Brandywine Realty Trust (BDN) Earnings Call Transcript & Summary

Welcome to Day 2 of Citi's 2026 Global Property CEO Conference. I'm Seth Bergey with Citi Research, and we are pleased to have with us Brandywine and CEO, Jerry Sweeney. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit questions. Jerry, we will now turn it over to you to introduce your company and team, provide any opening remarks and tell the audience the top reasons an investor should buy your stock today, and then we can dive into Q&A.

Good morning, Seth. Good morning, everyone. Thanks for joining. With me today is Tom Wirth, who is our Executive Vice President and Chief Financial Officer. I think the -- to start off, I mean, I think the top reasons to own Brandywine stock today are a high-quality operating portfolio in ever-improving markets, our relative valuation and our balance sheet improvement program, which will be implemented this year as far as our balance sheet simplification goes. I think just in terms of overview comments, look, operationally, the company is on very solid footing with room to accelerate leasing as conditions continue to improve. Our 2026 business plan anticipates our occupancy levels will be improved from '25 by about 120 basis points. We expect to have positive absorption in 2026. We continue to have a positive GAAP mark-to-market company-wide of 5% to 7% in our core markets of Philadelphia and the Pennsylvania suburbs, which is about 70% of our revenues, that mark-to-market will be between 8% and 10%. We expect to have higher same-store growth than we had last year. And we -- from an operating standpoint, our leasing capital will stay within our target business plan range. And our spec revenue target of $17 million to $18 million is 74% done at the midpoint. And our forward leasing commencements were over close to 250,000 square feet with occupancy occurring in the first and second quarter. We are also seeing increased tour volumes. So in 2025, our tour volume was up almost 50% -- 45% on a square footage basis over 2024. And our conversion rate, which is a statistic we track carefully is 56% of our tours have turned into proposals. And of our -- the proposal we issued, 38% turn into leases. When we take a look at Philadelphia CBD, which is our largest revenue component, generating about 48% of our overall revenues, we are 95% occupied, 97% leased. We only have 6% rolling through 2028. For the past 5 years, we have a market share of the inventory of about 15%. The last 5 years, on average, we've generated 30% of all leasing activity. But during 2025, I think it's a reflection of the continued flight to quality. 54% of all new leasing activity in Philadelphia CBD was signed at a Brandywine property. But more importantly, over the last 5 years, we've grown net effective rents in Philadelphia CBD and University City by slightly more than 5% per year. The challenge in the portfolio are Austin. There, we've had about a 400 basis point hit to occupancy. While tour volume is up, we still have a lot of vacant space in Austin, we need to fill out. And then certainly, from a development standpoint, we had 4 development joint ventures. We bought 2 of those out in 2025. That simplified our balance sheet. But as we've indicated on our earnings call, that did increase our leverage temporarily. And we have 2 remaining joint ventures down in our Austin developments that we plan on buying out during 2026. Those objectives will reduce our debt attribution, improve our balance sheet and reduce our overall interest carry. To finance that, we've announced a sale target of about $290 million at the midpoint. We anticipate an average cap rate of about 8%. We have about $200 million of properties in the market now and receiving bids, much more active interest in the buying pool than even last year, and we expect to be able to achieve those targets. We anticipate most of those sales will occur in the first half of the year. Our plan is to apply those proceeds to reduce leverage and improve our net debt to EBITDA. The tactics there will be to buy back some of our higher-priced bonds as well as refinance or pay off some of our construction loans. And certainly, to the extent we can generate some excess capacity, we certainly plan on buying back some of our stock as well. We have about $80 million of authorization. And certainly, as we generate additional liquidity, we'll plan on utilizing that as well. So, Seth they are kind of the overview comments, certainly happy to answer any questions.

Yes. I guess kind of just diving a little bit into some of those comments you made, maybe starting with Philadelphia. Just you talked about kind of some of the leasing activity and the success you've had there more recently. Can you just talk a little bit about kind of how much of that demand has been maybe tenants that are new to Brandywine? Are there any particular kind of industries that you're seeing kind of outsized demand from in terms of leasing? And then as there's kind of been a flight to quality, how do you kind of think about the continued ability to push rents in that market?

