Q4 2024 Brandywine Realty Trust Earnings Call
Speaker Change: Good day and thank you for standing by. Welcome to the Brandywine Realty Trust 4th Quarter 2024 Earnings Call.
Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.
Speaker Change: 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.
He thank you very much. Good morning. Everyone.
Speaker Change: Thank you for participating in our fourth quarter of 2020 for earnings call.
Speaker Change: On today's call with me as usual are George Johnstone, our Executive Vice President of Operations.
Speaker Change: Dan Palazzo, our Senior Vice President and Chief Accounting Officer and Tom Wirth, our Executive Vice President and Chief Financial Officer.
Speaker Change: Prior to beginning, certain information 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.
Speaker Change: For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the FCC.
Speaker Change: 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 2025 and 2026.
Speaker Change: During our prepared comments today, Tom and I will briefly review our 2024 results and frame out the key assumptions driving our 204 guidance. After that, Dan, George, Tom, and I are available for any questions.
Speaker Change: Well, from an operating and portfolio management and liquidity standpoint, 2024 was a solid year.
Speaker Change: 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 is improving sequentially over the last quarter.
Speaker Change: Leasing activity for the year approximate at 2.3 million square feet.
Speaker Change: 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.
Speaker Change: Looking ahead, we have less than 5% annual rollover through 2026.
or the lowest in the office sector.
Speaker Change: On an annual basis, our mark-to-market was 12.6% on a gap basis and 1.8% on a cash basis, both within our business plan expectations.
Speaker Change: Our new leasing mark-to-market was strong at 18% and 4% on the GAAP and cash basis, respectively.
Speaker Change: Fourth quarter physical tours exceeded third quarter by 7% with tours in 2024 exceeding 2023 by 22%.
Tour activity remains well above pre-pandemic levels.
Speaker Change: For the quarter on a wholly owned basis, 62% of leases were the result of flight to quality. During 2020, to work with a full year, flight to quality deals represented 60% of new leasing activity.
Speaker Change: We also importantly note that we do not have any tenant lease expirations greater than 1% of revenues through 2026
Speaker Change: 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.
Speaker Change: So the take-away on operations is stable, solid operating performance with limited rollover risk for several years, good capital control, improving markets, and expanding leasing pipeline.
Speaker Change: 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.
Speaker Change: This was well above our $150,000,000 2020 revised midpoint and our $90,000,000 original guidance.
Speaker Change: These efforts result in our having $90 million of cash on hand and no outstanding balance or over $600 million unsecured line of credit at year end.
Speaker Change: We also, in time we'll get into more detail, have no unsecured bond maturities until November 27th.
Speaker Change: 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 that we're evaluating the process of extending.
Speaker Change: During 2024, we also recapitalized or exited several operating joint ventures.
Speaker Change: Our twenty-four goal, you may recall, was to streamline these operating joint venture relationships and reduce debt attribution by $100 million. We achieved that goal, and during 2024, we reduced debt attribution by $229 million.
Speaker Change: Despite these strong operating metrics and significant progress on further strengthening liquidity, we did fall short of our FFO targets.
Speaker Change: The fourth quarter annual results were negatively impacted by three cents a share of reduced other income from a one-time transaction that we did anticipate in the fourth quarter, one cent per share net dilution due to the increase in accelerated disposition activity.
Speaker Change: and several other points that Tom will walk through as well.
Speaker Change: From a broader perspective, however, 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.
Speaker Change: In Philadelphia, there are encouraging signs of stabilization. Philadelphia's office market is seeing a clear shift towards high-quality space, with Class 8 properties accounting for 66% of all lease deals signed in 2024.
Our overall CBD portfolio is 93% lease.
Speaker Change: In addition, the city's life science sector, while still recovering, continues to be a driver of future growth, backed by a strong regional health care ecosystem that includes 1,200 biotech and pharmaceutical firms alongside 15 major health care systems.
Speaker Change: Austin, which continues to be a magnet 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.
