Brandywine Realty Tr Q3 2026 Earnings Call Transcript

Brandywine Realty Tr (NYSE:BDN) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Brandywine Realty Trust exceeded or met its 2026 business plan targets in Q3, with significant progress in asset sales and debt reduction, raising its sales guidance to $681 million.

Q3 FFO was $0.14 per share, in line with guidance, with debt reduced by $390 million, improving net debt to EBITDA from 8.4-8.8x to 7.8-8x.

Leasing activity was robust, with a 90.5% leased rate and tenant retention increased to 54% due to unbudgeted renewals.

Liquidity improved with cash on hand reaching $175 million and no outstanding credit line balance after October debt repayments.

Strategic focus includes continued debt reduction, potential asset sales in 2027, and exploring recapitalization options for One Uptown.

Full Transcript

OPERATOR

Thank you for standing by and welcome to the Brandywine Realty Tr third quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during this session, you’ll need to press star 11 on your telephone. If your question has been answered and you’d like to remove yourself from the queue, simply press star 11 again. As a reminder, today’s program is being recorded.

And now I’d like to introduce your host for today’s program, Jerry Sweeney, President and CEO. Please go ahead, sir.

Jerry Sweeney (President and CEO)

Jonathan. Thank you very much. Good morning, everyone. Thank you for participating in our third quarter 2026 earnings call. On today’s call with me today are Dan Palazzo, our Senior Vice President, Chief Accounting Officer, and Tom Wirth, our Executive Vice President and Chief Financial Officer. Just to note 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. 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 SEC.

Okay, so during our prepared comments today, Tom and I will briefly review third quarter results and frame out our key assumptions that drive our guidance for the balance of the year. After that, Dan, Tom and I are available to answer any questions. So, from a capital markets operating and liquidity standpoint, the third quarter produced results that exceeded or were in line with our 2026 business plan. And since our last call, we’ve made significant progress on our capital markets plan, primarily on asset sales and debt reduction.

Quarterly highlights include we increased our 2026 sales guidance from 305 million to to 681 million, highlighted by the sale of 3151 Market Street and our partnership interest in Solaris House in Austin, Texas. The 3151 sale was for $240 million or $544 per square foot. And it’s important to note, as we identified in the sip, that that sale also eliminated our forward capital spend of almost $80 million. On our sales target, we are 100% achieved and fully funded.

Our speculative revenue target increased by an additional $1 million and we are 100% achieved at 19.5 million, with basically nothing left to do for the balance of 2026 on that target. This marks the second increase to our speculative revenue target this year and is now almost 12% higher than our initial 2026 business plan. Third quarter FFO of 14 cents per share was in line with management guidance and estimates. We are maintaining our 55 cent per share full year midpoint and have narrowed our full year FFO guidance range. Our core FFO results, as Tom will articulate, exclude losses on early extinguishment of debt that we incurred during the quarter. With the increased sales achieved, we had paid off $390 million or over 13% of our outstanding combined debt. This is a $218 million increase over our initial 2026 debt reduction target that does include the payoff of the loan securing both 3151 Market and Solaris House.

Accelerating these debt paydowns lowered our year-end net debt to EBITDA midpoint from 8.4 to 8.8 down to 7.8 to 8 times, about an 8% reduction at the midpoint, and reduced our quarterly run rate from 9.0x in Q2 to 7.6 in the third quarter. From an operating standpoint, solid operating metrics during the quarter reinforced our strong market position and what we’re continuing to see is a tenant’s preference for very high quality office space. Our wholly owned portfolio is 90.5% leased and 89% occupied. We had very small negative net absorption of about 7,000 square feet during the quarter. Our year-end occupancy and lease percentages will improve through year end and we will have positive net absorption for the first time in several years.

I think as additional evidence of our pipeline continuing to build and our portfolio quality leasing activity for the quarter was our highest for the year totaling 558,000 square feet, including 372,000 square feet in our wholly owned portfolio. Also included in that number is about 114,000 square feet that we leased at One Uptown since our last call, bringing that property to 97% leased. Forward leasing commencing after the quarter totals 163,000 square feet with 111,000 square feet taking occupancy this year.

