter run rate, our operating portfolio pipeline continues to increase. And along those lines, we're pleased to report that we have 306,000 square feet of forward leasing activity that will commence after the first quarter end. This is the highest level of forward leasing velocity we've had in over 11 quarters. This forward leasing helps mitigate our first quarter negative absorption. The predominance of that negative absorption was the result of early terminations and two tenant defaults. Seventy-seven percent of that activity occurred in our Austin, Met DC, and New Jersey Delaware markets. We have already released 55,000 square feet of those move outs, all with 2025 commencement dates. As anticipated in our business plan, we did end the quarter at 86.6% occupied and 89.2% leased. In Philadelphia, we are 93% occupied and 96% leased. In the Pennsylvania suburbs, we are 88% occupied and 90% leased. And in Austin, where a number of early terminations impacted our overall occupancy numbers, that is now 75% occupied. But given the overall strong performance in the majority of our portfolio, we are maintaining our year-end occupancy and leasing guidance. Looking ahead, we have only 4.4% of annual rollover through 2026, remaining one of the lowest in the office sector. For the quarter, Our mark-to-market was 8.9% on a gap basis and 2.3% on a cash basis. Both are above our business plan expectations. Our capital ratio was 12.2%, slightly above our 25 business plan range, but as expected for the first quarter. First quarter physical tours were well in line with our fourth quarter volume and exceeded first quarter 24 by 4%. Also, on a wholly owned basis, 60%. of all new leasing activity was the result of the flight that clouded I'll talk about in a few moments. We also do not have any tenant lease expirations greater than 1% of revenue through 2026. Our operating portfolio leasing pipeline remained very strong. It includes about 159,000 square feet of leases in advanced stages of negotiations. So the takeaway on operations is it remains very stable, solid operating performance with very limited rollover risk for several years, good capital control, improving markets, and an expanding leasing pipeline. So all in all, very consistent with our 25 business plan forecast. From a liquidity standpoint, we did elect to prepay our $70 million unsecured term loan. and at $65 million outstanding on our $600 million unsecured line of credit. We have no unsecured bond maturities until 2027 in November of that year. Going forward, as we talk about every quarter to ensure ample liquidity, our business plan is predicated upon maintaining minimal balances on our line of credit over the next several years. If stepping back and looking at the big picture, Our real estate markets and overall sentiment continues to improve. We are seeing that every day in our tour activity. Our operating and leasing teams have established a solid operating foundation to capitalize on these improving office market dynamics. In particular, our pipeline activity continues to grow. Tour volume remains at a very healthy level. Rent levels and concession packages remain in line with our business plan. And in select submarkets and buildings, we're pushing both nominal and effective rents. Demand for high quality, highly amenitized product, evidencing the flight to quality trend remains a defining characteristic of both the overall sector and our portfolio. The market continues to see a quality bifurcation. For example, using one of the brokerage firm's numbers, Philadelphia has an 18% vacancy rate among 119 buildings. 50% of that vacancy is concentrated in just 14 buildings, while the 10 emptiest buildings account for 40% of the city's vacancy. So the high quality buildings are not only outperforming, but also pushing effective rents and the competitive set continues to narrow. Overall, Brandywine is 96.2% leased in our Philadelphia CBD portfolio, and during the first quarter, we captured 64% of all deals done in the Central Business District. The city's life science sector, while certainly still in the recovery phase, continues to be a forward growth driver, backed by a strong regional healthcare ecosystem that includes almost 1,200 biotech and pharmaceutical firms, along with 15 major healthcare systems. Austin, which is still early in the recovery cycle, continues to be a magnet for corporate expansion, driven by both a friendly business environment and robust job growth. Leasing momentum remains positive, with Austin recording over 112 tenants actively seeking more than 3.7 million square feet of space as of April. That's a 33% increase in demand over the fourth quarter of 24. Positive momentum is being driven by what we're seeing, a revitalization of the tech sector. There's also a notable trend encouraging return to work on a full-time basis. So we remain optimistic that Austin will see increased leasing activity as 2025 progresses. We