Speaker Change: Positive momentum during the fourth quarter was driven by revitalization of the tech sector. And there's also, finally, a notable trend towards, encouraging trend towards return to work on a full-time basis. So we are optimistic that Boston will see increased leasing activity.
in 2025.
Speaker Change: With tenants having a clear preference for premium office environments, Brandywine is demonstrated by 2024 leasing results, is well positioned to capture increasing demand in both Philadelphia and Austin.
Speaker Change: 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.
Speaker Change: As we'll discuss in a few moments, 2025 is a transitional earnings 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 JFK in One Uptown.
Speaker Change: While leasing momentum continues to accelerate, the lease-up phase is taking longer than originally anticipated. As such, 2025 is an earnings trough due to the items I just mentioned a moment ago.
Speaker Change: Stabilizing these development projects remains a top priority for the organization.
The pipeline at each property continues to build.
Speaker Change: In looking at each project, on our 3025 office project in Schuylkill Yards, we did execute a 117,000 square foot lease.
Speaker Change: with FS Investments for their new expanded global headquarters. This four-floor lease brings the office component to 83% lease with just over one floor remaining to lease with a very healthy pipeline behind that.
Speaker Change: We do anticipate this project component will stabilize in Q126 upon that tenant's occupancy.
Speaker Change: Looking at the residential side of the area, which is the residential of 13025, it continues to perform on pro forma in terms of absorption of rents and sits at 84% lease.
Speaker Change: Since we launched that marketing campaign, we have leased 306 leases, we're about 92% of the project. We're also seeing very good, as we're into the renewal program now, very good renewal rates for some of the existing tenants.
Speaker Change: were 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 Q225.
Speaker Change: 3151 Market, which is our life science project in Schuylkill Yards, was substantially delivered a year in, 2004, with some remaining work to do, and will remain in the capitalization period through 2025.
Speaker Change: At Uptent ATX, the pipeline for the office component now stands over 500,000 square feet with tenant size ranging between 6 and 200,000 square feet plus, including ongoing discussions with several sizable users.
Speaker Change: Given the composition of this pipeline, after accounting for tenant build-out and approval periods, we expect this project to stabilize in Q2-26.
Speaker Change: At Uptown Residential, known as Solaris House, we have delivered all 341 units. We are currently 30% occupied for 102 units and 32% leased.
Speaker Change: Our wholly owned office development in Radler is 100% leased and tenant occupancy commenced in November of 2014.
as known in the past.
Speaker Change: These development projects remain top-of-market, we remain confident in their success, and will continue our aggressive marketing efforts on each one. The earnings impact, as Tom and I will walk through in a few moments, of carrying these non-revenue-producing capital projects is a major driver impacting 2025 guidance.
Speaker Change: And along those lines, we did introduce 2025 guidance. We do view our 2025 business plan as being a transitional or a bridge year for us, highlighted by solid core portfolio performance with strong leasing activity.
Speaker Change: Significant balance sheet liquidity, with no significant debt maturities, and certainly reflecting the earnings impact of our development JVs moving off their capitalization periods.
Speaker Change: We did provide in our release yesterday 2025 FFO guidance with the range of 60 to 72 cents per share for a midpoint of 66 cents.
Speaker Change: 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.
Speaker Change: and primarily relate to the expensive 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 Arbira project.
Thank you. Bye.
Speaker Change: Looking at other metrics, our 2025 GAAP NOI will be approximately $18 million below 24 levels.
Speaker Change: primarily due to the asset sales activity, partially being offset by the 155 King of Prussia Road being fully operational in 2025. We do anticipate executing on some of the late land sales activity, which will generate some additional gains.
Speaker Change: Tom will review all these items in more detail and several other factors.
Speaker Change: Our cash and gap mark to market range is lower than 24, primarily due to the regional composition of our leasing activity in 2025.
Speaker Change: Our gap mark-to-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 renewals with no capital costs that impacted the mark-to-market for 2025.
