Brandywine Realty Trust (BDN) 2025 Q4 法說會逐字稿

Thank you for standing by and welcome to the Brandywine Realty Trust fourth-quarter 2025 earnings conference call. (Operator Instructions) As a reminder, today's program is being recorded.

And now, I'd like to turn our host for today's program, Jerry Sweeney, President and CEO. Please go ahead, sir.

Jonathan, thank you very much. Good morning, everyone. Thank you for participating in our fourth-quarter 2025 earnings call. On today's call with me are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Senior Vice President and Chief Accounting Officer; and Tom Wirth, our Executive Vice President and Chief Financial Officer.

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 assurances 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.

During our prepared comments today, Tom and I will briefly review fourth-quarter results and frame out the key assumptions behind our '26 guidance. After that, Dan, George, Tom, and I are available to answer any questions.

So to start moving forward from an operating portfolio management and liquidity standpoint, 2025 produced results very much in line with our business plan. We posted strong operating metrics, reinforcing the continued flight to quality among our tenant base and our strong market positioning.

Our wholly-owned core portfolio is 88.3% occupied and 90.4% leased. Forward leasing commencing after year-end increased 26% to 229,000 square feet with most taking occupancy in the next 2 quarters. We generated near $27.3 million of spec revenue, very much in line with our business plan. And we also exceeded our tenant retention target, which ended up at 64% compared to our original business plan range of 59% to 61%.

Leasing activity for the year approximated 1.6 million square feet. During the quarter, we executed 415,000 square feet of leases, including 157,000 in our wholly-owned portfolio and 257,000 square feet in our joint venture portfolio. Our capital ratio for the year was 9.5%, slightly better than our '25 business plan midpoint. This was the lowest capital ratio range we had in 5 years, primarily due to continued good capital control, our purchasing power and a high percentage of renewals. On an annual basis, our GAAP mark-to-market was 4.2%, exceeding our business plan expectations.

And on a cash basis, we were in line with our business plan. New leasing mark-to-market was very strong at 13% and 4% on a GAAP and cash basis, respectively. And then we also had some very encouraging news on the tour volume standpoint. So fourth quarter tour volume exceeded third quarter by 13%. Tours in the fourth quarter '25 exceeded fourth quarter '24 by 87%. And for the quarter on a wholly-owned basis, 45% of all new leasing was a result of flight to quality.

Our annual tour volume in 2025 outpaced '24 by 20% on the fiscal number of tours, but more importantly, 45% on a square footage basis. We experienced increased tour levels in all of our core markets, particularly CBD, Philadelphia and Radnor at 49% and 45%, respectively, on a square foot basis, a great sign of an ever-improving market. We also continue to experience good conversion rate from these tours, which is really the most important step. For 2025, 56% of all tours converted to a proposal, and from proposal, 38% converted to an executed lease. So very much in line with our historical averages, in fact, slightly above in some cases.

A few additional comments regarding our various market dynamics. In Philadelphia, which is our largest submarket, it encompasses both CBD and University City, we're now 95% occupied and 97% leased with only 6% of our space rolling through 2028. So a very solid operating portfolio. Our Commerce Square joint venture property is now 90% leased, bringing our combined Philadelphia holdings, both wholly-owned and joint ventured to 95%. As I noted, overall activity levels remain strong.

Interesting data points: over the last 5 years, Brandywine has captured 30% market share of all new leasing activities signed in Market West and University City, substantially outperforming our 15% market share. This trend accelerated during 2025 for the full year. 54% of all new leasing signed in these markets was at a Brandywine property. More importantly though, since 2021, our net effective rents in these submarkets have increased almost 20% or an annual net effective rent increase of 5.4%.

This net effect of rent growth was achieved through sustained controlling capital costs and continued rent growth. In the Pennsylvania suburbs, overall we're 89.4% leased and our Radnor submarket is 91% leased. We continue to see solid levels of pipeline prospects for the existing vacancies. Austin, at 74% occupancies, creating a 400 basis point drop in overall company leasing levels.

But tour volume there was up over 100% year over year and the other side of that market being on a slow path to recovery. Our operating portfolio leasing pipeline remains solid at 1.5 million square feet, which also includes about 140,000 square feet in advanced stages of negotiations.

