Q3 2020 Brandywine Realty Trust Earnings Call
Brandywine Realty Trust third quarter 2020 earnings call.
Time, all participants' lines on a listen only mode. After this.
It was presentation, there will be a question and answer session to ask.
A question during the session you'll need to Costar and then one on your telephone.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star and then zero.
I'd now like to hand, the conference over to your speaker today, Mr., Gerry Sweeney, President and CEO, Sir you may begin.
Crystal. Thank you very much good morning, everyone and thank you for participating in our third quarter 2020 earnings call.
On todays call with me as always are George Johnstone, Our executive Vice President of operations, Dan Palazzo, Our Vice President and Chief Accounting Officer.
And Tom Wirth, our executive Vice President and Chief Financial Officer.
Prior to beginning certain information discussed during our call 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 already.
Anticipated results pretty clean as reference our press release as well as our most recent annual and quarterly reports that we file with the FCC.
Well first and foremost you know all of us at Brandywine sincerely hope that you and yours continue to be safe healthy and engaged there.
The pandemic continues it did disrupt all of our lives and this resulted in a new landscape for everyone and certainly every business and its duration. Unfortunately remains unclear.
At the time of our Q2 earnings call in July we did anticipate a return to the workplace commencing after labor day and into the fall given recent headline sort of that timeline for many of our tenants has been extended into into 2021.
And as we noted in our city our portfolio is about 15% occupied with variances between the different operations well, we can certainly provide more color on that during the QNX additional details in our approach to this.
To this crisis are outlined in our COVID-19 insert found on pages, one to four of the supplemental package.
During these prepared comments were reviewed third quarter results and update to our 2020 business plan. Tom will then summarize our financial outlook and update you on our strong liquidity position after that Dan George and Tom and I are certainly available to answer any questions. So looking at the quarter No. We continue to execute on every.
A component of our business plan. We're certainly pleased that most of our 2020 objectives have been achieved we're 100% complete on our speculative revenue target and.
And while the volume of executed leases was down a bit quarter over quarter as you want it.
As you might expect during the summer it regardless of the pandemic, our overall pipeline increased by over 330000 square feet.
The third quarter, we also posted very strong rental rate mark to market of 17.1% on a GAAP basis and 9% on a cash basis. In addition.
In addition, the core portfolio did generate positive absorption of 102000 square feet, which includes 47000 square feet of tenant expansions also included in those absorption numbers was the full building delivery of our 426 Lancaster Avenue redevelopment at Pennsylvania suburbs.
That was 55000 square feet and 112000 square feet of the occupancy backfilling of the essayed shy space down in Austin, Texas, We did experience during the quarter 58000 square feet of Kobin related terminations. The primary one of that was a Philadelphia sports.
Club in our Radnor complex at 42000 square feet and a couple other small hospitality and medical offices.
Our full year 2020 same store numbers are tracking in line with our revised business plan for this quarter. The numbers were consistent with our business plan and were primarily driven as you might expect by then 932019 move out of KPMG and 183000 square feet.
And the SHRM move that on 331 20.
Cash collection rates continue to be among the best in the sector. We've collected over 99% of our third quarter billings and our October collection rate continues to track very very well with over 97% of office rents collected as of yesterday.
Also on capital our capital costs were in line with our targeted range.
We continue to experience very good success in generating short term lease extensions that require minimal capital outlay retention was 60% and slightly above our full year range and based on fourth quarter scheduled lease commitment Commencements, we will be within our stated occupancy range as Tom.
We'll articulate in more detail, we did post FFO of 35 cents per share which is in line with consensus estimates.
In taking a broader look at our 20 business plan.
As we mentioned on the last call any crisis embodies a level of danger and opportunity. So our first plan of attack was to fully assess risk to our business and we believe we have instituted plans to either mitigate or anticipate any adverse impacts we do remain focused on growth whether that's through our early lease renewal.
Oh program or margin improving rebidding programs, we're continuing to work with institutional sources of equity to seek investments and opportunities, where we can create earnings and value accretion.
But just looking at the risk factors that we face as part of the pandemic first and consistent with all applicable state local and CDC guidelines, we did maintain a doors open lights on approach to our buildings during the entire breadth of the pandemic, thus far while hard to fully quantify we estimate the current.
Occupancy levels of our buildings range from 8% in Austin to around 15% in the Philadelphia CBD to 18% in the suburbs the 25% in DC.
Now certainly for a variety of factors, primarily public policy employer liability concerns mass transit virtual schooling and other safety concerns most tenants in our portfolio, particularly the larger ones anticipated phase return after the new year.
Certainly remains fluid and we're tracking but it seems like a larger tenants won't be phasing Bakken until next year.
Second our refocused on portfolio stability is a top priority with particular focus on these items right collections already talked about and I think we're doing fairly well rent deferrals. We did frame add on page one of our said we had a total of $4.5 million of deferrals with 4.1.
On schedule to repay those deferrals within the next 18 months no interest linked to date, we've already collected 14% or $536000.
Of those deferrals, including $100000 of early prepayments. So we certainly think that we're making some good progress there another key focus for us the strategic tenant outreach information as you may expect his key right now and we have an outstanding on the ground team of property and leasing professionals.
And all of our operations their top priority is being in close touch with our tenants understanding their concerns there transition plans and seeing where we can provide help as such we've reached out to our entire tenant base with a particular focus on those tenants who spaces role within the next two years.
The results of those efforts are framed that on page two of the set and have resulted in 82 active tenant renewal discussions totaling over 920000 square feet that to date have resulted in 45 tenants totaling 300000 square feet executing renewals.
