Brandywine Realty Trust 2026 Q3 Earnings Call

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 and 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 laws. 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 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. From a capital markets operating and liquidity standpoint, the third quarter produced results that exceeded or were in line with our 2026 business plan. Since our last call, we have 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, or $544 per square foot.

It is important to note, as we identified in the SIP, 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 $0.14 per share was in line with management guidance and estimates. We are maintaining our $0.55 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 3151 Market and Solaris House. Accelerating these debt paydowns lowered our year-end net debt to EBITDA midpoint from 8.4x-8.8x down to 7.8x-8x, about an 8% reduction at the midpoint, and reduced our quarterly run rate from 9.0x in Q2 to 7.6x 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 very small negative net absorption of about 7,000 sq ft 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 continuing to build and our portfolio quality. Leasing activity for the quarter was our highest for the year, totaling 558,000 sq ft, including 372,000 sq ft in our wholly owned portfolio. Also included in that number is about 114,000 sq ft that we leased at One Uptown since our last call, bringing that property to 97% leased. Forward leasing commencing after the quarter totals 163,000 sq ft, with 111,000 sq ft 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%.

It allowed us to narrow and lower our 2026 business plan range from 12%-13% to 11%-12%. Our GAAP mark to market was 10.8%. We're narrowing our full year guidance range to 5%-6% versus 5%-7%. Cash mark to market was 5.7%. The adjustment to the guidance are a result of executing lower cost capital renewals with existing tenants. As a result, this quarter, our CAD number was higher than planned due to a number of those unbudgeted renewals that temporarily increased our revenue-maintaining CapEx run rate. Same store results were a 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 execute 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 at a 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 sq ft, which is about 11% of Philadelphia's inventory, and we believe 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 submarket. 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 sq ft, and this pipeline includes about 300,000 sq ft in very advanced stages of negotiation. Shifting to the balance sheet, our liquidity position improved significantly during the quarter.

While we had a $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 on an average interest cost of 8.7%. Obviously, the vast majority of our sale proceeds consistent 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 leverage targets, we anticipate using only 5%-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 the 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-to-EBITDA.

The year-end target we have identified in the SIP does assume we continue to apply that $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.

As noted previously, in anticipation of our 2027 IBM lease expiration, that will have an impact of about $11 million 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 2027 and 2030. The market response continues to be exceptional. The first building consists of 157,000 square feet. Again, assuming pre-leasing, and we are in significant discussion with some prospects, we expect to deliver a renovated building by year-end 2027. Also, as prospective tenants' requirements advance, we do have planning underway to do similar renovations at some of the other buildings. As we discussed on our last call, our hope was to sell Solaris, our 340-unit residential project in Austin.