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  Title	Q4 2024 Brandywine Realty Trust Earnings Call
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  Published Date	Feb. 6, 2025, 12:10 a.m.
  Summary	Q4 2024 Brandywine Realty Trust Earnings Call Thomson Reuters StreetEvents Thu, Feb 6, 2025, 12:10 AM 46 min read In This Article: BDN -0.30% Participants Gerard Sweeney; President, Chief Executive Of
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  Content	Q4 2024 Brandywine Realty Trust Earnings Call Thomson Reuters StreetEvents Thu, Feb 6, 2025, 12:10 AM 46 min read In This Article: BDN -0.30% Participants Gerard Sweeney; President, Chief Executive Officer, Trustee; Brandywine Realty Trust Thomas Wirth; Chief Financial Officer, Executive Vice President; Brandywine Realty Trust George Johnstone; Executive Vice President - Operations; Brandywine Realty Trust Steve Sakwa; Analyst; Evercore ISI Anthony Paolone; Analyst; JPMorgan Dylan Burzinski; Analyst; Green Street Tayo Okusanya; Analyst; Deutsche Bank Upal Rana; Analyst; KeyBanc Capital Markets Inc. Michael Lewis; Analyst; Truist Securities Michael Griffin; Analyst; Citi Presentation Operator Good day, and thank you for standing by. Welcome to the Brandywine Realty Trust fourth-quarter 2024 earnings call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. Please go ahead. Gerard Sweeney Thank you very much. Good morning, everyone. Thank you for participating in our fourth-quarter 2024 earnings call. On today's call with me, as usual, are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Senior Vice President and Chief Accounting Officer; Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain format 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 filed with the SEC. Well, first and foremost, we hope that you and yours are doing well. And with 2024 now behind us, we're looking forward to continued real estate market improvements into both '25 and 2026. During our prepared comments today, Tom and I will briefly review our 2024 results and frame out the key assumptions driving our '24 guidance. After that, Dan, George, Tom, and I are available for any questions. Well, from an operating and portfolio management and liquidity standpoint, 2024 was a solid year. We posted strong operating metrics again this quarter, reinforcing the high-quality nature of our portfolio. Our wholly owned core portfolio is 87.8% occupied and 89.9% leased which has improved sequentially over the last quarter. We exceed our 2024 business planned spec revenue target by 8%, generating $26.4 million. We also exceeded our tenant retention target, which ended at 63% compared to our original business plan target of 51% and 53%. Leasing activity for the year approximate 2.3 million square feet. During the quarter, we executed 783,000 square feet of leases including 486,000 in our wholly owned portfolio and 297,000 square feet in our joint ventures. This quarterly activity was the highest in 2024 and 42% above the corresponding fourth quarter in 2023. Looking ahead, we have less than 5% annual rollover through '26, one of the lowest in the office sector. On an annual basis, our mark-to-market was 12.6% on a GAAP basis and 1.8% on a cash basis, both within our business plan expectations. Our new leasing mark-to-market was strong at 18% and 4% on a GAAP and cash basis, respectively. Fourth quarter fiscal tours exceeded third quarter by 7% with tours in 2024, exceeding 2023 by 22%. The tour activity remains well above pre-pandemic levels. For the quarter on a wholly owned basis, 62% of leases were the result of [fleet] quality. During 2024 for the full year, (inaudible) quality deals represented 60% of new leasing activity. We also importantly note that we do not have any tenant lease expirations greater than 1% of revenues through 2026. Our operating portfolio leasing pipeline remains strong at 1.8 million square feet which includes about 163,000 square feet in advanced stages of negotiations. So the takeaway on operations is stable, solid operating performance with limited rollover risk for several years, good capital control, improving markets and an expanding leasing pipeline. Another key component of our business plan is continually improving liquidity. During 2024, we significantly exceeded our liquidity goals and completed over $300 million of dispositions. This was well above our $150 million 2024 midpoint revised midpoint and a $90 million original guidance. These efforts result are having $90 million of cash on hand and no outstanding amounts on our $600 million unsecured line of credit at year-end. We also -- and Tom will get into more detailed nonsecured bond maturities until November ['27]. And going forward, our business plan is predicated on maintaining minimal balances on our line of credit over the next several years to ensure ample liquidity and our only real maturity in 2025 is a $70 million unsecured term loan evaluating the price of extending. During 2024, we also recapitalized or exited several operating joint ventures. Our ['24] go you may recall, was to streamline these operating joint venture relationships and reduced attribution by $100 million. We achieved that goal into 2024. We reduced the attribution by $229 million. Despite these strong operating metrics and significant progress on further strengthening liquidity, we did fall short of our FFO targets. FFO results were $0.17 for the fourth quarter and $0.85 for 2024, the fourth quarter annual results were negatively impacted by $0.03 a share reduced other income from a onetime transaction. we did anticipate in the fourth quarter, $0.01 per share net dilution due to the increased and accelerated disposition activity. And from a broad -- and several other points that Tom will walk through as well. From a broader perspective, or the real estate markets are improving, we're seeing that every day. During the year, we laid a solid operating foundation in capitalizing these improving office market dynamics. In Philadelphia, there are encouraging signs of stabilization. (inaudible) office market is seeing a clear shift towards high-quality space with Class A properties accounting for 66% of all lease deals signed in 2024. Our overall CBD portfolio is 93% leased. The CBD reported 1 million square feet of transactions during '24, demonstrating the sustained demand for high-quality workspace. Of that activity, for any one captured 49% of all office deals. In addition, the city's life science sector, while