Q1 2021 Brandywine Realty Trust Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Brandywine Realty Trust first quarter 2021 earnings call at this time all participant lines are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question to one day session. You will need to press Star then one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker today, Gerry Sweeney President.
And CEO. Please go ahead.
Sarah Thank you very much good morning, everyone and thank you for participating in our first quarter 2021 earnings call as per our normal process on today's call with me are George Johnstone, Our executive Vice President of operations, Dan Palazzo, Our Vice President and Chief Accounting Officer.
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 our anticipated results. Please reference our press release as well as our most recent annual and quarterly reports that we filed with the SEC.
First and foremost we hope that everyone is continues to be safe healthy engaged and looking for to return to some semblance of normalcy that day.
Pandemic continues to disrupt but with the vaccine deployment being accelerated we are on a path towards that normalcy. There was more optimism about the economy opening up and we're hearing that directly from many of our 1200 tenants our portfolio right now still only remains about 15% to 20% occupied.
And the predominance of tennis return, thus far are the small to medium size employers.
What's interesting, though is many restrictions imposed by governmental agencies are being gradually loosen by state and local governments that happened just recently here in Pennsylvania, and Philadelphia, and we believe that those changes will definitely accelerate the return to the workplace.
So during our prepared comments today will review for first quarter results discuss progress on our 21 business plan and update you on our recent transaction development activity.
Tom will after that provide a detailed financial review and subsequent to that Dan George Tom and I are available for any questions first I guess, a general update on COVID-19 impact.
Consistent with all applicable guidelines our buildings have remained in a doors open lights on condition.
Each of our buildings has a customized return to workplace presentation, that's been distributed to our tenants and our property teams are in active discussions with many tenants on coordinating a safe return.
These discussions have enabled us to understand the tenants concerns and aid them in their transition plans. We have heard from about a third of our tenants directly in the last several weeks and the trend lines from those are indicating three basic milestone dates July 1st Labor day and into the fourth quarter of 'twenty.
One <unk>.
We've heard from again for about almost 400 tenants and clearly the small and midsized tenants look to be returning to the workplace first before the larger tenants.
As we look at our business plan, but certainly from a revenue standpoint, our key priority has been to focus on tenants who spaces roll in the next two years and those efforts have been very successful and they have significantly reduced our forward rollover exposure to an average of only 6% for the period of 'twenty.
One through 23 or 8% annual rollover for the years 'twenty two to 24, we do remain focused on revenue and earnings growth and key near term earnings drivers for us are leasing up our key vacancies that we anticipate will be absorbed in the next two.
For months, and we do anticipate that those leases will generate around a 10% cash and GAAP mark to market and could generate between 7% to 10 cents per share in additional earnings we do have for O five, Colorado and 3000 market stabilizing next year and the continued performance of.
Our early renewal program.
And to add to our early earlier rollovers debt when we look at our company from 'twenty. One through 26, we are through the efforts of our leasing teams on the early rollout early renewals were below 10% annual rollover in each year through 2006, so looking at first quarter result.
We did post <unk> in line with consensus we've made very good progress on many of our 21 business plan objectives.
We achieved a 90% target on our on our speculative revenue range midpoint and as they anticipate in our business plan. We did have a 165000 square feet of negative absorption during the quarter. However, we've already leased 72% of that at an average cash them Mark.
The market of over 19% rent collections continue to be among the best in our sector and we have collected over 99% of first quarter billings.
First quarter capital costs also remained well below our historical averages and within our 21 business plan range. As we continue to have good success in generating short short term extensions that require minimal capital at Legg.
Certainly George is available to answer any detailed questions on that front tenant retention came in at 52% and our portfolio leased percentage remained within our business plan range.
First quarter cash Mark to market was positive five per se in our GAAP Mark to market was a positive eight 3% both of those results are below our full year ranges. However, based on leases already executed with higher Mark to markets, we will be within our business plan ranges for <unk>.
One we.
We also expect all of our regions will post positive mark to market results on both a cash and a GAAP basis.
Looking at same store, our first quarter GAAP same store was was <unk> nine per cent negative below art zero to 2% range and our cash same store was one 4% negative below our range of 3% to 5% similar.
Similar to the Mark to market tenants, taking occupancy later this year will enable us to achieve our 21 business plan targets.
It's also important to note that with the exception of Med D. C. All of our regions and operations are expected to post positive same store results met D. C will remain negative was 16 76 international continues through its lease up phase, but during the quarter, we did execute a 75000 square foot lease.
With a large professional service firm old for a 10 year term with two 5% bumps and that represents about 30% of our current vacancy in addition to that and maybe more importantly, our overall leasing leasing and tour activity is accelerating and our pipeline remains.
About 600000 square feet Tom.
Tom will give us more detail on the balance sheet, but we are still forecasting a debt to EBITDA multiple in the range of $6 three to six five times.
Depending upon the timing of some future development starts for the balance of the year.
We have to keep in mind that we are in the beginning phases of a transition in the return to work journey and.
We know everyone's looking for data points, we believe it will take three quarters or so to fully play out and we know everyone is looking for recovery data points and we have several encouraging signs we'd like to share.
