Brandywine Realty Trust

Thank you for standing by and welcome to the Brandywine Realty Trust Third Quarter 2026 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 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 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 third quarter 2026 earnings call. On today's call with me today are Dan Palazzo, our Senior Vice President, Chief Accounting Officer, and Tom Wirth, our Executive Vice President and Chief Financial Officer. Just to note 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. Okay, so during our prepared comments today, Tom and I will briefly review third quarter results and frame out our key assumptions that drive our guidance for the balance of the year. After that, Dan, Tom, and I are available to answer any questions. So from a capital markets operating and liquidity standpoint, the third quarter produced results that exceeded or were in line with our 2026 business plan. And since our last call, We've made significant progress on our capital markets plan, primarily on asset sales and debt reduction. Quarterly highlights include, we increased our 2026 sales guidance from 305 million to 681 million, highlighted by the sale of 3151 Market Street and our partnership interest in Solaris House in Austin, Texas. The 3151 sale was for $240 million, were $544 per square foot. It's important to note, as we identified in the SIF, that that sale also eliminated our forward capital spend of almost $80 million. On our sales target, we are 100% achieved and fully funded. Our speculative revenue target increased by an additional $1 million, and we are 100% achieved at $19.5 million, with basically nothing left to do for the balance of 2026. on that target. This marks the second increase to our speculative revenue target this year and is now almost 12% higher than our initial 2026 business plan. Third quarter FFO of 14 cents per share was in line with management guidance and estimates. We are maintaining our 55 cent per share full year midpoint and have narrowed our full year FFO guidance range Our core FFO results, as Tom will articulate, exclude losses on early extinguishment of debt that we incurred during the quarter. With the increased sales achieved, we had paid off $390 million, or over 13% of our outstanding combined debt. This is a $218 million increase over our initial 2026 debt reduction target. That does include the payoff of the loan securing both 31-51 market and Solaris House. Accelerating these debt paydowns lowered our year end net debt to EBITDA midpoint from 8.4 to 8.8, down to 7.8 to eight times, about an 8% reduction at the midpoint and reduced our quarterly run rate from 9.0X in Q2 to 7.6 in the third quarter. From an operating standpoint, solid operating metrics during the quarter reinforced our strong market position and what we're continuing to see is a tenant's preference for very high quality office space. Our wholly owned portfolio is 90.5% leased and 89% occupied. We had a very small negative net absorption of about 7,000 square feet during the quarter. Our year end occupancy and lease percentages will improve through year end and we will have positive net absorption for the first time in several years, I think as additional evidence of our pipeline continue to build and our portfolio quality. Leasing activity for the quarter was our highest for the year, totaling 558,000 square feet, including 372,000 square feet in our wholly owned portfolio. Also included in that number is about 114,000 square feet that we leased at one uptown since our last call, bringing that property to 97% lease. Four leasing commencing after the quarter totals 163,000 square feet with 111,000 square feet taking occupancy this year. Tenant retention was 50%, resulting in our raising our full year midpoint retention target to 54%. This raise was mainly due to unbudgeted renewals and expansions in both the Philadelphia CBD and Pennsylvania marketplaces. Our capital ratio for the quarter was 8.9%. that allowed us to narrow and lower our 20 to 2026 business plan range from 12 to 13 percent to 11 to 12 percent. Our gap mark to market was 10.8 percent. We're narrowing our four year guidance range to five to six percent versus five to seven percent. Cash mark to market was five point seven percent. The adjustments to the guidance are a result of executing lower-cost capital renewals with existing tenants. As a result, this quarter, our CAG number was higher than planned due to a number of those unbudget renewals that temporarily increased our revenue-maintaining CapEx run rate. Same-store results were negative 0.6% on a GAAP basis and a positive 1.7% on a cash basis, both within our current guidance ranges. Tour volume in the third quarter remained very strong, slightly below the high volume we saw in Q2, with higher tour volumes in our CBD and University City markets, slightly lower in the Pennsylvania suburbs, and the same levels quarter over quarter in Austin. We also continue to experience very good tour conversion rates. For the trailing four quarters, 54% of tours converted to a proposal. From proposal, 49% converted to an executed lease. Both are running ahead of our historical averages. Just a few additional comments regarding market dynamics. In