Brandywine Realty Trust

Thank you for standing by and welcome to the Brandywine Realty Trust fourth quarter 2025 earnings conference 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 the 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 11 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 fourth quarter 2025 earnings call. 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 Wirth, 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 assurances 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. During our prepared comments today, Tom and I will briefly review fourth quarter results and frame out the key assumptions behind our 26 guidance. After that, Dan, George, Tom, and I are available to answer any questions. So to start moving forward from an operating portfolio management and liquidity standpoint, 2025 produced results very much in line with our business plan. We posted strong operating metrics, reinforcing the continued flight to quality among our tenant base and our strong market positioning. Our wholly owned core portfolio is 88.3% occupied and 90.4% leased. Forward leasing commencing after year-end increased 26%. to 229,000 square feet, with most taking occupancy in the next two quarters. We generated to a near $27.3 million of spec revenue, very much in line with our business plan. And we also exceeded our tenant retention target, which ended up at 64% compared to our original business plan range of 59 to 61%. Leasing activity for the year approximated 1.6 million square feet. During the quarter, We executed 415,000 square feet of leases, including 157,000 in our wholly owned portfolio and 257,000 square feet in our joint venture portfolio. Our capital ratio for the year was 9.5%, slightly better than our 25 business plan midpoint. This was the lowest capital ratio range we had in five years, primarily due to continued good capital control, our purchasing power, and a high percentage of renewals. On an annual basis, our gap mark to market was 4.2%, exceeding our business plan expectations, and on a cash basis, we were in line with our business plan. New leasing mark to market was very strong at 13% and 4% on a gap in cash basis, respectively. And then we also had some very encouraging news on the tour volume standpoint. So fourth quarter tour volume exceeded third quarter by 13%. Tours in the fourth quarter 25 exceeded fourth quarter 24 by 87%. and for the quarter on a wholly owned basis, 45% of all new leasing was a result of flight to quality. Our annual tour volume in 2025 outpaced 24 by 20% on the physical number of tours, but more importantly, 45% on a square footage basis. We experienced Increased tour levels in all of our core markets, particularly CBD, Philadelphia, and Radnor at 49% and 45% respectively on a square foot basis, a great sign of an ever-improving market. We also continue to experience good conversion rate from these tours, which is really the most important step. For 2025, 56%. of all tours converted to a proposal, and from proposal, 38% converted to an executed lease, so very much in line with our historical averages and, in fact, slightly above in some cases. A few additional comments regarding our various market dynamics. In Philadelphia, which our largest sub-market, it encompasses both CBD and University City, We're now 95% occupied and 97% leased, with only 6% of our space rolling through 2028. So a very solid operating portfolio. Our Commerce Square joint venture property is now 90% leased, bringing our combined Philadelphia holdings, both wholly owned and joint ventured, to 95%. As I noted, overactivity levels remain strong. Interesting data points. Over the last five years, Brandywine's captured 30% market share of all new leasing activities signed in Market West in University City, substantially outperforming our 15% share, market share. This trend accelerated during 2025. For the full year, 54% of all new leasing signed in these markets was at a Brandywine property. More importantly, though, since 2021, our net effective rents in these submarkets have increased almost 20%, or an annual net effective rent increase of 5.4%. This net effective rent growth is achieved through sustained controlling capital costs and continued rent growth. In the Pennsylvania suburbs, overall, we're 89.4% leased, and our Radnor submarket is 91% leased. We continue to see solid levels of pipeline prospects for the existing vacancies. Austin at 74% occupancy is creating a 400 basis point drop in overall company leasing levels, but tour volume there was up over 100% year over year, another sign of that market being on a slow path to recovery. Our operating portfolio leasing pipeline remains solid at 1.5 million square feet. which also includes about 140,000 square feet in advanced stages of negotiations. Relative to liquidity, we're in solid shape with no outstanding balance on a $600 million unsecured line of credit and $32 million of cash on hand at the end of the quarter. We also have no unsecured bonds maturing until November of 2027. And as noted previously, we plan to maintain minimal balances on our line of credit as our business plan is designed to return us to investment-grade metrics. As we'll discuss, our 26 plan will reduce overall levels of leverage. But as an interesting point, over 50% of our outstanding bonds has coupons north of 8%, providing very good refinancing opportunities over the next several years, assuming the market remains constructive. As an illustrative point, if we refinance those bonds over 8% to market rate today, our interest rate costs would decrease approximately 10 cents per share. As we look at the year-end results, our FFO for the quarter and year were both in line with consensus. And then notably, during the fourth