Tenant retention was 50% resulting in our raising our full year midpoint retention target to 54%. This raise was mainly due to unbudgeted renewals and expansions in both the Philadelphia CBD and Pennsylvania marketplaces. Our capital ratio for the quarter was 8.9%. That allowed us to narrow and lower our 2026 business plan range from 12 to 13% to 11% to 12%. Our GAAP mark-to-market was 10.8%; we’re narrowing our full year guidance range to 5 to 6% versus 5 to 7%.

Cash mark-to-market was 5.7%. The adjustment to guidance are a result of executing lower cost capital renewals with existing tenants. As a result, this quarter our CAD number was higher than planned due to a number of those unbudget renewals that temporarily increased our revenue maintaining capex run rate. Same-store results were negative 0.6% on a GAAP basis and a positive 1.7% on a cash basis, both within our current guidance ranges. Tour volume in the third quarter remained very strong, slightly below the high volume we saw in Q2, with higher tour volumes in our CBD and University City markets, slightly lower in the Pennsylvania suburbs and the same levels quarter over quarter in Austin. We also continue to experience very good tour conversion rates; for the trailing four quarters, 54% of tours converted to a proposal; from proposal, 49% converted to an executed lease; both are running ahead of our historical averages.

Just a few additional comments regarding market dynamics. In Philadelphia, we’re now 95% occupied and 96% leased with only 7% rolling annually through 2028. We continued our outperformance trend in the CBD and University City during the first nine months of this year with 60% of all new leasing signed in our CBD and University City submarkets being at a Brandywine property, as I noted on previous calls, significantly exceeding our 15% market share.

Residential office-to-residential conversion activity now aggregates in Philadelphia CBD over 5 million square feet, which is about 11% of Philadelphia’s inventory, and we believe that that dynamic will continue and further improve our competitive market position. In the Pennsylvania suburbs, we’re 93% leased and we continue to see solid levels of pipeline prospects for the existing vacancies, particularly in our Radnor submarket. Austin, at 66% occupancy, continues to lag the rest of the portfolio and does create about a 400 basis point drop in our overall company occupancy numbers.

The operating portfolio leasing pipeline remains stable at 2 million square feet and this pipeline includes about 300,000 square feet in very advanced stages of negotiation. Shifting to the balance sheet, our liquidity position improved significantly during the quarter. While we had a $137 million balance outstanding on our line of credit at quarter-end, upon receipt of course quarter-end sale proceeds, we paid off that balance in early October. As such, there’s no outstanding balance on our line of credit and we have $175 million of cash on hand.

As I noted previously, during the third quarter we reduced outstanding debt by almost $400 million, resulting in total, including wholly owned and joint venture, about $27.2 million of interest savings, and included in those amounts are about $140 million of bond retirements that we retired at an average interest cost of 8.7%. Obviously, the vast majority of our sale proceeds consistent with our business plan were used to reduce leverage and improve credit metrics.

We will continue to use our cash balances and any subsequent sale proceeds to further reduce debt, including repurchasing bonds in the fourth quarter and, to a much lesser extent to the extent dictated by the market, repurchasing shares. As we noted on previous calls, until we make significant progress on all of our leverage targets, we anticipate using only 5 to 10% of net proceeds to purchase shares. Our plan remains returning to investment grade metrics.

We will maintain minimal balances on our line of credit and the execution of the sales program this year has been an excellent catalyst to reduce leverage and further improve all of our credit metrics. With our sales activity now complete and debt reduction underway, as I noted previously, we expect a significant improvement to our net debt to EBITDA. The year-end target we have identified in the SIPP does assume we continue to apply about $100 million of cash on hand to further reduce outstanding debt during the fourth quarter.

