On Thursday, Brandywine Realty Tr (NYSE:BDN) discussed second-quarter financial results during its earnings call. The full transcript is provided below.

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Summary

Brandywine Realty Trust exceeded or met its business plan for Q2 2026, with speculative revenue increasing by $1 million and tenant retention guidance raised due to strong renewals and expansions.

The company completed $208 million in asset sales and anticipates a total of $305 million by Q3 end, using proceeds primarily for debt reduction and maintaining minimal credit line balances.

Brandywine's leasing activity was robust, with 353,000 square feet leased in Q2 and plans to use $192 million from sales to improve credit metrics, aiming for an investment-grade status.

Occupancy in the wholly-owned portfolio improved to 90.6% leased and 89.1% occupied, with significant activity in Philadelphia and University City markets.

The company's development projects, such as One Uptown and 3151, are progressing with significant pipeline growth, and the Radnor Hotel opened successfully, achieving near-full occupancy targets.

Brandywine plans to repurchase bonds with high coupons and may use 5-10% of proceeds for share buybacks, focusing on returning to investment-grade metrics.

The company reported a Q2 net loss of $31.7 million, with FFO of $0.13 per share, slightly below consensus, and expects debt metrics to improve with ongoing asset sales and debt reductions.

Full Transcript

OPERATOR

Thank you for standing by, and welcome to the Brandywine Realty Tr second quarter 2026 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. 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 & CEO

Jonathan, thank you very much. Good morning, everyone. Thank you for participating in our second quarter 2026 earnings call. On today's call with me are 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 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. During our prepared comments today, Tom and I will briefly review second quarter results and frame out the key assumptions driving our guidance for the second half of the year.

After that, Dan, Tom, and I are available to answer any questions. To start, from an operating, portfolio management, and liquidity standpoint, the second quarter produced results that exceeded or were in line with our business plan. This is highlighted by our speculative revenue increasing by a million dollars, at guidance's midpoint. Also, due to better-than-expected tenant renewals and expansions, we increased our full-year range for tenant retention.

All of our other full-year operating and financial metrics remain unchanged from our original 2026 business plan. Since our last call, significant progress has been made on our capital markets activity, including asset sales and our 3025 refinancing that we'll review in a few moments. Quarterly highlights include achieving 99% of our speculative revenue at the revised guidance midpoint; our second quarter FFO of $0.13 per share that was ahead of the management guidance we provided in our first quarter call and $0.01 below consensus.

We are maintaining our $0.55 full-year midpoint and have narrowed our full-year FFO guidance range accordingly. Our balance sheet strengthening program is progressing very much on target with approximately $208 million of asset sales now complete and the remaining under agreement with hard money deposits and scheduled to close in the third quarter. We raised our sale guidance to $305 million, which is up $15 million from our business plan, and for all sales we have achieved pricing in line with our original guidance.

Looking more closely at second quarter operations, solid operating metrics reinforced our strong market positioning and tenant's continued preference for high-quality space. Our wholly owned portfolio is 90.6% leased and 89.1% occupied. We had 88,000 square feet of positive net absorption during the quarter. Our year-end occupancy and lease percentage will improve throughout the year as we will have positive full-year net absorption for the first time in several years.

As additional evidence of the ever-improving market in which we're operating, leasing activity for the quarter totaled 353,000 square feet, including 254,000 square feet in our wholly owned portfolio and 98,000 square feet in our joint ventures. Forward leasing commencing after quarter-end totaled 166,000 square feet, with most taking occupancy this year. We have also achieved $18.3 million of spec revenue. That outperformance versus our original plan was primarily driven by Philadelphia CBD and our University City operations.

Tenant retention for the quarter was 85%, resulting in us raising our full-year midpoint retention to 51% to 53%. This raise is due to unbudgeted renewals and expansions again in Philadelphia CBD and the Pennsylvania suburbs. Our capital ratio for the quarter was 12.9%, within our 2026 business plan range, and our year-to-date capital ratio remains below our 2026 range but will remain within the overall guidance we've provided. Our GAAP mark-to-market was 1.5%; cash mark-to-market declined during the quarter, but we do anticipate improved results in the next two quarters and are maintaining our full-year guidance. Our same-store results were a positive 0.5% on a GAAP basis and 1.9% on a cash basis, both within our current guidance ranges. Tour volume in the second quarter remained on pace with the high volume we saw in the first quarter. We also continue to experience good tour conversion rates. For the trailing four quarters, 53% of our tours convert to a lease proposal, and from proposal 41% converted to executed leases, which is above our historical average.