These leases had an average term of 24 months with about a 2.6% cash mark to market and a sub 5% capital ratio, we certainly hope that as we get more clarity on the pandemic that over the next couple of months, we can convert some of those ongoing discussions to executed renewals.
From a construction standpoint, nothing really more to update from last quarter. We continue to have construction activity in all of our markets. We have not programmed any further construction delays in our numbers and we are beginning to see with the exception of lumber and up and pressure treated wood some downward pressure on construction costs.
As we're starting to see an overall shrinkage of forward construction pipelines.
And speaking of pipelines, our leasing pipeline stands at 1.6 million square feet, including approximately 400000 square feet in advanced stages of lease negotiations as I mentioned, the overall pipeline increased by 331000 square feet. This is the expansion of the pie.
Line was driven by over 444000 square feet of tours during the quarter, which as we noted is up 115% from last quarter, so size of the market reawakening a bit.
From a liquidity and dividends standpoint.
Tom will certainly talk about this in more detail, but the company is in excellent shape.
From a liquidity and capital availability standpoint as outlined on page three.
After factoring in the full repayment of the two Logan square mortgage we are still projecting to have about $530 million of our line of credit available by year end. We're also anticipating paying off the small mortgage during the fourth quarter of $9 million, we have no maturities in 21 and no one.
Unsecured bond maturities until 23 and have a very good 3.75% weighted average interest rate dividend remains incredibly well covered with a 56% FFF when a 76% cat ratio and given those mortgage prepayments, we do anticipate that by the end of this year.
We will have a completely unencumbered portfolio with no wholly owned secured mortgages and no wholly owned mortgages going into two into 21 now to quickly look at our development investment opportunities first of all on the development front all four of our production assets at Garza and four points in Austin.
650 Park Avenue and 155 in pet.
In Pennsylvania are all fully approved fully documented fully ready to go subject to pre leasing.
We are still actively marketing those we have a good pipeline on those production assets.
As you might expect this moving a bit slow.
But tenants continue to look at new construction and upgrading their stock as part of their workplace return strategy for five Colorado remains on track for completion in Q2 of next year.
At a very attractive 8.5% cash on cash yield we have a pipeline of almost 200000 square feet on that project again, moving slow, but again, we're pleased with the the breadth of that pipeline, but we really don't expect a lot of significant decision making to occur until the.
We get more clarity on what's happening with a pandemic.
3000, a market that's the 64000 square foot life science conversion that were done within Scoopable yards. Construction is underway that building is fully leased.
To spark therapeutics on a 12 year lease commencing later in the second half of 2021 at a development yield of 8.5%.
In looking at broad more institutional yards for just a moment we are.
We are advancing block AG, which is a mixed use block consisting of a 350000 square foot office building and 340 apartment units that's going through final design and final approvals from from the city of Austin, We Act.
We expect all those tests to be accomplished by year end.
Within Schuylkill yards, we continue a very strong push to the life science space.
As mentioned last quarter and Weve outlined in more detail in the supplemental package durable Master plan for school yards is we can do at least 2.8 million square feet of life Science space. So we have an excellent long term opportunity to really create a scalable life science community 3000.
Market in the Bulletin building where the.
We are the first steps in their conversions to create a life science hub. We're also well into the design development and marketing process for a 500000 square foot life Science building located at 31 51 market Street, we have a leasing pipeline on that project totaling about 580.
8000 square feet and our goal is to be able to start that by Q2 21, assuming of course market conditions permit.
Our school yard to West project, which is our life Science office and residential towers fully approved and ready to go subject to finalizing our debt and equity structure that project consists of 326 apartments, and 100000 square feet of life Science and office space. We currently have an active pipeline of over 300000 square feet.
For those a commercial uses and based on this level of interest we are contemplating starting that project without a pre lease similar to our approach on 3000, where we live.
When we looked at existing assets, we have commenced the construction and conversion of three floors three through nine.
Within Cirrus center to accommodate life science uses that will be done in two phases.
We have 34000 square feet already pre leased and we currently have a pipeline of better 100 125000 square feet.
Yes, another interesting point on both Schuylkill yards and broad more that we can't lose sight of is that based on current approvals and the master plans in place between those two sites. They can accommodate about 5000 multifamily units.
On the equity financing front, we have an active ongoing dialogue with a broad cross section of institutional investors and private equity firms. We continue to explore other asset level joint ventures in sales to both improve our return on invested capital generate additional liquidity and provide growth capital for developed.
In pipeline and these discussions as you might expect encompass both broad more in school yards, but also some of our existing assets.
Let me close on that on this one final point as you know our normal practice for many many years was to provide.
Next year guidance during our third quarter earnings call.
But these are not normal times and as we discussed in our July call, we're not providing 21 guidance at this time all.
Although our company's overall rent collections remained very strong we have increasing visibility into our course or existing portfolio and our.
And even with the rent collections being the highest in the sector. We believe it's prudent to delay our 2021 earnings guidance and business plan until we have better visibility on the duration of the COVID-19 pandemic and its impact on the macro economy and in particular our markets.
Tom will now provide an overview of our financial results.
Thank you Gerry.
Our third quarter net income totaled 2200 $74.4 million or $1.60 per diluted share and FFO totaled 60 million or 35 cents per diluted share. Some general observations regarding the third quarter results. The results were generally in line with our second quarter guidance with the following higher.
Lights core.
Core property operating income, we estimated $74 million it came in slightly above that $74.4 million, which.
