Q4 2022 Brandywine Realty Trust Earnings Call
The conference.
Okay.
Good day, and thank you for standing by and welcome to the Brandywine Realty Trust fourth quarter 2022 earnings call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will hear an automated message advising you. Your hand is raised to withdraw your question. Please press star one one again.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Jerry Sweeney President and CEO . Please go ahead.
Catherine Thank you very much good morning, everyone and thank you for participating in our fourth 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 Chief Accounting Officer, and Tom Wirth, Our executive Vice President.
And Chief Financial Officer.
Prior to beginning certain information discussed during our call may constitute forward looking statements within the meaning of the federal Securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.
Further information on factors that could impact oriented stated results. Please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC.
Well first and foremost we hope that you and yours had a wonderful holiday season and are looking forward to a successful 2023.
During our prepared remarks. This morning will briefly review fourth quarter results provide color on recent transactions.
Outline our 'twenty three business plan.
Tom will then review our 'twenty to your results and frame out the key assumptions driving our 'twenty three guidance after that certainly Dan George Tom and I are available to answer any questions. So quickly reviewing our 'twenty two results, we posted fourth quarter.
<unk> per share in line with consensus and full year <unk> of $1 38 per share, which exceeded consensus estimates by <unk> <unk> per share.
During the fourth quarter of 2002, we executed 226000 square feet of leases, including 142000 square feet of new leasing activity for.
For 2022, we leased one 8 million square feet of space, which compares favorably to both our volumes in 2021, and two and 2000.
More specifically looking at 2022 are new leases that we exited during the year exceeded our 21, new leasing activity by 11% was equal to pre pandemic levels that we experienced back in the fourth quarter of 2019.
We also posted rental rate mark to market of 21% on a GAAP basis, and 12, 5% on a cash basis, our full year Mark to market was just shy of 19% on a GAAP basis, and just shy of 10% on a cash basis.
Absorption for the quarter was negative by 123000 square feet now half of this negative absorption was the result of a tenant default in Austin.
Other half were known tenant move outs, which resort resulted in a quarterly retention rate below our annual run rate. So for the year, we did post <unk>.
Retention above our business plan guidance at 64%.
We did end the quarter at 89, 8% occupied and 91% leased which were below our targets and the previously mentioned tenant default accounted for about 50 basis points on each of those metrics and occupancy was generally a little bit lower due to anticipated <unk>.
Remember move into distillate into January and the sale of our four tower bridge property.
From an occupancy and leasing standpoint, our D. C portfolio continues to underperform and as such it's worth noting that our Philadelphia, Pennsylvania suburbs, and Austin portfolios, which comprised about 93% of our NOI are 91, 7% occupied and 92 seven.
That lease spec.
<unk> revenue of $35 $7 million exceeded the midpoint of our 34% to $36 million range.
As we look at it the portfolio was solid with a stable outlook as we noted in the supplemental package, we have reduced our forward rollover exposure through 2004 to an average of six 2% and through 'twenty six to an average of 7%.
Physical tour volume has also been encouraging fourth quarter physical tours exceeded third quarter tours by 50% and was also head of our fourth quarter 'twenty, one bias toward volume by 12% for the full year 2002, Our tour volume was over one 2 million square feet.
We also continued to experience tenants, taking advantage of opportunities to move up the quality curve during 2020 to over 600000 square feet of leasing activity was the result of this flight to quality in.
In addition, looking at our portfolio tenant expansions continue to outweigh tenant contractions.
As a point of reference in 2022.
Expansions totaled 325000 square feet, while contraction has totaled 132000 square feet. So almost at two five to one ratio of expansions ever contractions.
Our leasing pipeline of 3 million square feet is about $1 2 million on our operating portfolio and $1 8 million on our development projects.
On our operating portfolio.
It includes.
About 184000 square feet in advanced stages of lease negotiations.
So 41% of that pipeline, our prospects looking to move up the quality curve and in fact during the fourth quarter.
58%.
New leases, we executed were flight to quality tenants.
Looking at some financial metrics based on increased 2022 leasing activity higher EBITDA, our fourth quarter net debt to EBITDA ratio decreased to 7.0 times from seven two in the third quarter and as we've discussed this ratio transitional a higher due to our development spend.
And the debt attribution from our joint venture activity.
Yeah.
The more meaningful metric we track is our core net debt to EBITDA, which ended the year at the midpoint of our range of six two times.
And certainly in times of rate volatility and economic uncertainty leasing and liquidity are our two key benchmarks. So since our last call. We have made significant progress on both the financing capital recycling fronts by raising over $745 million of proceeds.
As previously announced in December we completed a five year $350 million unsecured bond offering at a seven 5% coupon. Those proceeds were essentially is to retire our February bond maturity.
In January we did complete our five year $245 million secured financing with a five five.
875% coupon, it's collateralized by seven wholly owned properties.
The note has flexible released in prepayment provisions after about two years and it's important to note. We took this secured route solely due to pricing differences between the secured and unsecured debt markets as we do plan to remain an investment grade unsecured borrower.
Also during the fourth quarter, we get actually to sales generating $130 million of proceeds the cap rates on those two sales were below 6%.
The team also swapped our $250 million unsecured term loan through its June 27 maturity date at roughly 5%.
So the results of all of these combined transactions significantly improves our liquidity our consolidated debt is 96% fixed at essentially a 5% rate we have no consolidated debt matures until our October 24 $350 million bond.
We also now have full availability on our $600 million unsecured line of credit and approximately $30 million of unrestricted cash on hand.
As we noted on page 13 in our Sip based on our full development spend projections, our 2023 business plan execution.
We're fully funding our remaining development spend all Ti leasing capital costs, we expect to have about $590 million of available capacity at year end 'twenty three.
Based on our business plan only $10 million of net usage during the year, so a very strong liquidity position.