Speaker Change: Occupancy levels will be incrementally higher, between 88 and 89 percent. Our lease level will also be incrementally higher, between 89 and 90 percent. We anticipate a retention rate of 59 to 61 percent.
Speaker Change: SageStore analyte growth will range 1 to 3% on a cash basis and negative 1 to positive 1 on a gap basis.
Speaker Change: Capital control will remain in very good shape. We're about 10% of revenues below our 24 results. Our business plan projects 50 million dollars of additional sales activity that occurs later in the fourth quarter of 25 with minimal dilution.
Speaker Change: Our dividend payout ratios for 2004 were 71.4% and slightly more than 100% on CAD. For 2005, the FFO and CAD payout ratios are above our historical averages and above our preferred levels.
Speaker Change: However, as development JVs grow occupancy, and we embark on several recapitalizations, we anticipate growing our FFO and CAD results through 2026 and bringing our dividend payout ratios back to historical levels without reducing the current $0.60 dividend.
Speaker Change: It's also important to note that as we highlighted on page 3 of the set,
Speaker Change: Our $25 capital spend, including CAD, is impacted by approximately $23 million, or $0.14 a share, of deferred tenant allowance payments.
Speaker Change: for leases that were done between 2020 and 2023. I also want to note that our 9-11% 25 projected capital ratio range is one of the lowest we've had in the past five years.
Speaker Change: So with that, let me turn the floor over to Tom to review our financial results for 20-4 and summarize our 20-5 outlook.
Tom Wirth: totaling $23.8 million or 14 cents per share related to two of our non-consolidated joint ventures located in the D.C. area.
Tom Wirth: Our fourth quarter FFO results were 3% below our guidance and 6% below the consensus estimates, partially as a result of timing and some general observations for the quarter. Our other income, we did anticipate receiving one-time transactional income, totaling about $6 million for just over 3 cents a share. We now anticipate that income being received in the first quarter of 2025.
Tom Wirth: Property Level Gap NOI. Our Gap NOI was 68.5. This was reflective of our higher than anticipated and earlier than anticipated asset sales activity and slightly higher operating expenses.
Tom Wirth: G&A totaled $10.1 million, $1.1 million above our third quarter re-forecast. That's primarily due to some higher non-cash equity amortization. The increase is due to higher forecast investing. That will continue into 2025.
Tom Wirth: The total interest expense was 1.2 below our pre-forecast, primarily due to higher cash proceeds from the asset sales, which lowered our line of credit balance, and we had slightly higher capitalized interest.
Tom Wirth: Looking at our debt metrics, fourth quarter debt service and interest coverage ratios were 2.1, slightly below our 2.2 projections. Our fourth quarter and annualized consolidated core net debt EBITDA were 7.9 and 7.2 times respectively, with both metrics above our range, primarily due to the lower fourth quarter income.
Tom Wirth: Portfolio and joint venture changes. We did add 155 King of Prussia Road to our portfolio during the quarter as our tenant took occupancy and the property is 100% occupied.
Tom Wirth: 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 $170 million term loan maturing in 2025 and no unsecured bonds maturing until November 2027.
Speaker Change: Our wholly owned debt is 95.4% fixed with a weighted average maturity of 3.7 years.
Speaker Change: Our full year 2024 payout ratio is 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%.
Speaker Change: Going into our 2025 guidance as a midpoint, our net loss will be $0.54 per share. Our 2025 midpoint guidance for FFO will be $0.66 per diluted share.
Speaker Change: with a stable wholly-owned portfolio. This reset of FFO, we believe, is temporary, impacted by our portfolio reshaping efforts to the disposition of non-core assets and the development project stabilization.
Speaker Change: Our fourth quarter, our FFO contribution from our under-validated joint venture is developments.
Speaker Change: As our development projects are completed but not yet stabilized, we are incurring interest expenses and preferred equity costs and overall negative operating income within those joint ventures.
