Brandywine Realty Trust

Thank you for standing by and welcome to the Brandywine Realty Trust second quarter 2026 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 1-1 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 second quarter 26 earnings call. On today's call with me are 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 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 second quarter results and frame out the key assumptions driving our guidance for the second half of the year. After that, Dan, Tom and I are available to answer any questions. To start, from an operating portfolio management and liquidity standpoint, The second quarter produced results that exceeded or were in line with our business plan. This is highlighted by our speculative revenue increasing by a million dollars at our guidance midpoint. Also, due to better than expected tenant renewals and expansions, we increased our full year range for tenant retention. All of our other full year operating and financial metrics remain unchanged from our original 2026 business plan. Since our last call, significant progress has been made on our capital markets activity, including asset sales and our 3025 refinancing that we'll review in a few moments. Quarterly highlights include achieving 99% of our speculative revenue at the revised guidance midpoint, our second quarter FFO of $0.13 per share, that was ahead of the management guidance we provided in our first quarter call and one cent below consensus. We are maintaining our 55 cent full year midpoint and have narrowed our full year FFO guidance range accordingly. Our balance sheet strengthening program is progressing very much on target with approximately $208 million of asset sales now complete and the remaining under agreement with hard money deposits and scheduled to close in the third quarter. We raised our sale guidance to $305 million, which is up $15 million from our business plan. And for all sales, we have achieved pricing in line with our original guidance. Looking more closely at second quarter operations, solid operating metrics reinforced our strong market positioning and tenants' continued preference for high-quality space. Our wholly owned portfolio is 90.6% leased and 89.1% occupied. We had 88,000 square feet of positive net absorption during the quarter. Our year-end occupancy and lease percentage will improve throughout the year as we will have positive full-year net absorption for the first time in several years as additional evidence of the ever-improving market in which we're operating. Leasing activity for the quarter totaled 353,000 square feet. including 254,000 square feet in our wholly owned portfolio and 98,000 square feet in our joint ventures. Forward leasing commencing after quarter end totaled 166,000 square feet with most taking occupancy this year. We have also achieved 18.3 million of spec revenue. That outperformance versus our original plan was primarily driven by Philadelphia CBD and our University City operations. Tenant retention for the quarter was 85%, resulting in us raising our full year midpoint retention to 51 to 53%. This raise is due to unbudgeted renewals and expansions, again, in Philadelphia CBD and the Pennsylvania suburbs. Our capital ratio for the quarter was 12.9% within our 26 business plan range, and our year-to-date capital ratio remains below our 26 range, but will remain within the overall guidance that we've provided. Our gap mark-to-market was 1.5%. Cash mark-to-market declined during the quarter, but we do anticipate improved results in the next two quarters and are maintaining our full-year guidance. Our same-store results were a positive 0.5% on a gap basis and 1.9% on a cash basis, both within our current guidance ranges. Tour volume in the second quarter remained on pace with the high volume we saw in the first quarter. We also continue to experience good tour conversion rates. For the trailing four quarters, 53% of our tours convert to a lease proposal, and from proposal, 41% converted to executed leases, which is above our historical average. A few additional comments regarding market dynamics. In Philadelphia, which includes our CBD and University City portfolios, we are now 95% occupied and 97% leased, with only 7% rolling annually through 2028, and overall activity levels remain very strong. During the quarter, we continued our CBD outperformance trend for the entire first half of 26, with 54%, of all new leases signed in our CBD and University City submarkets being out of Brandywine property, significantly exceeding our market share. In addition to that, as noted on page four of the SIP, we are monitoring conversion projects aggregating more than 5.1 million square feet, representing approximately 11% of Philadelphia's total office inventory. Our marketing position in Philadelphia will continue to improve as these conversion projects get executed. In the Pennsylvania suburbs, we're 91% leased with the Radnor sub market being 93% leased. We continue to see