Brandywine Realty Trust

Ladies and gentlemen, thank you for standing by. Welcome to the Brandywine Realty Trust's first quarter 2026 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 to ask a question during this session, you would need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. And to withdraw your question, please press star 11 again. 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. Please go ahead.

Michelle, thank you very much. Good morning, everyone. Thank you for participating in our first quarter 26 earnings call. On today's call with me are Dan Palazzo, our Senior Vice President, Chief Accounting Officer, and Tom Werther, 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 file with the SEC. During our prepared comments today, Tom and I will briefly review first quarter results and frame out the key assumptions driving our 26 guidance. After that, Dan, Tom, and I are available for any questions. So, to move into our presentation, from an operating portfolio management and liquidity standpoint, the first quarter produced results very much in line with our business plan. As such, as noted in our supplemental package, all of our full-year operating and financial metrics remain unchanged from our original 26 business plan. And while the first quarter was relatively quiet from a transaction announcement standpoint, it was very busy from an activity perspective. Quarterly highlights include we've achieved 94% of our speculative revenue target at the midpoint of our guidance. Our first quarter FFO was $0.11 a share, which was in line with consensus and management guidance. We have narrowed our full year FFO guidance while maintaining our $0.55 full year midpoint. Our portfolio recycling and debt reduction program is progressing very much on schedule. with approximately $305 million of potential sales under agreement and in various stages of due diligence with pricing right in line with our guidance. We expect, and we'll talk later, but we do expect the majority of these transactions to close in the second quarter. Looking more closely at first quarter operations, solid operating metrics reinforced our strong market positioning and tenants continued to like the quality of perspective. Our wholly owned core portfolio is 88.3% occupied and 89.9% leased. Our year-end occupancy and leasing percentages will improve throughout the year as we anticipate having positive net absorption for actually the first time in several years as further evidence of our improving markets. Forward leasing commencing after year end totaled 182,000 square feet, with most taking occupancy in the next couple quarters. We have achieved, as I noted, 94% of our spec revenue target, which is $16.4 million, which is running ahead of last year. Leasing activity for the quarter totaled 422,000 square feet, including 268,000 square feet in our wholly owned portfolio. and 153,000 square feet in our joint venture portfolio. The wholly owned leasing activity is our highest level since the fourth quarter of 24. Tenant retention was around 45%, very much as expected, since we know there'll be a number of known move-outs throughout the course of the year. Capital ratio is below our target at 6.4%. really driven by a low, as is, no capital deal within one of our portfolios, but our capital for the year will remain within our guidance range. Our gap to mark-to-market was 4.1%. Cash mark-to-market decreased by 2.6%, both below our annual business ranges, but we anticipate improving results in the next three quarters, and as such, we're maintaining our full-year guidance range. Same store results were a positive 0.8% on a gap basis and 3.3% on a cash basis, both above our current guidance ranges. Tours in the first quarter of 26 exceeded the first quarter of 25 by 80%. So continued uptick in overall leasing activity. We also continue to experience a good conversion rate from these tours. For the trailing four quarters, 53% of our tours converted to a proposal, and from proposal, 37% converted to an executed lease. Just a couple of other additional comments regarding market dynamics. In Philadelphia, which includes our Central Business District and University City portfolios, we're now 94% occupied and 96% leased, with only 6% rolling through year-end 2028s. Our Commerce Square joint venture property is now 93% leased, bringing our overall combined Philadelphia holdings to 95% leased. So overall activity levels in our core CBD and University City Marks remain very strong. And we continue to outperform our market share. As noted in the last call, we've captured more than double our market share in each of the last five years. And this trend did continue in the first quarter of 26, with 41% of all new leases signed in this market was at a Brandywine property. In the Pennsylvania suburbs, overall, we're about 90% leased, and we continue to see solid levels of pipeline prospects for the existing vacancies. Austin is 70% occupied. That continues to lag the rest of our portfolio and creates a 340 basis point drop in overall company leasing levels. Tour volumeover did increase 15% over prior quarters. The operating portfolio leasing pipeline is up again this quarter by 200,000 square feet from last quarter and remains solid at 1.7 million square feet. That does include about 314,000 square feet in advanced stages of negotiations. It does not include the leasing pipelines we have on either 3151 or our project at 1 Uptown. And we also believe our marketing position in Philadelphia will continue to improve as we monitor office to residential conversion projects. We're