A few additional comments regarding market dynamics in Philadelphia, which includes our CBD and University City portfolios. We are now 95% occupied and 97% leased, with only 7% rolling annually through 2028, and overall activity levels remain very strong. During the quarter, we continued our CBD outperformance trend for the entire first half of 2026, with 54% of all new leases signed in our CBD and University submarkets being at a Brandywine property, significantly exceeding our market share.

In addition to that, as noted on page four of the SIP, we are monitoring conversion projects aggregating more than 5.1 million square feet, representing approximately 11% of Philadelphia's total office inventory. Our market position in Philadelphia will continue to improve as these conversion projects get executed. In the Pennsylvania suburbs, we're 91% leased, with the Radnor submarket being 93% leased. We continue to see solid levels of pipeline prospects for all of our existing vacancies.

On the other hand, Austin, at 67% occupied, continues to lag the rest of the portfolio and creates a more than 400 basis point drop in our overall company occupancy. Our Austin quarter-end occupancy was negatively impacted by 3.7% due to 405 Colorado, which is 100% leased, being held for sale at the end of the quarter and subsequently closed. The operating portfolio leasing pipeline is up 13%, or 220,000 square feet, from the first quarter and remains a solid level just shy of 2 million square feet.

This pipeline includes about 456,000 square feet of deals in advanced stages of negotiation. Turning to our balance sheet, we remain in solid shape from a liquidity standpoint. While we had a balance outstanding on our line of credit at quarter-end, upon receipt of $192 million of sale proceeds, we paid off that balance. As such, there is no outstanding balance on our line of credit, and we have $35 million of cash on hand. Our paramount objective is to use the vast majority of sale proceeds to reduce company leverage and to further improve credit metrics.

As such, we intend to use our cash balances and sale proceeds to further reduce debt, including repurchasing bonds starting as early as this quarter, and to a much lesser extent repurchasing shares. As such, regarding our planned share buyback program, until we make significant progress on achieving all of our leverage targets and credit metrics, we anticipate using only about 5% to 10% of our net proceeds to repurchase shares. Consistent with this approach and as noted previously, our multi-year plan is designed to return to investment grade metrics.

As such, we plan to maintain minimal balances on our line of credit and continue improving all credit metrics. The execution of our sales program is an excellent catalyst to reduce overall leverage levels and further improve all credit metrics. As a point of note, almost 50% of our outstanding bonds have coupons north of 8.8%, providing an excellent refinancing opportunity over the next several years assuming capital markets remain constructive. Regarding other elements of our capital plan, during the quarter we repaid 3025 JFK's construction loan with a $90 million, seven-year secured financing on our residential component of VERA and payments from our unsecured line of credit. This transaction unencumbered the office component of the property for inclusion in our unencumbered asset pool, bringing over $13 million of GAAP income onto our balance sheet. During the quarter, we also exercised our first six-month extension right under our existing credit facility, moving the maturity date to year-end 2026. And as we complete our 2026 capital recycling program and other capital market activity, we'll continue our productive work with our bank group to recast the facility during this extension period.

With the asset sale activity and the financings, we do project our year-end core net debt to EBITDA to be, as we outlined in the SIP, in a range of 8.0 to 8.4 times. Looking at our two remaining development projects, One Uptown and 3151, while we have minimal definitive results to report this quarter, activity levels have been quite significant. Our overall pipeline for these projects is up over 10% from our last quarter. More importantly, at One Uptown we have three leases being finalized and five proposals advancing towards lease negotiations that total over 100,000 square feet.

At 3151, in addition to the pipeline continuing to build, we have a multi-floor client in advanced lease negotiations, and our overall pipeline remains around 46% office and 54% life science. We also have several other prospects in active discussions and several other key proposals outstanding. Additionally, in anticipation of the 2027 IBM expiration at Uptown ATX, we do plan to commence redevelopment at least one of the existing buildings. Since announcing this initiative, we've built a pipeline of over 1.1 million square feet, with that pipeline having lease commencement dates ranging from 2027 to 2028, so the market response has been exceptional.