Which was a good good result termination other income we expected that it ended up 1.3 below projections, primarily due to the timing of certain anticipated transactions that we believe will occur in the fourth quarter and then interest expense was also lower.
By $1.7 million over forecast, primarily due to the interest expense reduction from the loan assumption recapitalization of two Logan square, which resulted in a one time non cash reduction in interest expense totaling $2 million, our third quarter fixed charge and interest coverage ratios were 3.5 and.
3.8, respectively, most met both metrics improve sequentially as compared to the second quarter, primarily due to the commerce square joint venture both metrics exclude the one time interest deduction reduction noted above.
As expected our third quarter annualized net debt to EBITDA started to decrease the decrease to 6.7 was primarily due to the sequential EBITDA remaining similar to the second quarter and the reduced debt levels from the Commerce square joint venture.
Two additional reporting items as Jerry mentioned cash collections were up 99%. Additionally included third quarter deferrals, our core portfolio would have been very strong 97% collections for October are currently 97%. However, one vendor payment anticipated to be received in that.
Next day, or so will bring us up to 90, 599% write offs for the quarter were approximately half a penny and primarily due to retail related tenants same store as outlined on page one of our supplemental we have included 1.1 and $3.8 million of rent deferrals in our third quarter and year to date results.
Why not build during the quarter, we feel that presentation will more accurately represent our current same store metrics with normalized going forward results not inflated by subsequent cash deferral cash receipts, which as noted above is already starting to be collected looking.
Looking at the fourth quarter guidance, we have the following general assumptions property level operating income will total about $74 million and will be sequentially lower by about 500000. The decrease is primarily due to the.
Commerce square being in our numbers for part of the third quarter and they will not be in our numbers for the fourth quarter that totals about 1.5 million offsetting that decreases a sequential increase in the portfolio, which will improve at a lot by $1 million.
FFO contribution from our unconsolidated joint ventures will total $7.5 million for the quarter, which is up $8.3 million from the third quarter, primarily due to the full quarter inclusion of commerce square offset by reduced general why at RBC.
Our mapping joint venture for the full year 2020, the FFO contribution is estimated to be about $20 million.
DNA.
We will be about $7 million for the fourth quarter and full year will be about 31 million interest expense will be sequentially higher by zero point eightmillion compared to the third quarter and what totaled $17 million for the fourth quarter capitalized interest will be 1.1 million for the fourth quarter and full year interest expense will approximately 74.
<unk> million.
Of note, we repaid our mortgage at two Logan during October the mortgage payoff as approximately $79.8 million.
That loan had interest coupon of 3.98% we anticipated early prepayment of a wholesale mortgage at four tower bridge with an effective interest coupon of 4.5% with.
With those payoffs, we now have no maturities scheduled out of wholly owned books until 2023 or 2022 for the term loan I am sorry.
Termination and other income, we anticipate that to be $4.5 million for the fourth quarter, that's up from 0.9 in the third quarter and.
Net income leasing and development fees quarterly and alive will be $2.6 million and will approximately $8.5 million for the year, there will be half a million dollars in the fourth quarter as it relates to land sales, while we are $272 million gain represented a 100% of the gain for reporting purposes.
As we only recognize 30% of that gain for tax purposes, and with some tax planning we will not require a special dividend in 2020, we have no anticipated ATM additional share buyback activity scheduled for the investments guidance no more incremental sales activity with the acquisition of the land part.
So being anticipated fourth quarter, we only have the building acquisition located to 50 King of Prussia Road for $20 million is scheduled to be acquired in the fourth quarter and held for redevelopment no and ROI will be generated in 2020.
Looking at our capital plan as outlined we have two development redevelopment projects and our 2020 capital plan with no additional.
Plan scheduled for the balance of the year based on the above our 2020 CAD will remain at a ratio of 71% to 76% as lower capital offset deferred rent has repaid beyond 2020 you.
Uses for the remainder of the year is 185000 comprise a $25 million in development or redevelopment $33 million of common dividends $8 million in revenue maintaining capital 10 million of revenue create capital and the repayment of the mortgage is at two Logan and for tower bridge as well.
As the acquisition of 250 50, King of Prussia Road primary sources will be cash flow. After interest of 45 million use of the line of 68 million use of our current cash on hand at the end of the quarter of $62 million and $10 million and land sales based.
Based on the capital plan last outlined above our line of credit credit balance will be about $68 million. We also project that our net debt to EBITDA will remain in a range of six three to six five in addition, our net debt to JV will approximate 38%, which is down sequentially from the 43% in the prior quarter.
Quarter, primarily due to the Commerce square joint venture. In addition, we anticipate our fixed charge ratio will continue to approximate 3.9 on interest coverage and will be for 3.9.
3.9 on debt service fixed charge and 4.1 on interest coverage I will now turn it back over to Gerry.
Great. Thanks, Tom.
So these are really not normal times as we all know so let let us close a couple of key takeaways.
First our portfolio in operations are in solid shape.
With with really increasing visibility into our tenants their thought process process and what they're thinking about in terms of their return to the workplace.
Secondly, it look our deal pipeline continues to increase as those tenants begin to really think about their workplace return and us staying in touch.
Staying in touch with those tenants is key outreaching to a lot of existing.
Or new prospects is also very much a key part of our business plan. So we're happy to see our pipeline really increased during a pandemic and during this slow months of the summer.
In other observation and we're hearing this directly from from tenants, both large and small safety and health both.