On One Uptown, which is the only remaining development project, we made significant progress during the quarter and, as I noted, we are now 97% leased. We expect this project to stabilize in the third quarter, slightly behind schedule due to build out times with lease executions, but at a slightly higher pro forma yield. What’s interesting to note is the Uptown submarket where our projects are located is now about 95% plus leased with a vacancy rate including sublease space of less than 5% and really no large available blocks of space.

So as noted previously, in anticipation of our 2027 IBM lease expiration that will have an impact about $11 million of net NOI on us, we plan to commence the redevelopment of at least one of those existing buildings upon achieving pre-leasing activity. Since announcing this redevelopment initiative, the pipeline has risen to about 1.5 million square feet, with all those prospects having lease commencement dates, excuse me, between late 27 and 2030, so the market response continues to be exceptional.

The first building consists of 157,000 square feet and, again assuming pre-leasing and we’re in significant discussion with some prospects, we expect to deliver a renovated building by year end 27. Also, as prospective tenants’ requirements advance, we do have planning underway to do similar renovations at some of the other buildings. As we discussed in our last call, our hope was to sell Solaris, our 340 unit residential project in Austin. That sale closed in September. We received net proceeds after paying off the $76 million construction loan and paying off our preferred investor. That project was held in a joint venture with Brandywine owning about 57% and was sold at a sub-4% cap rate. As we’ve already highlighted, we’ve increased our business plan target to $681 million and we’re frankly delighted to achieve this increased sales target, particularly in light of the very choppy capital market.

So our team did a wonderful job of getting all those transactions closed without any retrade of pricing and on schedule, and the response from the market for the asset sales, even with the choppy market conditions, was fairly strong. We had significant considerable interest and the typical marketing process had between 7 to 10 qualified bids. All buyer types were engaged, including users, institutional investment managers, private REITs, and significant interest from private capital.

So with that overview and our clear priority to continue to lower leverage and return to investment grade metrics, I’ll turn the floor over to Tom to review financial results for the second quarter and the outlook for the balance of the year.

Tom Wirth (Executive Vice President & Chief Financial Officer)

Thank you, Jerry, and good morning. Our third quarter net loss was $22.3 million, or $0.13 per share, and our core FFO, which excludes debt extinguishment charges, totaled $15.4 million, or $0.09 per share, totaling $24.6 million, or $0.14 per diluted share, and met the second quarter guidance and consensus estimates. Some general observations for the third quarter: property NOI was $68.5 million, or $1.1 million below our forecast, due to lower retail and residential income.

We anticipate improvement in those areas in the fourth quarter. G&A expense was above our reforecast by half a million dollars, primarily due to compensation expense. Third quarter fees were $2.1 million, or half a million above reforecast, primarily due to third-party leasing fees. Quarterly JV FFO, interest expense, and other income were generally in line with the forecast. Looking at debt metrics, third quarter debt service and interest coverage ratios were 1.7 times, both equal to our second quarter results. We expect those coverage ratios to improve in the fourth quarter as we experience the full-quarter impact of our bond purchases. Our third quarter annualized combined net debt to EBITDA was 7.6 times, reflecting proceeds from our sales and corresponding debt repayments. During the fourth quarter, we expect these coverage ratio levels to increase slightly based on having the full-quarter impact of sold properties in the fourth quarter cash flow.

During the third quarter, we had no significant changes to our core portfolio since the properties that were sold during the quarter were either held for sale or classified as development. Looking at liquidity and financing, after the line of credit was paid off in early October, we had a solid liquidity position of $175 million of cash and no outstanding balance on our unsecured line of credit. As Jerry mentioned, on sales activity, we increased our target to $545 million on a wholly owned basis, which is 100% achieved and funded. The weighted average cap rate on those sales was 4.7% on a cash basis and 4.9% on a GAAP basis. In addition, the sales reduced our forward capital commitments, as Jerry mentioned, by around $79 million.