Turning quickly to two to 'twenty three we are providing 23 earnings guidance with an <unk> range of $1 12 to $1 20 per share for a midpoint of $1 16 per share at the midpoint. The <unk> III <unk> projection is 23 per share below our 2002 <unk>.
The primary drivers are as follows our 'twenty three NOI will exceed 22 levels by $20 million or about 10 cents a share those improved operating results include contributions from 405, Colorado to 50, King of Prussia Road, and $23 $40 as well as higher <unk>.
<unk> same store results.
Dan This NOI growth, though is offset by $33 million or <unk> 19 per share due to increased interest expense on the recently completed financings.
We also had about <unk> <unk> per share decrease in our contribution from joint ventures, primarily due to higher interest rates and initial projected losses from several development projects coming online and not being stabilized until after 'twenty three.
We also anticipate about a four cent per share decline in other income.
As well as a <unk> <unk> per share decrease in projected land gains over the activity in 2022.
And Tom can certainly amplify those points in more detail. Our 'twenty three plan is headlined by two key operating metrics, our cash mark to market range is between 4% and 6% and GAAP Mark to market is between 11 and 13.
While these ranges are lower than our 22 levels. They certainly remain very strong and is primarily driven by the composition of our projected 23 leasing activity.
For example, during 2022, we had much higher leasing revenue contributions from CBD University city in the Pennsylvania suburbs for 'twenty, three higher leasing volumes have shifted.
Austin, Texas, given the high levels of occupancy in our core, Pennsylvania, Philadelphia markets are mark to market in CBD and University City will perform above our business plan ranges, while Austin given current market conditions and demand drivers are anticipated to perform below those ranges.
Spec revenue will be between 17 and $19 million.
With $10 million or 56% done at the midpoint.
<unk>.
The occupancy levels will be between 90, and 91% leasing levels between 91%, 92% retention rate will be between $49, 51%. We do anticipate same store NOI growth will range from zero to 2% on a GAAP basis and between two and a half.
The three five on a cash basis.
Capital will run about 12% of revenues, which is lower than two.
2022 results and based on increased 2023 leasing activity and the continued development and redevelopment spend we do project, our net debt to EBITDA to be in a range of seven <unk> to 773 with our core leverage between six to six five.
As the guidance point at the guidance midpoint, our current dividend of <unk> 76 per share rep.
Ah represents a 66% <unk> payout ratio and a 100% CAD payout ratio. Our business plan is we'll talk to a few moments does project between 100 $125 million of sales activity that could generate additional gains and more importantly, with liquidity need substantially addressed this targeted sale activity we.
Believe conservative underpinnings to our coverage ratios, we are keeping the dividend at current levels.
Certainly as the business.
This plan progresses, and we get more clarity on the economic outlook. The board will as they always do continue to monitor both our coverages and the dividend payout levels.
In addition to the financing activities that we've already completed we are actively engaged and plan to enter into a construction loan on our 155 King of Prussia Road project, which is fully leased and our $350.
31, 51 market Street project here at Schuylkill yards.
During the first half of the year during.
During 2023, we also have two joint ventures with non recourse loans maturing.
We are already well underway with the refinancing discussions for these loans as well.
First one is a $200 million loan on our Commerce square joint venture.
Very low levered financing with a significant current debt yield and we're currently in the market to refinance their mortgage we currently have over 15 lenders reviewing this financing opportunity. The second maturities in August of 'twenty, three and refinancing efforts with our partners are underway there as well.
As I touched on.
During the year, we are including a range in our business plan of between $100 million to $125 million of dispositions, we anticipate those occurring in the second half of the year.
And we anticipate to generate those proceeds will have between $2 million to $300 million.
Properties in the market for price discovery.
And looking at development, we currently have $1 $2 billion under active development of that our wholly owned development aggregates $302 million.
And is 30% life science and 70% office. This portfolio is 83% leased with a remaining funding requirement.
Outlining the Sip of $91 million when the joint venture front, our development pipeline approximate $930 million with a brandywine share of $500 million.
At full cost this pipeline is 31% residential 41% life science and 28% office.
Brand new clients remaining funding obligation on this entire pipeline is $4 million with $68 million of equity remaining to be funded by our joint venture partners.
Furthermore, as I mentioned on the last call other than fully leased build to suit opportunities. Our future development starts are on hold pending more leasing on the existing joint venture pipeline and more clarity on the cost of debt capital and cap rates.
Looking ahead, though we do plan to develop about 3 million square feet of life science space and upon completion of the existing properties. We will have approximately 800000 square feet of life science space and operation representing about 8% of our portfolio.
<unk> identified on page six in the Sip our objective is to grow our life science platform to about 21% of our square footage just a quick review of specific projects.
$3 40, our redevelopment project is now 92% leased with $45 million of remaining funding in <unk>.
At mid year coming online or at least of those leases 250 King of Prussia Road in our Radnor Submarket remains 53% leased with a strong pipeline of over 200000 square feet.
You will note in the Sip, we have increased our costs on this project as our original pro forma assumed a 50 50 office and life Science split the pipeline is now 100% life science, which while requiring more capital is also generating longer term leases at a higher return on cost.
And given the extended build out of the pipeline of several key prospects for life Science space. We are all socially the stabilization to Q1 of 'twenty four.
30, 25, JFK, our life Science residential tower is on time and on budget for delivery in the second half of the year.
We currently have an active pipeline totaling 472000 square feet, which is up about 75000 square feet from last quarter. The project continues to see more activity as construction progresses and the superstructure is now complete the window wall systems halfway up the building we've done over 120.
Hard hat tours, we also expect to start the delivery of the first block of residential units in the second half of this year. So all remains on schedule there.
$31 51 market or 440000 square foot dedicated life Science building is also on schedule and on budget, we have a leasing pipeline totaling over 400000 square feet, which again is up from Q3.