The first building consists of 157,000 square feet, and we expect to deliver that renovated building in the fourth quarter of next year. We do expect rent levels to be 15% to 20% below rents required at One Uptown and for brand-new development, and we're targeting a cash yield north of 8%. Also, as prospective tenant requirements advance, we also have planning underway to do similar renovations to several other buildings within the complex. Our Radnor Hotel development opened on schedule in May of 2026.

This 121-room hotel is situated adjacent to our 2.1 million square foot Radnor life science portfolio, office portfolio, and Penn Medicine's campus. The hotel is already serving as an excellent amenity for the Brandywine tenant base, the eight universities and colleges within a five-mile radius, and the adjoining Penn Medicine complex. For the partial-year, eight-month operating period from May, when we opened the doors, through December of 2026, our pro forma projected a total of 8,500 room nights sold at a target ADR in the low three hundreds.

To date, with less than three months of operations, we have already booked over 8,400 hotel room nights, achieving almost 99% of our 2026 occupancy projections while maintaining our ADR target. So these initial results are very encouraging. We'll be fully opening our two food and beverage offerings by Labor Day, and we expect to stabilize the project in mid-2027. And as we've noted previously, once this project is stabilized, we will aggressively seek alternative capital structures for this operation.

Looking at capital markets, as we've already highlighted, we've exceeded our initial 2026 business plan target of $280 to $300 million of sales. We expect to close all $305 million of sales by the end of the third quarter. We do have several other properties in the market for sale as we look at our disposition pipeline moving into 2027. In general, the response from the market on assets listed for sale was very strong. There was considerable interest, with typical marketing processes producing seven to ten qualified bids.

All buyer types were engaged, including institutional investment managers, private REITs, and significant interest from private capital and family offices. Looking at our further elements of our capital plan, we do plan to recapitalize both One Uptown and Solaris, our residential project at Uptown ATX, during the second half of 2026. We anticipate a full sale on Solaris and a pari passu joint venture on One Uptown. These initiatives will recover significant capital, lower debt attribution while increasing liquidity.

So with that overview, Tom will now review our financial results for the second quarter and outlook for the balance of the year.

Tom Wirth, EVP & CFO

Thank you, Jerry, and good morning. Our second quarter net loss was $31.7 million, or $0.18 per share. Our second quarter FFO totaled $23.6 million, or $0.13 per diluted share, and was above our first quarter guidance and $0.01 below consensus estimates. Some general observations for the second quarter: FFO contribution from our joint ventures was $0.3 million, or $1.2 million above our forecast, due to termination fee income and improving leasing.

G&A expense was below our forecast by $0.2 million, primarily due to timing. Other income and termination fees were $2.2 million, or $0.3 million below forecast due to lower termination fee income, and third-party fees were $1.8 million, $3.0 million above forecast due to higher third-party leasing fees. Property-level NOI, interest expense, and other forecast-to-actual results were generally in line. Looking at our debt metrics, second quarter debt service and interest coverage ratios were 1.7, both equal to our first quarter results.

Our second quarter annualized combined and core net debt to EBITDA were 9.0 and 8.1, respectively. Since most of our sales and debt reduction will occur during the third quarter, our leverage metrics are similar to the first quarter. During the second half of the year, we expect these leverage levels to decrease. Portfolio composition: During the second quarter, we removed four properties from our core portfolio that are being held for sale, totaling approximately 775,000 square feet, and they are roughly a little over 91.5% occupied.

To confirm, properties that are classified as held for sale are removed from our core and operating statistics. Based on the assets sold and the assets held for sale, the impact to our 2026 portfolio statistics will be immaterial. During the second quarter, we added 250 King of Prussia Road, our 168,000 square foot life science property located in the Radnor submarket, to the core portfolio as the property stabilized in June. On liquidity and financing, we continue to maintain solid liquidity with $35 million of cash on hand and no outstanding balance on our unsecured line of credit, after taking into account the announced July sales activity.

Related to sales activity, we adjusted our business plan for an increase to the wholly owned disposition activity. As Jerry touched on, we have increased our sales target to $305 million, with $208 million already closed, and two properties expected to close during the third quarter. The majority of these proceeds will be used to reduce debt and continue our path back to investment grade. With respect to our planned buyback activity on the unsecured notes, we will be focused on notes with higher coupons, as that will have more of an immediate impact to improve our coverage ratios.