Both design in design and execution are rapidly becoming tenants top priorities and we believe that new development and our trophy quality stock will benefit from that trend and we're seeing the beginnings of that in the existing pipeline.
Private private equity and the debt markets have stabilized and are becoming increasingly competitive and rural group and strong operating platforms like Brandywine are really gaining significant traction for project level investments and then we'll land where we start it which is that we really do wish all of you and your families remain safe during.
These interesting times and with that we'd be delighted to open up the floor for questions and we ask that in the interest of time, you limit yourself to one question and a follow up.
Crystal.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your question on telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key once again to ask a question. Please press star and then one now.
And our first question comes from Anthony Paolone from JP Morgan Your line is open.
Okay, Thanks, and good morning, everyone.
Jerry I think last quarter, you talked about rents and the market generally holding up and you hadn't seen much diminution if that if any at that point can you give a little bit of color on where that stands today as you're getting deeper into the discussion.
Renewals and such.
Got it.
Certainly good morning, good morning, Tony Hope all is well.
Look we are continuing to see.
Fairly good stability within.
Our portfolio and I think the the harbinger of that or the or the look through the through the glass is is really through the renewal program that we have I mean, we're not really seeing any concessions that need to be made kind of as a part of post pandemic concerns.
We're we're very much focused in terms of the pipeline increasing the rental rates that we had in place pre pandemic or still the ones we have in place today.
Certainly in a couple of markets.
Like an Austin for example, I know Theres a lot of concern about the increase in sublease space down there, we could certainly talk about that.
We havent really seen any any real erosion of Randy yet certainly the overhang of the sub lease space might create that particularly in CBD Austin, where there's.
More than a million square feet of sublease space available in the announcement the other day of parsley Energy's acquisitions revenue impact as well, but in that case, Tony were even saying that no one on a four or five we have targeted kind of the mid eight.
Return on cost free and clear there we can reduce rents.
By more than 10% is still asking rents by 10% sold generate about an 8% return, but George want to amplify any things you are seeing throughout the portfolio, Yes, I think Tony the real evidence has been in the 45 early.
Early renewals that we've done.
Even those deals, albeit short in terms of.
Averaging 24 months of extension you still had a 2.6% increase in the cash mark to market. So I think.
Even as it relates to the new deals as Jerry alluded to the the asking rents that we have had been holding up we haven't really seen that much pressure on.
On that I think tenants.
Our little bit more focused on what their T.I. dollars, we'll get some in terms of building the space the way they want it to ensure that they have got.
Proper capacity for workstation, turning radius within the space et cetera.
Okay. Thanks.
And then my second question is maybe a two part on on life Science I think it was last quarter. You had mentioned converting 56000 square feet. It's here and I just couldn't tell us what your.
Laid out in your comments is.
An expansion of that conversion or if that was the same amount of space and then the second part of that just would love to get some color on that.
The nature of the tenants that would look at it converted space like that versus perhaps wanting to go into a new build or more.
Specific life science type.
Our building like are they are they okay, working with lawyers and accountants and stuff like that or is there a crossover with the pipeline you talked about pharmaceutical development with the same pipeline that would go into this converted space or any color there would be helpful.
Sure and then Tony.
Tony you are right I mean did the first phase that's why I mentioned, two phases ITSI or the first phases around that 56000 square feet and that's the lower lower several floors.
And then we are incorporating capacities due to conversion for the other floors as we need to or see the market demand over the next couple of years.
The the pipeline of transactions were saying on that.
Really have not indicated any concern about being in call. It a mixed use commercial project at all in fact.
The debt any concern that might be there.
Is really being more offset by then the ability of us to deliver space fairly quickly I mean, a number of these companies looking for for space in the very near term, which is really one of the catalyst behind doing this conversion doing it doing it on an accelerated basis and we.
We actually do view over time that that at that original building. We did seer center will essentially be incorporated into the whole ecosystem, we're creating it.
At Cirrus Center.
Okay. Thank you.
Thank you. Our next question comes from Jamie Feldman from Bank of America. Your line is open.
Great. Thank you and good morning.
Can you talk more about the incremental 300000 square feet and that leasing pipeline, where is that located it sounds like maybe a lot of that's it.
Total yards, but just more color.
Where are the incremental demand.
Yes sure Jamie Good morning. This is George just just so we're all clear when when we talk about the.
The volume of the pipeline Thats always exclusive of our development and redevelopment projects. So Jerry did cover the.
SGOCO yards, and 31 51 market Street pipelines in his commentary, but the increase in the.
That just normal core portfolio we.
We have had a very good quarter of of touring activity, a 444000 square feet and.
And a lot of that.
Really was in both.
Philadelphia, CBD and in the Pennsylvania suburbs.
Where we saw the largest amount of pipeline contribution.
And we're also continuing to now see.
The summer coming to an end and elevated amount of touring activity at our 16 76 International building and.
Tysons so they.
They probably had about a 140000 square feet of.
Additions to the to the overall pipeline.
Okay, and then as Jamie on the on the development pipeline I think the.
That was it thanks, George for that clarification for everyone.
I mean, we do.
We do have a pretty good pipeline on our scoop, we arch pricing has continued to grow.
Up pieces of that relate to a couple of the anchor institutions in University city are looking for some expansion.
Despite I think some of the macro impact of the pandemic on some of those institutions are still they are still looking forward to increasing their market share and expanding their research capacities.
And then we have a variety of of.
Life Science companies, who are looking at.
Both.
Scuba yards West and our 31 51 project and within our.
Sure yards West project, we have.