Yes, look, I think a couple of dynamics are taking place in Philadelphia CBD. Overall, the vacancy rate in Philadelphia is below the national average. There has been very little new construction of office product in the last decade. Right now, we're tracking about 15% of the existing office inventory being converted into either residential or hospitality uses. That's about 7 million square feet out of a 50 million square foot market. So we continue to see good upward pressure on rents in the higher-quality buildings. When you take a look at the overall vacancy rate in the city, it's very concentrated. 8 buildings in Philadelphia comprise over 65% of the vacancy. And a number of those buildings are targeted to be removed from inventory and move into residential uses. So we certainly continue to see, as evidenced by our track record the last couple of years, tremendous ability to continue to absorb space, grow our net effective rents and create really a dearth of availability in the higher quality inventory. And the other thing that's interesting for us is that the flight to quality, so tenants moving from lower quality, lower-priced buildings, actually, some of their compression of space, contraction of space has really played into our own inventory because they're taking less space, able to pay higher rents. So we've had a very good track record of bringing tenants in from older buildings into particularly our Logan properties and our market street properties. So we see that trend as being pretty durable. It's pretty broad-based, Seth. I mean we're not really seeing any particular segment drive that -- we've seen a really uptick in financial service firms. We've actually seen a number of companies move from the Philadelphia suburbs into Philadelphia, but the professional firms are still moving in a very positive direction. Just this past year, 4 AmLaw 100 firms have set a base of operation in Philadelphia, which we've captured several of those. So we actually see the dynamics in both -- there you go. Okay there, John? Maybe just the panel fell off. But we certainly see the dynamics in Philadelphia CBD and University City remaining very strong for the foreseeable future.

Great. And then maybe just following up on kind of your guidance and retention there. I think, 64% in 2025, but you're guiding to slightly lower levels in 2026. Is that kind of a shift to free up maybe larger blocks of space for tenants? Or is that kind of tied to known move-outs? And can you kind of walk us through that?

Yes. I mean we're projecting a positive net absorption this year, and that's in addition to having some tenants who are rolling out of some of our Philadelphia CBD and Austin properties. So from a tenant retention standpoint in terms of number of tenants will be about 56%, 57% from a square footage standpoint, we'll be below where we were last year. But certainly, as the year progresses, I think as we posted the last several years, we're able to kind of move our retention rate up as the year progresses. So right now, we're in active discussion with a number of tenants about renewing who were kind of on the fence. But as we look at the baseline, we're still going to be in a positive net absorption standpoint.

And then as you kind of talk to tenants and think about tenant behavior, how are those kind of conversations going? Are tenants kind of on the whole talking about expansion space? Are they renewing their existing footprints? And then one of the topics of this conference has obviously been kind of the headline noise around AI. Is that kind of coming up with any of your tenants and conversations about their space needs at all?

I think it does come up in conversation with most of our tenants. I think the conclusion is still undetermined. I think we're seeing most of our tenants utilize some level of AI, whether it's in the medical field, the financial service field, certainly the accounting world. But we really have not seen that impact any significant space requirements at all at this point. I mean, certainly, we're seeing that a lot of -- for example, a lot of the professional service firms that have leases rolling. A lot of those leases are 10 to 15 years old. So I think just the natural progression of technology, the old tried and true example is with law firms. They used to do big rolling files. We used to be reinforcing cores for the rolling file cabinets, big law libraries. That really is not in play anymore. But -- so the space compression is predictable. And I think we are, as I mentioned, benefiting from that by having a higher quality inventory in the marketplace.

And then just kind of how are you thinking about AI as a whole, maybe in the medium to longer term? In some markets, we've heard people think about it as creating new jobs. But then there's been headlines about overall potentially job reduction. Just how are you thinking about it as a company and the impact on office overall, maybe in the long term?

Yes. I mean I think internally, Brandywine, we're starting to utilize AI that is being developed in conjunction with some outside firms to help on our leasing front, customer traction perspective, I think there's some real opportunities there. And certainly, from a financial reporting standpoint, we're utilizing a lot of AI initiatives to help streamline our internal financial reporting techniques. And I think we're seeing a lot of our customers do that as well, kind of look internally to how they can accelerate or improve their internal processes. And in some cases, that creates a reduction of staff in, let's call it, the legal or the financial area, but an increase in staff on the IT side. So we haven't really seen a real definitive trend line one way or the other. I know there's been some headline announcements about some of the tech companies moving back to reduce employment base. But we've not yet seen that in the markets we're in, in any great degree. In fact, we're talking about Austin a few moments ago. We've actually seen a fairly significant uptick in the space requirements for technology companies.

Great. And then maybe just on that, I think there's kind of been some investment in often with Samsung and Apple's kind of multibillion-dollar expansions into the market. How much of kind of the pipeline is tied to either those initiatives or kind of other tech uses for space?