A majority of these proceeds have been used to reduce debt and will continue on our path back to investment grade. We also have a portion of those sales being used for share buybacks. Looking at our unsecured bonds, our planned buyback of existing unsecured bonds focused on bonds with higher coupons that will have a more immediate impact on our coverage ratios. During the quarter, we purchased $140 million of secured bonds, representing $50 million of the 2028 bonds and $90 million of the 2029 bonds, reducing annual interest expense by $12.5 million. We incurred debt extinguishment costs of about $9.2 million. However, we did not include those in our second-half FFO guidance.

As we discussed on the previous call, our C-PACE loan, in connection with the sale of 3151 Market, we prepaid our $57.3 million loan with a 7.3% interest rate that collateralized the property. The early prepayment resulted in a $6.2 million loss on the early extinguishment of debt, as outlined on page one of our supplemental. During the quarter, we reduced debt, including the line of credit, by $390 million, which resulted in $24 million of annual interest expense savings on a wholly owned basis.

The $24 million reduction represents approximately 18% of our second quarter 2026 midpoint guidance for annual interest expense. We anticipate using another $100 million of cash on hand to further reduce debt during the fourth quarter. Our unsecured line of credit had an initial maturity date of June 26th with two six-month extension options through June of 27. With our sales program now complete and our debt reduction program almost complete, we will work with our bank group to try and extend the line of credit this quarter. As we mentioned on recapitalization of our joint ventures, we’ve made significant progress toward recapitalizing the final two preferred equity development projects located in Austin, Texas.

We have sold Solaris for $136 million and received over $16 million of cash after repaying our partner and existing construction loan, and we reduced the debt attribution from that by $43.6 million. We are now 97% done at One Uptown on the leasing front, our office project, and we plan to recap that asset in 1Q27 rather than 4Q26. Based on the timing of the leasing, we expect that transaction to provide about $25 million of net proceeds and reduce our debt attribution by about $50 million in 2027.

Property-level income—now let’s look at the fourth quarter: property-level income for the quarter should be about $68 million and will be about half a million below the third quarter. The incremental decrease is primarily due to the sold properties between the NOI in the third quarter versus the zero NOI in the fourth quarter, and that decrease will be about $2 million. Offsetting that $2 million is improvement in the Radnor Hotel, which commenced operations earlier this year and is producing an incremental $800,000 of NOI between the third and the fourth quarters, and improved operating results at 3025 JFK, which also has $800,000 of improvement between the third and the fourth quarter. FFO contributions from our joint ventures will be about half a million dollars. G&A expense for the fourth quarter will total about $7 million.

The sequential decrease is consistent with prior years, and our full-year range is still $36 to $37 million. Interest expense, including deferred financing costs, will be approximately $35 million, which includes $400,000 of capitalized interest. We’ve lowered our full-year expense range by $3 million at the midpoint to account for the lower debt balances. As previously mentioned, in connection with potentially retiring additional debt, we may incur additional debt extinguishment costs during the fourth quarter that are not currently in our FFO or core FFO guidance.

Termination fees and other income will total about $2.5 million. Net third-party fees will be about $2 million. Interest income will total about $1 million with the cash we currently have on hand, and our diluted share count for the quarter should be about 177 million shares, reflecting the share buyback we did in the third quarter. And for clarity, the fourth quarter forecast will then result in core FFO range of $0.16 to $0.18 per share. Turning to the capital market plan for the fourth quarter, which is pretty straightforward and totals about $165 million. Our third quarter CAD payout ratio was 103, which we’ve adjusted to account for increased tenant renewals and revenue-maintained capital that’s being incurred, as well as some of the older capital that dates back to pre-2024. Looking at the larger uses, development spend will total $20 million, and we will then have $14 million of common dividends, $10 million of revenue-maintaining capital, $11 million of revenue-creating capital, and $10 million of equity contributions to our joint ventures.