solid levels of pipeline prospects for all of our existing vacancies. On the other hand, Austin at 67% occupied continues to lag the rest of the portfolio and creates a more than 400 basis point drop in our overall company occupancy. Our Austin quarter end occupancy was negatively impacted by 3.7% due to 405 Colorado, which is 100% lease being held for sale at the end of the quarter and subsequently closed. The operating portfolio leasing pipeline is up 13% or 220,000 square feet from the first quarter and remains a solid level just shy of 2 million square feet. This pipeline includes about 456,000 square feet of deals in advanced stages of negotiation. Turning to our balance sheet, we remain in solid shape from a liquidity standpoint. While we had a balance outstanding on our line of credit at quarter end, upon receipt of 192 million of sale proceeds, we paid off that balance. As such, there is no outstanding balance on our line of credit, and we have $35 million of cash on hand. Our paramount objective is to use the vast majority of sale proceeds to reduce company leverage and to further improve credit metrics. As such, we intend to use our cash balances and sale proceeds to further reduce debt, including repurchasing bonds starting as early as this quarter, and to a much lesser extent, repurchasing shares. As such, regarding our planned share buyback program, until we make significant progress on achieving all of our leveraged targets and credit metrics, we anticipate using only about 5% to 10% of our net proceeds to repurchase shares. Consistent with this approach, and as noted previously, our multiple-year plan is designed to return to investment-grade metrics. As such, we plan to maintain minimal balances on our line of credit and continue improving all credit metrics. The execution of our sales program is an excellent catalyst to reduce overall leverage levels and further improve all credit metrics. As a point of note, almost 50% of our outstanding bonds have coupons north of 8.8%, providing an excellent refinancing opportunity over the next several years, assuming capital markets remain constructive. Regarding other elements of our capital plan, during the quarter, we repaid 3025 JFK's construction loan with a $90 million seven-year secured financing on our residential component of Vera and payments from our unsecured line of credit. This transaction unencumbered the office component of the property for inclusion in our unencumbered asset pool, bringing over $13 million of gap income onto our balance sheet. During the quarter, we also exercised our first six-month extension right under our existing credit facility, moving the maturity date to year-end 26. And as we complete our 26 capital recycling program and other capital market activity, we'll continue our productive work with our bank group to recast the facility during this extension period. With the asset sale activity and the financings, we do project our year-end Core Net Debt to EBITDA to be, as we outlined in the SIP, in a range of 8 to 8.4 times. Looking at our two remaining development projects, one uptown in 31-51, while we have minimal definitive results to report this quarter, activity levels have been quite significant. Our overall pipeline for these projects is up over 10% from our last quarter. More importantly, at one octane, we have three leases being finalized and five proposals advancing towards lease negotiations that total over 100,000 square feet. At 3151, in addition to the pipeline continuing to build, we have a multi-floor client in advance of lease negotiations, and our overall pipeline remains around 46% office and 54% life science. We also have several other prospects and active discussions and several other key proposals outstanding. Additionally, in anticipation of the 2027 IBM exploration at Uptown ATX, we do plan to commence redevelopment of at least one of the existing buildings. Since announcing this initiative, we've built a pipeline of over 1.1 million square feet, with that pipeline having lease commencement dates ranging from 2027 to 2028. So the market response has been exceptional. The first building consists of 157,000 square feet, and we expect to deliver that renovated building in the fourth quarter of next year. We do expect rent levels to be 15% to 20% below rents required at run-up town and for brand-new development, and we're targeting a cash yield north of 8%. Also, as prospective tenant requirements advance, We also have planning underway to do similar renovations to several other buildings within the complex. Our Radnor Hotel development opened on schedule in May of 2026. This 121 room hotel is situated adjacent to our 2.1 million square foot Radnor life science portfolio, office portfolio, and Penn Medicine's campus. The hotel is already serving as an excellent amenity for the Brainy Wine tenant base. the eight universities and colleges within a five-mile radius, and the adjoining Penn Medicine Complex. For the partial year, eight-month operating