And as I touched on Georgia, we anticipate we will enter into a construction loan on this project in the second half of 'twenty three.
Uptown ATX block a construction in Austin is also on time and on budget.
On the office component our leasing pipeline. There is 500000 square feet that pipeline is down from last quarter, primarily due to two larger users putting their requirements on hold our focus up to that up to this point has really been on full building users. We're now shifting to a multi tenant marketing program.
So I expect that pipeline to build as the quarter progresses.
And to wrap up our commentary on the development pipeline look the key phrase and our forward pipeline as timing flexibility, we have a low land basis and product diversity of the 13 million square feet that we can build only about 25% it's hard to be office with the ability to do between three and 4 million square feet of life Science.
And over 4000 apartments or.
Our overlay approvals do give us flexibility to further adjust that next to meet market demands.
Our 23 business plan does include as I mentioned the 120.
To $120 million of property dispositions, we expect they will occur in the second half of the year.
While not really including many in our plan for 'twenty three we do anticipate continuing to sell non core land parcels and in looking at our joint ventures.
$458 million of our debt levels or about 19% of our total debt is coming from our joint ventures with about 416 million of that coming from our operating <unk>. Our 2023 plan anticipates recapitalizing several of those jv's. So our plan assumes we will.
Reduce attributed debt from operating Jv's by about $100 million of 24% by the end of the year certainly at $8 generated from these activities, we used to improve our existing strong liquidity fund, our remaining development pipeline reduced leverage and redeploy into higher growth opportunities, including.
As liquidity from its stock and debt buybacks on a leverage neutral basis, Tom will now provide an overview of our financial results.
Thank you gerrick.
Fourth quarter net income totaled $29 5 million or <unk> 17 per diluted share and <unk> totaled $55 7 million or <unk> 32 per diluted share in line with consensus estimates some general observations regarding the fourth quarter, while our fourth quarter results were in line with consensus we had a number of moving.
Pieces in several variances compared to our third quarter call guidance.
Our portfolio occupancy.
Palio income was up by $900000 above our third quarter guidance call, primarily due to overall portfolio performance being better throughout the portfolio.
Termination and other income totaled $2 7 million.
It was 800000 below our third quarter forecast, primarily due to budgeted other income.
Items that will occur in 2023.
Interest expense totaled $25 million or 2 million below our third quarter guidance, primarily due to the higher capitalized interest at our slower capital spend so our line of credit balance at the end of the year, which was below where we thought would be ex the bond deal transaction.
G&A expense totaled $9 1 million or $1 $1 million above our third quarter guidance.
The increase was due to a 1.8 million one time charge for the write off of acquisition pursuit costs, partially offset by lower personnel costs.
Forecasted one land sale to generate $800000.
Gain in the quarter, which did not occur we anticipate that transaction to occur in the first quarter, our fourth quarter debt service or interest coverage ratios were three 3% and three five respectively and net debt to JV was slightly below 40% our fourth quarter annualized net debt to EBITDA was seven <unk>.
And I had one turn 110th of a turn above the high end of our guidance, which was six six to $6 nine as.
As far as the portfolio changes we expect this year, we do expect that we will have four or five stabilize and become part of our core portfolio during 2023.
On the financing activity as Jerry outlined since our last call. We have made significant progress on our financings and capital recycling fronts in December 'twenty. Two we did complete the five year $350 million unsecured bond offering at seven 5% coupon and then January completed a five year $245 million secured for.
<unk> at $5, 875% and is collateralized by seven wholly owned properties. Those two financings raised $595 million at a blended rate of six 7%.
Yes.
Prior to the securing secured financing our wholly owned portfolio was completely unencumbered and we anticipate that will remain as is unsecured borrower. We will remain an unsecured borrower on future financings.
We also swapped our $250 million unsecured term loan through its June 27 maturity date, and our consolidated debt is now 96% fixed at just over 5% rate only or a floating line of only our line of credit and trust preferred securities are floating rate on the balance sheet.
<unk>.
Regarding joint venture that we're currently working on the 2023 maturities, including active marketing of our Commerce Square property. We also are already working on our 24 maturities with our partners to possibly extend the current maturity dates with existing lenders. While also considering some asset sales to lower leverage 2000.
'twenty three guidance at the mid point, our net loss, our net losses of <unk> <unk> per share on net income.
On a loss basis, and <unk> will be $1 16 per diluted share.
Just on the midpoint <unk> decreased 22 cents.
Per share as Jerry mentioned, the primary drivers being GAAP NOI being up we do.
The small increase the management fees, but we do expect other income to be lower interest income to be lower as a result of the sale of 1919.
Market Street in Philadelphia at our JV.
Interest expense is going to be upgraded $3 million or land gains are down $5 million in the JV <unk> is down 16, eight which is primarily interest expense that we anticipate happening due to higher rates, but also some of our liability management in terms of caps and swaps that will burn off.
We do also anticipate some initial losses, primarily on the <unk>.
Opening of our residential projects at Schuylkill yards West.
Our 23 or 2023 range was built on some of the following assumptions.
NOI will be $304 million, an increase of $20 million. Most of that is due to $23 40, and 405, Colorado, having incrementally higher NOI as we go through the year. We expect continued leasing of our life Science development at 250, King of Prussia to be about $5 million and we do expect about $3 million of net increase to the improvement.
On the same store portfolio, our <unk> contribution from joint ventures will total $8 million to $10 million.
And that is primarily due to lower income due to the higher interest expense G&A expense will be $34 million to $35 million and consistent with 2022.
As we talked about total interest expense will be about $105 million, we do forecast some use of our line of credit throughout the year, but as we have the asset sales hit in the later part of the second half of the year, we do expect that to bring the line down but there will be incremental expense during that time.