Relative to liquidity, we're in solid shape with no outstanding balance on a $600 million unsecured line of credit and $32 million of cash on hand at the end of the quarter. We also have no unsecured bonds maturing until November of 2027. And as noted previously, we plan to maintain minimal balances on our line of credit as our business plan is designed to return us to investment-grade metrics.

As we'll discuss our '26 plan, we'll reduce overall levels of leverage. But as an interesting point, over 50% of our outstanding bonds has coupons north of 8%, providing very good refinancing opportunities over the next several years, assuming the market remains constructive.

As an illustrative point, if we refinance those bonds over 8% to market rate today, our interest rate costs would decrease approximately $0.10 per share. As we look at the year-end results, our FFO for the quarter and year were both in line with consensus. And then notably, during the fourth quarter, we took our first steps towards recapitalizing our development joint ventures. In December, we redeemed our preferred partners' equity interest in both joint ventures at Schuylkill Yards. Our 3025 JFK property, what a high-quality asset onto our balance sheet with a major tenant already taken occupancy in early January.

The 3025 commercial component will be added to our core portfolio in the first quarter at 92% leased. Our buyout on 3151, which aggregate about $65.7 million, was mostly funded with a $50 million C-PACE loan, which effectively replaced our higher-priced partners' equity with a lower priced loan with prepayment flexibility. As we've noted before, the capitalization phase in this building ended at the end of 2025. Our pipeline in this project stands at approximately 1 million square feet, broken down to 60% office and 40% life science. Discussions with many prospects remain active and several key proposals are outstanding.

Both of these buyouts temporarily increased our year-end leverage in anticipation of the 35 construction loan refinancing and our asset sales program. Notably, the fourth quarter buyout on 3025 occurred in advance of our lead tenant taking occupancy. Pro forma for that revenue stream, which did commence this month, our net debt to EBITDA would improve by 0.4x and are fixed charge by 0.2x. As a result of these buyouts at Schuylkill Yards, our remaining joint venture development projects are One Uptown and Solaris in Austin. At Uptown ATX -- at One Uptown, we are now 55% leased, up from 40% last call, but we do have an additional 20,000 square feet or 8% of leases after execution, which would bring us to 63%.

The pipeline remains strong with tenant sizes ranging from 5,000 to 60,000 square feet. Solaris, as we noted, is 98% occupied and 99% leased, we are seeing significantly improved economics on lease renewals. In fact, our renewal since November 1, it's all achieved, on average, a 12.7% effective rent growth. Looking at One Uptown. With the outstanding lease being executed and at 63%, we have 3 floors available.

The 12th floor is subject to an extension right by our lead tenant, where we'll receive notice in July. Also, since we had great success on the seventh floor, which is 100% leased, the 10th floor is under construction for spec suites, which leaves the 11th floor at 43,000 square feet the primary target for the larger tenant bases right now. Looking at the investment market. We continue to see a strong improvement in that market, both in terms of velocity and pricing. For example, in a project recently marketed, over 90 CAs were signed.

We had 20-plus tours and a strong bid response from the buying pool. Buying pools we're seeing consists of high net worth family offices, operators with private capital and the reemergence of institutional quality buyers. And as we noted previously for 2025, we did exceed our sales target. Turning to '26. Our 2026 business plan can really be summarized as a return to earnings growth, a continuation of solid operating results, continued crisp focus on stabilizing One Uptown and 3151, an accelerated sales program to both pay down debt and further refine our portfolio with corresponding balance sheet improvements.

From an operating perspective, our 2026 business plan is very straightforward, highlighted by solid core portfolio performance and strong leasing activity. We are providing '26 FFO guidance with a range of $0.51 to $0.59 per share for a midpoint of $0.55. And at that midpoint, our '25 FFO represents a 5.8% growth rate over -- I'm sorry, '26 FFO represents a 5.8% increase over '25 FFO. The primary drivers of this are highlighted in the FFO reconciliation, which is found on Page 1 of our SIP, which Tom will review in more detail. Notably, our midpoint does not factor in the benefit of any of the Austin development recap.

Improvements as we looked at the year, G&A expense will be lower due to lower compensation costs and related cost control measures, improving operations in our development joint ventures and the buyout of our partners at 3025 and 3151, wholly-owned GAAP NOI will increase primarily from the consolidation of 3025, and we do not expect any early retirement of -- extinguished cost of debt. Reductions include higher interest expense, primarily due to the consolidation of the 3025 construction loan and lower capitalized interest due to the end of the capitalization period at 3151.

