Q2 2022 Brandywine Realty Trust Earnings Call
Welcome to the Brandywine Realty Trust second quarter 2022 earnings Conference call. My name is Hilda and I will be your operator for today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press the real one on your Touchtone phone.
I will now turn the call over to Mr. Jerry Sweeney, President and CEO . Mr. Sweeney you may begin.
Hilda. Thank you very much good morning, everyone and thank you for participating in our second quarter 2022 earnings call.
On today's call with me as usual 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 assurances that the anticipated results will be achieved for further information on factors that could impact our.
Anticipated results. Please reference our press release as well as our most recent annual and quarterly reports that we filed with the SEC.
Well since our last call. Our economy has seen record inflation continued global supply chain disruption and a dramatic increase in baseline interest rates.
These conditions have created significant cost increases and uncertainty in the equity and debt financing markets at least in the near term.
Our portfolio stability evidenced by our low forward rollover.
<unk> protection from operating expenses expense increases on 81% of our leases.
And that positions us as best as possible for this changing environment.
Our operating and development business plan remains on <unk> remains strong and very much on target. While overall return to work has been slower than we would like we are benefiting from a decided tenant focus on quality.
We continued to experience higher physical occupancy.
Our portfolio.
Our highest level of density being in our Pennsylvania suburbs in D. C operations tenant interest in high quality work environments is accelerating which.
See that every day in our tour levels lease negotiations and deal execution.
Fact, 32% of the new deals in our operating portfolio pipeline, our tenants looking to upgrade from lower quality lesser monetize buildings.
During the call. This morning, Tom and I will review second quarter results provide an update on our 2022 business plan and our guidance after that Dan George Tom and I are available to answer any questions.
During the second quarter, we exited 686000 square feet of leases, including 423000 square feet of new leasing activity. We also posted rental rate mark to market of 18, 4% on a GAAP basis.
Seven 8% on a cash basis.
Our full year Mark to market range remains at 16% to 18% on a GAAP basis, and 8% to 10% on a cash basis.
<unk> for the quarter was positive and tenant retention was 70%.
Second quarter capital costs were in line with our business plan range core occupancy and leasing targets. We're also within forecasted ranges and we ended the quarter 92, 1% leased and 89, 6% occupied.
It's further worth noting.
Our Philadelphia, CBD University City, Pennsylvania, suburbs, and Austin portfolios, which comprised 93% of our NOI are combined 93, 8% leased and 91, 9% occupied.
Our spec revenue target remains in the range of $34 million to $36 million with $33 7 million or 96% the midpoint achieved this.
This speculative revenue range represents approximately one 8 million square feet of which one 6 million has already been leased so 89% done on that metric.
The portfolio is stable and our forward rollover exposure through 2024.
Average of seven 2%, which ranks that six out of 17 office rates further our annual rollover through 2006 is below 10% ranking of seven out of 17 office Reits.
From an <unk> standpoint, we posted first quarter results of <unk> 35 per share, which was <unk> <unk> above consensus estimates and then looking at our 2022 guidance, Tom will articulate in greater detail, but the bottom line is our original 2022 business plan projected.
Interest expense between 70 and $72 million, we have met that assumption for the first half of the year.
However, looking to the second half due to the rapid increase in short term rates our interest expense.
<unk> our share of joint ventures will increase by about <unk> <unk> per share.
So while our operating plan remains fully on track based on the rise in interest rates, we are narrowing and adjusting our <unk> range from $1 37 to $1 45 per share to $1 36 to $1 40 per share and as I mentioned, Tom will articulate more detail on that in a few moments.
Based on our 2022 leasing activity and development spend we continue to project our debt to EBITDA range will be between six 6% and six nine times.
That leverage increase the majority is transitional coming through that attribution, particularly on the development side.
So to amplify that point, our core EBITDA range remains between 6.63 times.
By eliminating our joint venture in active development and redevelopment projects.
As we mentioned on the last call. We believe this is a more accurate measure of how we manage our core stabilized portfolio.
Looking a bit ahead, despite the ongoing skepticism onboard office demand drivers our leasing velocity actually remains fairly encouraging.
During the second quarter fiscal tour volume equaled first quarter levels with overall volume up over 30% from our previous year.
Virtual tour volume was up 27% from the first quarter and our total leasing pipeline is $4 8 million square feet broken down between one 4 million square feet on our operating portfolio and $3 4 million square feet on our development projects.
The one 4 million square feet leasing pipeline on the existing portfolio is up 100000 square feet from last quarter with approximately 130000 square feet in advanced stages of lease negotiations I.
I should note that as an example of building velocity out of last quarter's pipeline, we executed 430000 square feet of leases, while during the quarter, adding over 500000 square feet of new prospects to the current pipeline.
Also 32% of our new deal pipeline, our prospects looking to move up the quality curve and we did experienced this trend in terms of leases executed during the second quarter were 67% of the new leasing activity, we executed where flight to quality tenants.