Recently published reports indicate that 80% of tenants wanted tour spaces virtually before committing to an in person tour at least at this point in the cycle, we experienced the same trend within our portfolio. So during the quarter. We had a total of 1500 virtual tours inspecting over a 725.
5000 square feet of space, we think that was a contributing factor that led to a 40% increase in physical tours over the fourth quarter of last year.
Our overall pipeline stands at one 2 million square feet with approximately 165000 square feet in advanced stages of lease negotiations and the overall pipeline did increase by over 400000 square feet. During the during the quarter. We are clearly seeing from the pipe.
Line additions that the return to work moving will accelerate and the flight to quality higher quality office buildings is becoming increasingly clear from.
From a liquidity analysis and dividend coverage standpoint, we have excellent liquidity and as Tom will touch on and anticipate having.
Just shy of a $470 million line of credit availability by the end of the year.
We have no unsecured bond maturities until 2023, and a fully encumbered our wholly owned asset base, our dividend is extraordinarily well covered with a 56% SFO and is 70% CAD payout ratio, our five year dividend growth rate has been five.
3% versus a peer average of three 6% and we have grown our CAD during that same five year period at a seven 8% annual rate versus the peer average of less than 4%.
Quickly looking at some investment activity during the first quarter. We made two announcements we are very excited to have been selected by the University of Maryland as the exclusive developer for a five acre mixed use development located within the universities Discovery District. This project will consist of innovation research.
Life Science and multifamily residential units prior to commencing any development, we need to obtain local zoning approvals and complete the design development process. We also would target 50% pre leased before we start the first phase design development is underway now.
We hope to receive approvals by.
The second half of 2022, and the first phase again subject to the pre leasing standard and market conditions consists of about 250000 square feet of space.
In addition, we made another announcement that in order to meet the growing need for immediate lab space delivery in University City, Philadelphia, We have partnered with the Pennsylvania Biotechnology Center to create a 50000 square foot life science incubator that will be located at Cirrus Center.
The project is named <unk> Labs, and will open in the fourth quarter of 'twenty one.
Since the announcement just a few weeks ago, we've already build a pipeline for about 35% of that space.
From a production asset standpoint, all of our Garza for 650 Park $1 55, King of Prussia Road are all approved priced ready to go subject at least the pre leasing and we continue to see increasing demand for those types of products.
And looking at our existing development pipeline for Schuylkill yards West that project commenced construction on March the first the project will be built with 7% blended yield.
It will consist of 326 apartment units 100000 square feet of life Science space.
<unk> thousand square feet of high Bay innovative office and Street retail we have a very active pipeline for this project for both the life science and the and the office components.
As we noted in the.
Supplemental package from the press release, we are proceeding down that path on a construction loan financing package and expect to close that in the next 90 days at a 65% loan to cost.
And given the front loading of the equity commitment of $100 million.
We don't really expect the first construction loan draw to occur until the tail end of the first quarter of 'twenty two.
One for a five Colorado that project has achieved substantial completion. We currently have a pipeline of just shy of 300000 square feet of space activity is definitely picking up we've had for new tours in the last week alone and are under an LOI for a full for users that we hope to convert to a full for.
For lease in the next 30 days 3000 market. It was our 64000 square foot life science renovation Schuylkill yards that project will finish construction later this year. The building as is disclosed as fully leased for 12 years.
With the lease commencing in Q4 'twenty, one at a development yield of nine 6%.
Just some further amplifications on Schuylkill yards, and an update on broad more within Schuylkill yards. The strong life science pushed continues as we've noted the overall master plan can accommodate about 3 million square feet of life Science space.
Our plans for $31 51 market or 500000 square foot life Science building is well underway.
Pricing is done design development is complete active marketing is underway and we have a very healthy pipeline and are in discussions with several key tenants. Our goal does remain being able to start that project assuming market conditions permit later this year.
And then another note on Schuylkill yards as we previously mentioned we are converting.
Floors, two through nine in our Seara Center building for life Science, that's a total of about 188000 square feet. The incubator will take about 50000 square feet of that we've already leased about 47000 square feet of that to other life science tenants. So we have about 91000 square feet of near term.
Term life science space deliver that we can also achieve within Crs Center.
On broad more.
We are advancing block a in the first phase of block F that aggregates 350000 square feet of office and 613 apartment units.
At a total cost of about $360 million.
As we mentioned on the previous call. We are looking for a partner on that project. We have received excellent responses from very high quality institutions and will make it will make a selection in the next week or so and then proceed through documentation and debt financing shortly thereafter or <unk>.
<unk> remains the start the residential component of block, a which is 341 units for the cost of about $119 million by Q3, 'twenty, one and the office start.
350000 square feet is.
Is targeted to commence upon achieving a pre leased and we have decent activity that we're focused on there.
So with that Tom will now provide an overview of our financial results.
Thank you Gerrick, our first quarter net income totaled $6 8 million or <unk> <unk> per diluted share and <unk> totaled $60 2 million or <unk> 35 per diluted share and in line with consensus estimates.
