Q3 2024 Brandywine Realty Trust Earnings Call

Thomson Reuters StreetEvents10-24

Participants Jerry Sweeney; Chief Executive Officer; Brandywine Realty Trust Thomas Wirth; Chief Financial Officer, Executive Vice President; Brandywine Realty Trust George Johnstone; Executive Vice ...

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Thomas Wirth; Chief Financial Officer, Executive Vice President; Brandywine Realty Trust. George Johnstone; Executive Vice President - Operations; Brandywine Realty Trust. Good day. And thank you for standing by. Welcome to Brandywine Realty Trust, third quarter, 2024 earnings call at this time. All participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session instructions will be given at that time. Please be advised. Today's conference is being recorded. I would like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. Please go ahead.","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":["earning"],"viewcount":null,"language":"en","relate_stocks":{"BDN":"布兰迪维因房地产信托"},"translate_title":"2024年第三季度Brandywine Realty Trust收益看涨期权","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"BDN":1},"content_text":"Participants\nJerry Sweeney; Chief Executive Officer; Brandywine Realty Trust\nThomas Wirth; Chief Financial Officer, Executive Vice President; Brandywine Realty Trust\nGeorge Johnstone; Executive Vice President - Operations; Brandywine Realty Trust\nSteve Sakwa; Analyst; Evercore ISI\nAnthony Paolone; Analyst; JPMorgan\nMichael Griffin; Analyst; Citi\nMichael Lewis; Analyst; Truist Securities\nDylan Burzonski; Analyst; Green Street\nPresentation\nOperator\n Good day. And thank you for standing by. Welcome to Brandywine Realty Trust, third quarter, 2024 earnings call at this time. All participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session instructions will be given at that time. Please be advised. Today's conference is being recorded. I would like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. Please go ahead.\nJerry Sweeney\n Michelle. Thank you very much and good morning everyone and thank you all for participating in our third quarter. 24 earnings call on today's call with me. As usual are George Johnson, our executive Vice President of Operations, Dan Palazzo, our senior Vice President, Chief Accounting Officer and Tom Worth, our executive Vice President, Chief Financial Officer. Prior to beginning certain information discussed on the call today, may constitute forward-looking statements within the meaning of federal securities law. Although we believe 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 include reports that we file with the SEC. Well, first and foremost, we hope that you and yours are well. And with summer now behind us, we are looking forward to an ever improving end of 2024. During our prepared comments today, we'll briefly review third quarter results in our 24 business plan. Tom will then briefly review our financial results for the for the quarter and frame out the key assumptions driving our fourth quarter, 24 guidance. After that, Dan George Tom and I are available for any questions. Well, similar to last quarter, I want to start off by addressing the key themes that guide our business plan. Our focus remains on three key areas, liquidity development, lease up and portfolio stability. First on liquidity look, we're really in excellent shape with no unsecured by mature for over three years. We anticipate maintaining minimal balances in our line of credit over the next several years to ensure that ample liquidity continues. And our forecast liquidity does include proceeds from our asset sale program during the quarter. As you noted in our sip, we did sell, we did sell a class B portfolio located in the Pennsylvania suburbs for a little more than $65 million. We have several other transactions in progress and as such, we did raise our 24 sales target to a midpoint of $150 million. I'll review some detail on that in a few moments. The majority of our operating joint ventures which we spoke about earlier in the year have been restructured. We have no operating joint venture debt maturities for quite some time as well. And this combined activity has reduced our operating JB debt attribution by $159 million since the beginning of the year. And I'll touch on that in a few moments as well. Second on development lease up which remains a top priority for the organization. The pipeline on each project continues to build tour volume and issued proposals increased during the quarter at sel yards. We remain in advanced stage of negotiation with over 200,000 square feet of of prospects with continued advancement in the ever building strong pipeline. The residential component continues to perform on pro forma in terms of absorption and rent. The office component at our uptown A TX pipeline numbers now stand at over 600,000 square feet with tenant sizes ranging between six and 200,000 square feet. The scoop of yards residential project which we call a Vera has met our year end target of being over 80% leased. Well, I obviously hope to make more progress in the ensuing two months. At uptown residential, we opened in September and we'll be delivering finished units through December and we're already about 15% leased, as I noted in the past that these projects remain top of market. They're attractive to a broad range of our customer targets. And we remain confident of hitting our pro forma returns. We certainly recognize both the earnings drag and balance sheet impact of carrying this non revenue producing capital and continue our aggressive marketing efforts on each project to the upside upon stabilization. These projects will generate about a 15.5% increase to our existing income stream. So they do remain a key growth driver for the company. We do anticipate in time. We'll touch on that with interest capitalization periods expiring on two of these office projects, the interest treatment on residential deliveries and the expensing of our preferred returns. In those in those development, joint ventures, there will be increased expenses attributed to this pipeline before stabilization. And the final of the final third leg of the tripod is portfolio stability which again remains a top priority. The strong operating metrics we posted again this quarter reflect the underlying stability of that core portfolio. Austin continues to face near term challenges but intermediate term growth prospects or dynamics of that market remains strong activity levels have picked up and our product is quality and will be a strong participant in that market's eventual recovery. Philadelphia which has one of the lowest vacancy rates among large cities in the country continues to perform