Yes. I'm sorry, Seth, the demand drivers you're seeing in Austin?

Yes.

Yes. I mean it tends to right now really be centered on financial service firms and technology firms. And certainly, when we look at the situation today versus a year ago, there's certainly more technology firms that we're talking to for larger blocks of space.

Great. And then maybe just thinking about the IBM vacate in 2027. How are you thinking about kind of the redevelopment opportunity for that space?

Yes, certainly, IBM will be leaving kind of the mid part of '27 for most of their square footage. Stepping back for a second, at our Uptown ATX development, we were able to achieve some additional approvals last year that gave us the ability to increase density there as market demand permits, but also gave us the ability to transfer density between blocks. So we have complete master plan flexibility to both increase density and move that wherever we can on the site. The train station that we've been working on with CapMetro will be completed in the first quarter of '27. That's going to be a huge marketing tool for us. And so those 2 factors really gave us the ability to start rethinking about how we were going to utilize some of the existing buildings on the Uptown campus. We have several buildings that we're undergoing a renovation evaluation on right now. We anticipate those renovations could start midyear this year to some degree. We already have a pipeline of about 800,000 square feet of users for that. And the objective there is to really be able to present high-end renovated inventory that is priced below existing new development. So we're still going through that thought process right now. But as we look forward about the IBM rollover, we certainly think there'll be some additional NOI coming off of our operating portfolio with our mixed-use development in Philadelphia 3025 coming fully online. The major tenant took occupancy January of this year. We'll be able to pick up some incremental NOI off of that. We have our 250 Radnor development coming online with that tenant occupying the early part of this year. And then we certainly have a few other upticks in our NOI forecast that we think will be able to help us bridge the gap on the IBM NOI decline. In addition to that, our 3151 project at Schuylkill Yards recently completed. We have a pipeline there north of 1 million square feet. As you know, from our business plan forecast, we did not project any revenue from that building in 2026, but we certainly do expect some revenue coming from that building in 2027. So we think the combination of those factors will help offset the gap in NOI as we renovate the existing buildings that IBM will vacate.

And then maybe just on kind of some of the recaps that you mentioned, you did 2 last year, you have 2 kind of on deck this year. I guess what's kind of the holdup in terms of waiting until maybe later this year to kind of do those recaps?

Yes. And to recap your question on recaps, we had 4 properties that we had under development. Both were in structures with investors that had a preferred return structure that enabled Brandywine to retain all the value we would create. The construct of those joint ventures was that we needed to expense against earnings, the preferred accrual. The reality is that as we did with the 2 ventures at Schuylkill Yards last year, we paid off the preferred position and the accrual from a capital event from sale proceeds, refinancings, et cetera, with really no impact on earnings. But one of the things I think is misunderstood is that we had about $0.15 or so of earnings dilution due to the need to recognize those preferred charges against earnings. So last year, we bought out the 2 Schuylkill Yards projects. So we bought 3025 wholly on balance sheet. 3151 is on balance sheet right now. It's actually not -- as I mentioned, not generating revenue. We have 2 remaining projects in that structure, both in our Uptown ATX development. So one is residential, 341 units of residential project. That is 98% leased. We're going through the spring renewal process now. We are already evaluating and talking to investors about a recap there. And we anticipate that will happen sometime later in the second quarter, early third quarter. And we're really waiting for there is the results from the renewal cycle to take place to generate more incremental NOI to optimize value. I think that process is well underway. One Uptown, which is our 300,000 square foot office development. We have a lease outstanding that will take us to the mid-60% leased range with a good pipeline behind that. Our target there, Seth, is to get to about 85% leased with visibility towards stabilization and then recap that project, and we put that in our business plan for the second half of 2026. So our plan is by the end of 2026, we will have bought out those 2 remaining venture partners. We will have achieved our sales target. So we'll be able to reduce our debt attribution, generate additional liquidity and improve our balance sheet.

Great. And you mentioned 3151. Kind of -- and it sounds like you don't have anything kind of in the guide for '26 from a revenue standpoint. But you mentioned the pipeline as you kind of expect maybe some contribution there from -- for 2027. What's kind of the leasing strategy at that asset?