still recovering, continues to be a driver of future growth, backed by strong regional healthcare ecosystem that includes 1,200 biotech and pharmaceutical firms alongside 15 major healthcare systems. Austin, Austin, which continues to be a banded for corporate expansion. Leasing momentum there remains positive, with Austin recording two consecutive quarters of net absorption and over 81 tenants currently and actively seeking more than 2.5 million square feet of space. Positive momentum during the fourth quarter was driven by a revitalization of the tech sector. There's also finally a notable trend towards an encouraging trend towards return to work on a full-time basis. So we are optimistic that Austin will see increased leasing activity in 2025. I with tenants having a clear preference for premium office environments, brand new line is demonstrated by 2024 leasing results is well positioned to capture increasing demand in both [Pivot] and Austin. Well, throughout '24, we addressed the key themes that guide our business plan, liquidity, portfolio stability and our lease-up development. While significant progress was made on liquidity and portfolio stability, we have remaining work to do on development leasing. As we'll discuss in a few moments, 2025 is a transitional earnings earning year for us, impacted by the expensing of our preferred coupon payments and the interest expense charges relating to our two residential projects and 3025 GFK in to. While leasing momentum continues to accelerate, the lease-up phase is taking longer than originally anticipated. As such, 2025 as an earnings through due to the items I just mentioned a moment ago. Stabilizing these development projects remains a top priority for the organization. The pipeline of each property continues to build. Tour volume and issued proposals increased during the fourth quarter. But to be conservative, we are not projecting on the commercial properties an additional incremental being generated during 2025. Looking at each project on our 3025 office project at Schuylkill Yards. We did execute a 117,000 square foot lease with FS investments for their new expanded global headquarters. This four-floor lease brings the office component to 83% leased with just over [14] remaining to lease with a very healthy pipeline behind that. We do anticipate this project component will stabilize in Q1 '26 upon that tenant's occupancy. Looking at the residential side which is the residential component of 3025. It continues to perform on pro forma in terms of absorption and rents and sits at 84% leased. Since we launched that marketing campaign, we have leased 306 leases or about 92% of the project. We're also seeing very good as were the renewal program now, very good renewal rates for some of the existing tenants for in excess of a 55% renewal rate and an average rate increase in the high double digits. We do expect this project to stabilize -- this component of the project to stabilize in Q2 '25. And 3151 market, which is our life science project at Schuylkill Yards was substantially delivered at year-end '24 with some remaining work to do and will be -- will remain in the capitalization period through 2025. The pipeline of that price has grown significantly during the last quarter and stands at about 800,000 square feet with several advanced discussions underway. We do anticipate this project will stabilize in Q3 '26. At Uptown ATX, the pipeline for the office component now stands over 500,000 square feet. With tenant size ranging between [60,000 square feet] and 200,000 square feet plus, including ongoing discussions with several sizable users. Given the composition of this pipeline after accounting for tenant build-out and approval period, we expect this project to stabilize in Q2 '26. At Uptown Residential, known as Solaris House, we have delivered off 341 units. We are currently 30% occupied 102 units and 32% leased. Our wholly owned office development in Racker is 100% leased and tenant occupancy commenced in November of (inaudible). As noted in the past, these development projects remain top of market. We remain confident in our success, and we'll continue our aggressive marketing efforts on each one. The earnings impact, as Tom and I will walk through a few months of Karen's non-revenue-producing capital project is a major driver impacting 2025 lines. And along those lines, we did introduce 2025 guidance. We do view our '25 business plan as being a transitional bridge year for us, highlighted by solid core portfolio performance with strong leasing activity, significant balance sheet liquidity with no significant debt maturities and certainly reflecting the earnings impact of our development JVs moving off their capitalization periods. We did provide our release yesterday, 2025 FFO guidance with a range of $0.60 to $0.72 per share for a midpoint of $0.66. At the midpoint, the '25 FFO guidance is $0.19 per share below our '24 FFO of $0.85 per share. The primary drivers for this are highlighted in the FFO reconciliation on page 1 of our SIP and primarily related to expenses and interest rates, interest and preferred charges on 3025, Uptown ATX commercial development and the continued lease-up of our Solaris residential project, partially offset by the projected stabilization of our beer project. Looking at other metrics. Our 2025 GAAP NOI will be approximately $18 million below '24 levels, primarily due to the asset sales activity partially being offset by the 155 King of Prussia Road being fully operational at '25. We do anticipate actually given some delayed land sales activity, which will generate some additional gains. Tom will review all these others in more detail and several other factors. From an operating standpoint, SET revenue for '25 will be between $27 million and $28 million, up 4% from '24 levels. We are currently at 22.9% or 83% achieved at the midpoint. Our cash and GAAP mark-to-market range is lower than '24, primarily due to the regional composition of our leasing activity in 2025. Our GAAP market ranges are also below those levels, which is mainly driven by, again, the regional composition of our 2025 leasing activity, and we did actually two large -- two large renewals with no capital cost if the impact of the mark-to-market for '25. Occupancy levels will be incrementally higher between 88% and 89%. Our lease will also be incrementally higher between 89% and 90%, we anticipate a retention rate of 59% to 61%. Same-store NOI growth