very well for us in our wholly owned portfolio, leasing level and occupancy levels are about 94%. And that reinforces the strength of our product in Philadelphia. Looking ahead, we have only a 5% annual rollover through 2026. Again, one of the lowest in the office sector. Our 24 revenue plan has finished ahead of schedule. We have increased our spec revenue range to $26.3 million and also raised our annual retention range. Our 24 spec revenue target is up 1.8 million or 7.4% over our original 24 business plan. Our mark to market capital ratios and same store numbers all performed at strong levels as they have done for the last several quarters. With that said the momentum we think we have built has led to overall to our operating results to perform in line with or above our 24 original business plan. Just a few quarterly highlights. We did post second quarter ffo 23¢ per share. As I mentioned, our original spec revenue target of $26.3 million is up from 25 to 26 million last quarter and is 100% executed. Our combined leasing activity for the quarter totaled 558,000 square feet. During the quarter, we executed 298,000 square feet of leases including 125,000 square feet of new leases within our wholly owned portfolio. Total leasing activity, wholly owned leasing and new leasing all exceeded second quarter levels. So good signs of continued recovery in our various markets based on our efforts, as I touched on a moment ago, during the first nine months of the year, we have eliminated $159 million of debt attribution from our joint ventures. So that significantly significantly exceeded our targeted $100 million target for 2024 consolidated debt is 94% fixed at 6.2% rate. Our quarterly rate mark to market was 14.9% on a GAAP basis and 8.9% on a cash basis. Our, our new leasing mark to market was a strong 18% and 2.9% on a GAAP in cash basis respectively. We ended the quarter right in line with our 2024 business plan expectations. So the business plan remains in very for existing portfolio, remains in very solid shape for roll over through 25 has been further reduced to about 4.6%. And the 26 average through five, about 5.2%. More importantly, we do not have any tenant lease expiration, greater than 1% of revenue through 2026. So we're in very good shape from that standpoint. And along those lines to give you a little bit more color on the market, we do continue to see encouraging signs on the leasing front, certainly evidenced by the stats I just mentioned, but also by these metrics, the increase in physical tours has been very positive. Third quarter, physical tours exceeded second quarter tours by 7% which also exceeded our trailing four quarter average by 22%. Also, tour activity remains above pre pandemic levels by 36% on a wholly owned basis. During the third quarter, 62% of all leases all new leases were results of this flight to quality for 2024 flight to quality deals represented 60% of our new leasing activity. Executor renewal and expansion activity has enabled us to again raise our retention target by 300 basis points. So up from our original 51 to 53% range to now 62 to 63%. Total leasing pipeline through the company remains strong. The operating portfolio leasing pipeline stands at 2 million square feet and that includes about the 218,000 square feet in advanced stage of negotiations. Development project pipeline again remains strong and 32% of our operating portfolio new Deal pipeline. Our prospects looking to move up the quality curve in terms of looking at some of our leverage metrics. Our third quarter net debt to ebida ratio decreased to 7.5 times which benefit as Tom will touch on from our third quarter operating results and sales activity partially offset by increased investment in our development projects, our core Ebida metric, which we, we monitor very closely ended the quarter at 6.6 times within our targeted range. Based on our operating results for the first three quarters of the year. We we are adjusting and narrowing. Our 24 FFO guidance to 89 to 92¢ per share. The change in our FFO guidance is based on a change in our guidance for 2024 land sales which we did anticipate to be about 3¢ a share for 24. Based upon a couple of deals not coming to fruition. We now anticipate no further land gains in 2024. In looking at our, our, our liquidity and sales activity. Our initial business plan projected 80 to $100 million of sales activity occurring in Q4 with minimal dilution during the quarter. We did sell a non core class B portfolio in the Pennsylvania suburbs for about six, a little more than $65 million to facilitate that sale. We did take back a about $15.5 million of seller financing at an initial rate of 8.25% with subsequent rate increases over its term. In addition to that sale, we have a number of other sales that we believe will close during the fourth quarter. Therefore, as we note in our supplemental package, we have increased our sales target to a midpoint of $150 million. None of the additional contemplated sales will require any seller financing. In addition, if these transactions close, as currently contractually anticipated, we expect $150 million to occur at a blended 8% cap rate properties in the sale pool or in the Pennsylvania, Pennsylvania and Austin suburbs in looking at our developments. As I note, our development pipeline remains strong, we are very focused on getting some of the leases in negotiation across the finish line. Tour velocity continues to pick up particularly at the uptown A X and 3,025 JFK. The looking at our developments, we have about a billion dollars under active development of that are wholly owned development in Radnor, which is about $80 million in cost is 100% at least fully funded and the tenant is the process of taking occupancy during the fourth quarter. Looking ahead given the mixed use nature of our master plan communities, we we are expected for development pipeline. Product mix is about 27% life science, 42% residential, 22% office and 9% support retail, entertainment, hospitality. Of course, any further development starts or condition are conditioned purely upon us leasing up the existing pipeline as well as overall marketing market and capital market conditions. Specifically looking at some of the projects 3,025 our residential office residential tower is fully delivered on the commercial component. We're currently 23% leased with an active pipeline of well over 200,000 square feet including leases and negotiation. We continue to see steady traffic and leasing activity for a beer or a residential component. We currently have 278 leases executed for about 80% of the project which is up from 237 leases or 73% lease on our last call just about three months ago. We're