Conference. I'm Seth Bergey with Citi Research. We are pleased to have with us Brandywine and CEO Gerry Sweeney. This session is for Citi clients only. 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. Gerry, we'll now turn it over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, then we can dive into Q&A.
Great. Good morning, Seth. Good morning. Good morning. There we go. Good morning, Seth. Good morning, everyone. Thanks for joining. With me today is Tom Wirth, who's our Executive Vice President and Chief Financial Officer. 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's 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%-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. From an operating standpoint, our leasing capital will stay within our targeted business plan range, and our spec revenue target of $17 million-$18 million is 74% done at the midpoint. Our forward leasing commencements were over close to 250,000 sq ft, with occupancy occurring in the first and second quarter. We are also seeing increased tour volumes.
In 2025, our tour volume was up almost 50%, 45% on a square footage basis over 2024. Our conversion rate, which I, a statistic we track carefully, is 56% of our tours have turned into proposals. The proposal we issue, 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 five years, we have a market share of the inventory of about 15%. The last five years, on average, we've generated 30% of all leasing activity.
During 2025, I think as a reflection of the continued flight to quality, 54% of all new leasing activity in Philadelphia CBD was signed at a Brandywine property. More importantly, over the last five 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. Certainly from a development standpoint, we had four development joint ventures. We bought two 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. We have two 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. 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. 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, certainly, as we generate additional liquidity, we'll plan on utilizing that as well. Seth, they're kind of the overview comments. Certainly happy to answer any questions.
Yeah. I guess, you know, kind of as just diving a little bit into some of those comments you made, maybe starting with Philadelphia. You know, just you've, 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, you know, 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? Then, you know, as there's kind of been a flight to quality, you know, how do you kind of think about the continued ability to push rents in that market?
Yeah, 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 million sq ft out of a 50 million sq ft market. 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. Eight 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.
We certainly continue to see, as evidenced by our track record for 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. You know, the other thing that's interesting for us is that the flight to quality. 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. 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. 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, four Am Law 100 firms have set up base of operation in Philadelphia, which we've captured several of those. We actually see the dynamics in both. There you go.
Sorry.
You okay there, John?
Yeah.
Yeah, just the panel fell off. We certainly see the dynamics in Philadelphia CBD and University City remaining very strong for the foreseeable future.
Great. You know, maybe just following up on kind of, your guidance and retention there. You know, it was, 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? Can you kind of walk us through that?
I mean, we're projecting to have 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. From a re-tenant retention standpoint, in terms of number of tenants, we'll be about 56%, 57%. From a square footage standpoint, we'll be below where we were last year. Certainly, as the year progresses, I think as we've posted the last several years, we're able to kind of move our retention rate up as the year progresses. Right now, we're in active discussion with a number of tenants about renewing who are kind of on the fence. As we look at the baseline, we're still gonna be in a positive net absorption standpoint.
You know, 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? You know, one of the topics of this conference has obviously been kind of the headline noise around AI. You know, 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. We really have not seen that impact any significant space requirements at all at this point. I mean, certainly we're seeing that, you know, a lot of the professional service firms that have leases rolling, you know, a lot of those leases are 10-15 years old. I think just the natural progression of technology. Give the, you know, 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, the big law libraries. That really is not in play anymore. The space compression is predictable, and I think we are, as I mentioned, benefiting from that by having the higher quality inventory in the marketplace.
You know, just kind of how are you thinking about AI as a whole, maybe in the medium to longer term? You know, in some markets we've heard, people think about it as creating new jobs, you know, there's been headlines about overall, you know, potentially job reduction. How are you thinking about it as a company, and the impact on office overall, maybe in the long term?
Yeah. 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. Certainly from a financial reporting standpoint, we're utilizing a lot of AI initiatives to help streamline our internal financial reporting techniques. I think we're seeing, you know, a lot of our customers do that as well, kind of look internally to how they can accelerate or improve their internal processes. 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. We're, 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. We've not yet seen that in the markets we're in any great degree. In fact, we were talking about Austin a few moments ago. We've actually seen a fairly significant uptick in the space requirements for technology companies.
