Brandywine Realty Trust Q3 FY2025 earnings call

• Operations showed strong performance with continued flight to quality and solid market positioning. They executed over 99% of spec revenue target midpoint, with leasing activity and forward leasing remaining strong.
• Balance sheet and liquidity: No outstanding balance on $600 million line of credit, issued $300 million of bonds due 2031, used proceeds to repay secured CMBS loan, and maintained excellent liquidity.
• Development projects: Recapitalization of development joint ventures was delayed, with stabilization dates adjusted. Projects like 3025 Avira and Solaris were stabilized, but others had delays. Leasing pipeline on development projects increased, but stabilization dates were slid.
• Dividend: Board lowered dividend from $0.15 per share to $0.08 per share, believing it's sustainable and aligns with historical averages.

In the third quarter, Brandywine Realty Trust posted solid operating metrics. They executed over 99% of the spec revenue target midpoint. Quarterly tenant retention rate was 68%, with leasing activity approximating 343,000 square feet (164,000 in wholly-owned portfolio and 179,000 in joint ventures). Forward leasing after quarter end was 182,000 square feet. Net absorption totaled 21,000 square feet. Occupancy ended at 88.8% and leased at 90.4%. In Philadelphia CBD, occupancy was 94% and leased at 96%; Pennsylvania suburbs at 88% occupied and 89% leased; Boston at 77% occupied and 78% leased. Mark-to-market was negative 1.8% GAAP and negative 4.8% cash, but excluding a large Austin lease, it was positive. FFO for the quarter was $0.16 per share, $0.01 above consensus.

• Revised FFO range for 2025 is $0.51 to $0.53 per share. The reduction is due to transaction costs from CMBS loan repayment, delays in recapitalizing development projects, and other factors.
• Fourth quarter guidance: Impact of 3025 JFK consolidation on GAAP NOI, interest expense, FFO contribution from joint ventures. Property level operating income, G&A expense, interest expense, and other items were outlined. Anticipated no property disposition, ATM, or buyback activity.

• Delayed recapitalization of development projects, which will impact full earnings benefit until 2026.
• Uncertain timing of lease executions for development projects, affecting stabilization timelines.
• Impact of market conditions on leasing and the ability to meet guidance targets, such as uncertain lease commences for some development projects.

Q: Could you go over in more detail how we should think about the timing and process of the recapitalizations?

A: Recapitalizations were for bridge capital. Preferred structures had high cost of capital. 3025 was recapped, eliminating earnings drag. Solaris, One Uptown, and 3151 have different recap plans with various financing options.

Q: Just wondering if you could touch on a little bit more on Uptown ATX. It was obviously good to hear that the pipeline is up and you have some lease in the later-stage negotiation pass. Could you maybe clarify like out of the total leasing prospects that you see at the asset, how much is for spec suites versus like [indiscernible] users? What type of tenants those are, if those are real net growth in the market or just kind of like relocation tenants? And then on the second one, just like on the broader scope of the development land out there, what should we maybe expect in terms of starts in '26?

A: In Uptown ATX, 85% of leasing activity is in Class A buildings. The pipeline has various tenants, and there's a tight market in the submarket. For 2026, plans include recapping projects, working on Block B with multifamily, retail, and hospitality, and considering build-to-suits but prioritizing leasing and recapping.

Q: Maybe just first one on -- can you explain why you all decided to issue the unsecured notes and then take out the CMBS debt. If my recollection is correct, I thought the CMBS debt didn't -- wasn't too pricey in terms of the rate. So just sort of curious you guys' thoughts on how you guys approach that.

A: They approached it by looking to prepay CMBS debt to unencumber assets, help unleveraged ratios, and reset rates with debt capital markets. The 7.04% cap in June was high, and issuing unsecured notes at par helped reset the bar.

Q: Could you provide some detail on the Board's decision to reduce the dividend? How should we be thinking about timing of the cash flow ramping up in '26 in order to maintain a CAD payout ratio that's a little more sustainable? And then do you have any updates on the strategy to deal with the IBM move-out in Austin coming in '27?

A: Board reduced dividend due to cost of outside capital, sustainable floor, and shareholder support. For IBM move-out in Austin, they plan to cover the $12M hole with income from development projects and renovations of buildings, aiming to deliver renovated buildings in early '27 to accelerate absorption.