do anticipate tenants continue to have a clear preference for premium office environments and brandywine as demonstrated through our leasing results. is well positioned to continue capturing demand in both Philadelphia, Austin, and our other smaller submarkets. As we discussed during our fourth quarter call, 2025 is a transitional earnings year for us. We have made significant progress on portfolio stability. However, our earnings remain impacted by the expensing of our preferred non-cash accruals, and interest expense charges relating to our two residential projects at 3025 JFK and 1 Uptown. Stabilizing these development projects remains the top priority for the organization. And during the quarter, we had great success in our residential developments and expanded the pipeline and deal status of our remaining commercial projects. Looking at each project, at Schuylkill Yards, our 3025 office component is 80% leased, leaving us with just over one floor to lease. We have a good pipeline that advanced during the quarter on that remaining office space and have advanced negotiations underway on the two remaining retail spaces. We do anticipate the commercial component will stabilize in the first quarter of 26. Avira, our residential tower, continues to perform on pro forma and is currently 96% leased. We are also experiencing a very healthy renewal rate at an average rent increase in the double digits. We expect that VERA will stabilize in the second quarter of this year, so this quarter. 3151, our life science project was substantially delivered this quarter. Some physical work does remain, particularly on the streetscape, and this project will be in a capitalization phase through 2025. The pipeline now stands at over 500,000 square feet with advanced discussions underway with several prospects. The life science market remains in a recovery mode impacted by a challenging fundraising climate and public policy uncertainty. But given our success at the 3025 project, we're also conducting tours of this project with office users based upon the pipeline we're seeing and the stage of that pipeline we do anticipate this project will stabilize in Q3 26. At Uptown ATX, the pipeline for office component now stands just shy of 400,000 square feet with tenant sizes ranging between six and 150,000 square feet. Given the status of this pipeline after accounting for tenant build out periods, we do expect this project to stabilize in Q2 26 as we project it last quarter. Uptown Residential, known as Solaris House, opened six months ago in September. We're currently 56% leased, and we expect Solaris to stabilize early Q4 25. As noted in the past, our development projects remain top of market and are attracted to a broad range of our customer targets. We remain confident in their success, and we continue to aggressively market each of those projects. To the upside, Upon stabilization, these projects will generate about $41 million of annualized NOI increase to our first quarter income stream. So they do remain a key driver for the company. Also, as these projects stabilize, they present an excellent refinancing and recapitalization opportunity for us. In looking at the dividend, as we noted on the year-end call, we rolled out 25 guidance. For 25, the FFO and CAD payout ratios will be above our historical averages and frankly above our preferred levels. However, as our developments grow occupancy, we anticipate bringing our FFO and CAD results through 26 and bringing that dividend payout ratios back to historical levels without reducing the current $0.60 per share dividend. It's also important to note, as we highlight on page three of the supplemental package, Our 2025 recurring capital spend is projected to be impacted by approximately $21 million, or 12 cents per share, of deferred tenant improvement allowances for leases that were signed prior to 2023. During the first quarter, we recognized approximately 50% of those forecasted costs, totaling $10.5 million, or 6 cents per share, that's included in our CAD ratio. In addition, The CAD ratio for the quarter includes just shy of $4 million of accrued but unpaid preferred returns to our partners, or about $0.02 a share. We anticipate that the majority of those preferred returns will be paid upon a recapitalization of the joint ventures, not from cash flow. So in support note, without those new non-recurring costs, Our CAD payout ratio would have approximated 29.8 million, resulting in an 88% payout ratio, much more in line with our historical standards. I also would like to note on the capital side that our 9 to 11% 25 projected capital ratio range is one of the lowest we've had in the past five years. So we are keeping a tight control over capital spending as we aggressively move to lease up our development projects. So with that, let me turn the floor over to Tom to review our financial results and provide an outlook for the balance of the year.