period from May when we opened the doors through December of 26, our pro forma projected a total of 8,500 room nights sold at a target ADR in the low 300s. To date, with less than three months of operations, we have already booked over 8,400 hotel room nights, achieving almost 99% of our 2026 occupancy projections while maintaining our ADR target. So these initial results are very encouraging. We'll be fully opening our two food and beverage offerings by Labor Day, and we expect to stabilize the project in mid-2027. And as we've noted previously, once this project is stabilized, We will aggressively seek alternative capital structures for this operation. Looking at capital markets, as we've already highlighted, we've exceeded our initial 2026 business plan target of $280 to $300 million of sales. We expect to close all $305 million of sales by the end of the third quarter. We do have several other properties in the market for sale as we look at our disposition pipeline moving into 2027. In general, the response from the market on assets listed for sale was very strong. There was considerable interest with typical marketing process producing 7 to 10 qualified bids. All buyer types were engaged, including institutional investment managers, private REITs, and significant interest from private capital and family offices. Looking at our further elements of our capital plan, we do plan to recapitalize both One Uptown and Solaris, our residential project Uptown ATX store in the second half of 2026. We anticipate a full sale on Solaris and a Parry Pursuit joint venture on One Uptown. These initiatives will recover significant capital, lower debt attribution while increasing liquidity. So with that overview, Tom will now review our financial results for the second quarter and outlook for the balance of the year. Tom?

Thank you, Jerry, and good morning. Our second quarter net loss was $31.7 million, or $0.18 per share. Our second quarter FFO totaled $23.6 million, or $0.13 per diluted share, and above our first quarter guidance and $0.01 below consensus estimates. So in general observations for the second quarter, FFO contribution from our joint ventures was $0.3 million or $1.2 million above our forecast due to termination fee income and improving leasing. G&A expense was below our forecast by $0.2 million, primarily due to timing. Other income and term fees were $2.2 million or $0.3 million below reforecast due to lower termination fee income. and third party fees were 1.8 million, 0.3 million above forecast due to higher third party leasing fees. Property level NOI, interest expense and other forecasts according to results were generally in line. Looking at our debt metrics, second quarter debt service and interest coverage ratios were 1.7, both equal to our first quarter results. Our second quarter annualized combined and core net debt EBITDA were 9.0 and 8.1, respectively. Since most of our sales and debt reduction will occur during the third quarter, our leverage metrics are similar to the first quarter. During the second half of the year, we expect these leverage levels to decrease. Portfolio composition. During the second quarter, we removed four properties from our core portfolio that are being held for sale, totaling approximately 775,000 square feet. and they are roughly 91, little over 91 and a half percent occupied. To confirm, properties that are classified as held for sale are removed from our core and operating statistics. Based on the asset sold and the assets held for sale, the impact to our 2026 portfolio statistics will be immaterial. During the second quarter, we added 250 King of Prussia Road, our 168,000 square foot life science property located in the Radnor Submarket to the core portfolio as the property stabilized in June. From liquidity and financing, we continue to maintain solid liquidity with $35 million current cash on hand and no outstanding balance on our unsecured line of credit after taking into account the announced July sales activity. Related to sales activity, we adjusted our business plan for an increase to the wholly owned disposition activity. As Jerry touched on, we have increased our sales target to $305 million with $208 million already closed and two properties expected to close during the third quarter. Majority of these proceeds will be used to reduce debt and continue our path back to investment grade. With respect to our planned buyback activity, on the unsecured notes. We will be focused on notes with higher coupons, as that will be more, have more of an immediate impact to reduce our coverage ratios, to improve our coverage ratios, I'm sorry. Since these bonds trade at a premium, we will incur one-time debt extinguishment costs. However, we have not included these in our estimates of current FFO guidance. We also intend to use a portion of these proceeds, as Jerry mentioned, for sales proceeds to have an opportunistically buy back some shares. From a financing activity, the $178 million consolidated construction loan