currently monitoring more than 5 million square feet or approximately 11% of the total office inventory in the CBD converting from office to residential or other uses. That 5 million square feet is comprised of 1.2 million square feet that has recently been converted, 1.3 million square feet in active redevelopment, and 2.5 million square feet of price that have been announced during the planning phases. From a liquidity standpoint, we remain in solid shape with only $65 million outstanding balance in our line of credit and $36 million of cash on hand. As previously noted, our multiple-year plan is designed to return us to investment-grade metrics. As such, and you'll hear more from Tom, we plan to maintain minimal balances on our line of credit. The execution of our sales program will reduce overall levels of leverage. And as a point of note, almost 50% of our outstanding bonds have coupons north of 8%, which we also believe provide good refinancing opportunities for us over the next several years. In the second quarter, We will repay the 3025 JFK construction loan with a lower-priced seven-year financing that is approximately $100 million at a rate in the mid-fives. And that transaction, once accomplished, will be on securing the residential component but unencumbering the commercial component of that property for inclusion in our unencumbered asset pool. We're also in the process of extending our – current unsecured line of credit and term loans and plan to complete those extensions in the next couple of quarters. And as we'll outline in the next few moments, our active portfolio recycling program will have a majority of the sale proceeds being used to further improve all of our balance sheet metrics that Tom will walk you through. We do anticipate our CAD ratio continuing to improve during the second half of the year after we fully burn off the remaining tenant improvement costs relating to leases done between 2020 and 2023. As a reminder, on our 3151 project, we did acquire our partners' interest in the fourth quarter of 25. That did have the temporary impact of raising our leverage levels. The pipeline on that project is up 200,000 square feet from last quarter and does stand at approximately 1.2 million square feet and has roughly broken down 50% office and 50% life science. Discussions with a number of prospects are very active with several key proposals outstanding. As a reminder, we don't have any real lease commencements or revenue generating from 3151 in our 26 business plan. At one uptown, we're now 63% leased, which is up from last quarter. The pipeline now stands at over 230,000 square feet, with tenant sizes ranging between 5,000 and 50,000 square feet. We do have six proposals outstanding, aggregating just shy of 100,000 square feet, and we continue to see the pipeline and the velocity of decision-making accelerate at our one uptown project. In addition, as we talked last quarterly call, in anticipation of our 27 lease expirations at the existing buildings in our uptown development, we will be commencing the redevelopment of one of those existing buildings. That building 902 is about 160,000 square feet. We anticipate in completing that redevelopment, that renovation in the late second quarter or early third quarter of 27. And since our marketing launch of those projects, we have generated approximately 1.2 million of additional square feet of prospects. We do expect to deliver pricing levels below the rents required for new construction. And also, as some of our larger prospective tenant requirements advance, if they do, we'll also have planning underway for similar renovations for several other existing buildings. From a capital market perspective, our business plan does project $280 to $300 million of sales activity. We anticipate closing most of those sales within the next 60 to 90 days. We currently, as I noted earlier, have $305 million under agreement and in due diligence. And we also have several other properties in the market exploring sale exits. We do plan to recapitalize both one uptown and Solaris during the second half of 26. These recaps could provide a range from a complete sale to a para-pursuit joint venture where Brandywine retains a minimal stake and recovers significant capital to lower debt attribution and increase liquidity. And in fact, on Solera Center, we're already in the marketplace exploring some potential refinancing options. From a broad standpoint, the vast majority of our sale proceeds will reduce debt, continue to improve liquidity, and further strengthen all of our credit metrics. And also, while the clear priority is to lower leverage and return to investment grade metrics, we do anticipate, given where our stock price is, utilizing a portion of those sales to repurchase our shares while leveraging or lowering our leverage levels across the board. We do have about $82 million available under our existing share repurchase program, and we anticipate the debt reduction program will commence during the second quarter concurrent with the receipt of sale proceeds. The response from the market on assets listed for sales have been very strong. But we have an under-agreement of sale. There's been considerable interest with the typical marketing process producing between 7 to 10 qualified bids. All buyer types were engaged, including institutional investment managers, other institutional investors, and significant interest from private capital. So with that, Tom will review financial results for the first quarter of 26 and the outlook for the second quarter of the balance of the year.