Well, it's to get it leased. So we are -- we've got about $1.1 million pipeline on that project. It was originally designed to be a life science dedicated building. But of course, within that design construct, we have the ability to have it being office use as well. So right now, the pipeline is about 60% office and about 40% life science. We're making good progress on a number of fronts. The project has been very well received from an office standpoint. We have a number of ongoing tours and proposals outstanding. From a life science standpoint, the project has always been very well received. I think the problem we've run into on the life science front is capital capacity on the part of a number of the tenants that we're talking to. So hopefully, we're beginning to see some green shoots there. There have been a couple of life science IPOs on Philadelphia-based companies this year. There seems to be a little bit of a break in the storm class on the venture capital side. So we're hoping as more capital flows back into particularly cell and gene therapy therapeutics that we'll be able to try and get some of those life science companies, some of whom we've been talking about for quite some time across the finish line.

And then maybe just with life science and office in that space, how are the rents you're kind of underwriting different between life science and office and maybe from a net effective standpoint because I know the TIs typically can be a little different as well.

Yes. I think we're looking at net effective rent equivalency between the life science and the office. So the face rents in the life science are higher, but certainly, the TI capital costs are much higher as well. So face rents on the office are a bit lower, but the TI costs are a lot lower. So when we go through a net effective rent calculation, they're basically equivalent. So they're still in that mid-7% return standpoint.

Great. And then with the kind of boutique hotel at 165 King of Prussia, kind of what's the plan for that? Do you want to kind of have it wholly owned? Are you going to look to monetize that and sell it to a hospitality operator? How do you think about that in kind of the context of your business plan and your focus on deleveraging?

Yes, great question. Look, I think as we started, that hotel was really driven by a lot of objectives we're getting from our customer base. That hotel sits within the middle of about 2.5 million square feet of office space in our Radnor submarket and then another 600,000 or 700,000 square feet in an adjoining submarket. So when we were going through the exercise of trying to identify for our customers, what were the amenities they really wanted, hospitality became key. So we expect to be able to generate about 25% or 30% of the demand for that project right out of our existing tenant base. It's Marriott brand and we bought on Aimbridge, who's one of the largest operators of Marriott hotels around the world to be our manager. The project will be completed actually in the next couple of months and open for business in May. Our game plan there very simply is to get the project open, get it stabilized and then queue it up for a capital event. So we don't anticipate necessarily being a long-term owner of that project. The objective is to get it completed, get the operational throughput there, demonstrate the traction we're getting from our existing tenant base and look for a capital event sometime in '27 or '28.

Okay. Great. And then maybe going back to some of your comments around dispositions. I think you mentioned an 8% kind of cap rate. Can you talk about maybe the profile of the assets you're looking to sell? Are those primarily in Austin or those in Philadelphia? And then just talk about kind of the depth of the buyer pool and the level of interest in those assets. Is there -- is that kind of opportunistic money? Is that core money for office? Just talk about -- a little bit about the buyer pool and how that's kind of evolved?

Sure. Of the $300 million that we're targeting to sell this year, it's across all of our markets. So we have properties for sale in Austin, Northern Virginia and Pennsylvania. So really, it's portfolio-wide. And the projects are different in their gestation. So some are close to fully leased, if not fully leased with a good weighted average lease term remaining. There, we're getting high-quality institutional buyers who are core or core plus and the pricing levels we expect that there will be very good. We have a couple of under-leased properties that are in the market. And there, the buyer pool is very deep, very strong, but the targeted levels of returns are somewhere in the high teens to low 20s. So when we look at the blended disposition pace, we're pretty confident we're going to get that 8% overall return. But the composition of the buying pool does vary by property. So where we have, again, solid long-term weighted average lease term with no rollover, positive mark-to-market. I think the buyer pool there is a different class than we're seeing on some of the properties that are under leased. And as a predicate to that, we take a hard look at every one of our assets every year, and we identify which we think will be the assets that will generate NOI growth over the next 5 years and what the capital consumption cost is to do that. We certainly net present value that back to where we think today's values are. And if we think that we can trade out a piece of real estate and what we think the net -- equivalent net present value price will be in today's marketplace, obviate the need for the capital investment, we certainly do that. And that's a hard look we take every year. And certainly, this year, we took a harder look at that given our objectives on the balance sheet.

And then you fully kind of unencumbered the portfolio. How does that kind of flexibility influence decisions around debt reduction versus kind of share buybacks?

Well, the first objective is really is to achieve or exceed our sales target and stay within that cap rate range. We've got good visibility that we'll be able to do that. Once we generate that type of liquidity, we have a number of particularly 2 higher cost bond issuances outstanding that we certainly think will be right for a target to buy some of those bonds in. We have a couple of remaining construction loans that are a higher-priced debt that we certainly can reduce or prepay. So I think our attack plan will be once we generate that liquidity, and Tom has done a great job laying everything out. We have the ability to attack our highest price cost of debt to try and, number one, reduce our overall leverage levels of leverage, but also to improve our overall coverages. As we meet our sales goals, we certainly think given the discounted valuation of our public equity that there'll be an allocation of those proceeds to buy back in stock. But the paramount objective is to, first of all, generate the liquidity to achieve our sales targets. And then we have a number of different tactics already laid out to make sure that we optimize the balance sheet post transaction recovery.