quarter, we took our first steps towards recapitalizing our development joint ventures. In December, we redeemed our preferred partners' equity interest in both joint ventures at Schuylkill Yards. Our 3025 JFK property bought a high-quality asset onto our balance sheet with a major tenant occupant, already taken occupants in early January. The 3025 commercial component will be added to our core portfolio in the first quarter at 92% leased. Our buy-in on 3151, which aggregated about $65.7 million, was mostly funded with a $50 million C-PACE loan, which effectively replaced our higher-priced partner's equity with a lower-priced loan with prepayment flexibility. As we've noted before, the capitalization phase in this building ended at the end of 2025. Our pipeline on this project stands at approximately a million square feet. broken down to 60% office and 40% life science. Discussions with many prospects remain active and several key proposals are outstanding. Both of these buyouts temporarily increased our year-end leverage in anticipation of the 35 construction loan refinancing and our asset sales program. Notably, the fourth quarter buyout in 3025 occurred in advance of our lead tenant taking occupancy Pro forma for that revenue stream, which did commence this month, our net debt to EBITDA would improve by four-tenths of a turn and our fixed charge by two-tenths of a turn. As a result of these buyouts at Schuylkill Yards, our remaining joint venture development projects are One Uptown and Solaris in Austin. At Uptown ATX... At one uptown, we are now 55% leased, up from 40% last call. But we do have an additional 20,000 square feet, or 8% of leases out for execution, which would bring us to 63%. The pipeline remains strong, with tenant sizes ranging from 5,000 to 60,000 square feet. Solaris, as we noted, is 98% occupied and 99% leased. We are seeing significantly improved economics on lease renewals. In fact, our renewals since November 1st, it's all achieved an average, I'm sorry, 12.7% effective rent growth. Looking at one uptown, with the outstanding lease being executed and at 63%, we have three floors available. The 12th floor is subject to an extension right by our lead tenant, where we'll receive notice in July. Also, since you had great success on the seventh floor, which is 100% leased, the 10th floor is under construction for spec suites, which leaves the 11th floor at 43,000 square feet, the primary target for the larger tenant basis right now. Looking at the investment market, we continue to see a strong improvement in that market, both in terms of velocity and pricing. For example, in a project recently marketed, over 90 CAs were signed. We had 20-plus tours and a strong bid response from the buying pool. Buying pools, we're seeing, consists of high net worth family offices, operators with private capital, and the reemergence of institutional quality buyers. And as we noted previously, for 2025, we did exceed our sale target. Turning to 26. Our 2026 business plan can really be summarized as a return to earnings growth, a continuation of solid operating results, continued crisp focus on stabilizing one uptown and 3151, an accelerated sales program to both pay down debt and further refine our portfolio with corresponding balance sheet improvements. From an operating perspective, our 2026 business plan is very straightforward, highlighted by solid core portfolio performance and strong leasing activity. We are providing 26 FFO guidance with a range of 51 to 59 cents per share for a midpoint of 55 cents, and at that midpoint, Our 25 FFO represents a 5.8% growth rate over, I'm sorry, 26 FFO represents a 5.8% increase over 25 FFO. The primary drivers of this are highlighted in the FFO reconciliation, which is found on page one of our SIP, which Tom will review in more detail. Notably, our midpoint does not factor in the benefit of any of the Austin development recaps. Improvements as we looked at the year, G&A expense will be lower due to lower compensation costs and related cost control measures. Improving operations in our development joint ventures in the bite of our partners at 3025 and 3151. Wholly owned gap NOI will increase primarily from the consolidation of 3025, and we do not expect any early retirement of debt, extinguished costs of debt. Reductions include higher interest expense, primarily due to the consolidation of the 3025 construction loan, and lower capitalized interest due to the end of the capitalization period of 3151. Obviously, with the joint ventures at Schuylkill Yards disappearing, we'll have lower third-party management and development fees. But Tom will review those items and several factors in more detail. From an operating standpoint, The core portfolio will add 3025 in the first quarter and 250 Radnor in the second quarter. Spec revenue we've targeted between 17 to $18 million. While down from 25 levels, spec revenue from new lease transactions is up 39% from 25 levels. We are currently almost $13 million or 75% done at the midpoint with healthy pipelines across the board. We do project that our year-end occupancy will improve 120 basis points from 2025 levels. And based on this, we do project positive net absorption for the first time in several years as another evidence of an improving market. Gap mark to market will range between 5% and 7%, led by an 8% to 10% mark to market in CBD in the Pennsylvania suburbs. Cash mark-to-market will be between a negative 2 to 0, again, led by a positive mark-to-market in the CBD and PA suburbs. Leasing capital will be slightly above our 25 levels at a target range of 12% to 13%. Again, that's primarily due to a higher composition of new lease transactions. Same-store growth will range between a negative 1 and a