General observations for the first quarter, while the results were in line. We did have a number of moving pieces in several variances to up to our fourth quarter guidance portfolio operating income totaled about $68 5 million and was below our fourth quarter estimate the.
The main reasons for that was lower parking revenue as work guidelines restricted people coming back to work and recommended working from home our residential was below our expectations. Our operations, primarily FMC remains soft primarily from the results of both.
And then you pen and Drexel being primarily virtual also snow we had some snow removal costs that were above forecast, while we do get very good recovery, we do experience higher we did experienced higher netting operating costs termination and other income totaled $2 1 million or 1 million.
One 9 million below our fourth quarter guidance. The results were never were negatively impacted by one transaction that we anticipated to be classified in other income was actually recorded as a reduction to G&A expense.
Land gain and tax provision total about $2 million or $1 5 million above our fourth quarter guidance, we recorded a land gain associated with our contribution of our interest to the Schuylkill yards West joint venture and that was not forecasted we had.
A forecasted land gain of $5 million that didn't occur and was delayed and will now we anticipate occurring in the second quarter.
G&A expense totaled $6, six or one 4 million below our $8 million fourth quarter guidance decrease was primarily due to the reduction in our other income guidance, which I just mentioned and that was partially offset by higher professional fees at year end <unk> contribution from our own consolidate.
Joint ventures totaled $6 3 million slightly below our fourth quarter guidance and our cash and GAAP same store yields as Jerry mentioned came in below our targeted range, partially due to a tenant move out in the suburbs, but also due to the reduced parking that tenant has been back filled and will take occupancy later this year.
Our first quarter fixed charge and interest coverage ratios were for one and three eight times, respectively. Both metrics remained consistent with the fourth quarter or first quarter annualized net debt EBITDA increased to 6.5 and is above our current six point.
One to six three range and the increase is due to lower NOI sequential NOI from the fourth quarter. We do expect this metric to improve with increasing NOI during the second half for the year.
As far as other reporting items, Jerry did mentioned collections has been excellent at roughly 90%, 99% less than 100% of deferrals was in our results for the for the first quarter.
Portfolio changes.
340, 23, 40 Dulles corner as previously disclosed with Northrop move out we have placed this property into redevelopment and we will include it on a redevelopment patient in the second quarter supplement as we complete our final plans and underwriting.
905 broad more with the exploration of the IBM lease we have taken this building out of service and it will be demos at a future date as part of our overall broad more master plan as a result of that we did have broad more taken out of our same store and leasing.
Statistics as of one one.
This year looking more closely at the second quarter guidance for this year, we anticipate our second quarter results will be lower than the first quarter, primarily due to some of the onetime items mentioned previously as well as us.
The reduction will move out of 905 from our leasing as it gets retired we have some general assumptions portfolio operating income will be about $68 million that will be sequentially flat from the first quarter, primarily due to lower occupancy operating expenses, including snow, which will be offset by the broad more building.
Being taken out of service <unk> contribution from Rochus Saturday Joint Ventures will total a five and a half million dollars for the second quarter, a 1.3 sequential decrease primarily due to some.
Leasing at Commerce square and our map joint venture.
G&A, our second quarter G&A expense will total six point will increase from $6 6 million to $8 2 million a sequential increase is primarily due to the onetime first quarter decrease.
Interest expense will approximate $16 million in capitalized interest will approximate $1 7 million.
Termination fee and other income will total about $1 million for the second quarter.
Net management and leasing and development fees will be about $3 million. The seven the $700000 decrease is primarily from the first quarter is primarily due to the timing and volume of leasing Commission income.
Interest and investment income will total $1 7 million consistent with the first quarter.
Land sale and tax provision will be about $1 1 million.
Generating proceeds of about $12 million.
The 21 business plan also assumes no new property acquisition or sales activity, no anticipated ATM or share buyback activity and no finance or refinance activity. Our capital plan remains fairly straightforward our CAD remains unchanged at 75.
For 81% range and we have.
We have about 100, and then we have a common dividends of about $98 million revenue maintain capital of $38 million revenue create a $35 million.
Based on the capital plan outlined above our line of credit balance will be approximately $132 million, leaving a $168 million of line availability increased our projected line of credit is partially due to the build out of the remaining for.
From last quarter are reduced or increased line of credit is primarily due to the announced incubator at Cira Centre. We also projected net debt to EBITDA will remain at a range of six 3% to six 5%.
Variable between timing is the development activity.
And our debt.
To JV will be in the 42% to 43% range and we anticipate our fixed charge ratios will remain and three at three seven and our interest coverage around for <unk>.
I will turn the call back over to Gerry.
Tom Thanks.
So I guess the key the key takeaways.
Our portfolio and the operational platform is really in solid shape and.
Our team has done a really a wonderful job of getting excellent visibility into what our tenants for thinking.
How they're reacting to the return to work timeline and we're doing everything we can to aid them in that process, including as we've mentioned on previous calls doing a number of pro Bono space planning exercise is to make sure that they have.
The option of kind of evaluating how they want to reconfigure their space. Our leasing pipeline does continue to increase as tenants start to re emerge from that.
The work from home mentality.
Safety and health.