Capital interest capitalized interest will increase to $12 million as we continue our development and redevelopment projects and we have $2 million to $4 million of land sales program for this year. We anticipate we do anticipate further progress on selling non core land parcels and those numbers can change as we go through the year as well.
Termination and other income $5 to $6 million, which is below 2022 due to several anticipated onetime items and normal recurring activity in 'twenty two that we don't see happening in 'twenty three net management fees will be between 15 and $16 million and we do have the property sales as Jerry mentioned at the second.
Half of the year between 101 hundred $25 million, there or no.
Property acquisitions in our model, there's no ATM or share buyback activity in the model and we anticipate a construction loan on 155 King of Prussia Road, our share count will be approximately 174 million shares as we look at the first quarter of the year General assumptions are that we'll have about $73 million of property NOI.
<unk> contribution from our joint ventures will total.
5 million.
G&A will increase to $9 5 million. This is normal for the first half of the year as we have seen sequential increases due to our compensation expenses recognized and total interest expense will be $24 5 million.
Termination fee should be about $2 million, and we expect land gains to be about 1 million and a half.
From a capital plan perspective, our plants about $465 million, our CAD range as Jerry mentioned between 95 and 105%. The main contributor to the higher range is primarily due to lower earnings partially offset by reduced leasing costs.
As users are going to be $105 million for development and redevelopment. The primary uses are going to be for 405, Colorado.
250, King of Prussia Road, $23, 48, Dallas and some work on broad more infrastructure, our common dividend as $132 million revenue maintained should be about $34 million $60 million of revenue create cap.
Capital equity contributions to our joint ventures totaled.
Some of that will be the development joint ventures, but we also anticipate some capital contributions to our operating joint ventures, including Commerce square.
We had $54 million to retire the balance of our bonds in January and the primary sources are going to be cash flow from operations of $175 million.
<unk> secured term loan, which did close and generated 236 million of proceeds.
$18 million of our cash on hand, and about $120 million between the land sales as well as the program sales between 101 hundred $25 million.
Based on that capital plan, our line of credit balance will decrease by approximately $84 million at the end of the year, leaving almost full availability. We also projected our net debt to EBITDA will range between $7 73, and the increase is primarily due to the incremental spend on our development projects, which will have minimal income.
By year end, and our net debt to JV will be in the $40 to 42% range or additional metric of core.
Net debt to EBITDA will be 62% to 65% by the end of the year that excludes our joint ventures in active development projects, but will include.
Closed projects, such as 405, Colorado, we believe its core metric better reflects the leverage of our core portfolio and eliminates our more highly levered joint ventures, and our on stabilized development and redevelopment projects. We believe these ratios are elevated.
And due to growing development pipeline and we believe that as these developments are stabilized our leverage will decrease back towards the core leverage ratios.
We.
Anticipate our fixed charge and interest coverage ratios will approximate two seven times, which represents a sequential decrease in those coverage ratios primarily due to the capital spend but also the higher interest rates.
I will now turn the call back over to Gerry.
Tom. Thank you very much. So key takeaways are we believe the portfolio is in solid shape from an operation standpoint, our average annual rollover exposure through 'twenty. Six is only 7% were strong with strong mark to markets manageable capital spend and stable and accelerating leasing velocity.
Since last quarter, we are fully covered all of our wholly on near term liquidity needs for finance, our 'twenty three bonds.
I mentioned I mentioned earlier reduced our line of credit to zero presented and present, a baseline business plan that continues to improve our liquidity, while fully covering our dividend and keeps our operating portfolio on very solid footing with strong forward growth prospects.
As usual and where we started and that we really do wish you and your families well and with that we'd be delighted to open up the floor for questions. We do ask that in the interest of time, you limit yourself to one question and a follow up Catherine.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Okay.
And our first question comes from Steve Sochua from Evercore ISI. Your line is open.
Yes, Thanks, good morning, Gerry and Tom.
I guess I just wanted to start on the operating portfolio and some of the outlooks for leased and.
Core occupancy I know those numbers came in at the end of the year kind of below your original forecast and some of those numbers are expected to be flat or even up in 'twenty two.
<unk> got a lower retention ratio. So just trying to sort of square up your confidence level in kind of the new leasing pipeline to kind of hit your leasing and occupancy numbers. It seemed to fall short last year.
Sure, Steve George one takeaway, yes, sure glad too and good morning.
Look on that on fourth quarter occupancy, we did in fact come up short.
The tenant default in Austin.
Was 51 basis points.
We had another 42000 square feet or about 330 basis points.
Of occupancy that did occur in January but substantial completion.
The actual move in process.
<unk> did.
It did not occur in December so.
All in all.
We thought we'd probably be closer to $90, seven which would have been about 34000 square feet off of our.
91% bottom end.
The outlook for 'twenty, two is probably again close to up to a 90% average occupancy that.
It is really being driven twofold in Pennsylvania in CBD, Philadelphia were going to average about a 93% occupancy level for the year, but in Austin and D. C only an 82%.
And as Jerry mentioned in his commentary that's really.
Some of the dynamic that is occurring.
With CBD at 96% occupied for the year.
Contribution levels that we.
Will require anticipate out of Austin have risen.
They were roughly 16% of our square footage contribution in 'twenty, two and are now projected to be about 32% of our square footage contribution in 'twenty three.
The pipeline is relatively consistent with what we've seen in the past.
As it relates to Austin in particular spent a lot of our focus is there we have seen some good levels of tour activity, we do have.
Our lease out currently on about 12000 square feet of that.
That was defaulted and given back in December so, we're starting to see activity levels.
Levels already in that building so.
We remain positive we still believe in the growth characteristics of Austin.
Lot of our suburban.
Properties are somewhat insulated from the big Tech companies.
And we see a lot more of financial service and professional service.