Speaker Change: The result is losses totaling approximately $32.6 million, or $0.18 a share, during 2025 compared to a loss of $12.2, or $0.07 a share, in 2024. Our 2025 construction loan interest and partner preferred equity returns.
Speaker Change: total $43.8 million, or $0.24 a share. We expect to recapitalize these capital projects and to lower debt and equity costs as the project stabilizes.
Speaker Change: We will also receive $7.4 million of non-recurring cash income from the development joint ventures in the first half of 2025.
Speaker Change: To offset the development joint venture losses, we do expect our operating joint venture portfolio to generate approximately $9 million per 5.6% share of FSL.
Speaker Change: As Jerry noted, we will look to recapitalize the residential developments as they approach stabilization and recapitalize the commercial developments as leases are executed and our lease percentage approaches 80 to 90 percent.
results.
Speaker Change: Operating portfolio operations are expected to remain very stable with operating gap NOI totaling roughly $290 million, roughly flat on the same store basis as compared to 2024, with core occupancy increasing slightly at the midpoint.
Speaker Change: Our 2025 fully-owned core 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.
Speaker Change: The impact of those results will reduce our NOI by roughly $15 to $18 million.
Speaker Change: Foliar impact of 155 kg of pressure will be about 6 million and once the lease up of 250 occurs, we will generate an additional 3 million dollars. We call it G&A.
Speaker Change: We expect G&A to be between 42.5 and 43.5, which approximates our full year 2024 results.
Speaker Change: Our interest expense, including for 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.
Speaker Change: and from the developments becoming operational and formulated of interest which is the full year effect of the April 2024 unsecured bond issuance.
Speaker Change: Termination of the fee income will be between $7 and $9 million, as compared to $13.7 and $24. Net management fee and development fees will be between $8 and $10 million. $5 million reduction, again, due to lower development fees from recently delivered joint venture projects.
Speaker Change: and we do expect to do $50 million of speculative sales. Weighted towards the second half of the year, we project these sales will occur later in 2025 and have minimal dilution.
Speaker Change: We anticipate no property acquisitions, we anticipate no use of the ATM or tie-back activity, and we believe our share count will be roughly 178 million shares.
Speaker Change: Looking closer at the first quarter, we see property level NLI of 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.
Speaker Change: Our FFL contribution from our joint ventures will total negative $1 million for the first quarter. That's primarily due to the ramp-up of leasing in our multifamily.
Speaker Change: one uptown ATX coming online. However, that number is also inclusive of a six million dollar non-recurring 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.
Speaker Change: 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 will total about $2.5 million.
Speaker Change: We incrementally feel more positive about executing our land sales program this year and have reintroduced 4 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.
Speaker Change: 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 nearing completion.
Speaker Change: As our CAD payout ratio will be 120 to 150, we recognize this is elevated compared to historical averages and our long-term targets. However, as we complete our recent developments, we should see CAD levels rise and increase going into 2020 sets.
Speaker Change: Based on the trajectory of the leasing and occupancy taking effect
Speaker Change: In addition, as Jerry noted, we have over $23 million of revenue-maintained 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.
Speaker Change: Looking at larger users of our cash, $60 million for development, which includes $155 million, $250 million, and completing Xero Labs expansion. We have $105 million of common dividends, $35 million of revenue maintained capital, $30 million of revenue created, and $25 million of equity contributions to fund recent tenant leases in our joint ventures.
Speaker Change: Sources of this will be $130 million of cash flow after interest payments, $50 million of speculative asset sales, and $10 million of construction loan proceeds on 155 King of Prussia.
Speaker Change: 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 full availability of our line of credit.
Speaker Change: By year-end 2025, 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.
Speaker Change: 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 Sherry.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: The overall real estate market continues to improve. Our operating platform remains very stable with very 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.
Speaker Change: With that, we're delighted 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.
Speaker Change: And our first question comes from Michael Griffin of City. Your line is open.
Thank you.
Michael, your line is open. Please unmute.
One moment for our next question.
Thank you.
Our next question comes from Asif Sakhwa of Evercore ISI.
