Brandywine Realty Trust

Ladies and gentlemen, thank you for standing by and welcome to Brandywine Realty Trust second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session and instructions will be given at that time. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Jerry Sweeney, President and CEO. Sir, please go ahead.

Michelle, thank you very much. Good morning, everyone. Thank you for joining our second quarter 25 earnings call. As usual, on today's call with me are George Johnstone, our Executive Vice President of Operations, Dan Palazzo, our Senior Vice President, Chief Accounting Officer, and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed on this call may constitute forward-looking statements within the meaning of 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 and enjoying the summer. And during our prepared comments today, we'll briefly review our second quarter results and provide updates on our 2025 business plan. After that, Dan, George, Tom, and I are available to answer any questions. We posted solid operating metrics again this quarter, reinforcing the continued flight to quality, our portfolio's strong market positioning, and our asset quality. As we will review, we are increasing our business plan ranges on retention, same store growth from both the cash and GAAP standpoint, our capital ratio, and GAAP in combined mark-to-market. At the midpoint, we have now executed over 98% of our 2025 spec revenue target. Our quarterly retention rate was 82%. Leasing activity for the quarter approximated 460,000 square feet, including 233,000 square feet in our wholly owned portfolio and 226,000 square feet in our joint venture portfolio. Quarter over quarter, leasing activity increased 35%, highlighted by our signing 100,000 square foot lease with an industry-leading tech company at our one uptown joint venture development. Forward leasing commencing after quarter end remained strong at 280,000 square feet, Second quarter net absorption totaled 13,000 square feet. We do expect positive net absorption in the third quarter as well. As anticipated in our business plan, we ended the quarter at 88.6% occupied and 91.1% leased. The sequential increase in both our occupancy and lease percentage are primarily due to, as we outlined last quarter, reclassifying Thoreau, Delaware into a redevelopment opportunity. the sale of Quarry Lake in Austin, and an asset now held for sale in our Austin portfolio. While we are 91% leased, we expect negative absorption in Q4 from a tenant move out in Austin and several small leasing slides to Q126. So we're holding our year-end leasing range at 89% to 90%. In Philadelphia, we're 93.5% occupied and 96.5% leased. During the second quarter, we captured 54% of all office deals done in the Central Business District. In the Pennsylvania suburbs, we're 88% occupied and 90% leased. In Austin, that is now 78% leased and occupied up due to the sale of those two properties. Looking ahead, we have only 5.2% annual rollover through year-end 26. one of the lowest in the office sector, and only 7.5% through 2027. For the quarter, our mark-to-market was 2.1% on a gap basis and negative on a cash basis. We are increasing our range on both of these metrics, 50 and 75 basis points respectively, based on leases we have already executed in both Philadelphia and the Pennsylvania suburbs. Our capital ratio was 4.1%. well below our 25 business plan range, primarily due to continued capital control, construction efficiencies, and a number of as-is transactions. As such, we're improving our capital ratio by half a percentage point at the midpoint to now 9 to 10 percent, which is the lowest capital ratio range we have had in the past five years. Tour activity continues to accelerate. Second quarter physical tours exceeded the first quarter, by 29%, and the square footage toured in the second quarter exceeded first quarter by 66%. For the quarter on a wholly owned basis, 43% of new leases were the result of a flight to quality. And we also, as we always mention, don't have any tenant lease expirations greater than 1% of revenue through 2026. Our operating portfolio leasing pipeline remains solid at 1.5 million square feet, which includes about 75,000 square feet in advanced stages of negotiations. We anticipate continued strong operating performance in our operating portfolio supported by limited rollover risk, excellent capital control, the ongoing strengthening of our markets, and expanding lease pipelines. From a balance sheet standpoint, we issued $150 million of unsecured bonds in June, generating $159 million of gross proceeds and an effective yield to maturity just over 7%. We used a portion of these proceeds to repay the line of credit balance created by our prepaying the $70 million term loan last quarter. As a result, where we are now, we have no outstanding balance in our $600 million unsecured line of credit. and $123 million of cash on hand. We do plan, in fact, just very recently, use some of those proceeds to reduce our secured indebtedness by repaying our construction loan on 165 King and Pressure Road in Radnor and are in the process of prepaying a portion of our secured CMBS loan. We also have no unsecured bond maturities until November of 27. Going forward, To ensure ample liquidity, as Tom will further touch on, we plan to maintain minimal balances on our line of credit. As noted previously, our business plan is designed to return us to investment-grade metrics over the next couple years. As such, we'll be looking to reduce overall levels of leverage while retiring secured debt through unsecured bank or future bond offerings. Stepping back a bit and looking at the larger picture, Real estate markets and overall sentiment continue to improve. Our operating and leasing teams have established a solid operating franchise to capitalize on improving market dynamics. In particular, pipeline activity continues to grow quarter over quarter. Tour volume remains at very healthy levels. Rent levels and concession packages remain fully in line with our business plan, and in select submarkets and in select buildings, we are pushing both nominal and effective rents. The quality bifurcation continues in the office sector. As a way of example, Philadelphia's vacancy rate is about 18.6% among 119 buildings. 