also seeing very good renewal rates for some of our existing tenants where we're in excess of a 60% renewal rate and an average increase in the high double digits we have already met on a vera our year end lease target of being between 80 85%. But we're certainly continuing to push for more leasing activity in the ensuing months for uptown block, a residential which we call Solaris House. We did have some last minute permitting delays. So we did not open up units for occupancy until late September. That being said we currently have 5,052 leases executed. We're 15.3% for the other project which is up from about 6% on the last call. We're still projecting even with the delayed opening, that the residential component will be between 20 25% leased by the end of this year. 3,151 market. Our life science project is scheduled for delivery in this coming this quarter. We have a leasing pipeline there including some leases under negotiation which we are working to get across the finish line uptown A TX has a leasing pipeline that remains approximately more than double the space we have available that does include a mix of prospects ranging from a low of 6,000 square feet to a high of about 200,000 square feet. We did recently complete a floor of spec suites and are in the process of leasing those suites up. Our next phase of the labs expansion on the eighth floor here at C center is nearly complete and we're in the final stages of negotiations with several tenants for these graduate lab opportunities. So with that, let me turn the the floor over to Tom to review our financial results.\nThomas Wirth\n Thank you, Jerry and Good morning. Our third quarter, net loss of 165.5 million or 96¢ per share. And third quarter FFO totaled 39.8 million or 23¢ per diluted share. Our third quarter net income results were impacted by several impairment charges totaling 161.4 million or 93¢ share. Our third quarter FFO results were one penny per share below consensus estimates and some general observations for the third quarter. G and a total 12.6 million 3.6 million above our, our second quarter forecast primarily due to higher non cash equity compensation amortization. The increase is due to higher than forecast investing and we expect this amount to decrease in the fourth quarter interest expense was 1.2 million below our forecast. Primarily due to higher capitalized interest. Primarily due to the delay in commencing our multi family development in Austin partially offset by higher projected borrowings on our unsecured line of credit FFO contribution from our unconsolidated joint ventures was projected to be negative $2 million and it ended up being basically break even. The improvement was due to the timing on commencing operations for a multi family project in Austin and some delay and some improvement in the operating portfolio. Our third quarter debt service and interest coverage ratios were 2.4 times slightly above projection with net debt to GAV of 47.3%. Our third core annualized core net debt to Ebida was 6.6 times and this is within our 2024 range and our annualized combined net debt to IDA was 7.5 times also within our guidance range. Our leverage ratios were it basically improved based on a higher cash PBITA portfolio and joint venture changes. Our wholly owned core portfolio was reduced in the third quarter by the sale of our campus in the P A suburbs. Our joint venture portfolio now includes 4.1. Our joint venture portfolio now includes 4.1 million preferred investment for the recapitalization of our DK joint venture. We anticipate adding 155 King of Pressure Road to our core portfolio in the fourth quarter. As we anticipate the tenant will take occupancy during the quarter and the property is 100% leased financing activity. As Jerry highlighted earlier, we eliminated any material near term maturity risk with no unsecured bonds maturing until November 2027. Our wholly owned debt is now 93.9% fixed with a weighted average maturity of 3.9 years. Looking closer more closely at fourth quarter. FFO guidance components are operating portfolio portfolio level operating income will total approximately 72.5 million and will be roughly 1.3 million below our third quarter, primarily due to reduced no I related to our asset sales in the third quarter and projected sales in the fourth quarter. The FFO contribution from our unconsolidated joint ventures will total a negative $2.5 million. The increased loss is primarily due to 2030 25 JFK office being operational for more than 12 months ending capitalization and commencing operations of our multi family project in Austin, Texas, GN A our fourth quarter G&A will approximate $9 million due to lower equity compensation amortization. Total interest expense will increase to 33.5 million due to primarily due to lower capitalized interest totaling about $3.2 million. The lower capitalized interest is partially due to joint venture and wholly owned development projects becoming operational termination fee and other income will total roughly $6 million for the fourth quarter, which includes some incremental transaction, income, net management and leasing and development fees should be about $3 million. Land gids which were going to be $5 million for the year is now projected to be zero interest and investment income will be zero point 8 million. And our share, our share count to approximate 176.5 million diluted shares. As Jerry outlined previously, we have lowered the midpoint of our guidance by 3¢ primarily due to the anticipated land gains totaling $5 million that will no longer be included in our business plan. While we plan to continue to monetize our non core cash holdings, none, non core land holdings, none will close in 2024 for run rate guidance. As our development projects transition to operating properties, we will lose the ability to capitalize certain costs that will now be included in future earnings. While we will provide further guidance with our 2025 business plan, we anticipate that certain fourth quarter run rates will continue into 2025 interest expense. With the development projects becoming operation, our capitalized interest will decrease and future interest expense will be consistent with our projected fourth quarter run rate. FFO contribution from our joint ventures with certain developments becoming operational and others increasing. No I to release up our JV joint venture contribution on a quarterly basis will be consistent with our projected fourth quarter level on our capital plan which totals 109 million for the first nine months. Our 2024 C payout ratio was 95.5 and our full year range remains 90 to 95 uses for our our capital for the 2024 4th quarter, $35 million of development. $26 million