The leasing pipeline on our development projects.
Is it three 4 million square feet and that did increase over half a million square feet or 28% during the second quarter.
Deal conversion rates in the second quarter was up to 38%.
From 33% for last quarter and another good sign is it tenants continued to accelerate their decision timeline. This past quarter. The median deal cycle time improved by an additional week and is now within five days of our pre pandemic levels.
From a liquidity standpoint, even with our targeted development spend and absent any other financing yourself sources, we anticipate having $300 million availability under our line of credit and along those lines during the quarter. We did renew both our $600 million line of credit and our $250 million term loan on very.
In terms to those that were previously existing.
<unk> 76 per share annual dividend is well covered as a very attractive yield on our current stock price is accompanied by a 54% <unk> payout ratio.
And looking at capital allocation, we made progress on several fronts. We continued during the quarter and will continue to sell non core land parcels during the last quarter, we sold our land parcel in the Riverfront district of DC generating a $3 $4 million gain we also sold some non core bill.
<unk> and land in New Jersey, generating an incremental $800000 gain.
And looking at our development opportunity set our remaining Brandywine net funding obligation on all of our active development projects is just about $110 million, our equity requirements on Schuylkill yards, West and Uptown ATX block a it's fully funded we have 24.
$4 million to fund on our new start at $31 51 market the balance of that remaining funding requirement really tie directly to leasing activity.
During the quarter, we did commence the redevelopment $23 40 Dulles corner that property is 85% leased under an 11 year lease and we anticipate completing that project by the fourth quarter of 'twenty three.
405, Colorado made incremental progress during the quarter. We're now 91% leased based upon the 'twenty two fastest square feet of leases that we that.
That we signed during the quarter, we have two leases out for final execution that will completely fill the building.
So we are happy to deliver that project at our original anticipated yield.
250, King of Prussia, ROE, which is our first life science delivery and the Radnor Submarket is now over 36% leased.
Current pipeline totaled 237000 square feet.
And we're making great progress as that building approaches final delivery.
And looking at our development of Schuylkill yards in Uptown ATX.
Suitable yards west.
Which is our life science office residential tower on time on budget for a Q3 'twenty three delivery project is that we will continue to deliver a 7% blended yield.
As I mentioned, a moment ago, our entire equity commitment is fully funded our partners' equity investment is also fully funded and the first funding of the construction alone recently commenced.
You may recall in Schuylkill yards, we can develop out 3 million square feet of life science space and is another step towards realizing that vision. We are excited to announce the start of our 31 51 market Street project a.
440000 square foot dedicated life science building the.
The building has an estimated cost of $308 million will deliver a yield of seven 5% and we're targeting a second quarter of 2024 completion, our leasing pipeline on that project right. Now is over 400000 square feet. We have obtained an equity commitment from our existing.
Institutional partner at Schuylkill yards, and the $31 51 structure is consistent with our existing Schuylkill yards West project with Brandywine, having a 55% ownership stake in our partner, having a 45% ownership position.
Looking at that Uptown ACX block a the first phase of our 66 acre development is underway construction. There is also on time and on budget.
And we certainly anticipate that.
That project will continue to generate additional leasing activity as we go through the development pipeline in fact, even this early in the process our leasing pipeline stands at $1 6 million square feet.
In addition to <unk> ongoing developments, we have seen an increase in tenant interest in several of our build to suit projects and we are exploring several opportunities in both the Pennsylvania and Austin regions.
Two key points just to close out our development discussion is our on our forward pipeline is our low land basis per se are and our product diversity.
Of the $14 2 million square feet that we can build only about 25% as of.
His office with the ability to do between three to 4 million square feet of life science space and over 4000 apartment units. Furthermore, the overlay approvals we have on both of those Master plan communities gives us a degree of flexibility to further adjust that mix to meet market demand drivers.
Our key takeaways on the development pipeline is a very quantifiable forward funding basis, low land basis, low carrying cost demand driver flexibility and product diversity.
And in terms of generating additional liquidity, while 2022 business plan does not incorporate any additional dispositions, we do anticipate being active on these fronts, we anticipate continuing to sell select non core land parcels.
And even with the recent volatility in the debt markets. In particular, we believe that we have ongoing opportunities to harvest profits from the sale of several properties as such we are currently testing the investment market with several assets for sale.
Obviously volatility in the debt markets over the last 45 days of slowed that process, but we remain confident of being able to generate additional liquidity over the next several quarters. We also anticipate the sales of select properties out of some of our existing joint ventures over the next four quarters dollars generated from me.
These activities will be used to fund our development pipeline reduce leverage and redeploy into higher growth opportunities.
Tom will now provide an overview of our financial results.
Thank you Jerry our second quarter net income totaled $44 5 million or <unk> <unk> per diluted share and <unk> totaled $60 5 million or <unk> 35.