Philadelphia, we're now 95% occupied and 96% leased with only 7% rolling annually through 2028. We continued our outperformance trend in the CBD and University City during the first nine months of this year, with 60% of all new leasing signed in our CBD and University City submarkets being out of Brandywine property, as I noted on previous calls, significantly exceeding our 15% market share. Office to residential conversion activity now aggregates in Philadelphia CBD over 5 million square feet. There's about 11% of Philadelphia's inventory, and we believe that that dynamic will continue and further improve our competitive market position. In the Pennsylvania suburbs, we're 93% leased, and we continue to see solid levels of pipeline prospects for the existing vacancies, particularly in our Radnor sub-market. Austin at 66% occupancy continues to lag the rest of the portfolio and does create about a 400 basis point drop in our overall company occupancy numbers. The operating portfolio leasing pipeline remains stable at 2 million square feet, and this pipeline includes about 300,000 square feet in very advanced stages of negotiation. Shifting to the balance sheet, Our liquidity position improved significantly during the quarter. While we had $137 million balance outstanding on our line of credit at quarter end, upon receipt of quarter end sale proceeds, we paid off that balance in early October. As such, there's no outstanding balance on our line of credit, and we have $175 million of cash on hand. As I noted previously, during the third quarter, we reduced outstanding debt by almost $400 million. resulting in total including wholly owned and joint venture about $27.2 million of interest savings and included in those amounts are about $140 million of bond retirements that we retired in the average interest cost of 8.7%. Obviously the vast majority of our sale proceeds consists with our business plan were used to reduce leverage and improve credit metrics. We will continue to use our cash balances and any subsequent sale proceeds to further reduce debt, including repurchasing bonds in the fourth quarter, and to a much lesser extent, to the extent dictated by the market repurchasing shares. As we noted on previous calls, until we make significant progress on all of our leveraged targets, we anticipate using only 5% to 10% of net proceeds to purchase shares. Our plan remains returning to investment-grade metrics. We will maintain minimal balances on our line of credit, and the execution of this sales program this year has been an excellent catalyst to reduce leverage and further improve all of our credit metrics. With our sales activity now complete and debt reduction underway, as I noted previously, we expect a significant improvement to our net debt to EBITDA, The year-end target we have identified in the SIPP does assume we continue to apply about $100 million of cash on hand to further reduce outstanding debt during the fourth quarter. On one uptown, which is the only remaining development project, we made significant progress during the quarter, and as I noted, we are now 97% leased. We expect this project to stabilize in the third quarter, slightly behind schedule due to build-out times with lease executions, but at a slightly higher pro forma yield. What's interesting to note is the uptown submarket where our projects are located is now about 95% plus leased, with a vacancy rate including sublease space of less than 5%, and really no large available blocks of space. So, as noted previously, in anticipation of our 20-2027 IBM lease expiration that will have an impact about 11 million dollars of net NOI on us, we plan to commence the redevelopment of at least one of those existing buildings upon achieving pre-leasing activity. Since announcing this redevelopment initiative, the pipeline has risen to about 1.5 million square feet. with all those prospects having lease commencement dates between late 27 and 2030. So the market response continues to be exceptional. The first building consists of 157,000 square feet. And again, assuming pre-leasing, and we're in significant discussion with some prospects, we expect to deliver a renovated building by year-end 27. Also, as prospective tenants requirements advance, we do have a planning underway to do similar renovations at some of the other buildings. As we discussed in our last call, our hope was to sell Solaris, our 340 unit residential project in Austin. That sale closed in September. We received net proceeds after paying off the $76 million construction loan and paying off our preferred investor. that project was held in a joint venture with Brandywine owning about 57% and was sold at a sub 4% cap rate. As we've already highlighted, we've increased our 26 business plan target to $681 million. And we're frankly delighted to achieve this increased sales target, particularly in light of the very choppy capital markets. So our team did a wonderful job of getting all those transactions closed. Thank you for joining us. So with that overview and our clear priority to continue to lower leverage and return to investment grade metrics, I'll turn the floor over to Tom to review financial results for the second quarter and the outlook for the balance of the year.