of common dividends, 14 million of revenue maintain 9 million of revenue create and 25 million of contribution to our joint ventures primarily related to commerce Square. The primary sources are 28 million of cash flow after interest payments, 85 million of land and other sales and 12 million of construction loan proceeds based on the capital plan outlined above cash on hand should increase $16 million and our line of credit is expected to be unraw at the end of the year. Our pro our projected cash balances at the end of the year have been positively impacted by the incremental lease lease, increased sales activity partially offset by our seller financing and planned additional contribution to Commerce Square. We also project our net and net debt to ebita ratio will range between 7.5 and 7.8 and our net debt to gav approximately 47% our additional metric of core net debt invi that will range between 65 and 68, which will now, which does exclude primarily just our joint ventures as our active development projects will be complete. We believe that our core leverage metric better reflects the leverage of our core portfolio and eliminate some more highly leveraged joint ventures and our unstabilized development and redevelopment projects. During 2025 our core net debt to Ebida should begin to equal our consolidated net debt to Ebida as the wholly, as our wholly owned development projects reach stabilization, we anticipate our fixed charge and interest coverage ratios will approximate 2.2 by the end of the year which is a slightly below our third quarter results. I'll now turn the call back over to Jerry.\nJerry Sweeney\n Hey, great. Thank you Tom. So I think the key takeaways really are that, you know, the overall market dynamics in our sector continue to improve with a clear black application of of of a class A class B properties. Our portfolio remain operating portfolio remains in solid shape. I mean, we think we've got a very, very solid foundation for continued improvement over the next several years. You know, evidenced by the average annual roll over which is only 5.2% through through to 26. The strong mark to market very manageable capital spend to get new leases executed. So being able to grow net effective rents and we think stable and hopefully continued acceleration of overall leasing activity. We're actually a baseline business plan that continues to improve both liquidity, improve our market position, keeps that operating portfolio in very solid footing. With a major focus in the company on obviously leasing up our development projects. So we're in a great position to generate for earnings growth. So as usual and where we started, which is that we wish you and your families well. And with that, we're delighted to open up the floor for questions. We do ask in the interest of time. You limit yourself to one question to follow up Michelle.\nQuestion and Answer Session\nOperator\n Thank you. (Operator instructions) Steve Sakwa, Evercore ISI.\nSteve Sakwa\n Yeah, thanks. Good morning Jerry. I was just wondering if you could comment a little bit more on the demand in particular in Austin. And I'm just curious, the 600,000 ft that you've got kind of in the pipeline are those kind of tenants that are already kind of in the Austin market that are expanding or these new requirements just trying to get a feel for you know, kind of the likelihood of them executing and, you know, we've heard in other sectors there's some hesitancy to kind of commit to new deals. And so trying to figure out are these relocations or, or new commitments and are they in the market or are coming into the market?\nJerry Sweeney\n Yes, Steve. Good morning. Yeah, George, I can, I, I guess as we're looking at the pipeline, the majority of the deals we're working through it. One uptown are deals that are in the market. They are some significant expansions where one up time, one uptown can accommodate the expansion requirements. The overall market has been improving albeit slowly. I mean, there's about 90 tenants about 3 million square feet of prospects in the market opportunity, Austin you know, still represents they're, they're reporting about 275 hot active prospects looking at Austin for new in migration, about 22% of that of that is often that, that that up a bit quarter over quarter, but the pipeline primarily remains kind of Austin based at this point. But George any other color you want to share? I mean, I think in the overall Austin market pipeline, there probably are some, some out of city you know, companies in that pipeline but specific and as Jerry mentioned, our Uptown portfolio is really in market with a predominance of expanding and growing in market in tenants. So we're extremely pleased with the level of activity and and as we said, you know, our building can accommodate the future growth needs that these tenants have. Yeah, I mean, see, I mean, in our pipeline, we have on a regular basis, you know, brokers and, and site selectors coming through looking for large requirements. And we certainly give them a tour, we follow up with them, but their gestation cycle tends to be a lot longer with no real definitive occupancy date. So we really, we make our focus very crisply on tenants that we know have leases that are expiring. We know they need expansion state may be an option, but there's an opportunity for us to kind of convince them to move up the quality curve. So the primary focus in that pipeline today is on definable requirements that are currently within the within the city of Austin.\nSteve Sakwa\n Great, thanks. Good color. Maybe just as a quick follow up for for you or Tom just on all the dispositions, I guess that were done. And our planned. Can you provide kind of a GAAP in cash cap rate on kind of what you expect those deals to be done? And I don't think I saw anything as it relates to cap rates in the press release.\nJerry Sweeney\n Yeah, I think Steve if we, if if we achieve the new sales target, which we're obviously confident because we put it out there. You know, we think the blended Cashing GAAP cap rate is going to be right around 8%.\nSteve Sakwa\n Great. Thank you. That's it.\nJerry Sweeney\n You're welcome. Thank you.\nOperator\n Anthony Paolone, JPMorgan.\nAnthony Paolone\n Yeah, thanks. Good morning. Just if we can get back to uptown A TX. You said the the pipeline there ranges from 6,000 square feet to 200 there's been all the discussion out there around NVIDIA looking for over 300,000 square feet. Would something like that be considered in your pipeline or is that?