Per diluted share <unk> <unk> above consensus estimates some general observations regarding our second quarter results of our second quarter results were above consensus we had some moving pieces and several variances to the first quarter guidance on G&A, it's $1 7 million below that forecast primarily.
Due to the timing of expenses and we have not changed our range for the full year.
Folio operating income totaled approximately $69, two and was slightly below our first quarter guidance of $70 million land gains were above forecast by 600.
600000, due to a higher gain on the sale of our New Jersey portfolio, our second quarter fixed charge interest coverage ratios were three seven and four <unk>.
Respectively and sequentially below the first quarter results are in line with our forecasted results.
Our first quarter annualized net debt to EBITDA was seven four above the high end of our range. However, we are not changing that range at this time.
Looking at our guidance for the rest of 'twenty two as Jerry mentioned, we narrowed our guidance ranges for both net income and <unk> by $4 a share. In addition to that narrowing our guidance. We also reduced the midpoint of the guidance by <unk> 10.
<unk> per share the reduction is due to the higher interest expense based on we issued guidance the interest rate curve forecasted at that time for the third and fourth quarter were 71 basis points and 92 basis points, respectively. Current curve is higher by approximately 175 basis points in the.
Third quarter, and 240 basis points in the fourth quarter.
Two that we have.
Have an anticipated floating rate debt, averaging $500 million in the third quarter and $695 million in the fourth quarter, which includes about $148 million of JV floating rate debt in the third quarter and $125 million in the fourth quarter, our fourth quarter increase in floating rate debt is primarily.
Due to the $260 million term loan, which is fixed through mid October 22, and floating thereafter, and partially offset by cement placed caps and our joint venture.
<unk>.
We believe there will be.
Portfolio opportunities to mitigate some of the floating rate interest through hedging and potentially asset sales that will lower our line of credit balances.
Looking to the third quarter of 'twenty two we have some following assumptions our portfolio operating income will approximate $71 million and will be above the second quarter as we anticipate net absorption to continue through the balance of the year.
<unk> contribution from our own consolidated joint ventures will be $6 5 million for the third quarter.
G&A will remain unchanged roughly at $8 million.
Total interest expense will increase to $919 million, primarily due to the anticipated higher rates and capitalized interest will approximate $2 million.
Term fee and other income will approximate $2 million net management fee and development income will be $3 5 million and we do have a land gain sale.
And tax provision that will that around $1 5 million.
Refinancing activity as Jerry mentioned, we did recently refinanced 600 million of credit through June of 2026, and our $250 million term loan through June 2027 on very similar terms to the current facility.
Looking at our capital plan fairly straightforward and totals $200 million, our 2022, CAD payout ratio will continue to be 84% to 95% and likely be at the higher end of that range. The 22 range is above our historical run rate, primarily due to higher capital costs associated with higher leasing activity in our <unk>.
<unk> and joint venture portfolios.
<unk> uses for this.
Remainder of the year at $74 million of development and redevelopment projects $65 million of common dividends.
$30 million of revenue maintain and $20 million of revenue, creating capex and.
$10 million of net equity contributions to our joint Venture's primary sources, our $90 million of cash flow after interest $81 million use of our line of credit and 29 million cash on hand.
Based on the capital plan that lineup of our line of credit balance will approximate $300 million at the end of the year, leaving 300 available this needs to be adjusted or sit where we have $330 million, we will be adjusting and re posting that sip. This morning.
We also frankly, our net debt to EBITDA range of six 6% to six nine with the main variable being timing and scope of our development activities with regards to liquidity, we have ample capacity through our line of credit we do expect to invest an incremental $96 million and our active development projects after 2022.
And our plan is to complete targeted asset sales later this year and into 2003 that lower that line of credit balance.
We anticipate our fixed charge ratio to be approximately three five and our interest to be three eight.
A slight decrease from the prior quarter and our net debt to JV will be between 40% to 41%.
We believe these ratios are elevated due to our growing development and redevelopment pipeline and we believe they are transitory and once these developments are stabilized they will they will decrease to further highlight how the investment in future developments impacting our current leverage metrics as outlined in our development page. We currently have 300.
$97 million invested in development projects that are providing none or minimal 2022 earnings.
At $397 million investment is at one four times increase to our leverage at the end of the quarter.
We anticipate those projects generating $57 million of cash NOI over time and are confident on reaching those stated investment yields. Once these active projects are stabilized we re forecast we forecast that that leverage will go back down into the low six range as mentioned above we plan to partially offset the current development leverage was.
Some targeted sales in 'twenty, two and 'twenty three.
While the above development activity takes place. We included an additional metric of core net debt to EBITDA, which was $6 six at the end of the quarter, which excludes our joint ventures and active wholly owned development projects.
I'll turn the call back over to Gerry.