Prospects in that pipeline.
Okay, and then maybe just quickly.
Yeah no. Thank you.
Just wanted to touch quickly Jerry you talked about the 1 million square feet on the development pipeline I know you kind of walk through $3 $25 $30 51.
It sounded like Austin.
<unk> was a bit slower, but can you just give us a little more color on the tenants that you're talking to the timelines like how many of these are new to Philadelphia for the life science assets and are the are the Austin tenants kind of new to Austin or are they expanding tenants and Austin I mean, obviously that markets.
Feeling some pressure with the tech slowdown, which you mentioned, but just any.
Any flavor on kind of in house tenants or end market tenants versus new to the market.
Sure happy to.
And looking at taking a look at the Schuylkill yards development, Steve which is really the $30 25, which is coming online later this year and then $31 51, which is about a year behind.
As I touched on the pipeline is up quarter over quarter.
The majority of the prospects are.
Yes, I can.
Growth of in market companies.
Several who are new to the Philadelphia region, but the larger square footage tenants.
Our consolidations from other areas around the city, but also coupled with.
Some significant expansion capabilities.
So that seems to be the major driver on the life science tenant base that we're talking to and Schuylkill yards.
Hmm and office standpoint, they're all kind of in region companies not all in city, but in reaching and companies looking to kind of move up.
The higher quality more <unk> projects and and just to touch on that for just one second for our jumped to Austin and we continue to be very pleased I know theres a lot of dissident sort of what's happening in the office sector.
We do continue to be very pleased with the level of new prospect activity that we're seeing across the board of tenants look to move from older into.
All it better higher quality better manage better run buildings.
That's a trend line that we've seen really for the last two years and we're in an interesting position because we have a very good high quality existing portfolio and then very good new developments and it's actually been quite pleasantly surprising to see the velocity of new deals coming into our pipeline.
Fine.
From a market companies, but are looking to really upgrade their stock and at this point, even with the economic uncertainty those tenants still seem to be willing to pay the higher quality the higher rents.
To get into those higher quality building, so we monitor that dynamic very.
Closely through our CRM software tools, our outreach programs to then actually tracking the pipeline on a weekly basis.
Relative to Austin.
We've really been focused thus far Steve on trying to find a substantial full building user and we had a number of those in the marketplace that we're doing a lot of towards with us and a lot of discussions and trading paper.
As I mentioned in my comments, a couple of those got really put on hold not dead, but put on hold.
So we are shifting our strategy there really from.
Try to find out one large tenant you would take the vast majority of that building to a couple of mid sized prospects. We have and then thinking about a multi tenant approach with.
We think that will be successful.
Certainly Austin has been a bit a little bit slower to return to the workplace and some other markets, we see that trend improving a bit but it certainly behind or other markets.
But even now we're saying that.
Big push towards towards the quality components of.
Block eight presents.
Did I answer your question.
Yes. Thank you that's it for me.
Thank you Sir.
Thank you and our next question comes from Michael Lewis with Lewis Your line is open.
Thank you.
You mentioned the <unk>.
JV debt maturing this year, including Commerce square and it sounds like Theres a lot of interest in lenders, even though we've obviously heard that financing can be difficult to obtain for office properties in general.
So maybe can you speak to the financing environment.
If youre able to share anything regarding what you might be expecting for for proceeds of pricing on those loans.
Sure Tom.
Sure.
Yes on that.
We're talking to a number of lending sources I think that.
Mike.
On the traditional lenders side, which are mainly are banks. We are seeing there has been and continues to be a bit of a pullback on there.
At that site.
For four new loans, new origination loans. So we are looking at some of the other opportunities whether it be maybe.
Maybe a securitized type loan or whether it would be one of the debt funds. So.
There are other sources other than just the traditional banks, although we have a couple of banks looking at it and I think if they were to do it it may be with a group of banks rather than that one single bank, taking this project due to its size.
Pricing is still a TBD I would expect.
Pricing, though it should be higher than where the debt is today and we will see how that progresses over the next month or so, but we don't really have a good handle on pricing, we're getting those quotes kind of in the near future.
Okay, great. Thanks, and then.
I read an article recently, arguing that Philadelphia suburban office market might be in trouble because the flight to quality is bringing those tenants into center city, you already talked about flight to quality a little bit.
But on the other hand, there is a theory more broadly that people are going into cities less so perhaps offices in the suburbs or are more easily commutable and better positioned post COVID-19. So are you seeing anything in terms of demand in the suburbs versus the city.
Do you think theres, a theres a shift that favors one strategy over the other I know obviously you're involved in both.
Yeah, Michael Great question.
Haven't seen a discernible trend line to tell you the truth.
We're expecting to see at certain points more people either moving into this if youre moving out to the suburbs, we really haven't seen that we've only seen a couple of tenants from the CBD move out to the city. We Conversely, we've seen a few tenants moved from.
Outside of the city into the city, so no real discernible trend line by tenant type or by.
Or by tenant size.
Bob.
We do continue to see.
Tenants focused on quality in both places and I think our.
Radnor portfolio and look to build to suit we did we announced.
On the Arkoma.
Radnor is a great example of a company a high quality company, great credit relative to upgrade the amenity space they presented their employee base.
They love the location of Radnor served by two train lines and access to two Interstate highway so I.
I think those basic location and quality predicates are in place whether it be in the city or the suburbs.
Our the percentage of folks returning to the office.
Is higher in the suburbs than it is in the city.
Even though in the city of foot traffic is back to pre pandemic levels during the workday.
Mass transportation is kind of on a very positive trend line. It seems as though and I know George you got those numbers, what kind of occupancy daily occupancy levels in the suburbs are higher than the city, but that has not been Michael a driver and locational decisions as of yet.
Yes, and I'd just add.
Add on.