Thank you, Jerry, and good morning. Our third quarter net loss was $22.3 million, or $0.13 per share, and our core FFO, which excludes debt extinguishment charges, totaled $15.4 million, or $0.09 per share, totaling 24.6 million or 14 cents per dilute share and met the second quarter guidance and consensus estimates. Some general observations for the third quarter. Property NOI was 68.5 or 1.1 million below our forecast to lower retail and residential income. We anticipate improvement in those areas in the fourth quarter. G&A expense was above our forecast by half a million dollars, primarily due to compensation expense. Third quarter fees were $2.1 million or half a million above reforecast primarily due to third party leasing fees. Quarterly JVFFO, interest expense and other income were generally in line with the forecast. Looking at debt metrics, third quarter debt service and interest coverage ratios were 1.7 times. both equal to our second quarter results. We expect those coverage ratios to improve in the fourth quarter as we experience the full quarter impact of our bond purchases. Our third quarter annualized combined net debt to EBITDA was 7.6 times reflecting proceeds from our sales and corresponding debt repayments. During the fourth quarter, we expect these coverage ratio levels to increase slightly based on having the full quarter impact of sold properties in the fourth quarter cash flow. During the third quarter, we had no significant changes to our core portfolio since the properties that were sold during the quarter were either held for sale or classified as development. After looking at liquidity and financing, after the line of credit was paid off in early October, we had a solid liquidity position of $175 million of cash and no outstanding balance or unsecured line of credit. As Jerry mentioned on sales activity, we increased our target to $545 million on a wholly owned basis, which is 100% achieved and funded. The weighted average cap rate on those sales was 4.7% on a cash basis and 4.9% on a GAAP basis. In addition, the sales reduced our forward capital commitments, as Jerry mentioned, by around $79 million. A majority of these proceeds have been used to reduce debt and will continue on our path back to investment grade. We also have a portion of those sales being used for share buybacks. Looking at our unsecured bonds, our planned buyback of existing unsecured bonds focused on bonds with higher coupons that will have a more immediate impact on our coverage ratios. During the quarter, we purchased 140 million of secured bonds, representing 50 million of the 2028 bonds and 90 million of the 2029 bonds, reducing annual interest expense by $12.5 million. We incurred debt extinguishing costs of about $9.2 million. However, we did not include those in our second half FFO guidance as we discussed in the previous call. Our CPACE loan in connection with the sale 3151 market, we prepaid our $57.3 million loan with a 7.3 interest rate that collateralized the property. The early prepayment resulted in a $6.2 million loss on the early extinguishment of debt. As outlined on page one of our supplemental, during the quarter we reduced debt, including the line of credit, $390 million, which resulted in 24 million of annual interest expense savings on a wholly owned basis. The $24 million reduction represents approximately 18% of our second quarter 2006 midpoint guidance for annual interest expense. We anticipate using another 100 million of cash on hand to further reduce debt during the fourth quarter. are unsecured line of credit at an initial maturity date of June of 26 with two six-month extension options through June of 27. With our sales program now complete, we continue to work and our debt reduction program almost complete. We will work with our bank group to try and extend the line of credit this quarter. As we mentioned, recapitalization of our joint ventures, we've made significant progress toward recapitalizing the final two preferred equity development projects located in Austin, Texas. We have sold Solaris for $136 million and received over $16 million of cash after repaying our partner an existing construction loan, and we reduced the debt attribution by $43.6 million. We are now 97% done at one uptown on the leasing front, our office project, and we plan to recap that asset in the first quarter of 27 and rather than the fourth quarter of 26 based on the timing of the leasing. We expect that transaction to provide about $25 million of net proceeds and reduce our debt attribution by about $50 million in 2027. Property level income, now let's look at the fourth quarter. Property level income for the quarter should be about 68 million dollars and will be about half a million below the third quarter. The incremental decrease is primarily due to the sold properties between the NOI in the third quarter versus the zero NOI in the fourth quarter and that decrease will be about two million dollars. Offsetting that two million dollars is improvement in the Radnor Hotel which commenced operations earlier this year and is producing an incremental $800,000 of NOI between the third and the fourth quarters, and improved operating results at 3025 JFK, which also has $800,000 of improvement between the third and the fourth quarter. FFO contributions from our joint ventures will be about half a million dollars. G&A expense for the fourth quarter will total about $7 million. The sequential decrease is consistent with prior years. and our full year range is still 36 to 37 million. Interest expense, including deferred financing costs will approximately be 35 million, which includes 400,000 of capitalized interest. We've lowered our full year expense range by $3 million at the midpoint to account for the lower debt balances. As previously mentioned, in connection with potentially attiring additional debt, we may incur additional debt extinguishment costs during the fourth quarter that are not currently in our FFO or core FFO guidance. Termination fees and other income will total about $2.5 million. Net third-party fees will be about $2 million. Interest income will total about $1 million with the cash we currently have on hand. And our diluted share count for the should be about 177 million shares, reflecting the share buyback we did in the third quarter. And for clarity, the fourth quarter forecast will then result in core FFO range of 16 to 18 cents per share. During our turning to the capital market plan for the fourth quarter, which is pretty straightforward and totals about $165 million, our third quarter CAD payout ratio was 103, We've adjusted the CAD payout ratio to account for increased tenant renewals and revenue maintained capital that's being incurred, as well as some of the older capital that dates back to pre-2024. Looking at the larger uses, development spend will total $20 million, and we will then have $14 million of common dividends, $10 million of revenue maintaining capital, 11 million of revenue creating capital and 10 million of equity contributions to our joint ventures. The sources are going to be 20 million of cash flow after interest and using 145 million of our cash on hand. Based on the capital plan, we anticipate having a small amount of cash and no outstanding balance on our line of credit. We anticipate our net debt EBITDA range to be 7.8 to 8.0. and our fixed charge ratio to between 1.8 and 2.0. Implicit in these ratios is further reducing debt by another 100 million during the quarter. While the increase to 2026 sales has accelerated our deleveraging program, we are focused on additional sales in 2027 as we continue our goal to improve our pricing in public market debt and in our ratings. I will turn the call back over to Jerry. Tom, thanks very much.