Great Tom Thank you very much.
So just to wrap up key takeaways are but we're very mindful of the.
Of the tone on the office market and the impact of returned to work in hybrid work schedules.
And we're working on that Battle every day I do think we are seeing some very encouraging signs that evidenced this real flight to quality and I think the real bias on a lot of large and small employers are making sure that they provide the right physical platform to execute their business plans and our portfolio is in <unk>.
I'll, let Jay we have excellent visibility for forward growth as I mentioned earlier, our average rollover is very low through 2024 actually through 2026 with strong mark to markets very manageable and Demonstratable capital spend and accelerating leasing velocity.
Our forward growth drivers remain.
Increasing NOI out of our existing portfolio and executing our development pipeline.
So as usual.
Where we start and that we really do wish all of you and your families are doing well and having a chance to enjoy the summer and with that we're delighted to open up the floor for questions. As we always do we ask that in the interest of time, you limit yourself to one question and a follow up thank you very much.
Hilda.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your Touchtone phone.
If you wish to be removed from the question queue. Please press star zero to <unk>.
If you are using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press star one on your Touchtone phone.
And we have a question from Anthony Powell, Hello, <unk> from J P. Morgan. Please go ahead.
Thanks, Good morning.
Good morning. My first question is relates to Jerry you mentioned, 32% I think in the pipeline working for.
I guess improved space or highway monetize space can you talk a bit more about specifically, what they're looking for and maybe perhaps the type of space. They are coming out of and whether they are keeping the same footprint shrinking.
Exactly is changing there.
Yes, George wanted pick up on that yeah, Tony be glad too I mean, we're seeing the predominance of that flight to quality coming more from the B b inventory. So in downtown Philadelphia kind of taken the jump from from B inventory up to trophy.
But even in the suburbs, we're starting to see tenants.
Tenants taken advantage of.
Space opportunities that we have in Radnor conshohocken.
Even Plymouth meeting coming out of some of the.
Second to your Submarkets in the suburbs.
I think it's the knot.
Not only the management of the buildings, but its the building systems the elevator systems HVAC systems.
Technology within the within the buildings.
Overall.
I think the majority of those tenants are probably dialing back.
So a little bit, but but nothing I would say significant maybe five.
10% reduction in <unk>.
Footprint.
The typical build outs.
Our second quarter kind of special.
Analysis on pretty much the same.
We had been trending kind of 65% workstation, 35%.
Offices.
During the second quarter, we kind of saw that trends to.
60, 40, so not a dramatic shift between workstation and office, but.
A little bit more space planning.
Focused on.
Pathways, and turning radius and things along those lines, but again nothing of significance to the general footprint.
Yes, I think just to add on to that Tony.
Certainly quality of landlord location of building.
And also a demonstrated track record of capital reinvestment in the projects I mean, some of the highlighted items. In addition, what George mentioned with the.
The real keen focus on HVAC vertical transportation systems are really a very.
<unk>.
Christopher focus on.
More interior de lighting, which typically comes from higher ceilings more glass.
Some level of indoor outdoor component, we're certainly seeing that in our new development projects, where full service amenity program.
<unk> is very attractive to both office life science and.
And residential tenants structured parking is becoming a key issue now that have the ability to have covered parking so.
All of those things are more prevalent in portfolios like ours are key parts of every one of our development projects.
Think that's.
Those items as well as I think the reputations that respective landlords have our key decision points as tenants make their.
Final determinations.
Got it thanks for all that.
And then just for Tom.
You laid out the pieces of the floating rate debt and the cost impact to guidance, but just thinking bigger picture like where do you where do you think you should be over time in terms of the amount of your debt floating and also thinking about it as we start to look into next year, because you have some bonds.
Coming due earlier.
And the year as well.
Yes.
So sorry on the on the on our floating rate debt piece I do think that we will look at.
At least on the term loan is a good example, I think that is something we will look to fix what.
It would be now or in the future as we take a look at the curve, which has been moving pretty pretty volatile, but we do I do think we should be above 90% on our floating on our fixed rate debt and we will get back up into that level, which is where we historically have been I think the combination of the.
On the wholly owned portfolio on the JV portfolio I do think we will continue to float.
As we as we do development in this way as we have some of these joint ventures. So that one will probably stay in the same range that it's in now, but we have mitigated a little bit of that with some caps and hedging.
We've already put in place.
Alright, I think on the bonds, Tony we will probably look to refinance those I'm not sure if we're going to refinance them with 10 year bonds, but we're monitoring the market and we will probably look to refinance those with public bonds early next year.
Okay. Thanks for the color.
Thanks, Tony.
Thank you. Our next question comes from Jamie Feldman from Bank of America. Please go ahead.
Great. Thanks, and good morning can you talk more about the <unk>.
Development and redevelopment start just kind of what gives you conviction here I know that.