In the suburbs, where seeing closer to 70% to 75% kind of back in the office we're.
In the city.
Probably on average closer to 50%, but again.
Still a number of large employers.
That have been even a little bit slower to kind of bring everybody back even on a.
Two to three day, a week hybrid plan.
Got it thank you.
Thank you Michael.
Thank you just one moment our next question.
It comes from Michael Griffin with Citi. Your line is open.
Great. Thanks, maybe we can talk on life science demand for beds, specifically 250 King of Prussia, you noted the stabilization was pushed back a quarter.
Suburban asset kind of further out from where you sit he as you kind of think of that core life science cluster down and down and CBD Philly just how confident are you that the demand is there for a product like this and any additional commentary you could give there would be great.
Yes, Im sorry, Michael confident on the demand at $2 50.
Yes.
Okay, Yeah, no I think we're very comp and I think the.
We were trying to market that project is kind of a hybrid life Science office.
And that's really was the predicate behind our kind of leasing assumptions and the capital costs.
So as I mentioned this quarter, we did raise our capital costs by about $20 million.
Did increase the yield bye bye bye.
Two tenths of a point to eight two.
Because as we've been marketing that in the building really just delivered recently, so it's and showcase condition over two tenants in there now.
It's really become a magnet for life science companies and we put it we've invested a lot of money into the infrastructure of that building.
It's really part of our kind of Radnor life Science Center, which has a few buildings in it and.
And the demand drivers there have been very strong.
The demand drivers, while they've been strong they have been a little frustratingly slow in making decisions, which is kind of seeing across the board.
But as we look at that pipeline, it's a full bore 100% life science some of the larger users. We're talking to Michael are they just tend to take a little bit more time.
Then, we frankly would like as they go through their technical requirements and space planning requirements. So just taking a look at the existing pipeline.
<unk>.
And when Theyre targeting their occupancy dates that was one of the drivers behind key drivers behind move into stabilization date back.
But Philadelphia is pretty fortunate where there seems to be some.
Strong life science demand drivers, particularly in University city here in close proximity to the anchor institutions.
But also some kind of hubs of life Sciences.
Activity in the suburbs, primarily kind of Radnor King of Prussia Carter.
As well as up further north in the spring House. So you have a couple of those suburban pods that have generated some very good leasing activity on the life Science front and then here in the city, what's been predominantly University city kind of between 30 and 30 <unk> Street.
And in market.
There has also been very good parts of primarily manufacturing low impact research based on an ADR and a few other parts around the city as well. So we were actually we remain very encouraged with the demand drivers we're seeing.
On the life science side in both the University city and suburban locations.
Got you.
That's definitely helpful. And then just on the tenant defaults in Austin can you expand on that a bit and are there any other tenants in your portfolio that that might.
Find themselves in a similar situation.
Sure Yes.
So yes this was a.
65000 square foot tenant at our Barton Skyway.
Project out in the southwest corridor, we had.
Has it been has had a kind of ongoing dispute.
With them over the course of 2022, they were one of our fully.
Reserve tenants.
Werent really having a negative impact on the.
22 business plan.
Due to the reserve but.
We just got to the point, where we got to.
A stalemate and.
Proceeded with the next course of action, which was.
No.
The default in the Wiktionary and we've now got the space back on the market and as I said, we've got a little bit of a pipeline.
Forming and do have one lease for about 12000 square feet.
That we're negotiating.
And I guess are there any other tenants.
You might be concerned could default.
Yes, really not at this time.
Not really at this time Michael.
Tom and his team along with our asset management folks.
Kind of go through the.
The accounts receivable.
On a monthly basis, and we're kind of always assessing.
Who's utilizing space versus not utilizing space and we think that at this time, we really don't have any any other risk from.
From that perspective, yes, Michael this is Tom jump in if a second we did as you go back even.
At the start of the pandemic and where people were getting.
Health and who needed it and where we're seeing credit issues.
For the most part.
We were fairly lucky in terms of not having a lot of defaults and in most of those where we did give relief we're more in the retail area than the office area. So we've been fairly.
Fairly good on monitoring that and we.
We do monitor the tenant's credit as we go through the year that our team does a really good job of that so it's nothing different than where we saw in the first pandemic. So we really don't have a lot. This tenant has been on our list is by far the largest one that we've been following so we really don't see any storm clouds.
Now that will lead us to think thats going to be any change in our current.
The collection rate.
Tenant collections.
Yes, no that makes sense I appreciate it thanks for the time.
Thank you Michael.
Thank you and our next question comes from Tayo Okusanya.
From credit Suisse. Your line is open.
Yes, good morning, everyone.
Just talk a little bit about just about the dividend given the guidance.
As a forecasting good dividend coverage on an fob EBIT because of anywhere between <unk> 95 to 105, so he gets really tight.
Just kind of curious how you kind of think about it going forward again, especially given your kind of sources and uses of capital in 2023.
Yes, hi.
Yes, let.
Let me, let me address that and Tom certainly feel free to weigh in and look it was we acknowledged that the payout ratio for 'twenty three will be tight.
And certainly tighter than we've had in the last several years. So as we're thinking about the dividend. We took a hard look and we think we've established a strong but conservative baseline cash flow as the foundational point in our 23 business plan.
Obviously monitor that closely during the year.
But as an example, we started off 22 with a range of $95 to 84, and we wound up right at 84% so.
We've become very good at controlling our forward capital cost to making sure that we manage revenue and capital expenditure. So we feel as though that baseline gave us a good springboard to grow from.
We also as we look at the plan, we expect to sell as I mentioned between 100 $125 million of properties.
In addition to parse.
Partially liquidating or exiting a couple of joint ventures operating joint ventures. So some of those sales may generate losses, but we also anticipate some gains that could certainly impact our taxable income.