positive 1 on a gap basis and 0 to 2% on a cash basis. From a capital markets perspective, we plan to repay the 3025 construction loan with lower price debt. We expect about a 200 basis point savings there. We're also evaluating as part of that a secured financing on that residential component and then adding the office portion to our unencumbered asset pool. Our business plan projects between $280 to $300 million of sales activity. We anticipate average cap rates averaging around 8%. We anticipate closing a majority of these sales during the first half of the year. We currently have approximately $100 million with buyers selected and advancing towards agreement of sales and have a number of other properties in the market across all of our submarkets. The vast majority of sale proceeds will be used to reduce debt and continue to improve liquidity and all of our credit metrics. And while that primary focus is lowering leverage as a top priority, given that our stock remains significantly undervalued, we anticipate based upon the velocity of the sales program we have underway to repurchase our shares while continuing to lower leverage. We do have availability under our existing share purchase program. Our sale target also includes executing several delayed land scales, Land sales, which we anticipate will generate gains, but are not included in our 26 guidance. Our business plan does contemplate that both one uptown and Solaris will be recapitalized during the second half of 26. We could do sooner than that, but right now the plan is based on the second half of 26. Those recaps could range from a complete sale or a paraffin suit joint venture, where Brainy Wine remains a minority stake and recovers significant capital to both lower debt attribution and improve overall liquidity. We do project a year-end core net debt to EBITDA to be between 8 to 8.4 times, and we anticipate our CAD ratio will be between 90 to 70%. with the improvement occurring during the second half of the year after we fully burn off the remaining tenant improvement costs related to leases done between 2020 and 2023. So with that, Tom will review our financial results for the fourth quarter and provide more detail on the 26 outlook.

Thank you, Jerry, and good morning. Our fourth quarter net loss was $36.9 million, or $0.21 per share. Our fourth quarter FFO totaled $14.6 million, or $0.08 per diluted share, and in line with consensus estimates. Both quarterly results were impacted by a one-time charge for the early extinguishment of a CMBS loan, totaling $12.2 million, or roughly $0.07 per share. Some general observations from the fourth quarter. Property level NOI was $70 million or $1 million below our forecast, primarily due to increased operating costs across the portfolio. FFO contribution from our unconsolidated joint ventures totaled $0.6 million, or $1.4 million better than our projection. The improvement was primarily due to the improved operations at Commerce Square, ATX office, and Solaris. G&A expense was below our re-forecast by $0.6 million, primarily due to lower compensation expense. Net interest expense was 0.7 million higher, primarily due to the inclusion of JFK's loan, 3025 JFK's loan, partially offset by higher than anticipated capitalized interest. And our other forecasted quarterly results were generally in line. Looking at our debt metrics, fourth quarter debt service and interest rate coverage ratios were 1.8, both below the third quarter levels. Our third quarter annualized combined and core net debt to EBITDA were 8.8 and 8.4 respectively. Both metrics were also above our business plan ranges. These metrics were negatively impacted by our fourth quarter preferred equity partner buyouts totaling $136 million, which retired higher priced capital but was funded by lower priced debt. As we highlighted, we anticipate 2026 sales to reduce and reducing our ownership in uptown ATX will offset these increases. Of note, our consolidation of 3025 JFK occurred before the first quarter stabilization for contractual leases, which increase our combined net debt by 0.4 turns and our fixed charge by 0.2, otherwise placing both metrics within the stated targets. We continue to maintain a solid liquidity position with $32 million of cash on hand and no outstanding balance on our unsecured line of credit as of the end of the year. Looking at 2026 guidance, regarding guidance, at the midpoint, our net loss is projected to be 62 cents per share. Our 2026 SFO at the midpoint will be 55 cents per diluted share, representing a 5.8% increase compared to last year. Operating metrics, overall portfolio operations are expected to remain very stable with property level gap NOI totaling $292 million, representing a $13 million net increase compared to 2025. This increase is comprised of the following, 3025 JFK will generate an incremental $17 million as stabilized wholly owned asset, 2025 asset sales, plus the full impact for that, as well as the fourth quarter move-outs mentioned last quarter, will total $7 million NOI decrease. Same-store results will be essentially flat. Our fourth quarter contribution from the unconsolidated joint ventures will improve from an $11 million loss in 2025 to a $1 million contribution of income in 2026. This improvement is comprised of the 3025 JFK, which is now consolidated, and in 2025 had a loss of $11 million, which is now eliminated. ATX developments with continued lease-up at one uptown and reduced rent concessions at Solaris. We expect a $9 million improvement as compared to 2025. 