You've got pretty good leasing and redevelopment, but just kind of what gives you conviction on starting projects here in terms of the leasing outlook and maybe even more importantly, the cost outlook and what have you done in these projects to kind of hedge against inflation risks.
Yes, a great question, Jamie a couple of things so on the.
First on the cost side I think as we've talked on previous calls we don't start anything unless we're fully locked and loaded on the costs. So for example.
Jamie on on.
31, 51, we've executed.
A guaranteed maximum price contract with the general contractor, we know very well.
We are close to 89% bought out at the sub trade level, we do build in contingencies, both within the GC contract as well as at the owner level to make sure that we can account for any kind of last minute changes take place but.
We're very focused on running all of our projects, including kind of the prospective development pipeline.
All the way through the entire design development process and as part of that we're pricing two to three times before we kind of put pencils down so even in that number that Tom outlined that close to $400 million number on the <unk>.
Development investments some of that money is basically four design development work on projects that are next in the queue to make sure that we're fully locked down the cost equation.
In terms of the and happy to add any additional color to you on that point.
Yeah on the conviction for the starts I think they really come from a couple of different vantage points. One we know the markets very well.
We have great great recon and visit billings, what we think that both the current and prospective pipeline is so in the case of our redevelopment at $23 40 that obviously was conditioned upon getting that 85% lease done.
We will complete that over the next couple of quarters.
Oliver that building and that creates that will create a good capital event opportunity for us with that building.
And certainly having that building, which would have been previously vacant now 85% leased which is the two top floors to lease things puts us we think that puts us in a very good position to.
To generate either a great NOI stream over the next 11 years or great capital event sometime in 'twenty three.
In terms of $31 51.
Combined pipeline, we have for both Schuylkill yards West and.
And then the $31 51 store, it's very strong it's very diverse in terms of size of tenant.
Type of sponsorship that institutional public company established company. So when we take a look at where we think the timing requirements. These prospects are theyre very keen on delivery timelines, which us starting the project gives us the ability to meet.
The other thing is you may take.
As you know we've taken to account is taken a look at the forward supply pipeline and certainly one of the opportunities. We have here at Schuylkill yards is to be able to kind of preempt maybe some future development starts by competitors by starting our project given the existing pipeline. So we kind of assess all of those risk factors as they go.
Through the equation to actually make the decision to start the project Uptown ATX.
Certainly theres always a lot of construction in Austin, Texas.
And every product type, but I think from our perspective, knowing the full range of.
Of development capacity, we have at Uptown ATX, starting that office residential component of block gay.
We have already got over a million plus square feet of prospects in toe for the 350 fastest square feet of office can Panzer. So right now we're frankly evaluating do we break the building down for single floor tenants or hold off for a larger scale tenant which tends to take a little bit more time to go through the gestation of.
<unk> process.
So hopefully that answers your question.
Yes. Thank you very much and then just it sounds like Youre, considering some additional asset sales.
How should we think about the potential impact on earnings for the back half of the year, maybe even into 'twenty three.
Do you think can you mitigate the dilution or do you think thats actually downside to numbers.
Our hope as we go into all of these things is.
Is to minimize the dilution we do think we have a couple of assets that we're marketing for price discovery, neither a fairly low cap rate sales.
Yes.
Couple may go to users we may have other other joint ventures against sell out of so the game plan there Tony as to kind of sequence those sales into manage the dilution as much as we can but then also balance that against.
Optimal pricing is while this liquidity generation.
Okay alright, thank you.
Thank you.
Thank you. The next question comes from Michael Griffin from Citi. Please go ahead.
Hey, it's Michael Bilerman here with Michael Griffin.
Jerry just to sort of step back and just think about sort of the enterprise as a whole.
And you talked a little bit about that.
Lease rollover, and how thats more or less than peers.
Talked a little bit about the development, adding accretion, but when you look at the right hand side of your balance sheet.
You have not only the exposure on the floating rate side, which you've addressed in this year's guidance, but you have $1 $8 billion gross.
Rolling over the next two and a half years of which your share.
Is $1 1 billion you got $1 1 billion in the JV, then you've got $700 million.
The two bonds that come due one early next year and $1 24.
When you look at that right.
55% of your debt book and you are more highly leveraged than your peers.
44% on a net effective basis.
Would appear as though.
Everybody was issuing debt in the last few years to refinance upcoming maturities.
You guys sort of spat skill and.
I'm, just trying to better understand sort of risk mitigation on the balance sheet side, because it would appear.
Have a significant impact on earnings as you refinance some I know youre going to get development accretion, but it will largely be offset by the dilution from refinancing on top of the dilution from potential asset sale.
How should investors think about.
The risk.
This is posed to the enterprise today.
Hey, Michael It's Tom just to start off I think on the on the <unk>.
Maturities, we do have.
We do have two bonds coming due $3 50 each.