Obviously, with the joint ventures at Schuylkill Yards disappearing, we'll have lower third-party management and development fees. But Tom will review those items and several factors in more detail. From an operating standpoint, the core portfolio will add 3025 in the first quarter and 250 Radnor in the second quarter.

Spec revenue, we've targeted between $17 million to $18 million. While down from '25 levels, spec revenue from new lease transactions is up 39% from '25 levels. We are currently almost $13 million or 75% done at the midpoint with healthy pipelines across the board. We do project that our year-end occupancy will improve 120 basis points from 2025 levels. Based on this, we do project positive net absorption for the first time in several years as another evidence of an improving market.

GAAP mark-to-market will range between 5% and 7% led by an 8% to 10% mark-to-market in CBD in the Pennsylvania suburbs. Cash mark-to-market will be between a negative 2% to 0% again, led by a positive mark-to-market in the CBD and PA suburbs. Leasing capital will be slightly above our '25 levels at a target range of 12% to 13%. Again, that's primarily due to a higher composition of new lease transactions. Same-store growth will range between a negative 1% and a positive 1% on a GAAP basis and 0% to 2% on a cash basis.

From a capital markets perspective, we plan to repay the 3025 construction loan with lower priced debt. We expect about a 200 basis point savings there. We're also evaluating as part of that a secured financing on that residential component and then add in the office portion to our unencumbered asset pool.

Our business plan projects between $280 million to $300 million of sales activity. We anticipate average -- cap rates averaging around 8%. We anticipate closing a majority of these sales during the first half of the year. We currently have approximately $100 million with buyers selected and advancing towards agreement of sales and have a number of other properties in the market across all of our submarkets. The vast majority of sale proceeds will be used to reduce debt and continue to improve liquidity and all of our credit metrics.

And while that primary focus is lowering leverage as a top priority, given that our stock remains significantly undervalued, we anticipate based upon the velocity of the sales program we have underway to repurchase our shares while continuing to lower leverage. We do have availability under our existing share purchase program. Our sale target also includes executing several delayed land sales, which we anticipate will generate gains, but are not included in our '26 guidance. Our business plan does contemplate that both One Uptown and Solaris will be recapitalized during the second half of '26. We could do sooner than that, but right now, the plan is based on the second half of '26.

Those recaps could range from a complete sale or a pari-passu joint venture, where Brandywine remains a minority stake and recovers significant capital to both lower debt attribution and improve overall liquidity. We do project the year-end core net debt to EBITDA to be between 8 to 8.4 times. And we anticipate our CAD ratio will be between 90% to 70% with the improvement occurring during the second half of the year after we fully burn off the remaining tenant improvement costs related to leases done between 2020 and 2023. So with that, Tom will review our financial results for the fourth quarter and provide more detailed '26 outlook.

Thank you, Jerry, and good morning. Our fourth-quarter net loss was $36.9 million or $0.21 per share. Our fourth quarter FFO totaled $14.6 million or $0.08 per diluted share and in line with consensus estimates. Both quarterly results were impacted by a one-time charge for the early extinguishment of a CMBS loan, totaling $12.2 million or roughly $0.07 per share. Some general observations from the fourth quarter.

Property level NOI was $70 million or $1 million below our forecast, primarily due to increased operating costs across the portfolio. FFO contribution from our unconsolidated joint ventures totaled $0.6 million or $1.4 million better than our projection. The improvement was primarily due to the improved operations at Commerce Square, ATX Office and Solaris. G&A expense was below our reforecast by $0.6 million, primarily due to lower compensation expense. Net interest expense was $0.7 million higher, primarily due to the inclusion of 3025 JFK's loan, partially offset by higher-than-anticipated capitalized interest.

And our other forecasted quarterly results were generally in line. Looking at our debt metrics. Fourth quarter debt service and interest rate coverage ratios were 1.8, both below the third quarter levels. Our third quarter annualized combined and core net debt to EBITDA were 8.8 and 8.4, respectively. Both metrics were also above our business plan ranges.

These metrics were negatively impacted by our fourth quarter preferred equity partner buyouts totaling $136 million, which retired higher priced capital, but was funded by lower priced debt. As we highlighted, we anticipate 2026 sales to reduce -- and reducing our ownership in Uptown ATX will offset these increases.