Since these bonds trade at a premium, we will incur one-time debt extinguishment costs; however, we have not included these in our estimates or current FFO guidance. We also intend to use a portion of these proceeds, as Jerry mentioned, to opportunistically buy back some shares. From a financing activity standpoint, the $178 million consolidated construction loan that was scheduled to mature in July 2026 was repaid in June. We funded the repayment with a secured loan on the residential portion of the property totaling $90 million and our unsecured line of credit to unencumber the property.

The $90 million, seven-year secured financing was swapped to a fixed all-in rate of 5.8%. Regarding the credit facility, our unsecured line of credit had an initial maturity date of June 2026 with two six-month extensions through June of 2027. While we complete our sales and debt reduction program, we continue to work with our bank group and anticipate completing a longer-term amendment during the initial six-month extension period. Looking at the recapitalizations: As our joint ventures continue to lease up and cash flows improve, we anticipate recapitalizing the final two preferred equity development projects into pari passu common equity joint venture structures during the second half of the year, with our ownership decreasing to a minority stake or an outright sale. We extended two existing loans on our ATX projects. While we still anticipate closing those transactions in the second half of the year, we felt extending the loans will allow us time to run the recapitalization process without concerns about the maturities. The recapitalization of both these projects will generate cash proceeds between $40 and $50 million that will be used to further reduce our wholly owned leverage, and will be slightly accretive to earnings and improve leverage.

We continue to feel incrementally more positive about executing our land sales program this year, but we have not included any land proceeds, gains, or losses in our results or forecasted results. Focusing on the third quarter guidance, property-level operating income will approximate $69.5 million and will be $3 million below the second quarter. The incremental decrease is primarily due to the assets that are held for sale that did close in July and that will generate a $5 million reduction in NOI for the third quarter versus the second quarter.

The lower NOI is partially offset by the full-quarter impact of the Radnor Hotel, which commenced operations in May and will generate a $1.2 million quarter-over-quarter increase. We also have the stabilization of 250 King of Prussia Road, which stabilized in June and will have that full-quarter effect in the third quarter as well. FFO contribution from our joint ventures will be breakeven for the third quarter. G&A expense for the third quarter will total $7.5 million.

The sequential decrease is consistent with prior quarters and is primarily due to the timing of deferred compensation expense recognition. Our full-year range is maintained at $36 to $37 million. Total interest expense, including deferred financing costs, will approximate $40 million, which includes $400,000 of capitalized interest. We have lowered our full-year interest expense range by $6.5 million at the midpoint to account for the anticipated lower debt balances.

As previously mentioned, in connection with potentially buying back our unsecured bonds, we may incur one-time extinguishment charges that are not currently included in our guidance. Termination fee and other income will total $2.8 million. Net third-party fees will approximate $1.5 million, interest income $500,000, and our fully diluted share count will be 180 million. For clarity, the above forecasted results on our core FFO range will be $0.13 to $0.15 for the current third quarter.

Turning to our capital plan, the second half of the year remains active with a total of $250 million of activity. Our second quarter CAD payout ratio was 103%. However, payout will remain within our business plan range for the balance of the year at 70% to 90%, as we expect incremental improvement in the payout ratio as FFO improves for the balance of the year. Looking at the larger uses, we have development spend of $40 million. We also have $28 million of common dividends, $17 million of revenue-maintaining capital, $25 million of revenue-free capital, and $10 million of equity contributions to our joint ventures.

The sources are going to be $55 million of cash flow after interest and asset sales totaling $290 million. Based on the capital plan, we anticipate having a small balance outstanding on our unsecured line of credit. We anticipate our net debt to EBITDA to still be in the range of 8.4 to 8.8, and our fixed charge ratio will be between 1.8 and 2.0. Implicit in these ratios is the execution of our asset sales program and the recapitalization of the ATX developments.

Until revenue comes online from our remaining development projects, particularly 3151 Market, our leverage ratios will remain elevated. However, our asset sales recycling program is generating proceeds that will lower debt levels and improve our leverage metrics for both bonds and the credit facility. The benefit of this will be reported in future quarters as we continue to execute on this program. I will now turn the call back over to Jerry.