will range 1% to 3% on a cash basis and negative 1 to positive 1 on a GAAP basis. Capital control will remain in very good shape or about 10% of revenues below our '24 results. Our business plan projects $50 million of additional sales activity that occurs later in the fourth quarter of ['25] was minimal dilution. Our dividend payout ratios for '24 were 71.4% and slightly more than 100% on CAD for '25, the FFO and CAD payout ratios are above our historical averages and above our preferred levels. However, as development JVs grow occupancy, and we embarked on several recapitalizations -- we anticipate growing our FFO and CAD results through '26 and bringing our dividend payout ratios back to historical levels without reducing the current $0.60 dividend. It's also an important note that as we highlighted on page 3 of the set our '25 capital spend is including CAD, is impacted by approximately $23 million or $0.14 a share of deferred tenant allowance payments for leases that were done between 2020 and 2023. We also that our 9% to 11% '25 projected cap ratio range is one of the lowest we've had in the past five years. So with that, let me turn the floor over to Tom to review our financial results for '24 and summarize our '25 outlook. Story Continues Thomas Wirth Thank you, Jerry, and good morning. Our fourth quarter net loss stood at $43.3 million or $0.25 per share, and our fourth quarter FFO was about $29.9 million or $0.17 per share. Our quarterly net income results were impacted by several noncash impairment charges totaling $23.8 million or $0.14 per share related to two of our nonconsolidated joint ventures located in the DC area. Our fourth quarter FFO results were 3% below our guidance at 6% below the incentive estimates, partially as a result of timing and some general observations for the quarter. Our other income, we did anticipate receiving onetime transactional income totaling about $6 million or just over $0.03 a share. We now anticipate that income being received in the first quarter of '25. Property-level GAAP NOI. Our GAAP NOI was 68.5%, reflects -- this was reflective of our higher-than-anticipated earlier-than-anticipated asset sales activity and slightly higher operating expenses. G&A totaled $10.1 million, $1.1 million above our third quarter. We forecast that's primarily due to some higher noncash equity amortization -- the increase is due to higher forecasted vesting. That will continue into 2025. Total interest expense was [1.2%] below our reforecast, primarily due to higher cash proceeds from the asset sales, which lowered our line of credit balance, and we had slightly higher capitalized interest. Looking at our debt metrics. Fourth quarter debt service and interest coverage ratios were [2.1%] and slightly below our 2.2 projections. Our fourth quarter and annualized consolidated core net debt to EBITDA were 7.9 times and 7.2 times respectively, with both metrics above our range, primarily due to the lower fourth quarter income. Portfolio and joint venture changes. We did add 155 King of Prussia Road to our core portfolio during the quarter as our attendance to occupancy and the property is 100% occupied liquidity. Due to the asset sales, our year-end cash position increased to $90 million, $75 million above our third quarter projection. And as Jerry highlighted earlier, we have a $1 million -- $170 million term loan maturing in 2025 and no unsecured bonds maturing until November 2027. Our wholly owned debt is 95.4% fixed with a weighted average maturity every seven years. Our full year 2024 can rate payout ratio was 103.4%. This was negatively impacted by the lower-than-anticipated fourth quarter income. And if that income did come in, we would have been below the 100%. Going into our 2025 guidance at the midpoint, our net loss will be $0.54 per share our 2025 midpoint guidance for FFO will be $0.66 per diluted share with a stable wholly owned portfolio, this reset of FFO, we believe, is temporary impacted by our portfolio reshaping efforts of the disposition of noncore assets and the development project stabilization. Our fourth quarter -- our FFO contribution from our unconsolidated joint venture developments will be a loss of $25.2 million or $0.11 a share. As the development projects are completed but not yet stabilized, we are incurring interest expense preferred equity costs and overall negative operating income within those joint ventures. The result is losses totaling approximately $32.6 million or $0.18 a share during 2025 compared to a loss of [$12.2 million] or $0.07 a share in 2024. And our 2025 construction loan interest and partner preferred equity returns totaled $43.8 million or $0.24 a share. We expect to recapitalize these capital projects into lower debt and earning costs as the projects stabilize. We will also receive $7.4 million of nonrecurring cash income from the development joint ventures in the first half of 2025. To offset the development joint venture losses, we do expect our operating joint venture portfolio to generate approximately $9 million or $0.05 a share of (inaudible). As Jerry noted, we will look to recapitalize on the residential developments as they approach stabilization and recapitalize the commercial development as leases are executed and our lease percentage approaches 80% to 90%. We believe that will have minimal effect potentially in this year and have significant effect on results. Operating portfolio operations are expected to remain very stable with operating GAAP NOI totaling roughly $290 million roughly flat on a same-store basis as compared to 2024 with core occupancy increasing slightly at the midpoint our 2025 fully on portfolio would be reduced on a comparable basis. by the third quarter sale of our campus in the PA suburbs and the fourth quarter asset sales in Austin, Texas and Richmond, Virginia. The impact of those results will reduce our NOI by roughly $15 million to $18 million Full year impact of 155 King of Prussia will be about $6 million and, on the lease, up of [$250 million] occurs. We will generate an additional $3 million offers. You call G&A -- we expect G&A to be between 42.5% and 43.5%, which approximates our full year 2024 results. Our interest expense, including deferred financing costs and capitalized interest will approximate $135 million, with the midpoint representing a $14 million increase. That increase represents $9 million of reduced capitalized interest and from the developments becoming operational. And $4 million of interest, which is the full year effect, the April 2024 unsecured bond issuance. Termination and other fee income will be between $7 million and $9 million as compared to 13.7% in '24 net management fee and development fees will be between $8 million and $10 million, [$5 million] reduction, again, due to lower development fees from recently delivered joint venture projects. And we do expect to do $50 million of Schuylkill sales weighted towards the second half of the year. We project these sales will occur later in '25 and have minimal dilution. We anticipate no property acquisitions. We anticipate no use of the ATM or buyback activity, and we live our share count would be roughly 178 million shares. More -- looking closer at the first quarter, we see property level NOI or approximately $69 million. Again, this will have the full quarter effect of 155 King of Prussia but also have the full quarter effect of our fourth quarter asset sales activity. Our FFO contribution from our joint ventures will total a negative $1 million for the first quarter. That's primarily due to the ramp-up of leasing in our multifamily One Uptown ATX coming online. However, that number is also inclusive of a $6 million nonrecurring income. In the previous quarter, we had thought that would be a consolidated pickup that pickup will occur in the joint ventures in the first quarter. G&A expense for the quarter will be about $17 million. That's roughly 40% of our G&A for the year. And that increase is really resulting from timing of compensation expense being recognized in the company. Total interest expense will approximate $33 million capitalized interest will be about $2.5 million. Termination and other fee income will be about $2 million. Net management fees and development fees were close to about $2.5 million. we incrementally feel more positive about executing our land sales program this year and have reintroduced $4 million to $6 million of land sales, which were delayed from 2024. These sales will take place later in the year, and there are no anticipated closings of any land sales in the first quarter of 2025. Turning to our 2025 capital plan. The plan is much simpler than in prior years as our wholly owned development and redevelopment projects are fully construction or during completion -- as our CAD payout ratio will be [120 to 150] recognizes is elevated compared to historical averages and our long-term targets. However, as we complete our recent developments, we should see CAD level raise rise had increased going into 2026 based on the trajectory of the leasing and occupancy taking effect. In addition, as Jerry noted, we have over [$200 million] of revenue maintain capital spend for leases signed between 2020 and 2023. While there is always a delay, this is an unusually high year -- and it was tied to a number of large renewals done in the past. Looking at larger users of our cash, $60 million for development which includes 155, 250 and completing CeraLabs expansion. We have $105 million of common dividends, $35 million of revenue maintain capital $30 million of revenue create and $25 million of equity contributions to fund recent tenant leases in our joint ventures. The sources of this will be $130 million of cash flow after interest payments, $50 million expected of asset sales and $10 million of construction loan proceeds on 155 King of Prussia. Based on that capital plan, we anticipate using approximately $60 million of our $90 million of cash on hand, but we do expect to end the year with billability of our line of credit. We also project that our net debt-to-EBITDA range will be 82% to 84%, with increase -- the increase is primarily due to the losses of the joint ventures, and our debt to GAV will approximate 48%. Additional metric of core net debt to EBITDA should be [7.7%] to [7.9%] by year-end ['22], our core net debt to EBITDA should really equal our consolidated net debt to EBITDA since we will have no developments going on, and it will only exclude our joint ventures. Again, we believe those ratios are temporarily impacted by revenue coming on in our development completions. And we are confident that once those completions are stabilized, our leverage levels will decrease back towards core levels. we anticipate our fixed charge and interest card ratios to be roughly [2.0%] which represent a [0.1%] sequential decrease from this year, again, due to joint venture losses, and we anticipate the leverage will then begin to improve as we go into next year. I will now turn the call back over to Jerry. Gerard Sweeney So as we look ahead, we're confident that the strength of our operating platform and the quality of our developments will allow us to leverage improving real estate market trends and position the company for future growth. While earnings growth from our development pipeline is not yet fully visible, the groundwork has been laid, and we are poised to build on our continuing momentum as we drive towards long-term value. The overall real estate markets continue to improve. Our operating platform remains very stable with earnings limited near-term rollover. As Tom walked you through, our liquidity is in excellent shape, and we are well positioned to take advantage of continued market improvements. With that, we would like to open up the floor for questions. As we always do, we ask that in the interest of time, you limit yourself to one question and a follow-up. Question and Answer Session Operator (Operator Instructions) Steve Sakwa, Evercore ISI. Steve Sakwa I guess, Jerry, going to a couple of developments. You've talked about what I think are relatively good pipelines, and they seem to be growing, but the inability to get some of these deals over the finish line. So I guess the first question is -- have any of these larger tenants at 3151 or Uptown ATX, have they gone anywhere else? Have you lost them? Or have these tenants just not made decisions? And what do you think the biggest I guess, hold up is from getting these companies to make decisions? Gerard Sweeney Steve. We have not lost any of our major prospects to any other building or to them making a decision to stay put where they are. The timelines have been very protracted the discussions are ongoing. And I think when we take a look at the One Uptown and 3151, the pipelines are very good, and they are advancing through the various stages. It just seems that tenants are behaving a bit more pragmatically and cautiously than we