Of note, our consolidation of 3025 JFK occurred before the first quarter stabilization for contractual leases, which increased our combined net debt by 0.4x and our fixed charge by 0.2, otherwise placing both metrics within the stated targets. We continue to maintain a solid liquidity position with $32 million of cash on hand and no outstanding balance on our unsecured line of credit as of the end of the year. Looking at 2026 guidance.

Regarding guidance, at the midpoint, our net loss is projected to be $0.62 per share. Our 2026 FFO at the midpoint will be $0.55 per diluted share, representing a 5.8% increase compared to last year. Operating metrics. Overall portfolio operations are expected to remain very stable with property-level GAAP NOI totaling $292 million, representing a $30 million net increase compared to 2025.

This increase is comprised of the following: 3025 JFK will generate an incremental $17 million as stabilized wholly-owned asset; 2025 asset sales plus the full impact for that as well as the fourth quarter move-outs I mentioned last quarter will total $7 million NOI decrease. Same-store results will be essentially flat. Our fourth quarter contribution from the unconsolidated joint ventures will improve from an $11 million loss in 2025 to a $1 million contribution of income in 2026. This improvement is comprised of the 3025 JFK, which is now consolidated, and in 2025 had a loss of $11 million, which is now eliminated. ATX developments with continued lease-up at One Uptown and reduced rent concessions at Solaris, we expect a $9 million improvement as compared to 2025.

3151 partially offsetting these improvements was a one-time item for $7.5 million or $0.04 a share that we took as a tax credit gain in the first quarter of '25 that will not repeat. G&A will be $36 million to $37 million, which is $5.5 million below our full-year 2025 results. This reduction is primarily due to a decrease in compensation expense, including incentive compensation.

Total interest expense, including $5.5 million of deferred financing costs and $2 million of capitalized interest, will approximate $170 million, and at the midpoint, $30 million increase compared to 2025. The increase is primarily due to the capitalized interest, which will increase $10 million, primarily related to 3151 becoming operational on January 1, 2026. 3025 JFK, the consolidation of that property will increase interest expense by roughly $8 million once refinanced. 3025 bond issuances, which happened in June, also a bond issuance in October and the related CMBS loan repayment will have an $8 million increase in 2026. And the C-PACE loan which we put on 3151 will increase interest expense by about $4 million.

Termination and other income will be between $9 million and $11 million compared to $6.6 million in '25. The increase is primarily related to improved income from our increase in retail tenants that were put in place during 2025 and some in '26. Net management and development fees are anticipated between $6 million and $7 million, a $4 million decrease, mostly due to lower development fees in 2026 as our development joint ventures stabilize. Sales activity. We are anticipating $290 million of wholly-owned sales activity, which weighs towards the first half of the year.

As Jerry touched on, our sales activity will be used to reduce debt and continue our path back to investment grade. Depending on the volume and timing of these sales, we expect that we will use the shares to lower debt, which may include a buyback of outstanding bonds. Looking at financing activity. The 3025 JFK has a $178 million consolidated construction loan, which matures in July 2026. We plan to refinance that loan by late first quarter or early second quarter.

We are considering a low rate secured loan on the residential portion of the property totaling approximately $100 million and using those proceeds as well as the line of credit to fully unencumber the office portion of the property. For the credit facility, our unsecured line of credit matures in June 2026, and we anticipate an extension of that facility ahead of the maturity date.

Recapitalization of our joint ventures at ATX. As our joint ventures continue to lease up and improve cash flow, we anticipate recapitalizing projects on a pari-passu common equity joint venture basis during the second half of 2026 with our ownership level decreasing to a minority stake. The recapitalization of both projects will generate cash that will be used to further reduce our wholly-owned leverage. Due to the timing and changing in ownership structure being later in 2026, we've not included the benefit of any of these transactions in our FFO guidance. We anticipate no property acquisitions.

Our share count will be roughly 180 million shares. While we feel incredibly positive about executing on our land sales program this year, we have not included any land gains or losses in our results. Focusing on the first quarter, property level NOI will be approximately $70 million and will be fairly consistent with the fourth quarter. While we will have the full quarter impact of $2 million incrementally at 3025 JFK, this will be partially offset by seasonality throughout the balance of the portfolio. FFO contribution from our joint ventures will total a positive $0.5 million for the first quarter.