Jerry Sweeney, President & CEO

Great. Thank you, Tom. As we wrap up and look ahead, market conditions continue to firm. We're seeing, as I mentioned, a monthly increase to our overall pipeline across the board in all of our core markets. Our leasing team are doing a great job in terms of making sure we capture more than our market share of lease deals across our portfolio. And as we've outlined, 2026 is going to show earnings growth and lower leverage over 2025, and we certainly expect further improvement and growth in 2026.

As Tom touched on, as we continue to stabilize and recapitalize these projects, we do believe they'll be generating significant incremental NOI in ’26, ’27, and ’28. So the groundwork's been laid, and we'll continue building on the momentum that our teams have created to drive long-term value. So 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 and courtesy, you limit yourself to one question and a follow-up.

OPERATOR

Certainly. Thank you. And our first question for today comes from the line of Steve Sakwa from Evercore ISI. Your question, please.

Steve Sakwa, Analyst at Evercore ISI

Yeah, thanks. Good morning, Jerry and Tom. Could you maybe just provide a little bit more color on the 3151? I think you said you had multiple floor users looking at the building. Maybe just talk about the nature of the tenancy, you know, life science versus traditional office. And have you seen any meaningful improvement on the life sciences front as capital markets activity on that front has gotten better over the last six to nine months?

Jerry Sweeney, President & CEO

Yeah, certainly, Steven. How are you this morning? Yeah, 3151—we actually have a multi-floor client in advanced stage of lease negotiations right now, so we think that's moving very positively. We think that will also generate some additional momentum. As I mentioned, the portfolio’s pipeline is up about 10% from last quarter. I know pipeline isn't getting a deal done, but it's a harbinger of good things to come. So we're happy that the tour velocity remains very active.

A lot of ongoing discussions, proposals are advancing. In terms of the life science market, we are seeing a bit of a rebound. In fact, we were fortunate enough here at Cira Centre to host an event the other day with the Governor of the Commonwealth of Pennsylvania, Josh Shapiro, and a number of other political notaries, state senators, et cetera, to announce the Commonwealth, as part of the budget this year, adopted $125 million, Innovate 2.0 Pennsylvania, which is geared towards providing attractive financing to help life science companies grow.

We think that will accelerate the growth rate and the capital structures of a number of the life science companies that are being curated both at B.Labs, other incubators in the city, and certainly start to create a little more momentum for those incubator-level tenants to move to graduate spaces. And we are talking to a couple of tenants in our graduate-level spaces that take up more space than 3151. So the trend line—acceleration is not occurring, certainly, at the pace any of us would like, but the trend line is positive, it seems to be durable, and we're certainly looking forward to getting a couple leases across the finish line on this

Steve Sakwa, Analyst at Evercore ISI

Okay, thanks. And then just as a follow-up, I think you said that Solaris and One Uptown were basically JV asset sale kind of in the back half of the year. Maybe just talk about the demand for Austin assets in general, particularly on the apartment side, just given that that market's been oversupplied. And what kind of, I guess, demand did you see when you went to sell 405 Colorado?

Jerry Sweeney, President & CEO

Yeah, well, in terms of 405 Colorado, we saw great activity. And, you know, I guess stepping back for just a second, if you look at the activities that we have taking place in Austin, our primary focus, as I've talked on the calls before, is to take real advantage of the long-term value opportunity we have at Uptown. And as noted in the SIP, we achieved some excellent zoning changes in the last year or so that moved our FAR from 3:1 to 12:1 and moved up our height limit.

So certainly a big focus of our talent and capital base is going to be directed to harvesting the value we can create at One Uptown based on that. With our sale program really focused on reducing leverage, we took a look at a lot of properties in our portfolio. 405 came up as a property that, obviously very high quality, fully leased, we thought it was a good time to optimize some value there. We saw a very active bid list from a number of very high-quality institutions.

We closed that transaction a few weeks ago. The pricing of that project north of $700 a square foot came right in line with our assumed guidance. So even with the CBD market having more than 5 million square feet of current vacancy, including space coming online, and projected absorption levels between 500,000 and a million square feet, even with that overhang of a five- to six-year stabilization period, I think the leasing profile and the WALT, weighted average lease term, that we had on 405 was very attractive to a lot of investors.