50% of that vacancy is concentrated in just 14 buildings, while the top 10 vacancy buildings account for 40% of the city vacancy. High-quality buildings continue to outperform and push effective rent levels. Our competitive set, particularly in Philadelphia CBD and the suburbs, continues to narrow through both buildings being removed from office inventory for residential conversions, and a select few assets continue to have financial issues, essentially removing them from the leasing market dynamic. In fact, our numbers show that potentially 10 buildings totaling several million square feet of office product is in the process of being removed from inventory for conversion to residential uses. As such, our Brandywine team and assets remain in an ever-improving competitive position. In looking at the city's life science sector, while early in the recovery phase, that should remain a forward growth driver backed by strong regional healthcare ecosystem, that includes the 1,200 biotech and pharmaceutical firms, along with 15 major health systems. Green shoots on the capital raising front are emerging as evidenced by the recent $200 million raise by a local life science firm. Austin, that's actually emerging from real estate market lows and remains a magnet for corporate expansion. Leasing momentum remains positive, particularly in the Class A property, with Austin recording over 121 tenants actively seeking almost 4 million square feet of space as of July. Positive momentum was driven by a revitalization of the tech sector. There's also a notable trend encouraging return to work on a full-time basis, so we are increasingly optimistic that Austin will see increased leasing activity as 2025 progresses. As noted, significant progress is made on liquidity and our operating property performance. Earnings, however, remain impacted by the expensing of our non-cash preferred accruals and negative carry on our JV development. By way of illustration, we are incurring 14 cents per share of negative carry in our development projects, including about 10 cents per share in non-cash charges for our preferred structures on our JV developments. Looking at FFO, our FFO for the quarter was 15 cents a share and in line with consensus estimates. One point to note that we highlighted in our supplemental package in the press release is our 2025 business plan contemplated 3 cents a share in gains from land sales. We did anticipate these sales would occur in the second half of the year. Based upon the length of time required to perfect full site approvals, and that being a condition to achieve optimal pricing, we do not believe all required approvals can be obtained by year end. As a result, we remove these gains from our 2025 forecast, and as such, our revised FFO range is 60 to 66 cents per share, reflecting a midpoint still above consensus estimates. Optimizing value in our development projects remains the top priority in the company. And activity levels in all of our development projects significantly improved during the quarter, particularly at one uptown and 3151. In fact, our overall development pipeline is up over 1 million square feet from last quarter. During the second quarter, we also had great success on residential developments at Avira, which has reached 99% lease, and Solaris now being 89% lease. At Schuylkill Yards, on our 3025 project, that commercial component is now 85% lease. To accelerate leasing on the one remaining floor, we are pre-building space for delivery by year-end and have a very good pipeline of smaller tenants. We have executed one retail lease and are in advanced negotiations on the final retail space. We continue to project the commercial component will stabilize in Q126 shortly after our major tenant takes occupancy in January. Avira, the residential component, as I mentioned, is 99% leased and approaching full economic stabilization. 3151 market, our life science project, was substantially delivered the first quarter of this year and will be in a capitalization phase through 2025. That pipeline has grown significantly since last quarter, 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. Given the success of our 3025 office project, we're also conducting tours with office users. As I mentioned at last call, despite the strong increase in office and life science traffic, visibility on lease executions and related build-out timelines still remains a bit unclear, so we did move the stabilization of that project back a quarter to Q4 26. At Uptown ATX, traffic improved significantly over the quarter, And as highlighted earlier, we signed 100,000 square foot lease and are now 40% leased. Our remaining pipeline remains strong with tenant sizes ranging between 6,000 and 100,000 square feet, including ongoing discussions and negotiations with several full floor users. We are also proceeding with building