Brandywine Realty Trust

Thank you for standing by and welcome to the Brandywine Realty Trust Third 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. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Jerry Sweeney, President and CEO. Please go ahead, sir.

Jonathan, thank you very much. Good morning, everyone. Thank you for participating in our third 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 and Chief Accounting Officer, and Tom Worth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed on the call today 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 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 filed with the SEC. So, during our prepared comments today, we'll briefly review third quarter results, provide updates on our 25 business plan, and be prepared to answer any questions you may have. Looking at the third quarter, we posted solid operating metrics again, reinforcing the continued flight to quality and our strong market positioning. As we'll review in more detail, we do anticipate performing within all of our business plan ranges. At the midpoint, we have now executed over 99 percent of our spec revenue target. Our quarterly tenant retention rate was 68 percent, and we expect to end the year at the upper end of our range. Leasing activity for the quarter approximated 343,000 square feet, including 164,000 in our wholly owned portfolio and 179,000 in our joint ventures. Forward leasing commenced after quarter end remained strong at 182,000 square feet, with most of those leases taking occupancy in the next two quarters. Third quarter net absorption totaled 21,000 square feet, And as anticipated in our business plan, we ended the quarter at 88.8% occupied and 90.4% leased. In Philadelphia, we're 94% occupied and 96% leased. In the Pennsylvania suburbs, we're at 88% occupied and 89% leased with a solid pipeline of prospects for the existing vacancies. Austin remained 77%, occupied in 78% least. We do, as we forecasted before, a large known move out in the fourth quarter that will drop this region further into about 74% by year end. Looking ahead, we have only 4.9% of annual rollover through 26, which is among the lowest in the office sector, and only 7.6% through 27%. For the quarter, our mark-to-market was a negative 1.8 percent on a GAAP basis and a negative 4.8 percent on a cash basis. Both of those metrics, however, were heavily influenced by a large as-is renewal in Austin that had a negative 16 percent GAAP and negative 18 percent cash, but no TIs were invested. Without that lease, the company would have been a 6.2 percent positive GAAP and 2.8 percent positive cash. By way of example, our CBD in Pennsylvania mark-to-market were positive at 6.7 percent and 3.1 percent on a gap in cash basis, respectively. Our capital ratio was 10.9 percent, slightly above our 25 business plan range, but based on leases already executed for the fourth quarter, we're maintaining our capital ratio range of 9 to 10 percent, which is the lowest capital ratio range we've had in over five years. Tour activity through the portfolio continues to accelerate. Third quarter physical tours were in line with second quarter, but more importantly, the square footage of those tours in Q3 exceeded the second quarter by 23%. Another positive sign is that as we track our deal status, letters of intent, legal negotiations out for signature is up 170,000 square feet, or 25% from Q2 levels. For the quarter, 51% of all new leases were the result of a flight to quality. We do not have any tenant lease expirations greater than 1% of revenues through 2026. Our operating portfolio leasing pipeline, remains solid at 1.7 million square feet, which includes about 72,000 square feet in advanced stages of negotiations. To sum up, Operations 25 is characterized by continued strong operating performance, supported by limited rollover risk, excellent capital control, the ongoing strengthening of our marketplaces, and an expanding leasing pipeline. Looking at our balance sheet and liquidity, we remain in excellent shape with no outstanding balance in our $600 million line of credit and cash on hand at the end of the quarter. As previously disclosed, we recently issued $300 million of bonds due January of 2031, which generated $296 million of gross proceeds and an effective yield of six and an eighth. We used $245 million of those proceeds to repay our secured CMBS loan that was due in February of 28. That term loan payment leaves us fully encumbered in our operating portfolio, which provides much greater flexibility to lease and manage our assets, and then also bought about $45 million into our unencumbered NOI pool. We have no unsecured bonds maturing until November of 27. And to ensure ample liquidity, we do plan to maintain minimal balances on our line of credit. As noted previously, our overall business plan is still designed to return us to investment-grade metrics over the next several years. As such, we will continue looking to reduce overall levels of leverage. And as a point of reference on that, our average cost of bond debt is slightly north of 6%. But we do have $900 million, or about 50% of our outstanding bonds, with coupons north of 8%, which, assuming capital markets remain constructive, provide very good refinancing