So very pleased to get that across the table again. It helps us focus back on One Uptown and Uptown ATX in general, as well as generated a lot of great liquidity for us. Looking at Solaris. Look, we had great success in absorbing space at Solaris, and we've been testing the waters with a number of investors. We think that there's a high probability we get a very good cap rate transaction on that project done within the next 60 to 90 days. The in-migration is still very good.

The job growth is still very good. So even though there's a temporary overbuilding of apartments, the absorption pace has been pretty significant throughout the city of Austin.

Steve Sakwa, Analyst at Evercore ISI

Great. That's it for me. Thanks.

Jerry Sweeney, President & CEO

Thank you, Steve.

OPERATOR

Thank you. And our next question comes from the line of Seth Berkey from Citi. Your question, please.

Nick Joseph, Analyst at Citi

Thanks. It's Nick Joseph here with Seth. Just hoping to get some more commentary on the thought process behind the split between the debt repayments and the stock buybacks. Obviously that's accretion from the buyback side, but recognize the desire to return to investment-grade metrics. So just wondering how you came up with that 5 to 10% proceeds for the buyback.

Jerry Sweeney, President & CEO

Yeah, and hey, Nick, and Tom and I will tag team this, but look, again, as I mentioned, the paramount objective is to move to investment grade, improve all of our credit metrics. The opportunity we have is we have about $900 million of outstanding bonds that have a coupon rate in the high 8%. So being able to minimize those interest payments by buying back a lot of bonds is a real accelerant to improving all of our credit metrics. When we take a look at the share buyback, it's really deemed to be an adjunct to maintain earnings neutrality through the impact of our sales program.

So right now we're targeting that somewhere between 5 and 10% of overall proceeds. I did mention that we have some other projects in the market for sale. Tom alluded to some of the land sale activity we're having. So we're on a clear path to generate surplus liquidity and use that liquidity to improve our overall balance sheet metrics, with a piece of that being allocated to recognize the big dislocation between what we view as asset value and where the stock price is trading.

I mean, certainly trading a range of assets at $300 million this year thus far at our targeted cap rate in the high sevens to low eights versus where the stock is trading, say on a cap rate basis, is a clear indication that the stock price as it sits today is currently undervalued. That being said, major focus is to improve all the credit metrics I have. Tom, do you have anything else to add to that?

Tom Wirth, EVP & CFO

Yeah, just to add to that, Seth, at those levels of buyback, if in fact we do them—and it's all dependent on where markets are—is that it doesn't really impact our leverage levels significantly at all to buy back some shares relative to the leverage levels. Again, every dollar we go into debt is important, but we do think that it's not going to impact our leverage levels dramatically at all to have some level of buybacks that's in that single-digit area.

Especially when we're trying to buy back bonds that are north of an 8.5% coupon—yield to maturity probably somewhere in the mid-sixes—but still allows us to delever and keep earnings kind of in a neutral place.

Seth Berkey, Analyst at Citi

And this is Seth here. Just as a follow-up, can you just provide us some color on what the demand is for the IBM space that they're going to vacate and you have plans to renovate, and what kind of pre-leasing would you look for to start on 904 and 906?

Jerry Sweeney, President & CEO

Yeah. Well, good morning, Seth. Certainly, look, as I mentioned, the pipeline since we announced this initiative has been very, very encouraging. I think part of that is the fact that people, I think, see the value in our Uptown development. Again, the train station coming online early next year really does achieve that ultimate goal we had of becoming the first mass-transit-served mixed-use development in Austin. And Cap Metro does project that to be the second-busiest train station on that line.

So we think that's been a real draw in bringing companies to look at Uptown ATX. Then the ability to deliver these buildings at a pricing discount to new construction costs, with floor-to-ceiling glass, completely renovated HVAC and mechanical systems, with a really first-quality presentation, has been attractive to everyone. And then, of course, that overall submarket, even when you factor in sublease space, is less than 8% vacant. We felt there was a real window of opportunity.

So the first building we plan to start is about 157,000 square feet. We're hoping to get some leases done as we move through that construction process, but certainly moving forth other buildings are going to be a function of getting leases signed. We think we have some good discussions underway that will validate that thesis and we'll see what the market presents. But the game plan, as we see it, is there's a window of opportunity here to deliver, within a mixed-use community, very good-quality, renovated office space that hits the price point that a lot of people are looking for.