\nJerry Sweeney\n Not no, look, I think any tenant who's in the, I think it's safe to say Tony and good morning that any tenant who has a whisper of meeting office space in Austin, we're all over them. So I don't want to get into the specifics of any one deal versus another deal, but we have a very, very good talented team of in house leasing folks down there, augmented by a strong external team. So we track every single potential transaction that market whether whether they're looking at this, at the, at the Southwest, the Northwest CBD. So we're, we've been very pleased with the level of tour activity uptown. We clearly know we need to get at least. But now with the road improvements done, the residential component open amenity floor done, The project really does show incredibly well. So as soon as we know any prospect is looking at space, even if they, if we're, even if we're not on their initial tour, because we're looking at a different submarket, we're on top of them. We're getting the marketing materials videos, we're visiting them. So, again, I want to name any specific tenant because there's a number of larger users king around the marketplace. But I think it's a safe assumption on your part to assume that we are talking to every 10 in the marketplace.\nAnthony Paolone\n Okay. Got it. And then just my only other one was on C center. It seems like you're going up another floor on the lab space there. Can you just remind us like how much of the building now is lab and, and where sort of the limitation is there that I thought you, I thought you guys had already hit that, but I guess there's still a bit more room.\nGeorge Johnstone\n Yes, Tony, it's George. We delivered. Well, we delivered a full floor of graduate labs on the ninth floor. So the, the building in total is 27 floors. The lower bank, nine floors are what have been targeted for life science. Ninth floor delivered fully leased and occupied the eighth floor. 99% done in terms of build out with the four different prospects with leases currently being negotiated that would leave us really just with the seventh floor and a portion of the sixth floor left as potential either office expansion for those life science tenants or given the, you know pipeline needs the opportunity for additional graduate lab.\nAnthony Paolone\n Okay, great. Thank you.\nThomas Wirth\n Thank you, Tony.\nOperator\n Michael Griffin, Citi.\nMichael Griffin\n Great. Thanks. I just want to circle back to kind of the development pipeline leasing for a sec. Do you think that you might have to really ratchet up concessions in order to entice tenants to sign leases and then maybe to found the concessionary environment broadly? Have you started to see concessions taper off or is it fair to say they're pretty elevated still?\nJerry Sweeney\n I think it varies a bit by, by the different markets. I think in in, in the Philadelphia area on the development project, we really haven't seen concessions kick up. I think where we've seen increased requests for T I for 10 improvement dollars, we're able to advertise that as part of the rental income stream. So I haven't really seen any material change there at all. Austin is a competitive market. So I think there, we're, we're seeing us as well as our competitors, you know, keeping face rates, annual bumps lease terms around the same where we're probably, and, and, and, and not a real huge increase in free rent either, Michael. We're seeing that a little bit of pressures on the the increased T I side. I think, you know, most tenants, they want a higher level of tenant improvement allowance. In many cases, we're able to get longer lease terms, but in terms of upfront load, we're definitely seeing a little more upward pressure, particularly in Austin on the T I side.\nMichael Griffin\n Thanks Jerry, appreciate the color there. And then just on the disposition pipeline, is it fair to assume the properties in there are are similar to the portfolio that you sold in Plymouth Meeting? And, and I know that you mentioned probably there's no, there's not going to be any seller financing with the subsequent transactions but for the Plymouth Meeting deal, you know, was there a need for that seller financing due to a lack of debt capital available for the transaction?\nJerry Sweeney\n Yeah, great question, I guess and stepping back for just a second, if I might, I mean a couple of key points, I think when you know, because we do get investor inquiries on our investment on our sale program. I mean, look we're, as I mentioned, we're, we're in a very strong liquidity position and, and really as a result, we're only really marketing properties for sale that we really view as non core do either you know change in submarket conditions or position of submarkets, asset, physical superstructure, infrastructure limitations, etcetera. And we also recognize that valuations are in a state of flux due to both uncertainty on some demand drivers for some of the inventory. And certainly as you touched on the state of the the financing markets. So, so as such, we're really focused on using kind of this time period to, you know, improve our overall competitive position for the company on our best assets of which we have many and then really calling the portfolio of properties, you know, even at a bit of a discount to improve our overall competitive position for the organization reduce for capital spend and then generate some incremental liquidity. So I think the, when I looked at at a deal like we did in, in, in the Pennsylvania suburbs, you know, we're, we're at a time in the market, we really do need to recognize reality. And even if it's something you don't particularly like, and I think when we do to help us think through that reality, you know, we take a look at what the NPV of us holding any single asset is in terms of downtime some expense costs, you know, base building T I capital required, etcetera. And we come up with a range, we think the NPV of that asset hold period is and if we go to the marketplace and the marketplace gets within that strike zone, we typically will sell, even if we don't necessarily like where the price was versus our previous expectations, it's the right financial decision for the company. In some cases, based upon the profile of the property and this property sold was one of them given the forward roll over, given the overall state of the financing markets. Given the capital requirements to get that transaction closed. We needed to augment that with some seller financing but good quality buyer, very good capital plan from their standpoint, we think the position is very secure. It's a great coupon rate for us that ramps up over time. So to facilitate us achieving our larger picture, which is to better improve our competitive position overall with our inventory selling an asset like that made a lot of sense for us.