Asif Sakhwa: Yeah, thanks. Good morning. I guess, Jerry, going to a couple of the developments, you know, you've talked about what I think are relatively good pipelines, and they seem to be growing, but, you know, the inability to get some of these deals over the finish line. So I guess the first question is, you know, have any of these larger tenants at 3151 or Uptown ATX, have they gone anywhere else? Have you lost them?
Asif Sakhwa: or have these tenants just not made decisions and you know, what do you think the biggest I guess hold up is from getting these companies to make decisions?
Jerry Sweeney: Good morning, 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.
Jerry Sweeney: 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
that we would frankly like.
Jerry Sweeney: of that would probably be due 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...
It's because they weren't really, the tenants weren't really sure.
Jerry Sweeney: So, we have a number of space plans underway. We're quantifying both construction costs and square footage. So, the tone of conversations, again, continues to be positive.
Jerry Sweeney: 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
Jerry Sweeney: that these discussions will continue to progress and that we'll get some of them across the finish line. But the key answer to your question is we've not lost any of these prospects to any other competitive building.
Jerry Sweeney: You know, does it seem to be a pricing issue or just more of a tenant decision-making issue as you're kind of talking to them? I guess what's the risk that these yields, when you do get them leased, aren't achieved?
Jerry Sweeney: I think the dichotomy we're seeing in the market is, as evidenced by what we've seen here in a couple of the Philadelphia markets is, there's a real flight to quality. So, tenants are really looking at moving as far as they can up the quality curve. So price versus quality workspace is a secondary consideration.
Speaker Change: M.D. 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. Thank you. 1
Speaker Change: sign the lease quicker, build the space quicker, and commence it even quicker than, you know, that's the solid path to the yields that we've laid out for these projects.
Speaker Change: Yeah, just one final point on that, Steve, just to close the loop. I mean, were there, rents have not been an issue. TI costs have been a bit higher.
Speaker Change: And we're seeing where if the TI costs are higher, we're actually getting longer term leases.
Speaker Change: then we originally pro-form it. So while 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.
Great, thanks. That's it for me.
Speaker Change: Our next question comes from Anthony Paoloni of J.P. Morgan. Your line is open.
Anthony Paoloni: Thanks, good morning. Maybe for Tom, you went through a bunch of details on the drag from the developments in 25 and so forth, but you know, I don't know if you you can maybe just bottom line, like, upon stabilization
Anthony Paoloni: Yeah, I think, Tony, when we look at the income coming off the JVs this year, whether it's residential or commercial, it's give or take $10-12 million with the ramp-up. I think those numbers are going to jump to the yield you're seeing on the development page, which could go over $50 million.
Anthony Paoloni: for the OPEC side. On the overall FFO side, you will also see, Tony, that we did outline the costs we're taking in terms of the construction loans.
Anthony Paoloni: and in terms of the preferred equity. So those costs will, as we get them close to stabilization, they don't have to be stabilized, I think we will look to recap the assets.
Anthony Paoloni: 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.
Speaker Change: Okay, I mean it just I guess my follow-up and what I'm trying to just get to is
Anthony Paoloni: It seems like the accounting is pretty onerous here, but if I just look at your development page...
Speaker Change: Right, no, I think when we look at some of the capitalization rates we can get on some of the projects and we We think that there, we don't think there's an impairment concern. If you look at the yields
Speaker Change: We think that we can get out from our equity without a concern. Now, that has to happen. We have to lease them up so they can't say when that will happen. But no, right now, we don't expect...
Okay, thank you.
Thank you.
Thank you. Bye bye.
Speaker Change: Our next question comes from Dylan Brzezinski of Green Street. Your line is open.
Hi, guys. Good morning. Thanks for taking the question.
Dylan Brzezinski: When you say recap the JV assets, can you kind of talk about what that would look like? Would that essentially be brand new wine, taking a larger equity ownership interest or?