Issues, both in design and execution are really becoming tenants top priorities, we're hearing that from more and more prospects and we really do believe that.
New development in our trophy level inventory will benefit from this trend.
A good a good data point that is the pipeline and our development projects increased by 23% during the quarter evidencing that real focus of flight to quality and I think strategically we look at our.
We have some.
Very robust for growth drivers that remain very much on target we have to fully approved mixed use master planned sites that can double our existing inventory diversify our revenue stream and drive significant earnings growth, our planned 3 million square feet of life science at <unk>.
Development can create a real catalyst to accelerate the overall pace of the development of Schuylkill yards, we have a very very attractive CAD growth over the last five years and have created a very well covered and attractive dividend that is poised to grow as we increase earnings private equity is abundant and the <unk>.
Debt markets are incredibly competitive evidenced by the 65% loan to cost of Schuylkill yards West and strong operating platforms like Brandywine are gaining significant traction.
For project level investment as evidenced by.
The really strong activity, we had in our broad more marketing campaign.
Our partnership with Schuylkill yards, West reinforces that more and more smart investors are beginning to focus on the emerging life science market here in Philadelphia, and I guess as usual, we'll end, where we started which is we hope you all are doing well and you and your families are safe.
So with that Sir.
The open up of Florida questions, we do ask that in the interest of time, you limit yourself to one question and a follow up thank you very much.
Thank you to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.
Our first question comes from the line of Craig Mailman with Keybanc capital markets. Your line is now open.
Hey, good morning, guys.
Gary just curious on the commentary around improving kind of tours in the pipeline are you seeing any geographic concentration.
Concentrations of better strength or even weakness.
George and I will tag team that Craig and I hope, you're doing well, which is actually kind of interesting you know it's one of the when we look at some of the data points.
Actually our highest level of virtual tour activity.
By a by a wide margin occurred.
In Philadelphia CBD.
It was probably one of the markets that we're in it had the tightest returned to work.
<unk> lines in place, but that was followed by the Pennsylvania suburbs again.
Evidenced by the restrictions in this in the Commonwealth of Pennsylvania, and then met.
Med D. C came in third in terms of the overall some of the views and then Austin was.
In last place there, but but George maybe you can add some color to the dispersion of the pipeline.
And just quickly Craig on for.
Physical towards kind of the same same dynamic.
Philadelphia outpaced physical tours by 120%.
In the first quarter.
The pipeline again is.
Somewhat evenly dispersed.
Some of that has to do with the amount of inventory that each of our regions have so we don't have.
As much inventory in some market says as others Gerry mentioned that between $16 76, and $23 $40 that pipeline in.
In Northern Virginia is about 600000 square feet and.
CBD.
Again, we kind of outside of our pipeline E. Commerce is kind of outside of our quoted pipeline statistics since it's technically in the joint venture, but the pipeline continues to build at Commerce, It's right now about 120000 square feet.
On both the Macquarie and reliance give backs and in traditional CBD again, we're seeing good activity on.
The upcoming rollover by Comcast Decker and Baker.
Okay. That's helpful and just I am kind of curious relative to past downturns.
Is this kind of a normal pattern that you've seen where.
Towards of increases quickly and do you think just the increase availability of space broadly and some of your markets, whether it be sublease or direct.
Do you think that Theres, a lot of double counting as it seems like a lot of brokers and companies are saying that tour activity is up pretty meaningfully for them. Do you think it's just do you think it's really increased pool of tenants for tenants are looking at a broader swath of space and so there's a lot of overlap in terms of what people are seeing.
Yes, Greg that's a great question again, George and I'll tag team it.
<unk>.
How much for any of us have been through a downturn like this because we literally had the the.
The breaks on activity for almost.
12 months with the only real notable.
Deliveries being.
Lease negotiations that were in process. So.
I think when we talked to a lot of brokers in all other markets. I think there is an expectation that there will be a significant ramp up as companies are really now beginning to focus I think for the first time.
Two a programmatic returned to work timeline, so so I know that even down in Austin.
The amount of sublease space has gone down based upon reported results.
Levels of activity.
Certainly.
Much stronger in the first quarter.
Then they were in the.
In the fourth quarter with a real acceleration.
Month by month during the first quarter.
I know when we look at our pipeline and kind of assess the pace of deal flow. It seems as though a lot of tenants who are in the marketplace really fall into two categories one.
They need to get out and start taking a look at office space, but they don't really have any time pressure to make a decision, but theyre trying to think through what their decisions might be in the next nine to 12 months, but then we're also seeing a fair amount of tenants, who do need to make a decision.
<unk>.
In the near term and we're seeing some of those timelines be get increasingly compressed, but George what else can you I think one of the other dynamics that were seeing theres, a theres a number of.
Tenants that are kind of out looking at everything from existing vacancies to sublease opportunities because they are now going through the.
The need or the desire to reconfigure their space and so they have taken a little bit maybe of a wider look than maybe they would have traditionally and I think.
Obviously different than just a financial crisis rebound I think coming out of a pandemic and health and safety.
Workstation locations and turning radius within the space I think all of those things have led to to an increased level of interest both virtual tours physical force et cetera.