opportunities for us over the next several years. Looking at the markets, look, from an overall standpoint, the real estate markets and overall sentiment continue to improve. That perspective is supported by the following fact patterns. Our pipeline activity continues to grow. Tour volume remains at very healthy levels. Rent levels and concession packages remain very much in line with our business plan. And in select submarkets and buildings, we continue to push both nominal and effective rents. And all of our 2025 key operating goals have been achieved. The demand for high quality, highly amenitized buildings remains a strong consumer preference. In Philadelphia CBD, as I noted on previous calls, market vacancy remains concentrated in a small number of buildings, and high quality buildings continue to outperform lower quality while pushing effective rents. Our competitive set continues to narrow through buildings being removed from inventory for conversion, and several select assets still having financial issues, which essentially removes them from the leasing market. In fact, as an update from last quarter, our numbers now show that potentially 11 buildings totaling 5.1 million square feet of office is in the process of being removed from inventory for conversion to residential uses. As a frame of reference, that's about an 11 percent reduction in the overall office inventory in CBD Philadelphia. As such, with no construction on the horizon, our quality assets remain in an ever-improving competitive position. The city's life science sector, while still early in the recovery phase, should remain a forward growth drive, particularly with the return of capital. That sub-market is backed by a strong regional healthcare ecosystem that includes over 1,200 biotech and pharmaceutical firms, along with 15 major healthcare systems. Austin also remains in recovery phase. Leasing activity continues to improve. As of last report, there are over 108 tenants actively seeking more than 3.5 million square feet. with the tech sector accounting for 1.5 million square feet of that demand. So, a bit of a resurgence from the tech company space demand standpoint. Third quarter leasing activity was 1 million square feet, which was 70 plus percent higher than in Q2. So, green shoots are continuing to emerge in Austin, particularly in the higher quality product. Our FFO for the quarter was 16 cents a share. or one penny above consensus. We had two operating items that Tom will amplify in more detail that did impact our 25 guidance revisions. As previously announced, we will be recording in the fourth quarter an earnings charge totaling seven cents per share related to the early prepayment of our secured notes. In addition, we did anticipate as outlined on previous calls, making progress on recapitalizing at least one and possibly two projects of our development joint ventures in the second half of the year. We did anticipate these recapitalizations would add around $0.04 per share to 2025 FFO. During October, we did capitalize our 3025 JFK property as the first step in this process. We do anticipate a possibly one more later this year or very early in 26. As we talked before, the objective of these recapitalizations, which includes a full retirement of the preferred equity investments, is to bring high-quality stabilized assets onto our balance sheet, which will deliver high-quality cash flow, improve earnings, reduce overall leverage, and open up additional capital options for us on those properties. Due to several factors, including the slower stabilization of several projects, and slower than anticipated interest rate decreases, these recaps are occurring a quarter or two behind schedule. As such, the full impact will not occur really until 2026. As a result of that, you know, our revised FFO ranges we outlined in our press release is 51 to 53 cents per share. Optimizing value in these development projects remains a top priority. With 3025 Avira and Solaris both 99 percent leased and stabilized, our joint venture development pipeline is really down to one up 10 and 3151 JFK. The leasing pipeline on these projects is up 700,000 square feet from last quarter. But as you noted in the supplemental package, even with this increase, given the uncertain timing of lease executions, the time to complete tenant space plans, and the corresponding build-out timelines, we have slid the stabilization dates on both of those properties. Looking at Schuylkill Yards 3025, that commercial component is now 92 percent leased. We have a very good pipeline for the remaining space in the building. With leasing in place, the commercial component will stabilize in Q1-26, immediately after our major tenant takes occupancy. Avira, as I noted a moment ago, is 99% leased and achieved full economic stabilization during the quarter. We're also experiencing on that project a very good renewal rate, with average double-digit rate increases thus far this year. 3151 was substantially delivered in the first quarter of this year and will be in a capitalization phase for the balance of 25. The pipeline on this project has increased to 1.7 million square feet, broken down to 60% office prospects and 40% life science prospects. They range in size from 25,000 to 200,000 square feet. Discussions