Dylan Brzezinski: To refresh everyone's memory, these development joint ventures are structured on a preferred equity basis.
So the, the, uh, the.
The equity investment by our partners has priority over ours.
Dylan Brzezinski: There's a set price takeout for each of those. So even though the Sitton they have were a 64, 68% owner, Brainy One essentially owns between 88 and 90% of the residual position of those properties.
Speaker Change: So, as Tom touched on, these projects move towards stabilization, and 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 that asset on our balance sheet as a large unsecured asset, refinance existing debt, or bring an additional partner. So we think we have a whole range of options available for us.
Speaker Change: That can be both balance sheet strengthening and a creep to our earnings path going forward.
Speaker Change: 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 figures that you guys talked about starting development or redevelopment. Can you kind of give us
Speaker Change: Any details as to the size of that, and then maybe talk about why deciding to continue to start to develop given, you know, a public market cost of capital that isn't necessarily conducive to external growth at this time?
Speaker Change: It's a great question. Thank you. And look, you know, first of all,
Speaker Change: We have leasing to do, and that remains the top priority without exception. And we do anticipate, as we've talked about, you know, continued momentum on the leasing front. But as we were looking at our 2025 full-year plan,
Speaker Change: There are a couple of possibilities that we're evaluating. One is outlined on page 4 of the set for the last few quarters.
of Underperforming Office Act to the Multi-Family.
We also are exploring a fully...
Speaker Change: We're also evaluating the last piece of our Ragnar Arkham at Penn Medicine complex. They can do a residential or hotel project there. Those deals are all kind of in the $40-$50 million range.
Speaker Change: and really our desire to move forward on any of those is going to be totally a function of how we're doing on some of the lease-up and development projects. So, just with the full-year plan, with these things happening, we thought we'd...
Speaker Change: highlighted there could be a potential start but that certainly in no way was meant to convey that the eye is off the ball at least in our existing development projects. That's the number one priority we have as a company.
Great. Thanks for that detail.
Thank you.
Operator: Our next question comes from Teo Okusanya of Deutsche Bank. Your line is open.
Teo Okusanya: Good morning, everyone. So we wanted to understand a little bit about the guidance range of 60 to 72. Again, Tom, I appreciate a lot of the exploration around the carry cost.
Speaker Change: It's us just missing some of the carry costs. I don't know whether there's something unusual.
Teo Okusanya: that maybe we did not anticipate in 2025. And again, also kind of curious, you know, one, why the guidance range is so wide and what kind of moves you to the high end or low end of the guidance.
Speaker Change: Good morning. I couldn't hear it too crisply. I think you were asking about some of the guidance questions going forward. I mean, on the JVs, I think...
Thank you. Thank you.
Speaker Change: The guidance in the JVs, especially on the development side, we did push back all of the leasing into next year, that was large.
Speaker Change: 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.
Speaker Change: The war in Bandia, but we did lose a lot of capitalization of interest
Speaker Change: on our investment in those joint ventures and that we are losing development fees, which we also have signaled as going lower. And again, as these projects come online, we're not going to have the development fees. So there are a number of line items within
Speaker Change: Can you just talk a little bit again about the range, like why is the range particularly wide and what would get you to the high end or low end of the guidance range?
on the blog.
Speaker Change: So, at that point, you know, the development losses will also...
Speaker Change: to have losses come out there. And so those are the two main areas, Taylor, would be some recapitalization, certainly, or some additional leasing that we don't see right now in those developments.
Speaker Change: And Teo, it's George, if I could weigh in on the operating side there 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...
Speaker Change: Philadelphia and the Pennsylvania suburbs. So we do think that there is some potential uplift to spec revenue that could come from our, you know, lower than we would like to see Boston portfolio.
Speaker Change: So, I do think there's the opportunity for day-to-day operations to contribute that could get us above that current midpoint. Thank you.
Thank you. Thank you.
Speaker Change: Our next question comes from Upal Rana of KeyBank Capital Markets. Your line is open.