And given the amenity base we're building at Uptown, as well as the mass transit accessibility, we think that's a pretty good prescription for success. Great, thanks. Thank you.

OPERATOR

Thank you. And our next question comes from the line of upal Rana from KeyBank. Your question please.

Upal Rana, Analyst at KeyBank

Great, thank you. Jerry, just on the 405 Colorado Tower disposition, what was the cap rate on that? And then also once the $300 million of dispositions are completed this year, where would you stand on doing further dispositions from here? Just trying to get a sense of how much more there's left to do.

Jerry Sweeney, President & CEO

Yeah, I think from our perspective we're looking to do more asset sales. I think I mentioned that in our commentary. We have a number of assets in the market for sale. We haven't put a revised target in place for 2026 and we haven't put out any guidance for '27. But certainly as we take a look at each asset that we have within our portfolio, as we mentioned on the last call, we're analyzing each asset, its relative growth profile, what level of investment is required to bring those properties to stabilization and to deliver growth to the company.

So we would certainly expect sales somewhere in the couple-hundred-million-dollar range over the next, you know, four to six quarters as we move forward with this balance sheet enhancing program.

Tom Wirth, EVP & CFO

On 405, we did have a filing that kind of put the cap rate right around eight, maybe just slightly above that. Cash would be a little lower than that. But that's basically the cap rate we got on that asset on a GAAP basis.

Upal Rana, Analyst at KeyBank

Right, okay, great, that was helpful. And then just on the occupancy, you know, it improved 80 basis points to 89 and the leased percentage also increased. So you mentioned this year will be your first positive net absorption year in a while. So just trying to get a sense of timing on occupancy in the back half. You've got 166,000 still to commence and you sold several assets, which two of them are fully leased. So I just want to get your thoughts there.

And has your guidance still suggests further improvement in the back half?

Jerry Sweeney, President & CEO

Yeah, I think as we're taking, we will have positive absorption for the full year, as we outlined in the original business plan call. We'll have a dip in the third quarter, then we'll pick up strong in the fourth quarter. So we're holding our year-end occupancy and lease targets. I think generally, though, to answer your question, we're very encouraged with the number of tenants coming back into the marketplace. We do think that the bias towards quality buildings, quality operators, efficient operations remains very much intact.

And we think with our on-the-ground leasing and property management team, I think that's honestly one of the reasons why we're capturing so much activity versus our market share. So we think there's a real window to amplify the quality bias of our portfolio and team. And I think that's one of the reasons why that pipeline continues to build. I mean, to have our pipeline up quarter over quarter has actually been very good reinforcement of our leasing and marketing strategies, and we're not going to really rest until we get that occupancy level well above 90% again.

If you take a look at our Pennsylvania-based assets—CBD Philadelphia, University City, and the couple submarkets we're in in the suburbs—we're doing really well. We have a challenge in Austin, and we've got some programs in place to address that over the next several quarters. We're hopefully going to pick up some absorption there as well to bring that drag on our overall occupancy and leasing stats—to minimize that in future quarters.

Upal Rana, Analyst at KeyBank

Okay, great. That was helpful. 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

Hey guys, most of my questions have been answered, but I guess as you think about any sort of remaining asset sales, is that likely to be more so stabilized, core-like assets or more assets with maybe some either current vacancy or looming vacancy as we look out over the next few years? Can you kind of just maybe talk about how you think about the portfolio today?

Jerry Sweeney, President & CEO

Yeah, yeah. Great question. Good morning. It's going to be—without being too vague—it's going to be a mix. You know, I think we're, again, we have taken a hard, disciplined look at every single asset and go through that net present value calculation. We're constantly testing where we think values are. So for us it's really about at What point each asset is at its optimal value point given current market conditions. So even when you take a look at what we sold this year, we sold one significantly under-lease property because the reality from our perspective was that the amount of capital required to bring that project to stabilization and the projected absorption timeline delivered a very low return on invested capital. So from a net present value standpoint, we were able to actually, from the sales standpoint today, exceed that net present value.