3151, partially offsetting these improvements, was a one-time item for 7.5 million or 4 cents a share that we took as a tax credit gain in the first quarter of 25 that will not repeat. G&A will be 36 to 37 million, which is 5.5 million below our full year 2025 results. This reduction is primarily due to a decrease in compensation expense, including incentive compensation. Total interest expense, including $5.5 million of deferred financing costs and $2 million of capitalized interest, will approximate $170 million and at the midpoint $30 million increase compared to 2025. The increase is primarily due to the capitalized interest, which will increase $10 million, primarily related to 3151 becoming operational on January 1, 2026. 3025 JFK, the consolidation of that property will increase interest expense by roughly $8 million once refinanced. 3025 bond issuances, which happened in June, also a bond issuance in October, and the related CMBS loan repayment will have an $8 million increase in 2026. And the CPACE loan, which we put on 3151, will increase interest expense by about $4 million. Termination and other income will be between $9 and $11 million compared to $6.6 and $25. The increase is primarily related to improved income from our increase in retail tenants that were put in place during 2025 and some in 26. Net management and development fees are anticipated between $6 and $7 million, a $4 million decrease, mostly due to lower development fees in 2026 as our development joint ventures stabilize. Sales activity, we are anticipating $290 million of fully owned sales activity, which waits towards the first half of the year. As Jerry touched on, our sales activity will be used to reduce debt and continue our path back to investment grade. Depending on the volume and timing of these sales, you know, we expect that we will use the shares to lower debt, which may include a buyback of outstanding bonds. Looking at financing activity, The 3025 JFK has a $178 million consolidated construction loan, which recurs in July 2026. We plan to refinance that loan by late first quarter or early second quarter. We're considering a low-rate secured loan on the residential portion of the property, totaling approximately $100 million, and using those proceeds as well as the line of credit to fully unencumber the office portion of the property. From the credit facility, our unsecured line of credit matures in June 2026, and we anticipate an extension of that facility ahead of the maturity date. The recapitalization of our joint ventures at ATX. As our joint ventures continue to lease up and improve cash flow, we anticipate recapitalizing projects on a priori-pursued common equity joint venture basis during the second half of 2026. with our ownership level decreasing to a minority stake. The recapitalization of both projects will generate cash that will be used to further reduce our wholly owned leverage. Due to the timing and changing in ownership structure being later in 2026, we have not included the benefit of any of these transactions in our FFO guidance. We anticipate no property acquisitions. Our share count will be roughly 180 million shares, While we feel incredibly positive about executing on our land sales program this year, we have not included any land gains or losses in our results. Focusing on the first quarter, property level NOI will approximately $70 million and will be fairly consistent with the fourth quarter. While we will have the full quarter impact of $2 million incrementally at 3025 JFK, this will be partially offset by seasonality throughout the balance of the portfolio. FFO contribution from our joint ventures will total a positive 0.5 million for the first quarter. Our G&A expense for the first quarter will total $12 million. That sequential increase is consistent with prior years and is primarily due to the timing of our deferred compensation expense recognition. Total interest expense will approximate $42 million, which includes about $1 million of capitalized interest. Termination and other fees will total $2.5 million, and net third-party fees will approximate $1.5 million. Turning to our capital plan, As outlined above, our 2026 capital plan has more activity than 2025 and will approximate $475 million. Our CAD payout ratio will range between 70 and 90%, and we expect incremental improvement as the year progresses and as the year continues. Looking at our larger uses, we will refinance the 3025 JFK construction loan, which totals 178 million. We'll use 125 million for buyback activity on the bond side and debt reduction. Development and spend will total 50 million, including 3151 market, 165 King of Prussia, and 325 JFK. We have 57 million in common dividends. 33 million of revenue maintaining capital, and 25 million of revenue creating capital. 10 million of equity contributions to fund tenant leases at one uptown. The sources for these ongoing, for these uses will be 110 million of cash flow after interest payments, speculative sales activity totaling 290 million at the midpoint, and 90 million of loan proceeds potentially financing the residential portion of 3025. Based on the capital plan above, we anticipate having approximately 52 million of cash on hand at the end of the year and full availability on the line of credit. We anticipate net debt to EBITDA at a range between 8.4 and 8.8, and our fixed charge ratio between 1.8 and 2.0. Implicit in these ratios is the extension of our asset sales program and the recapitalization of the ATX developments. These ratios do continue to be elevated as increased revenue comes online with the development projects, particularly 3151, which is now a wholly owned investment, which continues to generate operating losses. As these developments stabilize, our leverage will decrease, will further accelerate improvement on these metrics, and we anticipate the leverage levels will improve as the year progresses. I will now turn the call back over to Jerry.