frankly like part of that would probably do to macro uncertainty, the elections, not sure where the economy is going, all those different things. But one of the trend lines we are seeing, Steve, which is kind of interesting is one of the reasons why some of these decisions were delayed is because they weren't real -- tenants weren't really sure what their return-to-work policies would be and how they see, and we need. So that is really starting to look like it's in the rearview there for companies in general. And certainly, for companies looking to move up the quality curve. So we have a number of space plans underway. We're quantifying both construction costs and square footage. So the tone of conversations, again, continue to be positive. As I mentioned at the close of my comments, we understand there's not clear visibility on the income timing from these development projects, but we remain confident that these discussions will continue to progress, and that we'll get some of them across the finish line. But the key next to your question is we've not lost any of these prospects to any other competitive building. Steve Sakwa Okay. And then maybe just as a follow-up. As you look at the cash yields, and I realize you've got a lot of carry costs coming through the P&L this year. And you're confident those will start to recede, I guess, in '26 and ultimately '27, I guess, what confidence do you have around the rents and the timing, I guess, to hit these yields? And does it seem to be a pricing issue or just more of a tenant decision-making issue as your kind of talking to them? I guess, what's the risk of these yields when you do get them leased aren't achieved? Gerard Sweeney Yes. Well, I think it's more of a timing issue than a pricing issue. I think the dichotomy we're seeing in the market is, is that is by what we've seen here in a couple of the Philadelphia market is there's a real flight to quality. So tenants are really looking at moving as far as the kind of the quality curve. So price versus quality workspace is a secondary consideration. But the reality is that timelines have become fairly protractive, but George, maybe you can make some comments on that as well. George Johnstone Yes. I mean really do, Steve, feel that it's really more of a timing issue. I think the rental deal incoming initial rental rates in our pro forma don't appear to be at risk. So again, I think if we can accelerate decision-making, sign the lease quicker, build the stay quicker and connect it even quicker than that's the solid path to the yields that we've laid out for these projects. Gerard Sweeney Just one final point on that, Steve, just to close the loop, I mean where the rents have not been an issue TI costs have been a bit higher, and we're seeing where if the TI costs are higher, we're actually getting longer-term leases than we originally pro forma. So while the -- so the overall returns we're expecting based on the capital investment we need to make is staying fairly in line with what our expectations were. But the TI cost at point of sale could be higher, but we're making up for that by longer lease terms. Operator Anthony Paolone, JPMorgan. Anthony Paolone Maybe for Tom, you went through a bunch of details on the drag from the developments in '25 and so forth. But I don't know if you can maybe just bottom line like upon stabilization, of the development pipeline, like what would be the difference between kind of the JV FFO, I guess, negative for '25 versus what the stabilized level would be? Thomas Wirth Yes. I think, Tony, when we look at the income coming off the JV this year, whether it's residential or commercial, it's give or take, $10 -- $10 million, $12 million with the ramp-up I think those numbers are going to jump to the yields you're seeing on the development page, which can go over $50 million. So the ramp-up will be there as we go through the for the OpEx side. On the overall FFO side, you will also see tell you that we did -- I did outline the costs we're taking in terms of the construction loans and in terms of the preferred equity. So those costs will -- as we get to close to stabilization, they don't have to be stabilized. I think we will look to recap the assets. To get out from one of those higher costs. So those were some larger costs I outlined that won't go away and potentially could increase until we recap the assets. Anthony Paolone Okay. I mean it just -- I guess my follow-up and I'm trying to just get to is, it seems like the accounting is pretty onerous here, but if I just look at your development page, and just take the project costs and the equity capitalization and your share roughly, it's like a quarter of a $1 billion, I guess, for Brandywine. Like, I guess, is there just ultimately an impairment to that amount? And we should think about that and the rest of this is just pretty tough accounting, it seems like. And just trying to understand what the equity is here. Thomas Wirth Right. No, I think when we look at some of the capitalization rates, we can get on some of the projects we think that there -- we don't think there's an impairment concern. If you look at the yields, we think that we can get out from our equity without concern. Now, that has to happen. We have to lease them up. So I can't say when that will happen. But no, right now, we don't expect to have an equity impairment based on the current trajectory and the projections we're seeing. Operator Dylan Burzinski, Green Street. Dylan Burzinski Tom when you say recap the JV assets, can you kind of talk about what that would look like? Would that essentially be Brandywine taking a larger equity ownership interest or... Thomas Wirth Yes. Gerard Sweeney And JV (inaudible) takes just to refresh everyone's memory, these developing joint ventures our structural on a preferred equity basis. So the equity investment by our partners has priority over hours. And during this period when it comes out of capitalization, we need to expense those preferred payments. There is a set price takeout for each of those. So even though the site have were 64%, 68% owner, Brandywine essentially owns between 88% and 90% of the residual position in those properties. So as Tom touched on these projects move towards stabilization. 