Upal Rana: Great, thanks for taking my question. Can you guys talk about the CAD payout ratio guidance of 120% to 150% this year and the $24 million deferred tenant allowance? Is the $24 million going to only impact 2025 or is there a chance this could bleed into 2026?
Upal Rana: done by our tenants, right? So they get a tenant allowance.
Upal Rana: They then are given a period of time to do that work.
Upal Rana: They do all the scoping, they do all the building, and at the end, or along the way, we then make payments.
Upal Rana: 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
Upal Rana: They go through what they want to do with 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 delay. It's just that we're highlighting this is...
That's a way that's much longer and much more...
Speaker Change: impactful to 2025 than in other years. Yeah, and again, this is George Wayne, and I mean, we have a, you know, the vast majority of those all have sunset provisions to them in the lease document. And and most of those sunset provisions trigger in 25. So.
Speaker Change: The tenant is basically in a use-it or lose-it position, so that's why we kind of feel that it all happens this year.
Speaker Change: You know, you were able to achieve positive rent spreads in 2024, but you expected to be negative in 2025, mostly due to Austin.
Speaker Change: 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.
Speaker Change: Yeah, again, George Weyand in here. Yeah, 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.
Speaker Change: And in lieu of TI, you know, we ended up dropping the face rate to still obtain a net effective front positive outcome, but basically traded.
capital for rent.
Speaker Change: break out on page three, you know, so you can kind of see the impact of Austin, so
You know, absolutely.
how the vast majority of the portfolio performs.
Okay, great. Thank you.
Thank you.
Michael Lewis: Our next question comes from Michael Lewis of Truist Securities. Your line is open.
Michael Lewis: obligation sooner? And, you know, when can you repay? Does the project have to stabilize? You know, why can't you pay it earlier?
Michael Lewis: residual profit position for Brandywine. The cost of us doing that was to do these preferred structures. So as I mentioned a little bit ago, there's pretty much defined takeout numbers for this.
Michael Lewis: Given our strong liquidity, that's certainly one of the things we're thinking about in terms of how we can minimize the FFO earnings impact.
Michael Lewis: of paying the preferred dividends on a current basis, now the capitalization goes over, by recasting or recapitalizing those ventures. We do not need to wait till there's any stabilization there. So there's active discussions underway. As Tom touched on, we think some of the...
Michael Lewis: excuse me, some of the coupons on the construction loans are higher than we could get today, so we're looking at both recap on the preferred equity side, but then also recap on the debt side as well, so
Michael Lewis: I think one of the questions was how we kind of move the range a little bit. I think some of those things happening on more of an accelerated basis than we have in our plan right now should be very helpful.
Okay, great. And then...
Michael Lewis: You know, looking at your portfolio, right? So Philly CBD, you know, 96% lease, excellent, low rollover. Philly suburbs have been higher leased in the past, but you know, a few spaces in Contra Hoc and in Plymouth meeting, but 90%, over 90% leased in the suburbs. And then Austin. So,
Michael Lewis: These numbers for Austin, I mean, is this a case where you hit one or two big leases and this, you know, 78% lease goes to 90% or do you think it's going to be kind of a longer term?
Michael Lewis: You know, I don't know what word to use, slog and often to kind of, to kind of get that up. And is the market still, you know,
It's soft and it's going to take a while.
Speaker Change: Well, I think the market is still in a recovery phase and 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 quarters ago, so certainly more tenants are moving in the marketplace.
Speaker Change: I think the positive absorption of leasing activity, particularly in some of the sub-markets for it, has been very helpful.
Speaker Change: Look, we're always tracking large and small sized tenants, so certainly the larger sized tenants we pay a lot of attention to, and they're more relevant probably to our Uptown ATX project. But, you know, as we're looking strategically at Austin over the next few years, you know, we're certainly very fortunate to have 405 Colorado downtown. We have a wonderful mixed-use development opportunity at Uptown ATX. We're hopeful that the CAP Metro...