Great. Thanks for the color.
Thanks, Craig.
Thank you. Our next question comes from from the line of Manny Korchman with Citigroup. Your line is now open.
Hey, Jerry you mentioned.
I think the way you framed it was pro Bono space planning I don't know if thats for existing tenants or for new tenants or the like but what's coming out of those exercises for as you go through those.
What interesting tidbits or lessons are you coming up with with how space may change now.
Yes.
When I think we have an in house space planning firm and some very good relations with some outside firms.
A number of months ago, we moved to create a tenant communication we're able to.
Suggest to our tens of any of them wanted to.
Go through a space planning exercise that we would help them think through that through our internal resources without charging them and I think the results have been all across the board I think that the trend line has been that.
Tenants are definitely looking for a higher percentage of private offices.
More circulation patterns hi.
Higher.
Profile and larger workstations.
Maybe multiple.
Gathering areas versus one central Commons.
And I think George in terms of the numbers that we've had a couple of expansions come out of it yes, I mean, just during this past quarter, we executed.
Two expansions with within the existing tenant base both out in the Pennsylvania suburbs, we've got two others that.
We've actually advance to <unk>.
For lease amendments with.
And again it was just a matter of they needed to take down a little bit more square footage.
Really more and how they wanted to alter their.
Physical space as opposed to just internal growth within their business.
Yes, I think one of the other data points for we're hearing many and I'm not sure if you'd see this through the other companies you follow but.
There is a lot.
Continued distance over what percentage of employees will be on <unk>.
Near or full permanent work from home.
And we've talked for a number of leaders of our 1200 tenant base and we've seen that thought process evolved significantly over the last 12 months for certainly more and more companies are recognizing the value of having people together physically and I know just anecdotally in conversations I've had with some large companies where they are.
Been targeting X percentage of employees are going to be all work from home, they're getting a lot of pushback I think they are hearing the employees would like the optionality of working from home, but not being permanent work from home employees and even nodes that are in either one of those categories are creating.
A lot of pushback about giving up a place in the office for them to come to when they return to the office so.
It's why I was saying earlier.
Three quarter plus type of transition as companies really start to think through how they're going to number one sequence people back in but then once people are in what they think the durability of concern is about the.
The COVID-19, its impact on the workplace.
Thanks for that and then just on the Maryland deal you are now.
Adding another sizable project for the pipeline you've got Schuylkill going on you've got brought more what youre going to bring in a partner you have now committed to new mass I guess you'd call. It a master plan development.
Just how do we think about a capital funding for all of it and B Y Y introduce Maryland for the mix when it hasn't been.
Core market for you or you don't have a standing relationship or hadn't as of yet like University of Maryland.
Yes. Many thanks, it's a great question and thanks for for.
For raising from.
From our perspective, I guess, our experience has been working with universities are solid long term business that can generate both value creation and fee opportunities for us.
And given our work with a number of other universities, we've developed a bit of a franchise in this area. So we have a number of universities always reaching out to us.
To bid on Master plan worker provides consulting services and.
Guess, what we're saying is universities and health care systems are often seeking outside help to think through their real estate strategy. So they can add value to their franchise and from from Brandywine perspective, engaging with these types of organizations really create great connection points for us within the entire University system from <unk>.
Ministration to faculty Board members, who tend to be business and civic leaders community groups that do business with the with the University and it really has been a great source of business development for Us <unk>.
Community and tenant networking.
And what's interesting is now a lot of these universities are now becoming incubator spaces for a number of companies that they plan on spinning out so when we looked at the University of Maryland opportunity.
It is it's obviously a prestigious university with a dinette with some very very dynamic growth drivers.
Particularly in quantum computing.
And as we assess the staging of that opportunity with the rest of our pipeline the transaction with Maryland is obviously much smaller in scale than schuylkill yards or broad more.
We have at least a year plus to go through an approval process.
Before we could even contemplate starting ground, we have a lot of flexibility under our transaction with Merrill Lynch.
<unk> development subsidiary Tarpon development company.
So we have real flexibility in terms of when we start a project and part of the project construct as we would not start that without a significant pre lease.
The returns we've underwritten there through our through all of our due diligence are the same as schuylkill yards and broad more I E around 8% for office and mid sixes for residential.
And as I mentioned, we can build this out in phases. The first phase will only be about $100 million again with the heavy pre leasing and as I did touch on I think there.
There's a tremendous amount of private capital out there that is.
Very focused on doing business with companies like Brandywine and in proven locations like University ecosystem. So even on the residential component of that transaction Manny we've already been approached by a number of companies looking to take that on as either investing partner.
<unk> in its entirety so.
We think it's a good long term value driver for us.
You that differently than just a one off investment in Maryland in the Maryland marketplace that it's really tied into an overall university system that has a lot of growth potential.
And maybe one last one for me.
You talked about more more conversion space for life science.
<unk>.
Given that those are.
The converted space is very much in an office building.
When you say life Science do you mean that the tenant is going to be in the life science sector and using it for office space do you mean.
<unk>.