with many of these prospects are active. Tour activity remains robust, and the project has been very well received. The life science market, as I noted, remains very much in a recovery mode. It's impacted by a challenging fundraising climate and public policy uncertainty, although we are seeing an increased traffic coming from that sector. Despite the strong increase in both office and life science traffic, as I noted, we did slide the stabilization date just to be conservative on when leases will actually commence. At uptown ATX, we're 40% leased, but have another 15% of the project in the final stages of lease negotiations. The remaining pipeline remains strong, with tenant sizes ranging from between 4,000 to 100,000 square feet, including ongoing discussions with several full-floor users. We're also nearing completion on building out some spec space on one of the floors to accommodate the accelerated move-in for several smaller prospects. Solaris, which opened about a year ago, has achieved stabilization during this quarter, so very successful on that, with the renewal program well underway. As noted last quarter, our 25-business plan anticipated $50 million of asset sales. We have sold $73 million of properties at an average cap rate of 6.9 percent and an average price per square foot of $212. At this time, we're obviously not factoring any more sales closings during 25, but we'll certainly identify a target as part of our 2026 guidance. In general, though, from what we're seeing, the investment market continues to improve both in terms of velocity and pricing. The pricing increase is notable because many asset trades are still on lower-quality or under-leased assets. For example, over the last 12 months, there have been about $475 million of sales in suburban Austin at prices per square foot ranging from $75 to $470 per square foot, an average occupancy of 67%, and cap rates ranging from the low single digits to upward of 12%. Likewise, in the TA suburbs, there were $242 million of sales at cap rates that ranged from 7% to 11%, and an average occupancy of 85 percent. So, buyers, including institutional buyers, are continuing to reemerge, so we anticipate the investment climate will continue to improve into 2026. On the dividends, as noted, our board decided to, or previously announced, our board decided to lower our dividend from 15 cents per share to 8 cents per share. We believe this revised dividend is sustainable and represents a CAD payout ratio much more in line with our historical averages. To the extent we continue to experience progress on the developments and cash flow growth from our operating properties, continued low capital costs and reduced borrowing costs and increased CAD, we'll certainly reassess our dividend going forward. But the idea was to set a good, solid floor give ourselves a vision to generate $50 million of internal capital that we can use for reinvestment back into our properties. So with that, let me turn the floor over to Tom to review our financial results for the third quarter and an outlook for the balance of the year.

Thank you, Jerry, and good morning. Our third quarter net loss stood at $26.2 million, or 15 cents per share. Our third quarter FFO totaled $28 million, or 16 cents per diluted share. and 1 percent per share above consensus estimates. Some of the general observations for the third quarter, our FFO from our unconsolidated joint ventures total a loss of $6 million, or $1 million higher than our $5 million forecast, partially due to the delayed recapitalization activity during the quarter. G&A expense was below our forecast by 600,000, primarily due to timing. and other income was $600,000 above our re-forecast due to various items. Other forecasted quarterly results were generally in line. Looking at our debt metrics, third quarter debt service and interest coverage ratios were 2.0, consistent with the second quarter. Our third quarter annualized combined core net debt to EBITDA was 8.1 and 7.6, respectively. Both metrics were within or below our business plan range. From a core portfolio composition during the third quarter, we made one adjustment to our projections. We had forecasted 250 King of Prussia Road becoming a stabilized core property during the third quarter. However, due to a tenant delay in occupancy, the stabilization date has been moved back to 1Q26. As Jerry highlighted, we completed a successful five-year bond issuance that closed in early October, which generated gross proceeds of $296 million. Proceeds were used to pay our $245 million secured CMBS loan, which was due in 2028. Both transactions closed in early October. It is important to highlight that in June of 25, we executed an unsecured bond cap of $150 million at 7.04%. And the recent issuance represents a 13% decrease in our unsecured borrowings since that June offering. In addition, the coupon on our recent bond issuance is slightly below our pro forma 6.26% weighted average effective rate. So we feel the significant increases to our interest expense from future refinancing should come down. We continue to maintain a strong liquidity position and use further sales and refinance proceeds to reduce unsecured debt and to improve our credit profile. We have time to work on this improvement