3025 is pretty much moving that direction very quickly. We'll be able to take out our preferred partner and then recap that and either bring an asset on our balance sheet as a large unsecured asset, refinance existing debt or bring additional partners. So we think we have a whole range of options available for us. that can be both balance sheet strengthening and accrue to our earnings path going forward. Dylan Burzinski That's helpful. Appreciate that, Jerry. And I guess just one more sort of on the development side of things. We noticed in your guys' guidance figure that you guys talked about starting one development or redevelopment. Can you kind of give us any details as the size of that? And then maybe talk about why deciding to continue to start to develop given a public market cost of capital that is initially conducive to external (inaudible) at this time? Gerard Sweeney Yes, a great question, And look, first of all, we have leasing to do, and that remains the top part of that exception. And we do anticipate, as we've talked about, continued momentum on the leasing front. But as you're looking at our 2025 full year plan, there are a couple of possibilities that we're evaluating. One is outlined on page 4 of the set for the last few quarters. We are evaluating the potential convergence of underperforming office as to the Meptifamily. We also are exploring a fully leased or build-to-suit as part of a university master planning process. And we're also evaluating -- the last piece of our rigor arcana pen medicine complex that can do a residential hotel project there. Those deals are all kind of in the $40 million to $50 million range. And really our desire to move forward on any of those is really going to be totally a function of how we're doing on some of the lease up of the development projects. So just we look at the full year plan with these things happening, we thought we'd highlight that there could be a potential start, but that certainly in no way was meant to invent the eyes off the ball, at least from our existing development projects. That is the number one priority we have as a company. Operator Tayo Okusanya, Deutsche Bank. Tayo Okusanya Hi. Good morning, everyone. So I just wanted to understand a little bit about the guidance range of [60%] to [72%]. Again, Tom, appreciate a lot of the exploration around the carry cost. But I guess, again, the guidance midpoint [66%] the kind of thing and pretty light versus where most of those were modeling to. So I don't know whether it's just missing some of the carry costs. I don't know whether there's something unusual, maybe we did not anticipate in 2025. And again, also kind of curious, one, why the guidance range is so wide? And what kind of moves you to the high end or low end of the guidance range. Thomas Wirth Some of you couldn't hear it too crystal. I think you asked out some of the guidance questions going forward. I mean, on the JVs. I think, yes. And the guidance in the JV, especially on the development side, we did push back all the leasing into next year. That was large. And -- we're going to have those projects on our books for the rest of the year. We were hoping that maybe there could be some recapitalizations done. We are not really forecasting much impact from those, which really did impact that number on the loss side. We also had an effect on the other areas, right? We had less capitalization of our interest expense. So cash interest expense. A lot of that is the size of the one bond deal, but we did lose a lot of capitalization of interest on our investment in those joint ventures. And then we are losing development fees, which is we also signaled is going lower. And again, as these projects come online, we're not going to have a development piece. So there are a number of line items within our guidance that's being impacted by that. And you can see those are outlined on that page 1, where we talk about some of those happening and what takes us from current [85%] for this year down to the [66%] . Tayo Okusanya Okay. That's helpful. And can you just talk a little bit again about the range. Like what -- why is the range particularly wide -- and what would get you to the high end or low end of the guidance range? Thomas Wirth Yes. I think on the high end of the range, there could be leasing that could take place. I mean we don't know if that will happen. But leasing that we have not programmed especially on the developments, there could be some opportunities properties are done, large pipeline, as Jerry mentioned, there are still tenants that they came in and really needed space that there's an opportunity to build some of that out. The second area is if we could use some recaps, which we're not sure if they can get done, as I outlined, there's some high costs related to our preferred equity in the construction loans are above where we think we could refinance the assets and -- or we just or potentially selling the apps or take a smaller position. So at that point, development losses will also go down. So there could be an opportunity that would allow us to have losses come out there. And so those are the two main areas. There would be some recanalization really with some additional leasing that we don't see right now in those developments. George Johnstone It's George. If I could weigh in on the operating side of the house, I mean look, we're 83% complete on our spec revenue for the year of what's remaining to be done. 90% of that is coming out of Philadelphia and the Pennsylvania suburbs. So we do think that there is some potential uplift to spec revenue that could come from our lower than we would like to see Boston portfolio. So I do think there's the opportunity for day-to-day operations to contribute that could get us above that current point. Operator Upal Rana, KeyBanc Capital Markets. Upal Rana Can you guys talk about the CAD payout ratio guidance of 120% to 150% this year the $24 million deferred tenant allowance. Is the $24 million going to only impact '25? Or is there a chance this could lead into 2026. Gerard Sweeney Yes. I'm sorry. Thomas Wirth No, I don't think there's going to be -- I think there are no tenant improvements that are being done. Part of that call go back is that these are allowances that, for the most part, are being done by our tenants, right? So they get a tenant allowance. They then are given a period of time to do that work. They do all the scoping; they do all the building. And at the end, we went along the way, we even make [payments] to those tenants. In the case of -- so they do a lot of the work, and so we're not really gauging when that happens, except to know that it's occurring or not and when they may bill