Life Science in terms of R&D space like when you and maybe others in the space used that term life science. It can mean, a whole bunch of things. So when you were talking about life science conversion.
And this is different for the ground up stuff, but for the convergence what do you mean, when you say we're converting.
Whatever it was eight floors for force for life Science.
Yes, I think as we contemplate it I'll give you a couple of specific examples within just seara.
Yeah.
A good portion of the 47000 square feet. That's been leased during the conversion is primarily office by a life Science company.
Our incubator, which is 50000 square feet that will have.
Essentially a 170 <unk> biology benches, and private labs 43, chemistry labs, all have a small component of co working and.
About 15 private offices, Thats, primarily real lab space.
So when we talk about it generically and looking at the balance of that conversion opportunity, we're targeting that being somewhere around a 50 50 office and lab split.
Does that does that answer your question.
Hey, Josh Thanks Terry.
Okay Manny thank you.
Sure.
Thank you. Our next question comes from the line of Anthony Pallone with Jpmorgan. Your line is now open.
Thanks, Good morning.
Jerry you emphasized this flight to quality that seems to be unfolding can you give a little bit more color on what that means in terms of whether it's building services Submarkets and also whether it.
Moving the line so to speak in your own portfolio of bad debt.
Brings about more non core assets that might have to be sold in the future.
Yes, Tony.
Good to hear from you and George and I will tag team. This as well I think when we when we talk about a flight to quality. It really revolves around a couple of key pieces. One is what the existing building infrastructure is relative to all the mechanical electrical and.
Other factors vertical transportation speed.
The level of filtration systems.
Fresh air intake, if you think about it from our production cycle. It's all of the items that used to be on page 47 of a 50 page RFP, which you are kind of the technical specs.
Now on page two or three.
So every major company and actually the larger the company the more acute the level of examination is on what the building can physically present from a platform standpoint, so that's kind of 0.1.
<unk> two is they're really looking for the level of on site management expertise I E. The quality of that building an operating engineering staff.
Qualification of the property management teams.
Because I think this pandemic has really shown a true bifurcation of landlord service delivery platforms and.
Those buildings that have really high quality on site management with the technical expertise by the operating engineers really fair much much better on that evaluation points.
And then those that don't.
So the idea of having an incentive.
E ownership based on site management is becoming a point of increasing examination third point is.
The inquiries relative to.
The capital investment program and the preventive maintenance programs that these buildings can present the perspective tenants tenants now again are very keenly focused on.
Not just the building today, but does this owner have a track record of actually reinvesting in physical plant to make sure that.
Those elements of the space that are very important to life safety et cetera are demonstrates for a long history and I know George you have anything else for yes.
Further adding onto that I think sometimes also are just the amenity programs that you can build and provide within those buildings.
Just based sometimes merely on the fact that some of the trophy buildings are bigger than others and there's just a flight to quality for for all of those things but.
The capital investment I think is a key part of it that Jerry touched on in <unk>.
We put between six and $8 million of kind of base building capital upgrades into our portfolio on pretty much an annual basis in that range is everything from hvac's elevator to restroom renovations parking lot upgrades lighting.
Filtration change.
Systems and the like so I think it's that commitment the service level that we can provide that really.
And then also kind of Submarket location I think some sub markets, obviously have a predominance of that so we feel good about our radnor portfolio and that the fact, it's one of the trophy.
Inventory sectors of the Pennsylvania suburbs.
And I think Tony.
The second part of your question, but I think one other thing we look back over the last several years within the within the company I mean, we've done.
A pretty effective job in moving a lot of the lower quality inventory out of our portfolio.
And I think that was evidenced by the last transaction that we did see a joint venture and we kind of view those as kind of non core for us in terms of our wholly owned operating platform. So.
I mean.
Tom George Dan and I and the rest of the team are always constantly evaluate on a quarterly basis the relative to the relative performance of every building within our portfolio and what we need to do to either reinvest capital to change the NOI trajectory or whether and if we do that.
Can we actually change the NOI trajectory or should we look to move that so I think that will always remain a part of our of our capital allocation strategy to look and identify on a relative basis within our portfolio what will be the laggard performers in terms of growth and capital ratios and look to move those out but.
As we stand right now we think we have the portfolio in an extremely good position to respond and every one of our submarkets to tenants.
Increasing focus on this quality issue.
Okay. Thanks for that and then just.
My other one is on television and fees I think you talked about debt should drive 10 cents of earnings can you just.
Refresh us on how many square feet that is what those are just to track that.
10 cents.
Specific blocks.
Sure absolutely Tony.
We've identified within the wholly owned portfolio. These are basically nine suites.
Suites.
Slash buildings, the largest have been $16 76 down in.
And Tysons so.
We've got about 175000 square feet left to lease down there.
Yes.
Next largest is a 40000 square foot block.
In Radnor.
Formerly.
A.
<unk> Center, we've got lease negotiations going on on a backfill use for that.
36000 square feet still down in Austin, Texas that was formerly <unk>.
For <unk> at <unk>.
One Barton.
We had a full for a full floor block at two Logan that we've now leased so that's kind of come off the table and.
We have a 25000 square foot block out in <unk>.