Our G&A expense for the first quarter will total $12 million. That sequential increase is consistent with prior years and is primarily due to the timing of our deferred compensation expense recognition. Total interest expense will approximate $42 million, which includes about $1 million of capitalized interest. Termination and other fees will total $2.5 million, and net third-party fees will approximate $1.5 million. Turning to our capital plan.

As outlined above, our 2026 capital plan has more activity than 2025 and will approximate $475 million. Our CAD payout ratio will range between 70% and 90%, and we expect incremental improvement as the year progresses -- as the year continues. Looking at our larger uses. We will refinance the 3025 JFK construction loan, which totals $178 million. We will use $125 million for buyback activity on the bond side and debt reduction.

Development and spend will total $50 million, including 3151 Market, 165 King of Prussia and 3025 JFK. We have $57 million of common dividends, $33 million of revenue maintaining capital and $25 million of revenue creating capital, $10 million of equity contributions to fund tenant leases at One Uptown. The sources for these uses will be $110 million of cash flow after interest payments, speculative sales activity totaling $290 million at the midpoint and $90 million of loan proceeds from potentially financing the residential portion of 3025. Based on the capital plan above, we anticipate having approximately $52 million of cash on hand at the end of the year and full availability on the line of credit. We anticipate net debt to EBITDA to range between 8.4 and 8.8 and our fixed charge ratio between 1.8 and 2.0.

Implicit in these ratios is the extension of our asset sales program and the recapitalization of the ATX developments. These ratios do continue to be elevated as increased revenue comes online with the development projects, particularly 3151, which is now a wholly-owned investment which continues to generate operating losses. As these developments stabilize, our leverage will decrease, will further accelerate improvement on these metrics. And we anticipate the leverage levels will improve as the year progresses. I will now turn the call back over to Jerry.

Great. Tom, thank you very much. So as I look ahead, the operating platform enables us to capitalize on improving real estate market conditions. Earnings growth from our development pipeline has begun to translate into earnings growth in '26, and we expect further improvement in '27. We have a very achievable sales program laid out that will drive a number of factors in the organization. So the groundwork has really been laid, and we'll continue to build on the momentum from an operating, from a capital standpoint to drive long-term value.

With that, Jonathan, we are delighted to open up the floor for questions. We do ask, as we always, in the interest of time, to limit yourself to one question and a follow-up. Jonathan.

Seth Bergey, Citi.

I think you mentioned in your opening remarks that just where your current -- your average cost of bond, that is kind of north of 6% and 50% is kind of north of 8%. And were you to refinance those kind of today, you could save $0.10 on interest expense. I guess kind of, what is a hurdle where you kind of want to look to pull forward some of those refinancings?

So I think the first course of action we have right now is to execute on the sales program and generate additional liquidity and continue to improve the credit metrics, which we think will continue to reduce our overall cost of debt capital. And we don't really have in our business plan for '26 any kind of pull forwarding of those bonds at this point. But look, capital market conditions are ever evolving. We think that the execution of the sale program, continued improvement on the lease-up of the development projects will generate some additional NOI and liquidity. And we'll be evaluating the bond buyback program, the debt reduction program all as part of the sales program acceleration.

Great. And then just as a follow-up, with the kind of $125 million earmarked for debt or share repurchase, how are you thinking about how much of that you would want to do with share buybacks versus debt repurchase?

Yeah, look, we didn't mention anything about $125 million share buyback. I think our major focus is sales proceeds will be used first to reduce leverage, period. That's top priority.

As we accelerate that program and get more clarity on maybe even some additional sales, we think we have an opportunity to be opportunistic in buying back, we think, our significantly undervalued shares. But want to be very clear. Our primary objective of the asset sale program is to continue on that path back to investment-grade metrics.

As Tom touched on, we temporarily increased some of those leverage metrics by doing the buyouts of our Schuylkill Yards joint ventures. Clearly, with the major tenant and the income stream coming off 3025, that brings some of those down fairly dramatically immediately. But we do want to stay on a very crisp path to continue to improve our overall balance sheet metrics. And stock buyback optionality comes into play as we achieve our other objectives. So hopefully, that is clear.

Anthony Paolone, JPMorgan.