Thank you, Jerry, and good morning. Our first quarter net loss stood at $27.4 million, or $0.16 per share, and our first quarter FFO totaled $24.7 million, or $0.14 per diluted share. Each quarter we provide future quarter guidance on certain significant revenue expense line items, and based on our fourth quarter guidance, Our results were one penny above that guidance, but were two cents below first quarter consensus. The difference is primarily due to a couple of estimates straight lining some expense line items, which did not impact the full year, but did impact the quarter. Some general observations for the first quarter. FFO contribution from our unconsolidated joint ventures totaled $900,000. or $1.9 million above our $1 million reforecasted loss. This is primarily due to income received at Solaris at one time in nature. Certain interest expense was $1 million less than our forecast, primarily due to capitalized interest. And all the other forecasted quarterly results were in line. Looking at our debt metrics, first quarter debt service and interest coverage ratios were 2.1. unchanged from the fourth quarter, and our first quarter and annualized combined core net debt to EBITDA were 7.7 and 7.9, respectively, with both metrics at or below our range. Our combined leverage was better than our core leverage, primarily due to the forecasted one-time cash income that was generated from our unconsolidated joint ventures. the uh there was no other changes to the portfolio or joint ventures as we finalize our our partial conversion plans and is outlined on page four of our supplemental we anticipate removing 300 delaware from our core portfolio within the next two quarters and placing it into redevelopment uh during the quarter we repaid our 70 million unsecured term loan on the extended maturity date with proceeds from the unsecured line of credit and cash on hand We have, as Jerry mentioned, we have no unsecured bonds maturing until November 2027. And our wholly owned debt is 95.4% fixed with a weighted average maturity of 3.5 years. Looking at our second quarter guidance, property level operating income will total approximately $70 million and will be slightly above our first quarter based on lower seasonal operating expenses. FFO contribution from our joint ventures will total a negative $5 million for the second quarter. This represents a sequential decrease of approximately $6 million, primarily due to the one-time forecasted non-recurring income that we received in the first quarter. G&A for the second quarter will total about $9.5 million, representing a sequential decrease totaling $8 million and consistent with prior years. The sequestral decrease is primarily due to the timing of our equity compensation expense recognition. Total interest expense will approximate $34 million and capitalized interest will be about $2.5 million. Termination and other income will total about $1.5 million and net management fee and development will be $2.5 million. Our full year business plan does include speculative sales activity totaling $50 million, which is anticipated to be weighted towards the second half of the year. We project these sales to occur later in 2025 and to create minimal dilution. However, the earnings impact may be higher if timing is accelerated. We anticipate no property acquisitions. We anticipate no use of the ATM or ATI buyback activity, and we believe our share count will be roughly 179 million shares. As Jerry noted, we will look to recapitalize our developments as they approach stabilization and recap the commercial developments as leases are executed and our lease percentages approach 80 to 90%. We are reaching those levels on several projects and we will commence these recapitalization efforts over the balance of the year. Turning to our capital plan, our capital plan for the balance of this year totals $180 million and is straightforward as our wholly owned development redevelopment projects are fully constructed with lease up capital remaining to be spent on our commercial projects. Our 2025 CAD payout ratio for the first quarter was 169.4%. We recognize this is very elevated, and as Jerry outlined, our quarterly CAD was negatively impacted by older tenant allowances and our crude but unpaid preferred dividends on our unconsolidated joint ventures. Longer term, as we complete the recent development cycle and experience higher net operating income, our CAD ratio should decrease significantly throughout 2026. Looking at the larger capital uses for the balance of the year, we have development spend totaling 35 million, which includes 155 King of Prussia Road, 250 King of Prussia Road, and the recently announced food hall at 1 Drexel Plaza. We have $80 million of common dividends, $20 million of revenue-maintained capital, $20 million of revenue-created capital, and $20 million of equity contributions to fund the recently signed tenant leases and our joint venture developments. The funding sources are $95 million of cash flow after interest payments, $55 million of speculative asset and land sales, and $5 million in construction loan proceeds from 155 King of Prussia. Based on the capital plan above, we anticipate using an incremental $25 million of net cash during the balance of the year with a $61 million outstanding balance on our $600 million line of credit. We also projected our net debt to EBITDA will range between 8.2% and 8.4% without any recapitalization of our joint ventures, with the increase primarily due to the losses that were occurring on those joint ventures currently. Our debt to GAV will approximately 48%. By the end of the year, our core net debt to EBITDA range will be 7.7% to 7.9%. and should equal our consolidated net debt to EBITDA, which does exclude joint ventures. We anticipate the fixed charge ratio and interest coverage ratios will be roughly 2.0, which will represent a one-tenth sequential decrease from this quarter, again, primarily due to the joint venture losses. And with incremental income from the development projects, we anticipate the leverage will continue to improve as the year goes on. I will now turn the call back over to Jareth.