And then as you kind of sell some assets and pay down that higher-priced debt, where do you kind of see leverage levels kind of ultimately shaking out at? Like where would you like to be kind of on a longer-term basis?

Look, I think as we've talked on our earnings calls, we very much are focused on getting back to a full investment-grade rating. Our team stays in close touch with the rating agencies. So we have a good road map of what we need to do to get there. I think our overall perspective is to get our fixed charge back to well over 2x and get our net debt to EBITDA back to the low 7s. I think as we laid out the multiple year plan, we feel we'll be able to get to that position.

Great. And then can you just give us an update on kind of the 300 Delaware conversion to residential? And are there any other kind of assets or land that you could convert to for similar conversions?

Sure. We have a couple of projects within our existing portfolio that we're evaluating residential conversions. Two of them are going through the historic tax credit certification process, which would add some very attractive cost of capital to increase the level of returns. We're also looking at a couple of our projects down in Austin, Texas for potential residential conversion. So I think that's -- as we start to take a look at what we think the demand drivers are in certain submarkets, alternative uses for those assets are certainly on the table. One of our objectives on those -- in those situations is to get all the design development work done, perfect the approvals. And at that point, we may or may not do that ourselves. But to get to a point we can actually sell to a residential developer or if we think that the marketplace is strong enough to do that ourselves if the capital capacity is there.

And then we got a question in from the audience. What are the main drivers of the recent weak demand for life science? How much of your existing life science tenants rely on government funding?

Rely on what?

How much of your existing life science tenants rely on government funding?

It's not as much as you would think. I mean, certainly, the NIH grants, the federal funding is really funneling through the major institutions. So Children's Hospital, University of Pennsylvania Medical System, Jefferson Healthcare System, Main Line Health, The Wistar Institute. They tend to be the primary recipients where a lot of the life science companies we're dealing with are really more privately financed and going through FDA trials. So we have a number of companies in our portfolio now that are in early to latter stage FDA evaluation. A number of them have raised capital. A number of them won't raise more capital until they actually get through the FDA trials. So as I alluded to earlier, we're definitely seeing a bit of a recovery from the capital standpoint on life science as we term green shoots, but those green shoots need to grow into trees, and we're not quite seeing that yet. So we're staying in very close touch with our tenants. We had a number of tenants in our graduate platform that we thought would be moving into larger space. They put those expansion plans on hold until they raise additional capital. And we have a number of other companies that have kind of reduced the number of vectors they're evaluating to try and dovetail with what the capital funding base is. So the good news is that the science that's being evaluated is actually startling. I mean it's amazing the therapies that are underway, whether it's to cure lupus, autoimmune diseases and really tremendous benefit to the public. So we hope that some of the government funding continues and certainly, the private capital sources continue to open up to take advantage of these advanced therapies.

And then just on that note, you kind of have the target of growing your exposure from 8% to kind of 25% to life science. Are you primarily doing that by some of these asset sales being more office-focused assets? And kind of what gives you the confidence given the softness in life science to kind of grow that exposure to the space?

Yes. Look, it's a great question. I think our 25% overall target is really subject to the timing of getting to that level is subject to where we see the marketplace going. And the major driver there, quite frankly, was when we pivoted a number of years ago to a more heavy life science component, our Radnor Life Science Center and Schuylkill Yards. Clearly, the absorption there has been slower than we would have liked given the overall state of the life science market. So we still have that as a target, but that's going to be totally a supplicant of where the demand drivers are. And one of the key things as we look at it, typically, the approvals we achieved for all of our developments give us the ability to pivot between product types. So for example, at both Uptown ATX and Schuylkill Yards, we have the ability to pivot to whatever use has the best demand drivers. So certainly, as we look forward, whether we are able to maintain that 25% life science target is going to truly be a function of how we're reading the tea leaves and what those demand drivers are.

Great. And then maybe just within the last minute moving into our rapid fire. What will net effective rent growth be for office overall in 2027?

I think 2%.

And then will the office sector have more, fewer or the same number of public companies in a year from now?

I would say fewer.

Fewer. Okay. Great. Thank you so much.

Great. Thank you all very much. Appreciate you being here.