Several life science companies, certainly, but we.
But we also have a number of law firms and financial service firms are also looking at Scooby Ars West as a new location.
Okay and the 300000 does that include renewals or that's all from me.
From rental demand.
It's all incremental yes.
So it's not that it would actually increase occupancy.
Correct Okay.
All right and then secondly can you just talk us through the largest vacancies in the portfolio I know, you've got Mclaren and standard reliance to work on.
And then just thinking about the expiration schedule get some big law firm expirations over the next 16 months or so based on your schedule.
Yes sure.
Look the the large.
Existing vacancies in the wholly owned portfolio are really at 16 76 international in Tysons and as I mentioned.
Previously we are starting to see some increase in the pipeline there the Macquarie and reliance vacancies at Commerce square.
Which are now within the joint venture structure.
No no significant change obviously during this past quarter.
We continue to do several specs, we builds on some of the lower floor space.
At least part of one floor previously and have the balance of that for now constructed for spec suites.
Have some hopefully accelerated quick hitting occupancy rose.
Reliance still little bit early in terms of of a true pipeline there, but we're hopeful.
Hopeful that.
The fall progresses and post election day, we start to see some increased activity over there.
The the rollover schedule for 2021 really there are kind of for kind of larger ones to talk about we've talked about.
Most of if not all of these in the past, but Northrop Grumman at 23 $40. Our plan when that lease expires on 12 31 of 2020 is to shifted into either a redevelopment mode continued to market the property to potentially sell land or Jay via.
In those plans are progressing we've had some.
Preliminary inquiry about the building from the brokerage community and.
And so we continue to vet that the second largest design VM and 199000 square feet at broad more in building five that will come back to us on March 31st and the plan is to then convert that building.
And its underlying land into the overall development planning that have brought more.
Third largest is Comcast four floors over at two Logan Square 88000 square feet, we have already back filled one of those four floors.
That was a kind of a.
A deal that was a little bit of a quick hitter for us they are going to take occupancy actually we're going to terminate Comcast among.
A month early and immediately backfill it with this replacement tenant.
And again, where that lease expired, we had close to a 30% mark to market on the cash rents with only a 10% capital ratio on a six year deal. So.
Again, I think that building being trophy class than what tenants are looking for we feel good about the prospects for the other three floors and then the last one is is some of the so.
Space over at Crs Center coming back to us in one of those is a full floor in that lower stacked 27000 square feet in that as part of our life science conversion that the Jerry just spoke to.
Okay. Thanks, that's very helpful.
Confirm when does the Comcast expire.
Natural exploration well is to 28 21, and one of those four floors, we will terminate a month or early.
Okay, and then do you have any updates on the decker blank row.
Current leases.
Doug continuing to negotiate with all three of them.
Active active dialogue.
No pen to paper at this point, but.
The expectation is that we.
We should be able to retain a good portion of those tendencies.
And again those are all in our 2022 exploration timeframe.
Timeframe.
Okay, great. Thank you Thats.
Thanks, Jamie.
Thank you. Our next question comes from Steve Sakwa from Evercore ISI. Your line is open.
Thanks, Good morning.
Gary I noticed that many of your.
Assumptions didn't change obviously for for the year end 2020, I guess, the one that jumped out at me was the percent leased I guess on the core portfolio of 94 to 95, I'm doing the math right that sort of implies 275000.
Square feet of absorption from a lease perspective, not not necessary an occupancy perspective, and I think you mentioned that you did about a 100000 of absorption in Q3, So just kind of walk us through sort of how you are going to.
See that debt lease percentage, just given the softness in the leasing environment.
Yes sure Steve This is George let me take a take first crack at that at that.
Yes.
Again, I think part of part of the reason, we still feel that that range is attainable is kind of the strength of the pipeline. We also have a couple of fourth quarter 20, expirations, where we're in advanced dialogue.
And actually have a couple of leases signed so that when those fourth quarter vacates occur. The backfill is there, but because its not vacant today. It does not hit our pre lease statistic. So so again.
So again I think.
No.
Again, the pipeline at 16 76, some of that looks promising and we're hope.
We're hopeful that we have.
A productive remainder of the fourth quarter to get some of these deals across the finish line.
As George mentioned, Dan was in our comments I mean, a good portion of.
All of that is coming out of the pipeline activity, we have which is where you have a number of tenants were advanced advanced stage of negotiations as well so.
When we when we kind of risk assessed that we thought we still had to.
A pathway to get to that number.
Great and then maybe Terry just to kind of circle down on Austin.
Four or five Colorado, I realize it's still maybe three quarters out from completion, but.
Maybe just talk a little bit about the 200000 square foot pipeline is.
Are those tenants really kind of all in the market with existing kind of upcoming expirations is there anybody kind of new or expanding in the market to take that and then you did mention kind of the increase in sublease space I'm, just curious the competitive nature of the sublease against new construction.
Yes, Steve Great question and look the pipeline.
Which is just shy about 200000 square feet now.
It has a number of of tentative in the pipeline for the last couple of quarters a couple of.
Of law firms and several financial service firms were talking.
We're talking to a couple of technology companies and look one of the things with four or five it's a fairly small floor plate building very highly amenitized with one whole sky lobby floor and over two and a half per parking on site, which is a rarity in the Austin CBD.
Market so.
We're very focused on getting some of those leases put away or some of those prospects translate the lease executions in the next couple of quarters. The curtain wall in the building is substantially done some of the interior finish work is starting so while we are still doing hard hat tours, the hope would be.