The sources are going to be $20 million of cash flow after interest and using $145 million of our cash on hand. Based on the capital plan, we anticipate having a small amount of cash and no outstanding balance on our line of credit. We anticipate our net debt to EBITDA range to be 7.8 to 8.0 and our fixed charge ratio to between 18 and 20. Implicit in these ratios is further reducing debt by another $100 million during the quarter. While the increase to 2026 sales has accelerated our deleveraging program, we are focused on additional sales in 2027 as we continue our goal to improve our pricing in public market debt and our ratings.

I will turn the call back over to Jerry.

Jerry Sweeney (President and CEO)

Tom, thanks very much. So as we look ahead, our asset quality and operating teams will really enable us to continue capitalizing on improving real estate market conditions. And we do expect overall market conditions from a leasing standpoint to continue to improve as we move into 2027. I think the success of our sales program has resulted in significant debt reduction well ahead of plan, improved liquidity, lower forward capital costs, which is a very key point that we are focused on, and really the complete elimination of our forward development risk.

The groundwork has been laid through the 26 business plan execution so far. We plan on building on that continuum momentum to drive long-term value. With that, Jonathan, 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. Thank you very much.

OPERATOR

Thank you. And our first question for today comes from the line of Nick Joseph from Citi. Your question please.

Nick Joseph (Analyst at Citi)

Thanks, Jerry. You outlined obviously a lot of the progress that you’ve made over the quarter and the year. I guess just as I think about the capital plan going forward, you mentioned still 5% to 10% to buy back shares. Why is that the right level versus using almost all the proceeds to continue the deleveraging plan?

Jerry Sweeney (President and CEO)

Yeah, I think it just provides us some additional flexibility, frankly. As we set the target at the 5% to 10%, we announced it on last quarter call, we bought back much less than that. I think the major focus, and I’m glad you raised the question, it’s nuanced, our major focus is continuing to reduce our overall leverage and improving all of our key credit metrics to get back on the path towards investment grade. So hopefully that clarifies. We keep that flexibility out there based upon what we’re seeing in the marketplace.

But the reality is that the vast majority, almost without exception, is being applied to reduce debt, whether that be some of the construction secured loans we have or continuing to get in the marketplace to retire bonds.

Nick Joseph (Analyst at Citi)

Thanks. And then with One Uptown now 97% leased, what’s the appetite to recap that asset?

Jerry Sweeney (President and CEO)

I think we’re going to take a hard look at that. We’re already starting to talk to some potential partners to recap that and improve our balance sheet metrics. And as Tom outlined, now with that project fully leased—and some of those leases, quite honestly, were in the process for a long period of time—but I think this quarter we were able to get all of them across the finish line. The build-out periods are underway for most of those tenants, and we expect all that capital to be spent in the first part of the year.

So we’re very keen, as Tom outlined, on fully vetting and exploring a recap option for that property in the first quarter.

Nick Joseph (Analyst at Citi)

Thank you.

OPERATOR

Thank you. And our next question comes from the line of Dylan Brzezinski from Green Street. Your question please.

Dylan Brzezinski (Analyst at Green Street)

Hi guys, good morning. Thanks for taking the question. Maybe just touching on Austin, because it seems like if you look at the portfolio, Philly stuff is largely leased up fully today, maybe with little room for improvement on the suburb side of things. But just looking at Austin, it appears that’s going to be the major driver that gets you guys over the hump into the total portfolio occupancy range of low 90%. I mean, this is a portfolio that you continue to see a leasing pipeline grow.

Do you guys feel like your assets are well positioned? Maybe you can kind of just talk about your overall long-term plans in Austin? That would be helpful.

Jerry Sweeney (President and CEO)

A great question. Thank you. As I mentioned on previous calls, our major focus really within Austin is on our Uptown ATX development. And there we’re really happy that early next year the train station will be fully operational. They expect that to be the second-busiest train station along that line. And I will tell you truly, that was a major draw for us to attract a number of these tenants to One Uptown. So it’s not a singular focus in Austin at Uptown, but that’s our primary focus.