us. So that can occur throughout that process. And when people renew, they may be restacking their space -- they go through why they want to do the space plan. And some of those take longer periods of time. And so what we're looking at and we think that the items that we're bringing up are points that we do think they're going to need the money this year should not spill over into next year. There is always delays. It's just that we're highlighting this is a delay that's much longer and much more impactful than 2025. Than in other years. George Johnstone Yes. And again, this is George. I mean we have -- the vast majority of those all have sunset provisions to them in the lease document. And most of those sunset provisions trigger in '25. So the tenant is basically in a use it or lose it position. So that's why we kind of feel it all happens this year. Operator Okay. Great. That was helpful. And then you're able to achieve positive rent spreads in 2024, but you expect it to be negative in '25, mostly due to Austin. Could you talk about what is driving the weakness for you there in Austin because as you said, there should be some increased activity this year? Gerard Sweeney Yes. Again, George, in here. Yes. I mean, look, the Austin metric is predominantly being driven. We had a 100,000 square foot tenant renew with us in our suburban project River Place. And in lieu of TI, we ended up dropping the face rate to still obtain a net effect in front positive outcome. But basically, traded capital for rent. So that's really why we provided the additional breakdown on page 3, so you can kind of see the impact of Austin. So accident absent that large lease in Austin and one other that we had done a similar structure within Philadelphia. Take two deals out of the mix, and we're rolling up to, call it, 2% cash and a 7.5% cap, so kind of more in line with how the vast majority of the portfolio performs. Operator Michael Lewis, Truist Securities. Michael Lewis So my understanding on the preferred to the JV partner is the yield is in the teens, that's frustrating when you have a cash balance and nothing drawn on your line of credit. Is there nothing that you could work out prior to stabilization with your partner to kind of get at that high-cost obligation sooner? And when can you repay does the project have to stabilize? Why can't you pay it earlier? Gerard Sweeney Yes, Michael, this is Jerry. Very good question. We were fortunate to have to have very good partners. With great relations with them. And some of those discussions that you're referencing are ongoing. So we recognize that when we hit these development joint ventures, our approach was to preserve the significant residual profit position for Brandywine. The cost of us doing that was to do these preferred structures. So as I mentioned, it's a little bit -- there's pretty much the fine takeout numbers for this. Given our strong liquidity, that's certainly one of the things we're thinking about in terms of how we can minimize the kind of, I'll call it, the FFO earnings impact of paying the preferred dividends on a current basis on the capitalization reserve, by recasting and recapitalizing those ventures. We do not need to wait until there's any stabilization there. So there's active discussions underway. As Tom touched on things, we think some of -- some of the coupons on the construction loans are higher than we could get today. So we're looking at both recapital on the preferred equity side, but then also recap the debt side as well. So I think one of the questions was how we kind of moved the range. But I think some of those things happening on more of an accelerated basis than we have in our line down would be very helpful. Michael Lewis Okay. Great. And then, looking at your portfolio, right? So Philly CBD, 96% leased excellent low rollover. Philly suburbs have been higher at least than the past, but a few spaces in contract and Plenish meeting, but 90% -- over 90% leased in December and then Austin. So you've already answered some questions about Austin, but there's a lot of conversation about this one big tenant in the market. And these numbers for used, mean is this a case where you hit one or two big leases in this 78% lease shows to 90%? Or do you think it's going to be kind of a longer-term I don't know or to slog in Austin to kind of get that up? And is the market still often it's going to take a while? Gerard Sweeney Well, I think the market is still in a recovery basin. George and I will tag team this. But look, I mean, the pipeline we have in our Austin portfolio is significantly higher than it was a couple of quarters ago. So certainly more tenants are moving in the marketplace. I think the positive absorption leasing activity, particularly in some of the submarkets for us has been very helpful. Look, we're always tracking large and small sized tenants. So certainly, the larger size tenants we pay a lot of attention to. And they're more relevant probably to our Uptown ATX project. But as we're looking strategically in Boston or in next few years, we're certainly very [445] Colorado downtown. We have a wonderful mixed-use development opportunity at Uptown ATX. We're hopeful of the CAD Metro project moving in the next quarter or so. So the other suburban assets, I think it's -- there's -- I defer it, George, but there's a range of larger tenants and smaller tenants. So my guess would be on some of the projects we're hoping for a quick hit for a larger user and maybe some of the other ones, there's less visibility to a large user. I will note though, Michael, to add on to it is on that page in the site we have identified a couple of buildings at River Place which are underperforming as potential residential conversion opportunities are excellent residential market. We're going through that zoning approval working with the local leadership in the community groups that test the liability of that. So there could be an opportunity for us to recast the use of a couple of those buildings at River Place. But George, any other observations? George Johnstone Yes, I think you touched on most of them. But I think, Michael, to kind of amplify on the suburban product, I mean, those projects are going to kind of play in that [5,000 square foot] to 20,000 square foot tenant on the larger end of the spectrum. So a lot of kind of 5s and 10s. And some of these assets we saw a lot of text to this over the years post pandemic. I think as return to work now starts to