\nMichael Griffin\n Great. That's it for me. Thanks for the time.\nJerry Sweeney\n Thank you. Bye.\nOperator\n Michael Lewis, Truist securities.\nMichael Lewis\n Great. Thank you. So I cover apartment and office rates and I get questions from investors in both sectors about residential conversions, your two largest building vacancies on page 4 of your supplemental. So that you're evaluating the feasibility of a residential conversion. I I think this is the fifth quarter in a row that those have have said that. So I thought maybe, you know, you could just give a little color into what the process is and the timetable and the, you know, the evaluation metrics that you're looking at. And if you think, you know, those will ultimately be conversions. You know, just some comments on the process that we might be able to, you know, apply to brandywine and kind of the broader question of, of, you know, whether we'll see a lot of these.\nJerry Sweeney\n Yeah, Michael, great, great, great question. I, I think, I mean, the two properties really are the, the property we have in Wilmington, Delaware as well as a complex we have up in Northwest Austin. They're both a little bit of a different circumstance. Let me share with you the current rating. Number one, we think they both are going to pass the muster for for residential conversion, but they do require a lot of upfront architectural design, a lot of work on the mechanical side to make sure that number one, it it's feasible to do. And then number two, that what we could deliver is a marketable product that will achieve the rents that we're targeting. So we're reaching the conclusion part of that process on both of those projects, both projects require some level of approval from the local authorities to obtain those approvals. Also requires a level of community engagement so that community engagement efforts underway on both of those properties to make sure that we, that we feel comfortable from an approval standpoint, we get those approvals perfected and move forward with both projects. I will tell you, we have looked at a number of other opportunities where we don't think the conversions are feasible. And I know from a national standpoint, there's a number of initiatives underway in the public sector. There's a bill pending in the Ways and Means Committee of Congress now that provide the accelerated tax credits for office to residential conversions. There's discussions underway here in the Commonwealth of Pennsylvania do the same thing. So my guess would be to get some of these to get the volume of office to residential conversions accomplished will require some level of of public subsidy and that public sub subsidy will probably be conditioned upon having some element of affordability in the delivered units. So I I know on those two properties they've been on there for a number of quarters, but we did want to highlight to our investor base that we don't view these properties as necessarily viable office properties for us going forward and we're going down the the the, the path to see if we can achieve a residential conversion there.\nMichael Lewis\n Okay. Got it. And then my second question, I'm going to make this up on the fly, but the stock is down about 7% this morning. The only change I I think in the guidance, you can correct me if I'm wrong is the land sale game? I don't remember those called out before, but even even with those, the consensus is at the high end of your revised guidance range, you know, maybe people expected some a leasing, maybe the seller financing concerns people. You just said you won't do any more of that. So, I don't know, maybe just an opportunity here to talk about, you know, whether you think things are improving have gotten better over the last quarter, whether we're not out of the woods yet. You know, just, just kind of a general sense of, of where we are when, you know, do you think occupancies troughing? Just anything to kind of, you know, are things improving or not?\nJerry Sweeney\n You know, look, I thank you for that question and we welcome the opportunity. Look, I think at a macro level, look, the overall landscape is definitely improving. The quality thesis has real traction. I mean, just look at the, at the percentage of our deals that we have moved up the quality curve. You look nationally statistically, you know, the roughly the 100 million square feet of positive absorption has really been less than 10% of the office stock, which is really driven, which reinforces that quality thesis. You know, the occupancy spread between A&B quality product is is close to historic high, almost 800 basis points and you have very, very limited supply growth going forward. So even with the demand remaining somewhat muted, although I think it will pick up the really good assets, we see their competitive positions improve over time. And I think lead to a formula of, of significant upward rank pressure on both a notional and effective rank base, I think from a gray line standpoint. But we certainly think our options are pretty well trough with the delivery. Now these development projects and the pipeline we have, you know, we are very keenly focused on getting some additional leasing done. So I do, I do think probably some investors might have been expecting more leasing. Now, the residential properties are are performing in line. We need to get some of these leases in negotiation across the finish line. To provide that quantitative for these projects will be successful, but the operating portfolio is in very good shape. I think we did actually talk about the potential for a deferred land gains last quarter. But probably didn't highlight it to the extent that we probably should have. But I think the, I think the landscape for Brandywine, given the positive macro overtones, but also the strength of our market positioning augmented by the foundation we have in the operating portfolio is really very strong going forward.\nMichael Lewis\n Yeah. Thank you.\nJerry Sweeney\n Thank you.\nOperator\n Upal Rana, KeyBanc Capital Markets.\n Hi, this is Gabon for Opol. Could you talk about your plans for the DC market and maybe any expectations on how you plan to reduce exposure down the line there?