And we're going to look at how the markets play out that the rates have gone up significantly spreads have not moved in fact, they've gone out further so we are going to have to monitor where that is those sponsored coming off just below 4% and we're probably looking at financing somewhere in the 5% area, depending where the market is.
And what kind of weak in those bonds that I assume we will refinance both of those bonds.
With with new public debt and at current levels.
There will be some dilution youre right on the on the other things that are maturing for example, like our commerce square, which is $200 million.
That one is.
As well under Levered and we haven't we've already been out in the market looking at debt to that and we feel we can we could refinance that at not too dissimilar number at the same level or actually put in some good news capital and couple of the other ones like that series square, we deliberately put some short.
Term debt on it based on where the markets were when we bought that property and we feel very confident with the IRS in there that we could refinance that property as well there are some others that are there I don't want to go into each one of them and that could certainly do that another point.
Like a 1919 is internal loan that partners have made that can easily be extended so.
And then hopefully Michael we're going to do some asset sales our line of credit as you know in the past has been minimal to actually having cash on the balance sheet. So.
And we haven't done sales has been a bit of time, so I think that thats.
Something we will look to do to bring that line balance down now that its extended and to the extent we didn't do some financing in the prior year's listen we did look at those financings, we weren't watching the bond market.
Hindsight, maybe we should have done something earlier, but we were looking at a lot of it.
Make wholes that hasnt been made on those bonds and people are paying a lot of money to do that and then at that time, we didn't think it was.
We're spending all the extra cash to prepay bonds and thought there was something that we could.
Mitigate that and look at doing them in 2022, Unfortunately the markets have.
Gone out quite a bit and you can look back and say, maybe we should have done some of those bonds earlier, but I think we can still refinance them.
And we will look to minimize the dilution from those as well just by being very proactive on time et cetera.
It would just seem that from a balance sheet management perspective, how do you leave yourself exposed with 55% of your total company debt rolling in two five years.
At a time when interest rates were at their all time lows.
Like I understand all the things on an operating basis and you're excited about the developments, but if youre going to give it all back from interest and take the risk on that I, just don't know when do when do earnings ever come out and it just feels like every year, there's just something else coming about that takes numbers down.
And I, just I'm trying to understand why the company put itself in this position.
Have their backs against the wall with such dramatic amount of debt coming due at extraordinary low rates.
Let's get some for some of that debt going into 'twenty. Four we didnt have 24 months I don't know that I would say, we got our back against the wall. If you go back to the beginning of the year, Michael we've looked at where those interest rates, where they ran up dramatically and I'm not going to forecast where interest rates are going.
But we do have 24 knots to refinance them our coverage ratios are in great shape, So we're going to be able to refinance.
Those rates are will find out but they did move a lot quicker than we thought but I don't think I would I would characterize it as our backs up against the wall with some of these facilities and what we're going to be able to finance.
More so from the fact that you just talked about how youre lying with more drawn than you'd like it to be most companies run a zero balance on their line and use it during the quarter. You. Obviously your equities constraints you can issue equity youre talking a little bit more land sales, but all you have done this year is take on more capital commitments and raise leverage rather than the other side. So.
It is what it is and I guess as we progress into 'twenty two 'twenty three 'twenty four we will have to better understand as you refinance $1 $1 billion of your pro rata share of debt that's under 4% how much of an impact that will take away from all the good leasing and development project leasing that's coming about.
Thank you.
Thank you the next question.
Okay.
I'm sorry.
We will take the next question comes from Brian <unk> from Evercore ISI.
Please go ahead.
Hey, Thank you.
Jerry you talked about physical Occupancies and I think you've mentioned the highest utilization levels in Philadelphia suburbs in D. C. Did you talk to tenants what are your expectations for utilization levels into the back half of the year do you think those numbers kind of topped off given hybrid work adoption.
Yeah, Hey, George and I will tag team.
I think we can.
It's interesting we actually the more conversations we have directly with tenants the more encouraging news seems to be in terms of then bringing people back.
Three or four days a week.
We really haven't as we've talked on previous calls.
Had any one focus on our hotel in concept, there's clearly a desire for more efficient space lay average George kind of framed at how we see some of the space planning working.
We're continuing to see kind of an incremental uptick in people coming back into the offices.
Actually that one of the slowest marks we have and people coming back to US really is the is down in Austin, Texas.
Thats.
A high concentration of tech companies and <unk>.
They seem to be slower than the financial service and the professional service companies in terms of bringing people back into the office certainly the healthcare related companies have been back.
So we actually it's something.
Myself and some of the other senior folks here.
And there seems to be this general bias to continue accelerating bringing people back to the office I do think it'll be somewhere in that 3% to four days a week for.
For the most part.
And I think to some degree that will be a function of labor market conditions specific industry exposure.
Even within companies, we're seeing different ground rules for different functional areas. So those those.
These are in very high demand like.
Hey.