And Plymouth meeting and so all in all it's about 400000 square feet.
<unk> lease.
About 100000 square feet of that thus far.
And we only had 200 of that 400 in our 21 business plan. So.
Halfway done with what we had in the 'twenty one plan the balance of it obviously is slated for.
For fall into the 'twenty two plan, but we're doing everything we can to put that space away today and just solidify the.
22 NOI.
Okay, great. Thank you for that.
Thanks, Tony.
Thank you. Our next question comes from the line of Jamie Feldman with Bank of America. Your line is now open.
For a little bit about net effective rents and where do you think if you think about your major markets CBD Philly suburban Philly Austin.
How much you think they'd move during the pandemic and where are they now you think they are stabilizing some more color on for Matt.
Key topic.
Yes, Jamie good morning, this is George.
During the pandemic I would say they really haven't moved much at all.
I think some of that.
Is.
Some tenants looking maybe for a little bit more of a free rent package and trading that off for the Ti package.
We continue to kind of assess the entirety of the concession package weigh that up against.
Length of lease term the bumps.
Sometimes we've seen deals where the bumps may be slower at first and larger on the back end to kind of preserve that net effective rents but.
Pan pandemic specific we haven't really seen a deterioration in net effective.
So just to get from you are saying, they're pretty much where they were.
Late 19th.
Yes.
Okay and this is across every market.
I would say, yes for the most part I mean I think.
Where youre, sometimes most challenged is this where you're you've either got one big blocks of vacancy you're trying to move where you've got you know.
An overwhelming amount of sub market.
Vacancy that you are competing with so we've seen a little bit.
In Tysons.
Where it's got a little bit more competitive.
But we kind of assess that as the pipeline builds we kind of know where we need to be to make deals and.
And we pivot accordingly, when we have to.
Yes, I think Jamie just to add to that.
One of the things we are keeping a watchful eye on is.
Is that really it has an impact on net effective rents, but is that really driven by the pandemic or demand drivers. It's really it's been the.
<unk> and construction costs.
We have seen price of steel lumber a number of other construction materials class.
Really really ratcheted up quite a bit.
And that as we go through certain tenant pricing exercises for space.
Ti cost may come in north of our target.
And that may create some downward pressure going forward, but it's not necessarily rent.
Rental concession per se due to the pandemic, it's more a function of.
What we're hoping will be.
Our transitional blip in construction pricing.
Okay. That's helpful. Thank you.
And then you had talked about doing.
Maybe 24 months forward view.
On explorations are there any new move outs that you guys were thinking about before that have popped up or that people have given you.
Noticed that.
No there really aren't I mean, the list has kind of remained the same and we can continue to chip away at that.
So yes, no no new ones.
The larger ones that we've spoken about.
With Comcast, we've got pipeline on two of those three floors.
Deckers.
Two for give back in 'twenty, one we've got pipeline on that we've got.
Active deals to backfill all of the Baker give back in the first quarter of 'twenty two.
So really 'twenty one 'twenty two.
Pretty good shape, it's really.
Three leases over 10000 square feet in 'twenty, one and for leases over 50000 square feet in 'twenty two.
Okay alright, thank you.
Thanks, Jamie.
Thank you.
Our next question comes from the line of Steve <unk> with Evercore ISI. Your line is now open.
Thanks, Good morning.
Jerry I was just wondering if you could comment a little bit on Austin.
It seems like debt market has been a big beneficiary of a lot of movement, whether it's for.
For any either.
I'm surprised maybe the pipeline isn't a little bit stronger demand isn't a little bit better either for some of the developments or maybe speak for by then what are your expectations for leasing in Austin over the next 12 to 24 months.
Sure Steve.
Look we think.
The pipeline in Austin continues to build.
I think the first quarter numbers. This is a market wide commentary not just brandywine I think there was a level of discipline with the first quarter leasing numbers coming through Austin.
But based on very recent conversations not just with our team, but with other market.
Prognosticators Theres, a big pipeline coming tour level is way up in fact, there are.
Some some comments relative to.
It being back to pre pandemic levels.
Just through February.
Austin's created 800, new jobs and head of opportunity Austin there is.
18, new companies in the queue.
Who have located to Austin 21 company is expanding.
I mentioned.
We've seen a tremendous upsurge in activity at four O. Five now that building is done lobbies pretty much complete sky lobbies pretty much their garage is ready to open.
We're getting a lot more traffic through the building is ready to be late at night, So it's getting to be much more of a recognizable.
Stopping point on on on tours.
So we've seen the number of tourists tick up hopefully that translates into an increasing pipeline when we take a look at.
Our broad more development there are a number of larger tenants in the market and we're certainly talking to a number of those no assurances those deals will come to fruition or we will make them, but we are in the freight for every major deal in the marketplace.
I think in the southwest for Gosh. It is I think.
We're still waiting for some of that tour level activity to pick up.
But generally we're feeling very good about where we are in Austin I think the.
For a five we think has a convertible pipeline that will put that project in good shape as we enter 'twenty two.
With the marketing launch of broad more particularly with the commencement targeted the residential start we think that will show real activity at broad more and we think that will generate even more activity coming to the office building. So we're very encouraged.