You know, where we have vacancy in Austin right now, we have Four Point Center, one of those buildings that we continue to see. We continue to see a building pipeline there and hope to get some traction. We are actually pursuing a couple of prospects currently. And in River Place, which really consists of two individual pods, we’re actually evaluating converting one of those pods to residential development. There was some state legislation passed in Austin or in Texas that accelerates the ability to do office-to-residential conversions.

The submarket dynamics where River Place is, Dylan, have changed a little bit more towards residential versus office. So we’re carefully assessing the outcome of at least taking one of those pods and moving into a residential redevelopment process. The first part, that we’re putting some of that on the market to see what other developers in that marketplace value that site at so we can evaluate what we think our appropriate next steps are.

Dylan Brzezinski (Analyst at Green Street)

That’s helpful.

Jerry Sweeney (President and CEO)

Hopefully that’s helpful.

Dylan Brzezinski (Analyst at Green Street)

Yeah, no, that’s extremely helpful, Jerry. Appreciate that. Maybe just one last one. Thinking about the solid execution and the successful execution of the disposition plan in 26, I mean, how do you sort of think about the portfolio today? Do you feel like you still have large percentage, not what you would deem non-core assets? And how should we sort of think about potential additional proceeds over the next 2, 3, 4 quarters?

Jerry Sweeney (President and CEO)

Yeah, I think obviously we’re not announcing anything relative to 27 at this point. But you know, as Tom and I both touched on, we do anticipate about another 200 million, maybe more in sales next year. Some of those will be in-market assets. Some of those will be in what we consider to be some of our non-core markets. But some of that may frankly be land parcels. We’re taking a hard look at our land inventory to figure out what parcels we want to liquidate and more effectively deploy that capital.

So one of the interesting things is given the capital market volatility, it’s really given us an opportunity to take a look at where we want to sell assets and then how we use those proceeds as we have thus far in 26 to really reduce leverage, reduce our forward capital calls, and improve financial flexibility.

Dylan Brzezinski (Analyst at Green Street)

Great. Thanks for the time, Jared.

Jerry Sweeney (President and CEO)

Thank you.

OPERATOR

Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone. Our next question comes in the line of Michael Lewis from TUA Securities. Your question, please.

Michael Lewis (Analyst at TUA Securities)

Thank you. I was just going to ask any additional details or color regarding progress on the 2027 lease expirations. Other than IBM, obviously, which we know about, and, you know, excluding IBM, do you expect occupancy to move up next year or are there other pockets of downtime in the portfolio?

Jerry Sweeney (President and CEO)

Yeah, we. Michael, thanks for the question. We are very actively going out into our forward maturity curve for both 28 and 29, looking to kind of get some early renewals done across our portfolio. We’ve been successful in getting a couple done this quarter and have a few underway. And one of our objectives is to really minimize that rollover, particularly in 28, 29, down to the levels we were experiencing in 25 and 26. And we think the market’s constructive for that business approach.

There’s clearly a recognition by both our customer base, both existing and prospective, as well as the brokerage community, that there is an increasing dearth of really high-quality, well-run, good-landlord space in our key markets. We’re using that to our maximum advantage. So I think, generally speaking, from a business plan standpoint, we are moving very expeditiously on all of those forward renewals, and we do expect to be able to further de-risk our operating portfolio over the next several quarters.

Tom, do you have anything to add to that?

Tom Wirth (Executive Vice President & Chief Financial Officer)

Yeah, Michael, as we look at 27, again, putting aside IBM, as you asked, you know, I think we will see, you know, some absorption, continued absorption next year. As Jerry mentioned, you know, we only have two tenants in the portfolio over 30,000 square feet that are expiring next year, and we think both of those tenants will renew. So really. But looking at that, and then you go down below 30,000 on other tenants that, you know, take a look, you know, closer to their renewal date, are going to start talking with them, which we are now.

But it’s fairly low in terms of any other large tenants expiring in 2027.