out spec space on one floor to accommodate the accelerated move-in dates for several smaller prospects. Those suites will be completed in Q1, early Q1 26. Solaris, which opened 10 months ago, is currently 77% occupied and 89% leased. We expect Solaris to fully stabilize in early Q4 of this year. As noted in the past, our development projects remain top of market and attracted to a broad range of our customer targets. We continue to remain confident in their success, and we'll continue our aggressive marketing campaigns. Also, as these projects stabilize, they present an excellent opportunity for refinancing and recapitalization. We do anticipate making progress on this front. with at least one and possibly two projects being recapitalized in the second half of this year. We expect these recapitalizations to retire the preferred investments, recover invested capital, improve our financial metrics and earnings, and reduce overall leverage. Our original 2025 business plan contemplated one development start during the year. So during the second quarter, we did commence construction on the last component of our overall Radnor mixed-use complex, a 121-room hotel situated adjacent to our 2.1 million square foot office life science portfolio and Penn's medical campus. The project cost is slightly less than $60 million, and we anticipate a 10% return on cost. The hotel will serve as an excellent amenity for our Brandywine tenant base and the adjoining universities, And based on surveys with our existing tenant base, we anticipate over 25% of the demand will come from the existing Radnor tenant base. In addition, there are seven colleges within a five-mile radius and an adjoining Penn Medical Complex. The project will be flagged by one of the world's leading brands and full service managed by the world's leading third-party hotel management company. Our plan is to finance these costs through the application of current and future sale proceeds, and potentially a construction loan. The project will be completed in Q2 26 and open for business shortly thereafter. Our 2025 business plan also anticipated $50 million of sales occurring the second half of the year. We're pleased to report that we have sold or are firmly committed to sell almost $73 million of properties. The average cap rate on these sales with 6.9% with a price per square foot of $212. We will continue to market several select assets during the balance of the year, but at this time are not factoring any additional sales into our 25 plan. We had an excellent quarter controlling capital spend as evidenced by tightening of our capital ratio to 9 to 10% of lease revenues. As I alluded to earlier, our metrics have remained impacted by deferred tenant allowances and the non-cash expensing of the preferred dividends. However, as NOI from development has come online and those projects are recapitalized, our plan contemplates growing both our FFO and CAD results to bring our dividend payout ratio back to historic levels. During the second quarter, by way of reference, we recognized approximately 26 percent of the deferred tenant improvement costs, totaling $5.5 million, or three cents per share, in our CAD ratio. In addition, the CAD ratio for the quarter included two cents, or $3.8 million, of accrued but unpaid preferred dividends. We do anticipate that a large majority of those preferred returns will be paid upon the recapitalization of these joint ventures and not from cash flow. Each quarter, we do assess the ability to return historic CAD coverage ratios over the next succeeding four to six quarters. As previously noted, we carefully monitor the timing of NOI coming from development projects, ongoing capital spend, intermediate term coverage ratios, and our plan to return to investment grade metrics in determining our quarterly dividend policy. So with that overview, let me turn the floor over to Tom to review our financial results for the second quarter and outlook for the balance of the year.

Thank you, Jerry, and good morning. Our second quarter net loss stood at $89 million, or $0.51 per share, and those results include several impairments in our Austin portfolio, including $63.4 million, or $0.37 per share. Our second quarter FFO totaled $26.1 million, or $0.15 per diluted share, which met consensus estimates. Some general observations for the quarter. FFO contribution from our unconsolidated joint ventures totaled a negative $5.8 million, or $800,000 more than our $500,000, $5 million re-forecast. Loss was partially due to higher concessions at our Solaris house during lease-up, and we expect those to improve over time. Interest expense was $0.5 million, less than our re-forecast, primarily due to capitalized interest. Other forecasted quarterly results were generally in line. Looking at our debt metrics, second quarter debt service and interest coverage ratios were 2.0, sequentially 0.1 times from the first quarter. Our second quarter annualized combined in core net debt to EBITDA were eight, three and seven, nine respectively with both metrics within our business plan range. Uh, looking at our core portfolio composition, we've made several changes as highlighted previously. We are removing 300 Delaware from our core portfolio and placing it into redevelopment, which is anticipated to commence in 2026. We have sold Quarry Lake and we have one other Austin property help for sale. During the third quarter, We will add our life science redevelopment project located in Radnor, Pennsylvania, 250 King of Prussia Road to the core portfolio as it will be stabilized. Liquidity