rebuild, we feel pretty good about the quality of the project, we are still competing with some new developments and some very good sublease space. But the subnet, that market and often has started to tighten. So again, I think we're on still a couple of quarters away to start posting some absorption in the suburban. But it will be on the smaller side as compared to the larger prospects for seeing in the development assets. Operator Michael Griffin, Citi. Michael Griffin I'm sorry for the technical difficulties earlier. Wondering if we could get some color just on the year-end asset sales. Can you give us a sense of the buyer pool was like, anything on cap rates and whether or not seller financing was essentially needed to get some of these deals over the finish line? Gerard Sweeney On the technical issues we were having a few of those this morning ourselves. So -- understood perfectly. Yes. Look, we actually went up have a very successful close of '24 of the asset sale, certainly, or beyond what we initially had in our plan. So we wound up essentially including a parcel of land in our (inaudible) area about over $30 million of sales or in $10 million. The cap rates range on that from low 5s on the sales up to a 10 plus on our suburban Philadelphia asset. I guess at from a buyer pool standpoint, a couple of things. One is we're definitely seeing some owner occupants seizing the opportunity to buy assets at fairly low price. I actually, we were able to last year was one of our other assets and a couple of the sales here in the Philadelphia region have gone to owner occupant. We're definitely seeing more family offices, well-capitalized buyers kind of all cash moving into the market to take advantage with, again, may see is lower pricing with significant upward bias. Most of the institutional capital that we're saying is really still opportunistic. We're looking for mid kind of mid- to high teens total returns. We are being -- that includes, I would say, some of these smaller syndicators like the buyer of one of our properties was a syndicator. They're raising money for some smaller family offices and aggregating capital. We are beginning to see though the emergence of some core and core plus buyers. What was interesting is most owners like Brandywine are reluctant to sell our really truly high-quality assets. Today given kind of depressed valuations and also the anticipation of a much lower supply coming in over the next few years to better position those better assets, both from a rental rate and a value standpoint. So some of those core buyers where we're getting pinged on different unsolicited sales, et cetera, are trying to get in now in anticipation of the continued recovery in the marketplace when the forward supply pipeline for office as you well know, is very, very low for the foreseeable future. We're also seeing a lot of preferred equity and mezzanine financing sources out there. who are still looking to take advantage of kind of a recovering debt capital market to provide bridge financing to get certain transactions done. And then certainly, one of our larger sales last year went to the city of Austin, who's going to occupy that for a public building public safety building. So that was a very fortunate internal event for us as well. So I think it's still being dominated, Michael, by kind of the family offices, smaller syndicators core plus -- I'm sorry, opportunistic routes targeting those returns I mentioned. There's an awful lot of capital sitting on the sidelines. I think is as the market gets more visibility on the slight quality, no future pipeline, demand drivers picking up, I think you'll see a big uptick in buyers coming back into the marketplace in a much more realistic values are close to historical levels. Michael Griffin Thanks, Jerry. I really appreciate the color there. And then maybe just one on kind of the development leasing pipeline as it relates to 3151. Obviously, you've had success at 3025, but they largely signed there. The commercial component is about 80% leased but still seems like it's lagging from the 3151 probably just a function of where we are in the life science cycle right now. Would you ever consider leasing space there to traditional office users if demand was there for it? Gerard Sweeney Yes, great question. A couple of things. One is that building was literally just completed. So we still have perimeter work to do log is still big finish. So it's not quite interesting marketing conditions. So -- but we are having, as I mentioned, earlier, some significant increase in the pipeline. The life science market has been slow to recover. That being said, we are seeing a lot of, as we call them green shoots out there for a half floor full floor couple of floor users. There's still some institutional demand out there that we're talking to. So we still feel very good about the track that we have that project on right now. Your question is an excellent one, though, and we certainly have -- given the success we've had at 3025. We certainly have started to show that building to other office users who are looking to get next to a mass transportation center, move into University City, looking for a very, very high-quality office space that has great visibility. So I think one of the beauties of how we design that property can accommodate as heavy a life-sized user as is out there from a lab research mechanical system standpoint, but it also can become a recipient for office users as well. So we really weren't pushing that very hard until we achieve this lease at 3025. Now, with that project, clearly on a path to stabilization success, we've made a tip with our marketing teams to put 3151 to that market queue as well. Michael Griffin That's it for me, and good luck for the Eagles this weekend. Gerard Sweeney Thank you very much. We appreciate that. Operator I'm not showing any further questions at this time. I'd like to turn the call back over to Jerry Sweeney for closing remarks. Gerard Sweeney Dean, thank you today. And everyone, thank you very much for participating in this earnings call. We look forward to continued progress on our '25 business plan and updating you on that progress on our next -- our first quarter call in April. So thank you very much and have a great day. Operator Thank you for participating. You may now disconnect. Good day. View Comments Terms and Privacy Policy Privacy Dashboard Recommended Stories
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