Jerry Sweeney (President and CEO)

I mean, the dynamics are actually improved. I’m sorry, Michael. The dynamics are actually improving significantly. Just in terms of when we take a look, really, at CBD, University City, and particularly Radnor, we think there’s room to get early renewals done there and accelerate the absorption of some of our existing vacancy.

Michael Lewis (Analyst at TUA Securities)

Okay, appreciate that. And then for my second question, you know, you mentioned the 200 million of potential dispositions next year. I guess I’m going to ask about pricing. Right, the 4.7% cap rate on the dispositions. Obviously you had one large property, 3,151, you know, basically at zero, and you had Solaris in there. Is there any more color you can give on what’s happening to office cap rates for stabilized assets given the change in the cost of capital?

Jerry Sweeney (President and CEO)

Yeah, great question. And actually let me amplify you. If you would exclude 3,151 from our calculation of cap rates, the remaining property sold right around our projected mid-8% cap rate. There are some lower, a little bit higher, but blended was about in the mid-8s. So the last 30, 60 days with interest rate volatility, the new inflation numbers, I think, has certainly at least short-term changed dynamics. So we were really happy, Michael, to get all of our sales done and locked away before all this increased market volatility.

Look, the reality is that as debt costs go up, it has a corresponding impact on pricing. So as we start to look at what our sales program will be for 2027, we’re going to stay very close to what we’re hearing back from the investment market on both the timing and composition of those sales. We’re certainly very mindful that when we sell a property, we lose income. And I think that the success this year, being able to sell on a blended basis properties well below the cost of debt that we’ve repurchased, was very additive to our balance sheet and to our income stream.

I think we’re going to be taking a hard look at that same metric being applied in 2027 as well.

Michael Lewis (Analyst at TUA Securities)

Thank you.

Jerry Sweeney (President and CEO)

Thanks, Mike.

OPERATOR

Thank you. And our next question comes from the line of Manis Ebike from Evercore ISI. Your question please.

Manis Ebike (Analyst at Evercore ISI)

Great. Good morning. Thanks for taking the question. Could you expand on your commentary around the tenant demand for the IBM buildings? Give some color maybe on what type of tenants are looking there? If there are current existing tenants in the market, expanding or new-to-the-market tenants. And I’m just curious about economics you kind of target for those read-ups.

Jerry Sweeney (President and CEO)

Yeah, thank you for the question. The pipeline, as I mentioned, is about 1.5 million square feet. Those size tenants range from a low of 20 to 30,000 square feet up to several hundred thousand square feet. It’s actually a fairly good mix between technology and financial service companies. Most of the tenants are in market, and I use the term market being all of Austin, and a number looking for expansion or consolidation opportunities. As I alluded to a few moments ago, we are, I think, beginning to reap the marketing benefits of access to this train station.

That employee mobility, traffic congestion, affordable housing have all been issues that have really risen to the fore in Austin. And I think Uptown ATX, given its location in Northwest but also proximity to the far northern suburbs and easy access to downtown, I think really creates a very valuable marketing platform for us. As I mentioned on the previous calls, we’re planning to deliver these buildings somewhere in the mid 8 to 9% return on cost. And we’ll really only proceed with the planning and the execution once we get a much higher level of visibility and leases done with some of these prospects. But we think that that’s a good runway for us over the next couple years.

I mean certainly as we take a look at the IBM roll and the income, that $11 million or so we’ll lose in income next year, we’re certainly very mindful of how we start to replace that revenue stream while at the same time building a very effective neighborhood at One Uptown that will deliver longer-term value for us.

Manis Ebike (Analyst at Evercore ISI)

Got it. I appreciate it, thank you. And maybe the quick follow-up just on whether that high demand that you’ve been seeing in that submarket has already resulted in some interest for future phases of ATX, for example, Phase B or anything else, and how that kind of triangulates with your thoughts on just like general capital allocation and deleveraging.