By December we'll be able to actually get people through.
In a more kind of finished way and we think that will certainly generate some activity.
So the leasing team is very encouraged by the by the increased level of activity that we're seeing there. Obviously, we're all frustrated with the that pace of how that pipeline progresses.
And I think Steve is we looked at it. We're still you are still our proposals are still out in the mid 40 range.
Rental rate range with the same level of concession packages that we had program.
And I think one of the things that we don't really necessarily see that there could be downward pricing pressure, what we're seeing now but when we look ahead to the amount of sublease space and frankly, the gap between sub lease rates.
Existing.
Building rates and the new building rates, we think there could be some downward pressure, which is why we've certainly flexing our financial model that even if we went up reducing our pro forma rents by 10% were still able to deliver about an 8% yield but the major folks trap right now is from a leasing.
Sample it is let's get a few more of these leases signed.
And across the finish line, we think that will build some momentum as the Austin market.
Continues to open back up.
Great. Thanks.
Thank you Steve.
And our next question comes from Manny Korchman from Citi. Your line is open.
Hey, good morning, everyone.
Sure, maybe just spending a little bit more time of life science.
In a space that we've seen a lot of owners and developers talking about converting or building new space and.
Yourself included so just wondering maybe specifically for school. If you think about just the supply picture.
Where else might there be competitive supply that comes up and either existing or new product.
From the demand you're seeing are those tenants that you think end up in that great.
Greater Philadelphia market or are these tenants that might have national pursuits, and they're trying to figure out where they end up.
Yes, thanks, mainly to answer the best of the best I can.
You know, we do view that the competitive set we have in Philadelphia for life Science is a University City Science Center.
Which again is about eight blocks west of where we are at FMC tower.
And there's also.
The discovery center in the Pennsylvania suburbs, which is a privately owned former GSK facility is being converted to.
To more up to date life science shoes.
There is one.
One building in the East market Street corridor, an older building that.
They are positioning some of their vacancy to be life science and that build is in close proximity to Jefferson University health care system. So.
The basis for us.
For some some demand drivers there.
But when we look at the competitive set number one I think they are what they are all good and high quality competitors I think what we can deliver is is it.
He is a better location and.
Very good high quality and efficient design.
Most of the tenants that we are talking to manage to go to your I think your second question, Yes, I think the bias is they would always rather be a new build.
And I think Thats why we're seeing such a great upsurge in activity on both scope regards west our 31 51 project.
The challenge on that new build is that did take 24 to 36 months to actually deliver the space and a number of these tenants are.
Our facing near term requirements that they need to fulfill rather than wait for that so one of our objectives as it really was with 3000 markets you was to kind of create.
Some near term space deliveries that would be attractive to other to some of those life science tenants our pipeline.
For better or for worse, we went up leasing that building's entirety to spark therapeutics, who had a real near term demand and that's when we pivoted the Sierra to take a look at that from an engineering design load HPC standpoint to see what the conversion costs there would be in the lower bank. Fortunately, we've built in a lot of design flexibility.
We built that building years ago. So the costs arent prohibited by any stretch. So we're able to present 30000 foot floor plates to some of those tenants and be in a position to deliver that by the second half of 2021, which has a lot of value.
But I think we do view that the life science is one of the real green shoots in the Philadelphia region, and not just being driven by the major anchor institutions as well as it has historically been there are a number of tenants on our pipeline that are new entrants to the Philadelphia marketplace.
I think the.
The first mover advantage in Philadelphia is generated in cell and gene therapy, and the continued massive investment by University of Pennsylvania Healthcare systems with Star Children's Hospital of Philadelphia, as well as the and augmented by the increase in NIH and venture capital funding I think has really created.
Solid springboard here four locations like Schuylkill yards to really have the opportunity to create something that is scalable and attractive to these companies in terms of its creating an ecosystem with some door ability.
Thanks, Thats great color.
In the past when we've spoken to life science developers.
There's been some hesitation to do mixed use especially with residential.
Have you seen.
That sentiment change are people willing to.
We live in a life science building or life science tenants are willing to be in a building is partially residential.
Well I did it actually depends on the composition of what that life science companies doing in the building. So it's a lot of level. One work, it's not too concerned at all to the life Science company and in the case of like 60 yards West money to go to your point specifically.
They're the theirs. They are separate lobbies for all of those uses so there is a level of privacy and confidentiality that we build into the design of the building to make sure that there is not that concerned about a resident walking into a lobby with white coats or bice or you know.
White coat walking into a building with with someone walk in their small dog so the.
I think you can design some of that segregation into the building, which we have done with school yards and there again, if the commercial component is only about 200000 square feet and we want to really anticipating about 100000 of that to be a combination of life science slash.
Research labs, the balance we think will be.
Loft office space.
And then a certainly in our dedicated life science building, we're dealing with larger tendencies, there, they're looking and larger floor plates, they're looking for.
Dedicated life science component.
And then last one from me just.
Can you talk about what you're seeing in terms of multifamily.
Rental demand and.
Total market.
Yes, actually they're holding in there very well.
There are really have it has not been a lot of downward pressure, particularly the higher end of the curve.
So we've we just completed our kind of monthly market survey.
And the feedback across both existing stock projects under construction.
Are still very much in line with.
With what our pro forma assumptions are I think we're also we are planning no matter that there could be a slight slowdown in rental rate growth and maybe a marginal increase in concessions going in so we have already built that into our scope regards west pro forma.
But right now it seems like the fundamental demand drivers seem to be in pretty good shape.