Jerry, just following up on the dispositions and thinking about capital markets activity, when we look at your stock price and where it is, and you just mentioned you think it's pretty undervalued. Like as you think about what to sell, is there a part of the portfolio that you think is just being undervalued or just not being appreciated in the market? And are you trying to crystallize value at that? Or are you going into the market just selling what can be sold right now? I understand debt paydown is the priority, but just trying to understand where you're trying to go with the portfolio and what to sell.

Tony, great question. Yes. Look, we think the entire portfolio is being undervalued. So I think across the board universally, from a public market standpoint, we think that we're significantly undervalued primarily do, I think, the perceived headwinds on stabilizing the remaining two development projects. But as we're looking at the sales program going forward, we took a hard look what we forecast some of the growth rates to be on some of our assets, given changing submarket dynamics.

We took a look at what we thought the net present value to us was on holding certain assets and then kind of developed the framework for what assets do we think could, number one, be marketable in today's climate. And again, we're targeting an average cap rate around 8%. Where we have lease-up risk and some assets we think will be protracted and will be expensive so we can obviate some future capital spend. And then just the general portfolio realignment. As we talked before, our major focus in the Pennsylvania suburbs is to get down to one or two core submarkets.

Our focus in Austin is to really shift our attention primarily to the tremendous opportunity we have at Uptown ATX. And then as we mentioned publicly, one of our programs is to rationally exit the DC marketplace. So when we looked at the overall sale program, Tony, it was a company-wide look and kind of looking through a number of quantifiable metrics to identify which properties we thought would generate real value for us today without sacrificing growth rates going forward.

Okay. Got it. And then just my follow-up is on the life science side. You all have the incubator space and I think part of that, that effort was to kind of see what was coming down the pipe as tenants grow. I guess, is there anything to glean from what you're seeing in that part of the portfolio as to whether there's been any improvement in terms of life science funding for these smaller companies or the start-ups that, overtime, could become bigger tenants in the portfolio, or just anything you're seeing there that might be helpful as a forward look?

Yes. And George and I can tag team this. I mean, on the life science front, we're seeing a number of green shoots. But honestly, I think the entire life science market needs to see those green shoots grow into trees. So we are seeing activity.

There has been a good performance of a number of the privately held life science companies that are in Philadelphia regions, particularly cell and gene therapy. We're seeing a high velocity of activity at our incubator space and the graduate labs and has signed up a couple of key tenants with a good healthy pipeline. But George, maybe you could add some color to that as well.

Yes. I think as Jerry mentioned, I mean, the incubator, the 1, 2, 10-bench kind of companies, we have seen them expand. And that, quite honestly, is what helped generate the graduate lab spaces, which are 93% occupied at this point. So we've got all of that. We have 1 4,000-square foot lab left to lease up on the 8th floor.

But again, we've seen a little bit of expansion outside of the incubator, and we're really just kind of waiting for the next kind of expansion of graduate lab tenants to then move into a full-fledged lab space.

Steve Sakwa, Evercore ISI.

I guess, Jerry, as it relates to the outright sales as well as the recaps of the JVs, maybe my recollection was wrong here, but I thought there was maybe a view that you would try and do some of those JV recaps and bring those assets to market kind of earlier in '26, or at least one of them. But now it sounds like those are kind of pushed to the back half of the year. I'm just trying to sort of understand a little bit the thinking of maybe flip-flopping those. And is it just a question of getting things like Solaris more stabilized before you can bring kind of an apartment asset to market today to maximize value on that sort of transaction?

Yes. Steve, look, I think our business plan contemplated those recaps occur in the second half of the year. The business plan also, as Tom mentioned, doesn't really include any earnings impact of those plans for the year. That being said, we're actively in the market, continually evaluating with a variety of investors what the right timing is to recap there. Solaris has done very well.

As I mentioned, it's essentially 99% leased. I think to accelerate the leasing of that property, you may recall from our previous calls, we did embark on a fairly strong concession package given the oversupply in that market. We were successful, at one point, absorbing almost 40 units a month.

Right now, we're heavy into the early stage of renewals. So all the renewals that we have done in the third quarter -- I'm sorry, beginning in the third quarter and fourth quarter of last year, enrolling thus far this year, we're getting almost a 13% increase in effect of rent.

That's a huge impact on the NOI. So we're monitoring that to decide the best time to recap that. So that's moving along on a very nice track, and we feel very confident that, that will be happening, call it, a midyear convention. It could occur sooner than that. On One Uptown, right now, it was closing on 63% leasing.