Tracking both through our own very talented team the key brokers in the market conversation with other business leaders, including the chamber opportunity Austin and political leaders, we think Austin is in a very good position with.
A lot of.
Ms outside of Austin looking at Austin as a potential place to go.
Great. Thanks, and the second question, maybe just going back to your construction cost comments and kind of increase in steel and other.
Inflation pressures how are you sort of looking at some of the near term development starts whether it be $31 51 are the developments abroad more.
Have you kind of re cost it out those projects and based on current rents today do do those deals still pencil for you.
Yes.
<unk> I think Steve.
We take these projects all the way through.
For construction documents, 100% Cds were doing iterative pricing all the way through so we can value engineer properly and then once we get the kind of pencils down the drawings were pricing, including now let's talk about gcs, but also.
The pool of sub contractors and it's a fairly dynamic process. So we're staying in very close touch with all of the various subs trades and gcs on every one of our development projects.
And what we've seen thus far is while there's been some upward pressure, we've been able to keep within the relative band all the projects still working and certainly as we price things through with the Gcs, we asked them to give us a.
Pricing metric based upon us, giving them and notice to proceed within the next three and six months. So we've got a little bit of a forward window.
Two.
What we think the pricing would be a quarter or two from now we also have a team that tracks all the futures markets. So even while steel on a spot basis is up over 20% in some of the commodity levels steel components futures are down. So we're certainly talking to a lot of steel fabricators.
Just doing the same thing on pre cash curtain wall.
So it's really kind of it.
Ongoing daily process by our construction team and development professionals staying on top of all the major component parts of every one of these buildings and.
I think as we stand here today I think we're in pretty good shape across the board.
Great. Thanks, that's it for me.
Yeah.
Thank you Steve.
Thank you. Our last question comes from the line of Daniel Ismail with Green Street Advisors. Your line is now open.
Great. Thank you just a quick one for me weighted average lease terms came in below recent averages I'm curious if that was just day.
Related to several large leases or.
For more in these terms are to be expected for the rest of the year.
Sure.
Yes. This is George.
Great question and it really is just based on kind of the volume of deals and what we had in this first quarter, leading to that 3.3 year average lease term is.
Last last year during really the.
Start of the pandemic, we started reaching out and did a number of one year extension two year extension leases.
Where.
The end result of that that lease then commence with its extension during the first quarter of 2021 so.
We had done.
A one year extension with Decker at Cirrus Center for 12 months a year ago. So you had 109000 square feet with only a 12 month term that kind of really skewed the commencement for this quarter and now we've also.
Further extended them.
And that lease will be reported in first quarter of 'twenty two when it naturally commences so.
It was really just the.
A combination of one large lease in a number of others that were just short term in nature.
Kind of just expand extend explorations as a result of the pandemic.
Okay.
Okay. As you look at the rest of your pipeline and discussions with tenants there is no.
The answers choice to reduce lease terms as a result.
Sure.
Yes.
Dan Youre, commenting kind of did you ask if there was a.
A part of our strategy was to do shorter term leases.
Apologies I'm, hopefully I'm coming in better now.
My question was related to our tenants consciously deciding to lower lease terms and as a result from the pandemic for the rest of the pipeline.
Yes.
Can't say that they are I mean, I think again, sometimes it just comes down to each individual tenants kind of comfort level on how long they want to go but we.
So we're still seeing.
Larger deals still wanting that 10 to 15 year lease.
Lease.
Period, sometimes they will want to negotiate an early termination sometime throughout that term but.
That's no different than it was pre pandemic.
Just add Dan I'll, just add on for George as companies look we take a look at our our development pipeline for all 10% to 15 year proposals.
It is not meeting any resistance at all at this point.
I think the theory behind your question I think that that's a <unk>.
Remains to be seen depending upon when we get full visibility into the overall market.
Whether some tenants will all will be more of a mindset to do three to five year deals versus.
Longer term deals.
We certainly have the flexibility to do that within our business model.
But it's all about how you maintain the same as.
The level of net effective rents we've had some very good success with some of our prebuilt spaces.
Offering flexible lease terms on that so there is clearly.
A subset of the tenant universe that will pay a premium for a shorter term lease and that premium.
Can be more than adequate compensation for the incremental capital.
Look we're already seeing that just even at the incubator location, we're offering anywhere from one month deals up to multiple years and in the proposals the team has out.
The level of premium.
Tied directly correlates to how short the term is so we think that will be it will be a key part of every office company's business plan going forward I, just don't know how big it will be or how durable that trend line will be because we're still seeing from a number of large companies that we're talking on the development side, they still want to have their corporate to their home.
There are cultural platform.
And we're not seeing any kind of additional request for expansion or contraction rights for even as George touched on anything that deviates from historical norms on the early termination process.
Okay. Thank you.
Yes.
Thank you.
This concludes today's question and answer session I would now turn the call back to Jerry Sweeney for closing remarks.
Great well. Thank you all for participating in today's call. We look forward to updating you on our business plan activity. Our next quarterly call and in the meantime, please stay safe and healthy. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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