We felt with the baseline casual and place the variables potential sale gains we felt that it might be premature to take a look at cutting the dividend.
And also we as Tom has outlined and you have seen from our announcements.
Our liquidity is in very good shape.
So looking ahead and certainly subject to change based upon economic circumstances right now, we're very confident that our cash flow will continue to grow from this baseline forecast.
So quantitatively, we assess that the dividend coverage, while it will be tight should be adequately covered and.
And qualitatively honestly, it's been a very challenging year for office companies shareholders. So the board after getting very comp with a baseline cash flow numbers wants to make sure that we really keep our focus on returning as much value as we can pragmatically and considerably to our shareholder base. So the decision was made to <unk>.
Keep the dividend in place certainly the board as they always do we will monitor that during the course of the year make any adjustments as appropriate but that was kind of thought process.
So hopefully that answers your question.
That's very helpful. And then just a follow up on the JV debt side, just could you just give us a general sense at this point of where you think you could raise debt for a lot of the upcoming debt maturities and if you would consider kind of putting any kind of swaps on some of the outstanding variable rate debt.
Sure. This is Tom ill jump in on that I, just wanted to follow up on Jerry's comment on the dividend as we looked at our dividend this year.
The dividend because of our gains on the sales. We did have we ended up having full utilization of the dividend between operating income as well as the gains.
Our goal has always been to kind of keep it monitored and stable rather than giving out.
Sort of one time.
Dividends or special dividends to the to the extent we have gained so I thought we monitor that this year and basically came in right on top of our actual dividend. So we'll monitor that again as we look at the sales we have quite a bit in the market that may generate gains that we know will happen and would certainly dictate whether we would keep the dividend in place.
For those reasons as well.
As we look at the at <unk>.
That on the Jv's.
Yeah, we are looking at probably executing on maybe a couple more swaps for the debt. That's in place. So there may be increases to that from where they are right now.
And then on the rates.
We are looking a little further out the rates seem to dip as we get into 'twenty. Four we are talking to a couple of banks about extensions to those loans. So to the extent, we can get those extensions.
Are there properties are performing well.
The occupancy in general is about 80% on the whole portfolio.
But they are still performing pretty well, we see good leasing activity. So we would hope that if we can get some extensions on the debt. We may then talk to our partners about fixing the debt.
Looking out on the curve it at something that might be lower than where that curve is today.
Thank you very much.
Thank you thank you Sir.
Thank you and our next question comes from Camille Bono from Bank of America. Your line is open.
Hi, Good morning. This morning, you mentioned the quantum of disposition targets. This year can you talk to the asset types or geographies youre looking to sell.
More broadly what your expectations of when we might start to see pricing stability for office.
Great.
Yeah, Great question and good morning.
Yes, right now as we look at our sales program for 'twenty three actually in all three of our markets. We have identified a few properties for sale that includes.
Philadelphia as well as the Pennsylvania suburbs.
Several properties targeted for sale in our Washington, DC Operation also looking at test marketing a couple of properties in the suburban and this.
Suburban areas of Austin.
We have a number of properties in the market now.
And.
In terms of pricing.
I honestly think like everybody is out there doing price discovery. So salaries are trying to figure out what they think pricing will stabilize that buyers are trying to figure out where that yields will be and what kind of price. They can pay so we've actually been pretty happy with the volume of.
Confidentiality agreements have been signed people that are reviewing the packages and checking out the share file rooms.
The due diligence as well as the number of tours. So to give an example, we have one property on the marketplace, where we launched it back in in January . This is in the independent Sylvania suburbs, we already have 56 confidentiality agreement signed now.
How they all translate to pricing I really don't know at this point, that's one of the reasons why we're going to get as many things in the market. During the course years, we can we do know that.
Couple questions have come up in <unk>.
And Tom.
Articulated the debt markets, while not ideal or certainly better today than they were in.
In the fourth quarter of last year. So we are seeing and we certainly are seeing that through our commerce square financing and the number of lenders looking at that is it's certainly been a pleasant surprise to us where again pricing and terms come out we don't know, but certainly a lot more lenders are out there looking for high quality office loans, and we think once we get more clarity.
On that we will get more visibility on pricing, but.
Right now we're targeting cap rates.
From the <unk>.
Very high sixes low sevens up to a nine once given the quality of some of the properties, we're selling but until we actually get offers in I really can't give you definitive read we've.
<unk>.
But careful to have we want to see quite some of these properties in the market during the course of the year.
And to some degree that pace will be modulate it based upon what we see happening macro tone level and what we're hearing from exist or from lenders on some of these current refinancings I think we I think if we see that the lending market is opening up a bit and spreads are compressing and terms are a little more.
Well, we might accelerate some of those sales opportunities going into the marketplace to take advantage of that window.
Is that helpful to answer your question.
Yes very helpful. Thank you that's all for me.
Thank you very much.
Thank you. Our next question comes from Dillon presents <unk> with Green Street. Your line is open.
Good morning, guys. Thanks for taking the question.
Just curious if you can kind of comment on your expectations for net effective rent growth across the portfolio.
Sure sure.
Yes, absolutely and good morning Dillon.
Look.
It varies a little bit market to market, but I think.
In our Philadelphia, and Pennsylvania suburban markets.
Is probably where we see.
The best opportunities.
We kind of look at our CBD portfolio today I mean.
Yes.
Okay.
Average lease is probably 5% below market today.
So we do have.
<unk> opportunities.
As people roll to market and depending on when those leases were last executed.
We're seeing our best Mark to market coming out of.
Philadelphia So.
Rental rate pay.
This is.
Is outperforming.
The increases we've seen in.
And construction cost and even in and free rent.
Quest, So I think.
Philadelphia, Pennsylvania suburbs are kind of on the plus side as it relates to net effective rent growth that I think.
In Austin, we are probably <unk>.