\nJerry Sweeney\n Happy to do that. Yes, I mean DC has not really been a growth market for us for a number of years. We did a number of we did several joint ventures of our existing portfolio in DC a number of years ago. Those joint venture kind of reaching their natural conclusion point. I think we'll be exiting a number of those properties. At this point. Our wholly owned portfolio is really down to three buildings. Two in Tyson, I'm, I'm sorry, four buildings three buildings in Virginia, one in Maryland. So we have two buildings in Tysons at 1,676 and 8,260 which are performing well. There's some vacancy there and we're trying to figure out there's a formula there for us to continue investing money to bring that occupancy level back up. We have one remaining wholly owned building out in on the toll road out by in Herndon and Dulles corner. That just is going through the process of a major tenant moving in there now. And then one building that's fully over in Maryland, we'll continue to manage and operate those properties to our high standards. Waiting for the investment market to improve and as that market improves our, I think our plan would be to sell those assets over the next couple over the next couple of years.\n Thank you. That's helpful. And then as a follow up, are you able to provide color on your few known move outs, looking ahead and any conversations you're having with tenants about renewals or other options. And then maybe any idea on when you could anticipate that absorption, turning positive.\nJerry Sweeney\n You might take that. Sure.\nThomas Wirth\n Yeah, I mean, as Jerry's outlined, I mean, our forward rollover exposure is extremely low when we look at our 2025 explorations, we have 11 tenancy 40,000 square feet here in the city of Philadelphia that the space was being utilized for construction Swing Space. That lease will end in the third quarter of 25. Outside of that, we don't have any other large expirations. You know, the next largest on the list is a 20,000 square footer in Austin. So we do think occupancy has trough, I think you know, during this third quarter, we had 141,000 square feet of move outs, 100,000 square feet of that was a tenant here in Philadelphia that we've already backfilled the 40% of that space. So, so we do think that, you know, the work that our leasing teams have done to reduce the forward roll over curve.\nJerry Sweeney\n And the prospects that we have in the market to replace those that we do in fact lose. Bodes well for occupancy games.\nOperator\n Omotayo Okusanya, Deutsche Bank.\n Yes, good morning. This is actually Tao from from DB. Thanks for taking the time. The first question I had is on the joint ventures. Any additional work that still has to be done in that regard? Are we kind of at the point where they've all been recapitalized, repositioned, restructured?\nJerry Sweeney\n We're, we're, we're really closing in the in getting across the finish line. I mean, most of those have been resolved. We have two more that are in kind of transition that we expect it to be resolved by the end of the year in discussion with partners and lenders. And we would expect to have those two ventures fully behind us by the time of 2024 ends. So, as I mentioned earlier.\n I'm sorry, I'm sorry. Which Jerry, which two of those? And is it just the debt that needs to be financed or what has to happen there?\nJerry Sweeney\n Yeah, I think on, on one is one small portfolio down in DC. And that's in, in in discussions with the, with the lender at this point, whether that that portfolio is sold or restructured is in process right now and then one other property where we're involved with our partner on a potential sale of our interest.\n Got you. Okay, then if you could just indulge me and I, pardon me? If I missed it earlier. But could you talk a little bit about the retention rate in the quarter? Again, it was kind of lower than kind of what you've guided to for the year and then you actually increased guidance on retention for the year as well. So, wondering again about, you know, the confidence in four Q to to kind of get the overall retention for the year higher than you were initially expecting?\nJerry Sweeney\n Sure, this is George, I'll take that one. So, so the third quarter retention was was negatively impacted by that 100,000 square foot move out here in the city of Philadelphia. That that move out was known that move out was in our full guidance range for the year. We are confident in meeting that new provided increased retention rate because the balance of the leasing plan for 2024 is 100% complete at this point. So, so we know the tenants that are that are leaving in the fourth quarter and we know the ones that have already signed their, their renewal. So the reason we were able to substantially increase it over the course of the year for the fact that we got some additional tenant expansions done. And then we had a number of tenants who in our original business plan, we thought would not stay, ultimately opted to stay.\n Thank you.\nJerry Sweeney\n You're welcome.\nOperator\n Dylan Burzonski, Green Street.\nDylan Burzonski\n Morning guys. Thanks for taking the question. Just sort of touching on, on the disposition guidance. I mean, just sort of trying to figure out, you know, as you guys have gone through the marketing process throughout the year and, and, and gotten into contracts to sell the portfolios and assets that you guys referenced. I mean, how has that pricing shaken out relative to your initial expectation?\nJerry Sweeney\n It's actually our initial expectations when we launched the marketing process for those assets, we have stayed very much on track. I think we've got surprised the upside on one, the others were very much within the range of of both we and the listing broker thought they could achieve so no material change at all from what the launch pricing expectations were.\nDylan Burzonski\n And then maybe just touching on, on, on the Commerce Square transaction, you guys took up your ownership there. I mean, is there any, you know, as we look at as I think about the future of the company and the JVS that you guys have in the development pipeline as well as future Commerce Square, I mean, any desire to continue growing your, your, your ownership in in the development projects or Commerce square?\nJerry Sweeney\n Well, I think looking at Commerce Square Deal and I think, you know, I mean, you may recall several years ago, we, we we bought an investor in that project in a preferred position. And at that time, based on the reporting requirements, we wrote the bag of the asset of about $270 million. I think as we start to think through, sources and uses of cash, given our liquidity position and frankly, the cost of that preferred, we bought back a piece of that, a few months ago and when we did that, we were required to do an ad is appraisal. Take a look at what the appraisal the price value was and that was, that's what kind of resulted in the in the in, in the, the write down based on the ads is that now we think the ads is value based price is much different than the stabilized value when we lease up the project. But it was really the, the commerce is really by the cost of preferred, the strength of our liquidity position. What we believe is a fairly low and attractive investment base. So we thought that was a good transaction in terms of your broader question. Look, I I think one of the opportunities we have as a company is to on these, these larger joint venture developments, be that at skal yards or at Austin, an option to bring those assets on balance sheets. Do we structure those deals on a preferred basis where Brandywine is entitled to you know, 88 to 90% of the upside of those properties. So as those properties approach stabilization, we certainly think that presents a very good opportunity for us to bring those assets on balance sheet. Did that answer your question?