Thanks George.
Thanks, Matt.
Thank you our next.
Our next question comes from Michael Lewis from Scherlis. Your line is open.
Thank you.
So this morning, the Philadelphia business Journal posted a story about rising vacancy and sublease space in Center City.
Sharply lower leasing activity.
I was wondering your thoughts on earlier portfolio roughly its philly suburbs, we think some of this.
May be movement from.
That's the center city to Philadelphia suburbs, or do you think you know where we stand right. Now this is just.
Evidence of.
We demand.
Overall weak demand of where we are right now yes.
Yes, Michael I hope, you're doing well, it's George I'll Tag team. This look I think when we've looked at the sublease inventories in Philly I have to be actually that we're pretty pleased with it I mean, the numbers are are fairly low I mean going the city. We're we're talking about is CBD sublease space of.
In class, a bathroom and 20000 square feet, which really hasn't moved all that much with the largest block being 30000 square feet.
University city less than 30000 square feet of sublease space.
The Pennsylvania suburbs have stayed in around that 500000 square foot, Mark, which really given the size. The inventory days is fairly small and in none of those three markets have we really see any big upticks since.
The crisis began at one level.
I think the world knows the office marks and a bit of a pause and a pause can simply be a pause without it being an armageddon I mean, if you think about what's going on in the world. So many folks are focused on.
Bids are folks something other than just their office platform right now they are concerned about distance in public policy mass transportation.
The children getting back to school.
So we know that's why I feel pretty optimistic that our leasing team and our regional heads I mean, there were talking to tenants brokers political leaders community leaders on a daily basis to try and get as good a window into whats happening as possible and I think frankly, Philadelphia will will prove that its reserve.
Billions C.
In challenging times as we look out over the next couple of years.
Whereas on the upside whenever grow as fast we tend to be fairly stable when things get slower.
To go to your other question, we really haven't seen and I'll defer to George but I mean.
Seen any real significant movement Michael from.
CBD out to the suburbs and or vice versa, but George what do you say, yes, I think I think most tenants and and companies are just.
Evaluating any and all options, but have been somewhat slow to pull the trigger on on any so I think the the sublet prospect is one where it's.
Should we test to see if there is some some demand for some of our space and.
But again.
We've got kind of the best of both worlds is that we've got this this center city and the suburban.
Locations.
And even within our own portfolio, we've yet to really see anybody say hey can.
Can I do something.
Out in the suburbs.
Even on a short term basis to maybe allow me to get more people into the office.
And not have to worry about mass transportation or other concerns they might have about the longer.
Longer commutes because of home schooling et cetera. So.
Well I think.
The more visibility we get on on the pandemic each and every day I think you will start to maybe see some companies start to make some of those decisions.
And again as I said I think given our inventory locations, we've got an opportunity to kind of capture some of that whether it's a city.
City flight out to the suburbs or vice versa.
Okay. Thanks, and then my follow up is kind of a big picture question as well and maybe Jerry already answered it kind of an ask it anyway, because I think.
Testers are less concerned about the next few quarters and the stocks are kind of pricing off of what people think.
The permanent impacts of this maybe so.
Would you say you know do you think we have any more clarity on office demand long term versus a quarter ago or less because there.
Gary on the pipeline activity and the Tories are off and we've had some pass at the time, but on the other hand, we still at below physical occupancy Labor day came and went.
Now, we'll see what happens next year.
What do you think about kind of the range of outcomes and the.
Already we have into whether the office business is now whatever take the trajectory and now its that trajectory minus 10% or or whatever it is how do you kind of think about the long term.
Yes.
That's a great question and certainly it's something we're spending a lot of time as a team and as a board thinking about.
Look I think we still remain.
Very optimistic and and I'll give you a couple of data points, probably since the last quarter I think the longer. This has gone on I think the more we are hearing consistently across our office base that they can't wait to return to the office. So to go to Michael your observation on.
Kind of a low level of occupancy you can never dismiss the fact that public policy at this point is paying a fairly large role in what tenants want to do that public policy has a couple of different elements to it one is like for example here in Philadelphia.
The city public health guidelines are that if an employee can tell of work it's feasible for them. The telework. They must telework. So employers don't really have the public policy stamp of approval to be bringing people back into the office, except on a very voluntary.
And a very essential basis, and we're seeing that certainly with the distance.
In Texas between the state and the city governments.
So that is a as a bit of a gating issue for people, bringing their tenants back an attempt. This question of employer liability is it.
Is a big issue as well as well as the issue of mass trend. So I think there are other factors. Besides people not wanting to come back to the Austin joint working from home that is preventing these comps from ramping up their occupancy is up. So he has one point I think another point is that.
Yes, certainly from what we're seeing and again, it's early in the stage, but we are certainly seeing that while there could be.
As a cyclical decline in office demand, we think the compensating factors there will be the re planning and re densification of space I think.
One of the brokerage firms had it at a report they were thinking I think about a 10% decline in office demand on a gross basis, but about 5% of that would be made back up through the through the re densification space, we're going through a number of space planning exercises with some of our existing tenants and topic one on their mind.
How they create.
More work space area for each of their employees with greater circulation patterns, whether thats, a durable trend or goes away. When the vaccine comes along we don't really know, but I think the signs are very encouraging that one of the the downward pressures on office over the last decade has been this condensing of work space I think that.
Trend, which had been slowing anyway is certainly going.
Going to go in the opposite direction for the foreseeable future.
And then.
There is more and more studies coming out for both small and large companies that.