Speaker Change: project moving forward in the next quarter or so. So the other suburban assets, I think, 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.
Speaker Change: I will note though, Michael, to add on to it, on that page in the SIF, we have identified a couple of buildings at River Place.
Speaker Change: 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 vibe.
Speaker Change: You know, 20,000 square foot tenant on the larger end of the spectrum. So a lot of kind of fives and tens. And, you know, with some of these assets...
Speaker Change: You know, we saw a lot of text of this over the years, post-pandemic.
Speaker Change: 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...
Speaker Change: You know, some absorption in the suburban, but it will be on the smaller side as compared to the larger prospects we're seeing in the development.
Thank you.
Thank you, Michael.
Michael Griffith: Our next question comes from Michael Griffith of Citi. Your line is open.
Michael Griffith: Sorry for the technical difficulties earlier. I'm wondering if we could get some color just on the year-end asset sales. Can you give us a sense of what the buyer pool was like, anything on cap rates, and whether or not seller financing was potentially needed to get some of these deals over the finish line?
Michael Griffith: The cap rates range on that from, you know, low fives on the sales up to a 10-plus on our suburban Philadelphia asset.
I guess from a buyer-pull standpoint...
Michael Griffith: A couple things, you know, one is we're definitely seeing some owner-occupants.
Michael Griffith: Seizing the opportunity to buy assets at fairly low price. We were able to do that last year with one of our other assets. A couple of the sales here in the Philadelphia region have gone to owner-occupants. We're definitely seeing more family offices.
Michael Griffith: well-capitalized buyers have all cash moving into the market to take advantage with again May City
is lower pricing with significant upward bias.
Michael Griffith: Most of the institutional capital that we're seeing is really still opportunistic. We're looking for, you know, mid- to high-teens total returns. And that includes, I would say, some of these smaller syndicators.
Michael Griffith: 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,
today giving kind of depressed valuations, and also the anticipation.
Michael Griffith: 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.
Michael Griffith: So, some of those core buyers who were getting pinged on different unsolicited sales, etc., are trying to get in now in anticipation of a continued recovery in the marketplace when the foreign supply pipeline for office
Michael Griffith: As you all know, it's 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 a recovering debt capital market to provide bridge financing to get certain transactions done.
Thank you.
Michael Griffith: And then certainly one of our largest sales last year went to the city of Austin.
Speaker Change: He's going to act by that for a public service public safety building So that was a very fortunate turn of events for us as well So I think it's still being dominated Michael by kind of the family offices smaller syndicators
Speaker Change: As the market gets more visibility on this flight to quality, no future pipeline, demand drivers picking up, I think you'll see a big uptick in buyers coming back into the marketplace at much more realistic values or closer historical levels.
Speaker Change: Thanks, Jerry. Really appreciate the call there. And then maybe just one on kind of the development leasing pipeline as it relates to 3151. Obviously, you've had success.
Speaker Change: at 3025 with the large lease signed there. The commercial component is about 80% leased, but still seems like it's lagging for 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?
Speaker Change: 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 the half-floor, full-floor...
Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.
given the success we've had at 3025.
Speaker Change: We certainly have started thinking to show that building to other office users who are looking.
Speaker Change: 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 designed that property, it can accommodate as heavy a life-size user as is out there.
Speaker Change: from a lab research mechanical system standpoint, but it also can become a recipient for office use as well. So, you know, we really weren't pushing that very hard.
Speaker Change: until we achieve this lease at $3025,000. Now with that project clearly on a path to stabilization success, we've made a pin with our marketing team to put $3151 into that market queue as well.
Speaker Change: Thanks, that's it for me, and good luck to the Eagles this weekend.
Thank you very much. We appreciate that.
Speaker Change: Thank you. 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.
Speaker Change: Thank you very much for participating in this earnings call. We look forward to continued progress in our 25 business plan and updating you on that progress on our first quarter call in April. So thank you very much and have a great day.
Speaker Change: Thank you for participating. You may now disconnect. Have a good day.