Great. Maybe just on that, you know, I think there's kind of been some investment in Austin, you know, with Samsung and Apple's kind of multi-billion dollar expansions into market. You know, how much of, kind of the pipeline is tied to, you know, either those initiatives or kind of other tech uses for space?
Yeah. I'm sorry, Seth. The demand drivers you're seeing in Austin?
Yeah.
Yeah. I mean, it tends to right now really be centered on financial service firms and technology firms. 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. Maybe just thinking about, you know, the IBM, vacating in 2027, how are you thinking about kind of the redevelopment opportunity, for that space?
Yeah. Certainly, IBM will be leaving kind of the mid part of 2027 from 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. 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 2027. That's gonna be a huge marketing tool for us.
Those two 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 sq ft of users for that. The objective there is to really be able to present high-end renovated inventory that is priced below existing new development. We're still going through that thought process right now.
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. 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 sq ft.
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. We think the combination of those factors will help offset the gap in NOI as we renovate the existing buildings that IBM will vacate.
Maybe just on, you know, kind of some of the recaps that you mentioned you did 2 last year. You have 2 kind of on deck this year. You know, what's kind of the hold up in terms of waiting until later this year to kind of do those recaps?
Yeah. To recap your question on recaps, you know, we had four 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 with as we did with the two ventures at Schuylkill Yards last year, we paid off the preferred position and the accrual from a capital event, from sale proceeds, refinances, et cetera, with really no impact on earnings.
One of the things I think that's misunderstood is that we had about a $0.15 per share so of earnings dilution due to the need to recognize those preferred charges against earnings. Last year we bought out the two Schuylkill Yards projects, so that we 3025 wholly on balance sheet. 3151 is on balance sheet right now. It's actually, yeah, as I mentioned, not generating a revenue. We have two remaining projects in that structure, both in our Uptown ATX development. One is residential, 341 unit 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. We anticipate that will happen sometime later in the second quarter, early third quarter.
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 sq ft 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. Our plan is by the end of 2026, we will have bought out those two 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. You mentioned 3151. You know, kind of. It sounds like you don't have anything kind of in the guide for 2026 from a revenue standpoint. You know, you mentioned a pipeline as you kind of expect, you know, maybe some contribution there for 2027. You know, what's kind of the leasing strategy at that asset?
Well, it's to get it leased. We've got about a million, one pipeline on that project. It was originally designed to be a life science, dedicated building. Of course, within that design construct, we have the ability to have it be in office use as well. 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's 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's 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. Hopefully we're beginning to see some green shoots there. There've 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 clouds on the venture capital side. We're hoping as more capital flows back into strictly 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.
Then, you know, maybe just with life science and office in that space, you know, how are the rents you're kind of underwriting different between life science and office and, you know, maybe from a net effective standpoint, because I know the TIs typically can be a little different as well.
Yeah. I think we're looking at net effective rent equivalency...
Yeah
... between the life science and the office. The face rents in the life science are higher, but certainly the TI capital costs are much higher as well. Face rents on the office are a bit lower, but the TI costs are a lot lower. When we go through our net effective rent calculation, they're basically equivalent. They're still in that mid 7% return standpoint.
Great. Then, you know, with the kind of boutique hotel, at 165 King of Prussia, you know, kind of what's the plan for that? You know, do you wanna kind of have it wholly owned? Are you gonna 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?
Yeah, great question. Look, I think as we started that hotel was really driven by a lot of objectives we were getting from our customer base. That hotel sits within the middle of about 2.5 million sq ft of office space in our Radnor sub-market, and then another 600,000-700,000 sq ft in an adjoining sub-market. When we were going through the exercise of trying to identify for our customers what were the amenities they really wanted, hospitality became key. We expect to be able to generate about 25%-30% of the demand for that project right out of our existing tenant base.