Continued remote work is having a significant adverse impact on productivity and human nature being what it is I mean, we're actually seeing our some of our some of our tenants is when the when the leadership of the company comes back to the office.
The people that work for those leaders typically want to come back as well. So you have that whole social dynamic and team effort taking place. So so will we still remain pragmatically optimistic that the.
The office market will return to some level of stability is the pandemic starts to ease and we also do think and we firmly believe this is that there will be a greater emphasis on higher quality well maintain stock owned by well capitalized landlords and I put our public company peers in that category.
With us we tend to own the best space in the market, we tend to run it in a very very professional proactive manner with great tenant outreach programs.
What used to be points about HD AC et cetera on page 15 of an RFP. There now page one I think companies like Brandywine are really resonating quite nicely.
If that answers your question I apologize for going a little too long no. Good point. Thank you.
Thank you.
Next question comes from Daniel Mail from Green Street Advisors. Your line is open.
Great. Thank you just a follow.
Just a follow up on your last point Jerry for those types of core office buildings.
Transaction volume that quickly falling off from curious and the conversations you're having if there's been any noticeable differentiation between your markets and how office guys are changing.
Hey, Dan how are you doing.
Look we were really pleased to have been able to achieve.
The.
The venture financing at Commerce square, we thought that resonated very well from a us being in the market a fairly large value add transaction.
In Philadelphia, and I think we got some very good response to it and I think we executed a very good deal.
I think as we're looking at other.
Other types adventure opportunities, where this on our development projects are on existing stock I think while private equity and institutions are really coming back into the real estate market in in some sectors much more aggressively in the office sector. There there still is a prevailing house view.
That.
Most office investments are on hold until we get clarity post pandemic.
So just the same question, Michael Laskin and a lot of other folks ask about what's going to happen with office until there's more clarity on that I think the bidding pool for office assets will be will be a bit now lower than some of the other asset classes.
I think prop projects that have shorter average weighted term lease renewals for value added component.
We'll face.
And even narrower set of investors, but I think generally on the office I think you've seen a couple of trades take place where there is long duration credit back lease structures that have been done at very low cap rates, where a lot of those investors.
Are really looking at.
A credit.
Stability situation compared to bond yields and I think that will continue to create overall downward pressure or stability in office cap rates and I think where you will see it a bit of an increase in overall cost of capital.
On kind of more value add components temporarily.
I think once the market has some visibility in terms of where the demand drivers are that gap could close as well.
Great. Thank you and then last one for me.
Going back to the leasing pipeline.
Doug.
You gave.
Details regarding the composition of the pipeline terms.
And if you notice any more or less activity.
Good industries outside of life science within that pipeline.
Yes, again, the the pipeline in the core portfolio.
But for those couple of.
Floors over at Cirrus Center, where we're doing the lab convert or life science conversion everything else would be traditional office use and.
Yes, the composition of the pipeline really hasn't varied.
Too much from kind of the existing composition of the portfolio.
Still seeing low.
Law firms professional services.
And the like so I can't say that there is any one rising or declining industry.
At this point.
Fair enough great. Thank.
Hi, everyone.
Thank you.
Thank you and our next.
And our next question comes from Bill Crow from Raymond James Your line is open.
Thanks, Good morning Gerry.
I think of all the bench.
You've talked about today, the most surprising to me was the 8% return.
This level.
Kind of think about taxes more open.
Good in other markets.
You referred to kind of local policy issues.
That's that's about half the rate of New York City is lower than San Francisco and.
Is it a tenant issue is it a portfolio issue is a regulatory issue.
Does it does it suggest that maybe there will be a more permanent impact.
He asked to market, maybe some other markets.
Yes, and we feel it's a great observation and thanks, and thanks for the price because I should have mentioned that.
During our comments.
One of the reasons Austin is so low at 8% is it IDN who's a major tenant of ours down there is not coming back until after the first of the year. So if we excluded IBCM and their square footage from that Austin calculation, we're back into the mid teens.
So I think you know the Austin I think wound up being one of those cities that had opened up early then had some other had some sort.
Serge issues reduced.
Kind of retracted back some of that progress.
And now is on the on the way back so I don't think its when I looked at the numbers with after factor in IBCM and frankly look we take a look some of our other large tenants at Comcast to Lincoln financial.
Those companies are being much slower to come back then the smaller companies and our average tenant size is less than 10000 square feet. The smaller comes from back much faster. When you look at macro level staff of square footage of occupancy those big users are big users. So they have a big impact.
But now it looks like there's dissonance in every marketplace on public policy and what.
Public health experts in politics political leaders and other folks are saying in terms of when it's safe to come back youre seeing at a different level of ramp up of mass transit agencies that is having an impact on the on workforce returned these major urban areas.
But but thanks for raising that point on Austin, because with the 8% is really it does not reflect the composition of our portfolio down there and you.
You wouldn't anticipate that idea.
Be more inclined to make permanent changes that your typical kind of it sounds like.
No not at all in fact, I think the larger tenants are the ones that are indicating they want it.
They want to try and get back and even faster they just for a variety of issues they're dealing with.
Within their own employee base are being slower to come back.
Gotcha. Thank you.
Thank you Bill.
Thank you and that does conclude our question and answer session for today's conference I would now like to turn the call back over to Gerry Sweeney for any closing remarks, Chris. So thank you and thank all of you for participating the call again.
And stay safe stay well stay engaged and we look forward to updating you on our business plan on our year end call. Thank you very much.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and you may now disconnect everyone have a wonderful day.