So we're going through the exercise, Dylan, across the entire company. We took a look at 405 or 500 North Gulph Road. You know, there the weighted average lease terms in today's market were very attractive to a whole series of investors. So we felt that was a good optimal price point for us to generate the liquidity to execute the balance sheet strategy we have underway. So I think you should be looking out for a mix of asset sales going forward.

As Tom alluded, we're also taking a look at a lot of our land inventory and have a certain number of those parcels going through the sale process. And that, again, is a non-earning asset. Our major quest right now is to generate liquidity to improve the balance sheet and to improve our growth profile going forward.

Dylan Brzezinski, Analyst at Green Street

And would you say, like, you know, for the assets you've brought to market, you know, that exercise of comparing sort of capital markets bids versus where your guys' internal assessment of value is, is closer when you look at stabilized core assets? Can you kind of just give us—I'm trying to get a sense for, like, as buyers get back into the market, is there, you know, stronger depth of appetite for maybe more value-add oriented assets versus the core product?

Just curious your thoughts there?

Jerry Sweeney, President & CEO

No, hey, it's a great question, and we actually debate that internally. I think the market is moving. There's still core money there, and I think the core money is really focused on stability, weighted average lease term, asset quality, and submarket positioning and submarket dynamics—key issues. But we're also seeing an interesting return of a lot of value-add capital that is basically taking a look at the supply pipeline coming on board in the office sector, which is de minimis, as all the forecasts show.

In the case of Philadelphia, just to use that as an example, 11% plus of the inventory being converted to residential, public policy moving to amplify more office-to-residential conversions. You can actually make a pretty good quantitative case that the office market fundamentals will improve dramatically in the next several years. So we're seeing a number of value-add buyers come in who are willing to take vacancy risk and not overpay for that today, but be much more aggressive in pricing that today than they were a year or two ago.

And with the debt markets being very fluid, that's also amplifying, I think, the pace of their execution. So I think it's a good time for us to be, you know, taking a look at our overall portfolio, identifying which assets will deliver great growth for us from a quality and financial standpoint, and then use what we're hearing from the market dynamics as we're talking to different investors to dovetail in where we want to sell assets and at what price point is acceptable.

Dylan Brzezinski, Analyst at Green Street

Great. Jerry, thanks for that thoughtful explanation. Appreciate it. Have a good one. Thanks, Tom.

OPERATOR

Thank you. And as a reminder, if you have a question at this time, please press star 11 on your telephone. Our next question comes from the line of Anthony Pelloni from J.P. Morgan. Your question, please.

Anthony Pelloni, Analyst at J.P. Morgan

Yeah, thanks. Just two quicker ones to think. One is on the IBM buildings. What do you think your all-in spend will need to be to get those repositioned and backfilled?

Jerry Sweeney, President & CEO

Yeah, I think on the first building, which is what we kind of fully priced at, I think the idea there is we'll be somewhere in the $60 million range. That includes the related infrastructure work, all the TI cost, and getting all the base building improvements done.

Anthony Pelloni, Analyst at J.P. Morgan

Okay, and would that be a similar type number for the other if you kind of move it in that same direction?

Jerry Sweeney, President & CEO

I think so. I think so. I hesitate to give you a definitive answer because we're really—we're pricing through all that right now, but that's a good order-of-magnitude pricing. I think the key issue for us is, in addition to the cost number, is where the rents will be versus new development rents and our targeted returns being north of 8%. So we're kind of looking at those metrics to really drive the cost equation as well.

Anthony Pelloni, Analyst at J.P. Morgan

Got it. And then just second one: with the JV recap anticipated, you mentioned ownership stake going down. What do you think, order of magnitude, your ending ownership stake is going to be?

Jerry Sweeney, President & CEO

Yeah, I think our ideal structure, both from a liquidity harvesting, profit taking, balance sheet improvement, is probably a holder of between 10 and 20%, the bias more towards 10%. As I mentioned, right now the current thought process is, while we're talking to a couple of partners on the residential project in Austin, I think the bias right now is to sell that, given more pricing.

Anthony Pelloni, Analyst at J.P. Morgan

Got it. Thank you.

Jerry Sweeney, President & CEO

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 & CEO

Jonathan, thank you, and just thank all of you for participating in our second quarter earnings call. We look forward to updating you on our business plan progress in October for our third quarter call. And in the meantime, have a wonderful summer. 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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