that was scheduled to mature in July 2026 was repaid in June. We have funded the repayment with a secured loan on the residential portion of the property totaling $90 million and our unsecured line of credit to uncover the property. The $90 million seven-year secure financing was swapped to a fixed all-in rate of 5.8%. Regarding the credit facility, our unsecured line of credit had an initial maturity date of June 2026 with two six-month extensions through June of 27. While we complete our sales and debt reduction program, we continue to work with our bank group and anticipate completing a longer-term amendment during the initial six-month extension period. Looking at the recapitalizations, as our joint ventures continue to lease up and cash flows improve, we anticipate recapitalizing the final two preferred equity development projects into Perry Pursuit common equity joint venture structures during the second half of the year, with our ownership decreasing to a minority stake or an outright sale. We extended two existing loans on our ATX project. While we still anticipate closing those transactions in the second half of the year, we felt extending the loans will allow us time to run the recapitalization process without concerns about the maturities. The recapitalization of both these projects will generate cash proceeds between $40 and $50 million that will be used to further reduce our wholly owned leverage and will be slightly accretive to earnings and improve leverage. We continue to feel incrementally more positive about executing our land sales program this year, but we have not included any land proceeds, gains, or losses in our results, our forecasted results. Focusing on the third quarter guidance, property level operating income will approximate 69.5 million and will be 3 million below the second quarter. The incremental decrease is primarily due to the assets that are held for sale that did close in July and that will generate a $5 million reduction in NOI for the third quarter versus the second quarter. The lower NOI is partially offset by the full quarter impact of the Radnor Hotel, which commenced operations in May and will generate a $1.2 million quarter over quarter increase. We also have the stabilization of 250 King of Prussia Road, which stabilized in June and will have that full quarter effect in the third quarter as well. FFO contribution from our joint ventures will be breakeven for the third quarter. G&A expense for the third quarter will total $7.5 million. The sequential decrease is consistent with prior quarters and is primarily due to the timing of deferred compensation expense recognition. Our full year range is maintained at $36 to $37 million. Total interest expense, including deferred financing costs, will approximate $40 million. which includes $400,000 of capitalized interest. We have lowered our full-year interest expense range by $6.5 million at the midpoint to account for the anticipated lower debt balances. As previously mentioned, in connection with potentially buying back our unsecured bonds, we may incur one-time extinguishment charges that are not currently included in our guidance. Termination fee and other income will total $2.8 million net Third-party fees will approximate $1.5 million, interest income $500,000, and our fully diluted share count will be $180 million. For clarity, the above forecasted results on our core FFO range will be $0.13 to $0.15 for the current third quarter. According to our capital plan, the second half of the year remains active with a total of $250 million of activity. Our second quarter CAD payout ratio was 103%. However, payout will remain within our business plan range for the balance of the year at 70 to 90%, which we expect incremental improvement in the payout ratio as FFO improves to the balance of the year. Looking at the larger uses, we have development spend of $40 million. We also have $28 million of common dividends, $17 million of revenue maintained capital, 25 million of revenue free capital and 10 million of equity contributions to our joint ventures. The sources are going to be $55 million of cash flow from after interest and asset sales totaling 290 million. Based on the capital plan, we anticipate having small balance outstanding on our unsecured line of credit. We anticipate our net debt to EBITDA to still be in the range of 84 to 88 and our fixed charge ratio will be between 18 and 20. Implicit in these ratios is the execution of our asset sales program and the recapitalization of the ATX developments. Until revenue comes online from our remaining development projects, particularly 3151 market, our leverage ratios will remain elevated. However, our asset sales recycling program is generating proceeds. that will lower debt levels and improve our leverage metrics for both bonds and the credit facility. The benefit of this will be reported in the future quarters as we continue to execute on this program. I will now turn the call back over to Jerry. Great. Thank you, Tom.