<unk> to slightly down when you look at.
Both where rental rates are kind of currently in fact.
Factoring in where construction pricing has gone.
Yes, I think bill to add on to that.
We've been very.
Very happy with the kind of the mark to markets that we've been receiving on particularly our youth.
University City, CBD and suburban properties.
And one of the things that we really do modern and one of the key points, we evaluate and look at our business plan is when we take all of our 23 activity.
Leasing activity.
Our capital ratios are actually lower than in 2003 on a projected basis in 'twenty two.
And thats, even given the composition of the leasing activity that we've targeted.
So we continue to remain.
Pretty charged up about the ability to drive effective rent growth.
In a couple of our core market currently University city here.
CBD Philly in the Pennsylvania suburbs.
As George touched on I mean candidly, we're we're somewhat of a price taker in our D C operation.
And have not really had positive mark to markets there for a number of years.
And capital costs have remained.
Fairly fairly static, but no doubt in a decrease to that and then Austin, but we have.
Some some holes to fill in the Austin portfolio and 23 and 24. So we're very much in a very aggressive marketing posture.
Get those spaces leased up as soon as possible those leases again are done on a triple net basis. So we built a bit of an inflation hedge in.
Construction cost increases have moderated across the board, but are still still upward bias and were seeing big decreases in construction costs.
Kind of one building super structure issues that don't really play in too much into Ti, which is basically cheap rock electrical carpeting et cetera, which which anything thats controlling batesville sit still tend to have upward bias on the pricing model.
So hopefully that provides some clarity for you.
Yes, no that was extremely helpful. I appreciate the color there and then just touching on the Costa Hawkins asset I think you mentioned it traded at a sub 6% cap rate.
And is there anything thats kind of driving that cap rate lower than sort of the high sixes to low nine that you had mentioned on the <unk>.
Good question.
Yes.
But the rest of your suburban portfolio.
I think for the.
The properties are really well located like four tower bridge and our other conshohocken prompts our Radnor properties, we certainly with the very low end to that cap rate range I quoted.
It is in place I think for some of the some of the other products, particularly in.
Our call kind of the DC marketplace kind of northern Virginia or effective rent growth has not been that great. As we just touched on I think there were thinking that those properties are trading closer to the midpoint of the range I gave before.
But we're still seeing very good very good demand again somewhat driven by that cost so I want to caveat my answer.
But.
Every time, we talked with.
A potential list of buyers on our really premier asset with good weighted average lease term good lease structures no deferred capital good credit tenants, we're actually seeing pretty good demand how that all translates to pricing deal honestly, we have to see how things play out during the course of the year.
Great. Thanks, guys.
Thank you.
Our next question comes from Bill Crow with Raymond James Your line is open.
Hey, good morning Gerry.
As you talk to your joint venture partners do you sense, an increased interest in selling assets rather than financing at today's rate is there is there increased pressure and I guess.
The other part of that is what does it mean for future joint ventures.
Agreements.
Bill Good question.
As we look at it all of these joint ventures, we enter into on the operating side really really transitional financing strategies for OXXO in the past we've done a lot of joint ventures, we exit a lot of joint ventures.
And some of the joint ventures, we have today are frankly kind of reaching.
At the end of their targeted useful life for both parties.
Certainly, we probably would have been more active on the JV front in the second half of 'twenty two if the capital markets have been more cooperative.
But as we're talking to all of our joint venture partners today.
Theyre on the operating side.
Every discussion includes is now a time to sell the assets is now time to sell one of the assets what should we think about doing in terms of re characterizing the platform. So it was really based on a lot of those discussions bill that we kind of put into our prepared comments that we do expect.
To recapitalize, partially exit or exit a couple of those joint ventures during the course of 'twenty three.
With that to revive sell mechanism, where we sell our interest we have.
Seven or eight property portfolio with the joke with one particular partner, we sell two or three assets out of that refinance out the balance.
All of those discussions are very active and we're blessed that a lot of our joint venture partners are really smart too theyre very smart operators. They understand the real estate business. They are pragmatic they understand the realities at.
We are facing in trying to sell and refinanced property space. So all of the discussion with every partner is productive constructively focus for and how we maximize returns to both parties.
So we do think the first half of 'twenty three will be very interesting in terms of getting some of these financings done but more importantly, developing.
12 to 36 month horizon on how it can actually recycle out of some of these operating joint ventures.
Is that helpful.
Yes, I think so thank you.
And then for either you or Tom good morning.
Just curious one of your west coast peers.
Cut their dividend, but then implemented a share repo.
Platform.
And I'm just.
Curious, how youre thinking about given where your stock is trading and the implied cap rate et cetera.
Kind of a trade off there between.
A lower dividend, but.
Getting more active on the repurchase side.
Yeah look I think.
Its a sound strategy that company is using and I think our approach has been let's let's generate some surplus liquidity.
Through selling assets.
Keep the return levels tour existing shareholders.
Where it is.
And as we certainly can generate excess liquidity through some asset sales as we talked about some joint venture liquidations as I mentioned in my comments I think both share buybacks and debt buybacks of our longer term debt are certainly on the table on a leverage neutral basis, but we're very focused on continuing.
To grow cash flow.
Very focused on as part of that reducing our overall leverage metrics to provide more capital flexibility, but theres no question that both the share and debt buybacks are on the table and Tom in nine months that very carefully really the driver there being how we view near term source of liquidity.
To implement either one of those tactics.
Great. Thanks, guys.
Thank you Bill.
Thank you and there are no further questions in the queue I'd like to turn the call back to management for closing remarks.
A great Catherine Thank you very much and everyone. Thank you very much for participating in our call.
Look forward to updating you on our two three business plan progress on our first quarter call. Later this year. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to.
Two reasons lower Johan during Q&A, you can dial star one one.
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Yes.
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Okay.