\nDylan Burzonski\n Yeah, that, that's very helpful. Thanks Jerry. I really appreciate it.\nOperator\n Steve Sakwa, Evercore ISI.\nSteve Sakwa\n Yeah, thanks Jerry. I just wanted to circle back on the apartments. I mean, in particular, I guess Philly because that one's been open, you know, much longer than Austin. And you know, you went from 73 to 80 I know that seemingly was was in your kind of bull's eye of where you wanted to be. But you know that 7% only equates to about 23 units if I'm doing my math right about eight per month, which typically just seems like a low, slow pace of leasing. So is there something kind of going on in Philly that you're intentionally holding back units? Is it a price point issue? You know, just eight per month would strike me as low for a lease up asset?\nJerry Sweeney\n Yeah, I'm I'm looking for my notes here because I thought it was closer to 13 or 14 per month because we were at the trying to find my page here. Excuse me. So the, well I'm looking, the answer is August was slower than we would have hoped. But we had, and it's only really been, it's been less than three months since our last call. So it was late July. We're now in October. So I, I think we are, we, we were really focused on getting to that target by the end of the year. And I think we've met that target. Let me just see here, you guys have that page then. So anyway, I thought, I thought it was, I thought it was about 1,413, 14 units a month. We went from we're at 270 I thought we were in the in the 235 range. Anyway, we'll, we'll, we'll get back to that. But I think to answer your question, we're not holding back anything. I mean, we're, we're clearly on a full, a full court press to get all of our units the same thing down at Solaris House where we had a little bit of a of a permitting delay to open those units up. So those units actually didn't open up until until mid September. So, yeah, I got, we have here, sorry. So we have, we're 278 leases. We're 237 last, so 41/3 months, we're 14 units per month.\nSteve Sakwa\n Okay, I'll, I'll go back and double check, double check my math.\nJerry Sweeney\n Guess we kind of follow up, right. I'm sure you would. Okay. I guess to go back to, to Michael lewis' question about, you know, the stock being down. You know, I guess there were some comments by Tom, maybe just about, you know, some dilution and you, you mentioned the 8% cap rate, the dilution on, you know, the developments coming online. I know you're not giving 25 guidance, but, you know, at this point, is it fair to assume that you know, it's going to be very challenging to have FFO growth next year and you know, most likely FFO growth might dip down and be negative. You know, in 25 before bouncing back in 26 is the development stabilized given that you haven't, you know, done any, you know, office leasing of, of size and in Austin and those leases would take time to kick in and you know, 3,151 you know, is nearing completion and, and you know, unless you get a lease soon, you know, may also contribute to some earnings solution next year before stabilizing in 26 and beyond. Yeah, look, I think as we bring these properties on, particularly with the residential properties where that interest calculation ends. As Tom and I both touched on, there's going to be some some some run rate similar to what we have in the fourth quarter of 20 for impacting earnings growth for next year now, certainly the expectations given the pipeline we have, we'll be able to announce some definitive leasing activity that provides a clear runway to FFO growth. Because we, as I mentioned, when these properties come online, there'll be a huge boost to our FFO base to the tune of almost $50 million a year from a from a cash standpoint. So we do anticipate that that trend line will be very, very positive albeit with with a transition period will be recognizing not capitalizing interest and, and, and the preferred cost of preferred.\nSteve Sakwa\n Great, thanks. That's it for me.\nJerry Sweeney\n Thank you, sir.\nOperator\n Omotayo Okusanya, Deutsche Bank.\n Yes. Just a quick one. Along Dylan's line of questioning. Again, you, you guys did increase the, the guidance for for dispositions, but at the same time too, you kind of, you know, got cautious on the outlook for land sales. So I guess I'm just a little bit curious in regards to why is it that for kind of fee simple asset sales? You've got maybe a little bit more constructive, but for just like land, it, it actually feels like it's a little bit more difficult to sell.\nJerry Sweeney\n Yeah, I think, I think the short answer is in this kind of marketplace, land is a challenge as well. There's really not a lot of financing source that will provide debt financing on that. There, you know, with cap rate uncertainty, whether it's in the multi family class or the office sector or industrial sector, you know, excuse me, folks aren't really sure what the underwrite the the required development yields. And one of the one of the first things that get squeezed there in terms of valuation is land. So it's a combination of kind of residual caprate uncertainty, obviously, what the development yields need to be and the challenge financing market. So we, when we developed the business plan for 24 we did expect to have a couple of land sales closed based upon where they were in the contract in the contractual and approval process. And at the of recent date, those deals fell apart because of lack of financing.\n Sounds good. Thank you.\nOperator\n Thank you. I'm sure no further questions at this time, I'd like to turn the call back over to Jerry Sweeney for closing remarks.\nJerry Sweeney\n Great Michelle. Thank you and thank you all for participating in this earnest call. We look forward to updating you on our fourth quarter in 2025 business plan after the 1st year. So, thank you very much and have a wonderful day.\nOperator\n Thank you for participating. You may now disconnect. 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