and financing activity. As Jerry mentioned, we completed a follow-on bond offering in June, which generated gross proceeds of 159 million. The proceeds were used to repair our unsecured line of credit and pay off our construction loan at 155 King of Prussia Road. which is 100% occupied and now paying cash rent. We are working with our services to partially repay a portion of our secured term loan to increase our unencumbered asset pool. It's important to highlight that in April 2024, we executed an unsecured bond issuance at 8.875%, and this recent follow-on issuance had a yield to maturity of 7.04%. representing a 20% decrease in our unsecured borrowing costs. We continue to make a strong liquidity position and we will use sales and refinance proceeds to reduce secured debt and to improve our credit profile and related credit outlook and rating. We have time to work on this improvement with no unsecured bonds maturing until November 2027. Our wholly owned debt is 98.1% fixed with a weighted average maturity of 3.3 years. As we highlighted, we are adjusting and narrowing our guidance for 2025. The midpoint reduction of 3 cents per share is due to removing the anticipated land sales from our guidance, and we also narrowed the guidance by 4 cents a share. As Jerry noted, we expect to recapitalize our residential and commercial developments as our leasing percentages approach 90%. We've either achieved or are reaching those levels with several projects, and we will commence those recapitalization efforts over the balance of the year. We are anticipating some benefit in the 2025 results, with full benefit being realized in 2026. Looking at the third quarter guidance, property level operating income will total approximately $71.5 million and will approximate the second quarter results. FFO contribution of our joint ventures will total a negative $5 million, which is consistent with our second quarter results. Our G&A expense for the third quarter will total approximately $8.5 million, representing a sequential decrease totaling $800,000. Consistent with prior years, the sequential decrease is primarily due to the timing of our equity compensation expense recognition. The interest expense will be approximately $34.5 million, and capitalized interest will be approximately $2.5 million. The sequential increase in interest is primarily due to the $150 million unsecured bond issuance, partially offset by actual and anticipated debt paydowns. Termination fees and other income will total about $1.5 million, and net management and development fees will be about $2 million. The sequential decrease is primarily due to lower forecasted construction development fees due to lower capital costs being incurred at our development properties. Our previous 2025 business plan included speculative sales, totaling $50 million, which we anticipated to be towards the second half of the year. Although we have other assets on the market, we are adjusting our disposition guidance to $72.7 million, representing the sale in the second quarter and our anticipated sale in the third quarter. We anticipate no property acquisitions. We anticipate no ATM or buyback activity. and our share count will be roughly 179.5 million shares. Turning to our capital plan, our capital plan for the balance of the year totals 215 million, and it's fairly straightforward with some adjustments based on recent activity. Our 2025 CAD payout ratio for the second quarter was 176%. We recognize this is a very high elevated level compared to our historical average and our long-term target. As Jerry outlined, our quarterly CAD ratio was negatively impacted by older tenant allowances and unpaid preferred dividends in our unconsolidated development joint ventures. Long-term, as we complete these developments and experience higher operating income, we anticipate our CAD coverage ratios should decrease throughout 2026. Looking at the larger capital uses, we have development spend totaling 55 million, which includes 250 King of Prussia Road, a food hall at 1 Drexel Plaza, and our recently announced development at 165 King of Prussia Road. We have 52 million of common dividends, 15 million of revenue-maintaining capital, and 20 million of revenue-creating capital with $30 million allocated to equity contributions to fund recently signed tenant leases in our joint ventures. The funding sources are $62 million of cash flow after interest payments, asset sales, and construction loan proceeds if we get a construction loan on 165 King of Prussia Road. Based on the capital plan, We anticipate using an incremental $81 million of cash during the balance of the year, with $42 million of cash and no outstanding balance on our line of credit. We also predict our net debt to EBITDA to range between 8.2 and 8.4, with the increase primarily due to losses from the joint ventures developments. Our debt to GAV will approximate 48%. We excluded the CMBS payoff from our sources and uses, so if we are successful in repaying a portion of the secured CMBS loan, we will have another use of cash and likely have a small line balance by the end of the year. By the end of 2025, our core net debt to EBITDA range will be 7.7 to 7.9 and should come close to equaling our consolidated net debt to EBITDA, which excludes our joint ventures. We anticipate our fixed charge Coverage and interest ratios will remain steady at 2.0. And with incremental income in the development projects, we expect these leverage levels will begin to improve as we go into next year. I will return the call back over to Jerry. Thank you, Tom.