Jerry Sweeney (President and CEO)

Yeah, look, I think that we continue to see a high level of broad-based activity in that marketplace. And as you know from our previous calls, we do have planning underway for Block B and D. Block B and D are primarily retail and multifamily with potentially a hospitality component. While we’re going through the planning processes, there’s no desire on our part to proceed with those until there’s firm lease commitments, firm financial commitments, and it layers very nicely into our overall balance sheet strategy.

So right now we’re planning. The approval process down there can be a bit protracted getting some of those pieces pulled together. But from a capital deployment standpoint, what we’re seeing in the intermediate term is moving forward to renovation of the 900 series building, subject to pre-leasing, and then we’ll see what the capital market conditions present to us as we think about any other future phases.

Manis Ebike (Analyst at Evercore ISI)

Got it. Thank you.

OPERATOR

Thank you, thank you. And our next question comes to the line of Upal Rana from KeyBanc Capital Markets. Your question please.

Upal Rana (Analyst at KeyBanc Capital Markets)

Great, thank you for taking my question. Jerry, maybe you can talk a little bit about your decision to sell 3151 Market. Last quarter you mentioned negotiating with a multi-floor tenant at the property, but ultimately you decided to sell. So any color there would be helpful, especially on life science leasing dynamics in the Philadelphia CBD will be helpful. Thank you.

Jerry Sweeney (President and CEO)

Thank you for the question. Look, on 3151, our goal was to deliver a very high-quality building that would be very additive to both our portfolio and to our Schuylkill Yards neighborhood. The life science market changed since we commenced construction. That project where demand drivers are still there, but they’re much more muted than the demand levels were several years ago. And as a consequence of that, as you know, about a year or so ago, we pivoted to kind of a mixed life science office leasing strategy and we were getting traction on that.

I think the decision for us came down to this. We had the ability through that building to bring a Fortune 500 company with over 2,000 employees as a base to Schuylkill Yards and to further cement Schuylkill Yards as the place to be with mass transit access in the city. When we took a look at the timeline to lease up the balance of that building, and as Tom and I both touched on the $80 million or so future capital commitment to deliver a building that will yield in the mid-7% range to us, the capital markets actually presented an amazing opportunity for us to sell that building, again bring a big employment base into the city and the Schuylkill Yards, eliminate that future capital spend, obviate the lag time to get income in place, and sell that property and buy back bonds at over an 8% yield.

So from our perspective, it was really a financial decision to say we can generate significant liquidity, generate proceeds, immediately redeploy those proceeds back into buying back higher priced debt. And that higher priced debt was yielding more on retirement to us than the stabilized return of the property would be. So it was a challenging real estate decision because we felt we could create some great value there. But from a financial planning standpoint, given the current capital market conditions and our ultimate goal to get to investment grade metrics, it was an easy decision.

Tom Wirth (Executive Vice President & Chief Financial Officer)

Yeah, you know, we’re going through our 2027 planning process right now and certainly from our perspective, as we’re looking at the dividend, coverage is higher than we wanted it to be. At the beginning of this year, we targeted between 70% and 90%. We frankly were a lot more successful in getting a lot of renewals done that generated the need for additional revenue maintaining CapEx, which kind of drove that percentage up. So we’re going to take a hard look at that run-rate, take a hard look at what the net impact of our interest rate savings is versus what we project the absorption to be in 2027 impacted by the IBM move-out.

Then we’ll make a decision. We review that every quarter with the board. Right now we’re feeling very good about where the dividend is. We’re certainly hoping that the stock price recovers so the dividend yield goes down. But that’s a source of capital that’s always on the table as we review our business plan and business plan progression with the board on a quarterly basis. Thank you.

OPERATOR

Thank you. This does conclude the question and answer session of today’s program. I’d like to hand the program back to Jerry Sweeney for any further remarks.

Jerry Sweeney (President and CEO)

Great. Jonathan. Thanks for your help today and thank you all for participating in our third quarter conference call. We wish you the best as we head into the end of the year and the holiday season and look forward to providing an update on our 2027 business plan early next year. Thank you very much.

OPERATOR

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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