It's Marriott brand that 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 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. 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, then look for a capital event sometime in 2027 or 2028.
Okay. Great. 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, you know, are those primarily in Austin, are those in Philadelphia? Just talk about kind of the depth of the buyer pool and the level of interest in those assets. 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. We have properties for sale in Austin, Northern Virginia, and Pennsylvania. really it's portfolio wide. The projects are different in their gestation. 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 to get there will be very good. We have a couple of under-leased properties that are on the market, there the buyer pool is very deep, very strong, you know, the targeted levels of returns are somewhere in the high teens to low twenties.
When we look at the blended or blended disposition pace, we're pretty confident we're gonna get that 8% overall return. The composition of the buying pool does vary by property. 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. As a predicate to that, we know, 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 five 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.
If we think that we can trade out a piece of real estate at 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. That's a hard look we take every year. Certainly this year, we took a harder look at that given our objectives on the balance sheet.
You know, you've fully kind of unencumbered the portfolio. You know, how does that kind of flexibility, you know, influence decisions around debt reduction versus kind of share buybacks?
Well, the first objective is really 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. You know, once we generate that type of liquidity, we have a number of, particularly two higher cost bond issuances outstanding that we certainly think will be ripe 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. I think our attack plan will be once we generate that liquidity, and Tom's 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 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 a allocation of those proceeds to buy back in stock. The paramount objective is to, first of all, generate the liquidity to achieve our sales targets. Then we have a number of different tactics already laid out to make sure that we optimize the balance sheet post-transaction recovery.
Then as you kind of, you know, sell some assets and pay down that higher priced debt, you know, 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 in 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. We have a good roadmap of what we need to do to get there. I think our overall perspective is to get our fixed charge back to well over two times 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. You know, can you just give us an update on kind of the 300 Delaware conversion to residential? Are there any other kind of, you know, 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 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. This session will end in five minutes. I think that's as we start to take a look at what we think the demand drivers are in certain sub-markets, alternative uses for those assets are certainly on the table. One of our objectives 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.
To get to a point where we can actually sell to a residential developer, or if we think that the marketplace is strong enough, do that ourselves if the capital capacity is there.
Thanks. 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, you know, the NIH grants, the federal funding is really funneling through the major institutions. 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. 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.
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. Those green shoots need to grow into trees, and we're not quite seeing that yet. 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've put those expansion plans on hold until they raise additional capital. 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. 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, really tremendous benefit to the public. We hope that some of the government funding continues, certainly that the private capital sources continue to open up to take advantage of these advanced therapies.
Just on that note, you kind of have the target of growing your exposure from 8% to kind of 25% to life science. You know, are you primarily doing that by, you know, some of these asset sales being more office-focused assets? You know, kind of what gives you the confidence, given the softness in life science, to kind of grow that exposure to the space?
You know, look, it's a great question. I think, our 25% overall target is really, you know, subject to the timing of getting to that level is subject to where we see the marketplace going. The major driver there, quite frankly, was when we pivoted a number of years ago to a more heavy life science component in our Radnor Life Science Center and Schuylkill Yards. Clearly, absorption there has been slower than we would've liked, given the overall state of the life science market. We still have that as a target, but that's gonna be totally a supplicant of where the demand drivers are. One of the key things as we look at it, typically the approvals we achieve for all of our developments give us the ability to pivot between product types.
For example, at both Uptown ATX and Schuylkill Yards, we have the ability to pivot to whatever use has the best demand drivers. Certainly as we look forward, you know, whether we are able to maintain that 25% life science target is gonna truly be a function of how we're reading the tea leaves and what those demand drivers are.
Great. 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 it's 2%.
2%. Will the office sector have more, fewer or the same number of public companies in one year from now?
I would say fewer.
Fewer? Okay, great. Thank you so much.
Great. Thank you all very much. Appreciate you being here.