We're certainly seeing more flexibility with more tenants to have the right people.
<unk> work remotely, but George any other color on that yes, I think the one thing we're seeing.
Part of it is probably also influenced by the summer, but Tuesday Wednesday Thursday, right now is kind of the height occupancy days was lower.
Lower amounts Monday.
Friday as one would imagine it expects but.
Even those companies that have rolled out voluntary return to work, we're starting to see increased.
Tom work environment, they have sometimes they do just wanted to get back to collaborate so I think.
We kind of keep.
Keep moving the goalpost, a little bit, but I do think end of summer, we'll really be kind of the next.
What happens after after labor day, and I do think it just requires a couple of.
Ceos to kind of just flip.
Flip the gauntlet down and say Hey, it's time to come back and I think youll start to see.
Each industry sector kind of follow the lead.
Okay. Thanks.
And just on the incubator Jerry can you remind us I think there were a couple of floors that you'd plan to expand there and is that still on track and I guess what are you seeing what are you hearing from these tenants and how are you monitoring the health of these tenants and their appetite to expand just given the pullback in funding that we've seen.
Yes, we are monitoring them daily and they all seem to be doing pretty well, so but certainly we're mindful of the fact that.
With the index the pump the other public company index down, 27% and some of the venture capital pullback that Theres certainly.
Certainly higher risk that some of these tenants.
We are.
We're seeing some.
Near term expansion requirements by some of those tenants.
As you know.
The <unk> lab is 50000 square feet.
We've got 12 companies and there were 98% leased and we do anticipate based upon feedback from those tenants somewhere between.
80 to 150000 square feet of future demand drivers there over the next 12 months to 24 months.
So, but certainly the point you raised is a fair one that's top of mind for us as well, which is with some of this.
Some of this pullback in.
Kind of more negative macroeconomic overtones.
Very closely tracking.
These tenants are doing how their trials are going how their capital base is growing their burn rate.
And that's really where our partnership with <unk>.
Biotech has been helpful as well.
They know the science I know these companies so we can assess them.
Through the window that we know real estate, they can help us assess the future viability and growth expectations for these tenants from a from a scientific and talent standpoint. So it's been a very effective partnership on that front, which the last piece of your question. We do plan on expanding the incubator.
<unk>.
<unk>.
Contrary to some of the negative arbitrage, we're actually trying to work with trying to move some office tenants into other buildings.
Where their leases don't expire until the mid part of 'twenty three so to some degree our timing of delivering that additional square footage is going be a function of how we can relocate those tenants we do have some.
Work, taking place on one of the floors within sphere to facilitate some.
Known tenants I would expect that to take place over the next several quarters.
Alright, Thank you very much.
Thank you.
Thank you. The next question comes from Omar.
Tayo Okusanya from credit Suisse.
Please go ahead.
Yes, good morning, everyone.
Could you just talk a little bit about the build to suit you mentioned that you mean, you may actually start something on that front.
A little bit about where that demand is coming for build to suit and specifically interested in maybe if it's coming from the lab biotech side.
And also just how big that opportunity could be in the near term and how that would potentially be funded.
Certainly happy to answer that.
The build to suits I alluded to.
Primarily in some of our production assets that are kind of in the 101000 to 150000 square foot range.
They.
They are would be potentially full building users on 10% to 15 year leases.
Element is really an elective decision so I think as we look at.
The landscape today, certainly having those smaller buildings locked away from it for tenancy standpoint would be attractive.
One one key prospect, we're talking to is a life science company.
Who is looking for a significant expansion opportunity.
And the other was a.
A larger regional relocation and consolidation of some existing older space when you're looking at kind of creative.
Our newer corporate image.
And to do that.
And to do that in a newer building that has all the amenities that seem to be top of mind for all key tenants now.
Great.
Theres projects.
Capital standpoint are kind of in the $75 million plus range.
Can deliver those within.
Typically.
Four quarters could be four or five quarters, depending upon the complexity of fit out so the delivery cycle between the investment of the money and the recovery of the of the NOI is much less protracted than were seeing on these on these larger scale developments.
Gotcha. Thanks.
Thank you.
Thank you. The next question comes from Bill Crow from Raymond James. Please go ahead.
Hey, good morning. Thanks, Jerry can you just highlight the pipeline for life science buildings.
Phil.
What the risks that we may see some overbuilding given some of the challenges VC funded.
Smaller company for me to answer.
Yes sure Bill.
As we're looking at the pipeline. We have there are a number of properties that are excuse me currently under development.
There have been several that have been announced.
And.
The.
We're not sure that some of the ones that have been announced will actually get the financing or the tendency is to actually get the project started.
So right now theres, probably four or five core competitive projects between University City Science Center.
Down to Philadelphia Navy yard, which tends to be lower rise low rise projects.
There tend to be more manufacturing versus lab space.