Thank you, Jerry. Good morning. Our first quarter net loss was $48.9 million or $0.28 per share. Our first quarter FFO totaled $20 million or $0.11 per share. in line with our fourth quarter guidance and consensus estimates. Our net loss was impacted by one-time non-cash charges for property impairments, so only about $11.9 million or seven cents a share. Some general observations from the first quarter, property level NOI at $70.2 million was $800,000 above our current reef forecast due to better margins throughout the portfolio. G&A expense was above forecast by $300,000, primarily due to compensation expense. Other income and term fees were $2.2 million or $300,000 below budget, primarily due to lower income from our retail operations. And third-party fees were $2.6 million or $1.1 million above forecast, primarily due to higher third-party leasing fees. Other forecasted results were generally in line. Looking at our debt metrics, first quarter debt service and interest coverage ratios were 1.7 million, both below, incrementally below our fourth quarter results. The decrease is primarily due to lower interest capitalization from 31.51, which did increase interest expense. Our first quarter annualized combined and core net debt to EBITDA were 9.1 and 8.3, respectively. Based on our forecasted sales and debt reduction, These leverage levers will decrease during the balance of the year. Regarding our portfolio, during the fourth quarter, we did remove one property from our core portfolio that is being held for sale. That property totals 116,000 square feet. During the second quarter, we will add 250 King of Prussia Road, our 168,000 square foot life science property located in Radnor Submarket. That will be added to our core portfolio as we anticipate stabilizing that property in June at 100% occupancy. From a liquidity standpoint, we continue to maintain a solid liquidity position with $36 million of cash and $65 million outstanding on the secured line of credit, unsecured line of credit at the quarter end. For the sales activity, we are anticipating $290 million of wholly owned sales at the midpoint, which is weighted towards the first half of the year. And those cap rates continue to price at roughly 8% on a cash and a little above that on a gap basis. As Jerry touched on, we now have $305 million of potential sales in various stages of due diligence. And the anticipated proceeds will be used to reduce debt and continue our path towards investment grade. We also intend to use a portion of the proceeds to opportunistically buy back shares on an earnings neutral basis. On financing activity, At 3025 JFK, the $178 million consolidated construction loan matures in July of 2026. We plan to complete a secured financing on the residential portion of that property, totaling $100 million, and use the proceeds from that loan and the unsecured line of credit to unencumber the office portion of that portfolio. The $100 million seven-year secured financing will be fixed at an all-in rate of roughly 5.7%. On the credit facility, our unsecured line of credit has an initial maturity date in June of 2026 with extensions through June of 2027. And we are working with our bank group to amend and extend the facility ahead of its maturity. Capitalization of the ATX joint ventures. As our joint ventures continue to lease up and cash flow improves, we anticipate recapitalizing those projects on a peri-pursue common equity joint venture basis during the second half of 2026, with our ownership decreasing to a minority stake or an outright sale. We announced our intent to extend two existing loans on those ATX projects, and while we still anticipate closing on those transactions in the second half of 2026, We felt extending the loans will allow us time to run the sales process without concern about the maturity dates. The capital recapitalization of both projects to generate between forty and fifty million dollars of cash that we will use to further reduce our wholly owned leverage and will be slightly accretive to earnings and improve leverage for the balance of the year. Due to the timing and change in ownership structure being later in 2026, we have not included any benefit of these transactions in our FFO guidance. We feel incrementally more positive about executing our land sales program this year, but we have not included any land gains or losses in our results. Focusing on the second quarter guidance, property level operating income will total about $72.3 million and will be about $1.3 million above our first quarter. The incremental improvement is primarily due to increased NOI at our CBD portfolio and the stabilization of 250 King of Prussia Road. These increases are partially offset by startup costs at the Radnor Hotel project, which should open during this quarter. FFO contribution from our joint ventures will be a negative $900,000 for the second quarter, the decrease primarily due to higher interest rates on some of the floating rate debt. GNA expense for the second quarter will total about $9.5 million. The sequential decrease is consistent with prior years and is primarily due to the timing of our deferred compensation recognition. Our full year range of $37 million remains intact. Our interest expense, including deferred financing costs, will approximately $43 million, which includes about $700,000 of capitalized interest. Termination and other Income will total about $2.5 million. Net third-party fees will approximate $1.5 million. Interest income will be about $400,000, and our diluted share count will be about $180 million. Again, these second quarter results and share count do not take into account any potential sales and share buybacks. Turning to our capital plan, our capital plan for the balance of the year remains active and totals about $450 million. Our first quarter 2026 CAD payout was 92.7%. However, our payout will remain within our business. However, our payout ratio for the balance of the year will remain within our 70% to 90% range, as we expect incremental improvement in the payout ratio as FFO improves during the balance of the year. Looking at the larger uses for the rest of the year, we will refinance our 3025 JFK with a construction loan, utilize $140 million of debt and share buyback. Development spend will be about $50 million. We have $42 million of common dividends. Our revenue maintain and revenue create will both be, revenue maintain will be $25 million and revenue create will be $25 million. With $15 million of equity contributions to primarily fund tenant leasing, at one uptown and Solaris extension. The sources to offset those uses are going to be 80 million of cash flow after interest payments, speculative asset sales totaling 290 million, and 100 million of loan proceeds from our Vera residential project financing. Based on the capital plan, we anticipate having approximately 10 million of net outstanding on the line of credit. We anticipate net debt dividend will be within the range of 8.4 to 8.8, and our fixed charge coverage will be about 1.8 to 2.0. Implicit in these ratios is the execution of our sales program and the recapitalization of the ATX developments. These ratios will continue to be elevated until increased revenue comes online from our development projects, particularly 3151, which is now a $250 million wholly owned investment which is currently producing operating losses. As these developments stabilize, our leverage decrease will further accelerate. And as we anticipate that, those leverage metrics will improve as the year progresses. I will now turn the call back over to Jerry. Great, Tom.