with no unsecured bonds maturing until November 27. Giving effect to the CMBS loan prepayment at the end of the quarter, our wholly owned debt was 100% fixed with a weighted average maturity of 3.5 years. This excludes the 3025 construction loan, which will now be consolidated and matures in July of 2026. As highlighted, we adjusted and narrowed our guidance for 2025. The midpoint reduction is 10% and is comprised of the $0.07 reduction from the transaction costs associated with the repayment of the $245 million CMBS loan. A reduction of $0.04 per share is primarily due to the delays in recapitalizing our development projects, which we expected to generate some benefit to our third and fourth quarter results. There is some negative carry from the bond issuance and the CMBS redemption, and we did have a delay in the stabilization of 250 King of Prussia. Looking at fourth quarter guidance, In connection with the October buyout and consolidation of 3025 JFK, the impact to our fourth quarter results will be an increase to GAAP NOI of $1.9 million, an increase to interest expense of $2.9 million through the consolidation of the construction loan, and $2.7 million improvement in our loss from unconsolidated joint ventures and a reduction in interest income about $600,000 to our reduced cash-on-hand balances. While that is muted to our fourth quarter, the opportunity to buy out our higher-priced capital partner ahead of a final stabilization gives us flexibility entering 2026. The $8 million of annualized NOI for the fourth quarter will increase to over $20 million in the first quarter and grow from there. With the property now wholly owned, we have the flexibility to refinance the above-market debt with lower-priced, unsecured, secured, or agency debt, and we assess, as we also can assess, the opportunity to find a common equity partner and potentially reduce our equity stake. Okay, turning to the rest of the fourth quarter, property-level operating income will total about $71 million and will be similar to the last quarter. results with 3025 being included in the fourth quarter, but lower NOI primarily due to a known move out in Austin as well as the pushback of 250. Our FFO contribution from our joint ventures will total a negative $2 million, which is sequentially lower in the third quarter, primarily due to the fourth quarter consolidation of 3025. higher NAY at both Solaris and Avira, and a partially offset by a higher loss at 3151. G&A expense for the quarter will total about $8 million, representing a full-year expense of 42.6, and within our 2025 business plan range. Our interest expense will approximate 38.5 million, and the capitalized interest will be about 2.5 million. Sequential increase in the interest expense is primarily due to the consolidation of 325, lower projected capitalized interest, and the negative carry impact of the $300 million of unsecured bonds offset by the $245 million of CMBS loan repayment. Termination fees and other income will total about $2 million, and net management and development fees will also be about $2.5 million. We anticipate no property disposition activity for the balance of the year. 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 $388 million and is fairly straightforward, but with some adjustments based on the recent capital markets activity. Our 2025 FFO payout ratio for the third quarter was 93.8%. And then looking at the larger uses, the repayment of the CMBS loan is $245 million. We used just over $70 million to acquire the preferred equity interest at 3025. Our development spend was totaled $24 million, which includes $165 and $250 King of Prussia Road. Our food hall at 1 Drexel Plaza is also in those numbers, and we have $14 million of common dividends. $8 million of revenue-maintaining capital, and $12 million of revenue-creating capital. The funding sources are the $300 million unsecured bond issuance, $25 million of cash flow after interest payments, and $5 million of a proposed and expected King of Prussia construction loan for our hotel. Based on the capital plan, we are anticipating an incremental $58 million of our cash being used and balance end of the year of roughly $17 million with no outstanding balance on our $600 million unsecured line of credit. While our 2025 business plan net debt to EBITDA range is between 8.2 and 8.4, due to the consolidation of 3025 JFK, we project this will temporarily increase to 8.8 times at the end of the fourth quarter. However, and that is the 8.8 is generated by the consolidation of 3025 or about four-tenths of a turn. However, when 3025 JFK income stabilizes in 2026, that ratio will decrease by three-tenths of a turn or for only a net increase of one-tenth of a turn increase. Our net debt to GAV will approximate 48%. Our core net debt to EBITDA will also be impacted temporarily by the same EBITDA adjustments we just made for 3025. We anticipate our fixed charge and interest coverage ratio will be negatively impacted by the financing activity and the consolidation of 3025. and we'll reduce our fixed charge to about 1.8. With incremental income from the development projects, we anticipate that leverage will then begin to improve as we get into 2026. I will now turn the call back over to Jerry. All right, Tom, thank you very much.