And then there is theres a number of other properties that are kind of between.
The Navy yard, the Nir and Pennsylvania suburbs.
<unk>.
CBD Philadelphia that are either being talked about bill is life science conversions pending getting a tenant in place.
We're starting the design development process. So so look we're very mindful of the fact that.
Life Sciences.
It seems to have more clarity to the demand drivers than traditional office. So a number of office developers or holders of land that was deemed to be office or looking at life science opportunities now as we kind of assessed our risk.
We do think that schuylkill yards, given our location.
Next to the train station adjacent to the major institutions.
Next.
Two interstate highways or location.
It tends to be top tier.
And based upon the feedback we've gotten from the prospects that we are talking to today, we know that that locational drivers very important in addition to that when we took a look at a design level on a project by $31 51, we'll be introducing some.
Some technical components that building in terms of riser HVAC capacity vibration dynamic lazing oversized elevators with a higher speed things that Philadelphia market really hasnt seen before and we think that those design elements and the efficiency that footprint. In addition to the location.
Advantage.
<unk>.
In a very good position to attract more than our fair share of tenants to fill these buildings up.
I appreciate that comment.
And if I could just.
And another question on the return to office rate.
I use the capsule systems data you may disagree with the data itself, but it shows Philadelphia at 38% at short Philadelphia.
38, 1% December 1st which would imply no real improvement, but I'm wondering if a disagree with the data or be maybe you could tell us what's going on with parking revenue.
And maybe how far below what it is from 2019.
Yeah sure Bill this is George I'll be happy to let me look the capsule report.
It's <unk>.
Hit or Miss kind of market to market I mean, we monitor our own turnstile data fourth quarter.
'twenty, one we were about 25% and we're currently at about 40% right now so we are kind of.
At that capsule number, but we actually were a little bit lower than their number.
So we have seen some improvement.
Parking is a good <unk>.
Segue, because we are seeing.
Those people that are coming in.
Predominance.
Are using the garage is that we have in both commerce square over at Logan Square and <unk>.
Couple of other ancillary garages within the city I mean, our our garage occupancies are.
About 92% and.
And we're just about all the way back to kind of pre pandemic parking revenue numbers.
Okay. Thanks.
Thank you Joe.
Thank you and we have a question from Michael Griffin from Citi. Please go ahead.
Hey, Thanks for taking the follow up and excited to be on the call just.
Just curious on the $23 $40 redevelopment why does that makes sense to own as opposed to you know exiting the greater DC market entirely and focusing on an Austin or Philly.
Yes look I think that's a question that I alluded to that I thought in my in one of my answers where look the building for us.
What was had a major tenant move out and sat vacant for a period of time, we were successful in attracting a.
A major time was actually the largest lease done in northern Virginia. This year.
And the game plan is to essentially.
I'm pleased that renovation.
With the high probability of creating a capital event there.
I think as you may know from Luke.
Looking at the company, we have sold a significant portion of our DC portfolio over the years and it's now down to.
A fairly small percentage of our revenue stream I think with a $23 40.
We're definitely seeing that that is an opportunity to harvest some significant liquidity.
On a building that for all intents and purposes, you need to look as almost as a land play right. Now so it's really not generally actually generating negative net NOI for us through the current clubhouse or selling that building would actually generate.
It has significant liquidity event for the company Okay.
And you can go back to kind of the debt refinancing question that gives us the ability to generate a fairly significant amount of money with.
No earnings dilution and at a cost of capital that layers very well into our refinancing program that will add over the next several years and we think we frankly I have a couple of those opportunities within the company, where we have company properties that are.
Frankly like for sale.
Could be in joint ventures are wholly owned that we can generate fairly low fares.
Fairly high proceeds off a fairly low cap rates of the buildings are generating fairly low returns to us right now and they are good value add acquisitions for other companies that can actually layer into the financing strategy, we're going to lay out over the next 12 to 24 months.
Got you I appreciate the color on that and then I also noted that.
Sublease space in your portfolio ticked up slightly sequentially to three 3% kind of how should we expect this to be trending sort of going forward and sort of what led to the slight increase quarter over quarter.
Yes, I mean, this is George I'll take that one.
I think it's probably going to continue in that low single digit.
Obviously sublease space.
No.
It requires a little bit of <unk>.
Term to it.
We attract somebody.
I think we've got a number of tenancies, who.
With desire to sublet their space, but again I think given the term and the like just have not been successful to date, so but again I think based on our historic run rate.
I still think it's a low single digit.
Proposition for us.
Okay. That's it for me thanks for the time.
Thank you.
Thank you and at this moment, we show no further questions I would like to hand, the call over to Mr. Sweeney for final remarks.
Great. Thank you very much and thank you all for participating on the call. We look forward to making continued progress in our business plan and to updating you on that at our third quarter conference call enjoy the rest of the summer. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Please standby for your debrief.