The pipeline remains pretty strong, particularly on the small tenant side. That's why we're building out one of the floors as another spec suite floor. We're certainly anticipating making more leasing progress there. And again, we're dovetailing those leasing efforts, Steve, with our conversations with recap partners as well. So it's not like -- it's not as sequential.

It's kind of a concurrent review that we're going through. So I hope that answers the question, but we would love to get those done sooner rather than later. But I think in the interest of being conservative, we didn't really factor in any of that impact into our earnings outlook for the year.

Okay. Great. And maybe just to go back. Again, I'm just trying to make sure I had the facts right. I think you said there was like 1 million square feet of pipeline, or maybe it was 1.5 million. Could you just maybe provide a little more color on the overall pipeline just kind of broadly by market? And where are you seeing kind of the most demand in either by product type or whether it's life science, office and in which submarkets?

Yes. And again, George and I will tag team. Look, I think from -- where we're clearly seeing the strongest trend lines at this point are really in CBD Philadelphia and University City. I think as I noted in the prepared comments, we've really been able to drive effective rents there. I think that's really a function of -- I think demand levels are returning to pre-COVID levels.

For example, in '25, we saw the highest level of new deal volume in the past 5 years. So certainly, things seem to be accelerating. Certainly, the inventory is shrinking. So there's been a number of properties that are either in some level of financial strain or in the process of being evaluated for residential conversion. So we do expect that somewhere between 10% and 15% of the inventory here in the CBD will be converted to residential.

State had passed a 20-year tax abatement for office to residential conversions. The city is evaluating that as well. So we think that will spur some additional inventory decreases. We've actually been pretty pleased with the pickup in activity in Radnor, Pennsylvania and King of Prussia. We've seen some very good activity there as well.

And in terms of the -- and George, let me just cover the development. And on the development side, 3151, look, that pipeline remains very robust. We actually have proposals outstanding to a number of tenants. It's about 60% office, 40% life science.

Look, we understand that we're trying to get all those transactions across the finish line as quickly as possible. We know the project is being very well received. We're not really receiving any pushback on the proposed economics. So we remain encouraged by the level of tour activity coming through that building.

And then finally, at One Uptown, really, with the size of the tenants there, we have between 5,000 and 50,000 square feet, we feel as though we're in very good shape to meet all our leasing objectives there. But George, in terms of overall operating portfolio.

Yes. I think the operating portfolio, the pipeline remains fairly consistent. We're at 1.5 million square feet today. Last quarter, we were at 1.7 million, and then we executed about 200,000 square feet of that 1.7 million. So every time we seem to execute a lease, we're generating more, as Jerry mentioned, in the pickup in overall tours.

So I think these spaces all show well, getting plenty of activity. We're seeing good levels of conversion.

And it really comes down to converting this very robust pipeline at 3151. And then at One Uptown, really, with 3 floors to lease, one of them kind of with an expansion right encumbrance, we've got a pipeline that's almost 3x the available amount of square feet we have.

Upal Rana, KeyBanc Capital Markets.

Jerry, do you have an update on the IBM move-out in Austin? one of the footnotes in your '26 business plan states that you plan on redeveloping one existing ATX building. So just want to get some details on that.

Yes. Great question. Yes. Certainly, as been previously disclosed, IBM will be rolling out of their space at our Uptown development starting at the end of the first quarter of next year. In addition, as we've mentioned before, we did receive a significant modification to our Uptown approvals last year that gave us the ability to do much more increased density throughout the 66-acre park.

So as part of that and looking at the market demand drops, and certainly that Northwest market remains fairly cyclical in the domain area, we are looking at -- again, this is a function of how the sales program goes and a few other functions. But our '26 business plan does contemplate us commencing redevelopment of one of the existing buildings. That building is currently vacant, consists of about 157,000 square feet. We anticipate the renovation cost would be somewhere in the $30 million to $40 million range, and we can complete that within a 3- to 4-quarter period. We have done a marketing launch on that.

And we've been very, very pleased with the results. We have about 600,000 square feet of potential prospects there. Pricing levels would be about 20% to 15% below the rents required at One Uptown, and we're targeting everything to a cash yield north of 8%. So all the planning for that, Upal, is underway. We're waiting for the other elements of our capital plan to really come together.

But we'll continue the marketing process for --