Brandywine Realty Trust Q1 2023 Earnings Call
Okay.
Yeah.
Good day and thank you for standing by welcome to the Brandywine Realty Trust first quarter 2023 earnings call. At this time, all participants are in listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
Please be advised that today's call is being recorded I'd like to hand, the call over to your speaker today, Jeffrey Sweeney President and CEO . Please go ahead.
Michelle Thanks, actually Gerry Sweeney, but that's quite all right.
Good morning, everyone and thank you for participating in our first quarter 2023 earnings call.
On today's call with me as usual are George Johnstone, our executive Vice President of operations and Palazzo Our senior Vice President and Chief Accounting Officer, and Tom Wirth, Our executive Vice President and Chief Financial Officer.
Prior to beginning certain information discussed during our call today may constitute forward looking statements within the meaning of the federal Securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved for further information on factors that could be.
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.
So to start off with our prepared comments will review first quarter results and progress on our 2023 business plan.
Tom will then review first quarter financial results and frame out some of the key assumptions driving our 2023 guidance for the balance of the year and then after that Dan George Tom and I are certainly available to answer any questions.
The first quarter has gotten you're off to a very solid start results are in line with our 2023 business plan.
During the quarter, we executed 357000 square feet of leases, including 179000 square feet of new leasing activity.
For the first quarter, we posted rental rate mark to market of 14, 9% on a GAAP basis, and four 2% on a cash basis, our full year Mark to market range remains at 11%, 13%, GAAP and 4% to 6% cash.
As outlined in our 23 operating plan.
We did have a 109000 square feet of negative absorption for the quarter, you would have known move out and early termination activity.
While correlate gap in same store quarterly GAAP same store outperformed and cash same store slightly underperformed our business find ranges, we're keeping our ranges in place based on leases executed, but not yet commenced as well as some forecasted activity first quarter capital cost.
With our business plan.
About 8% this first quarter, which was excellent for us tenant retention of 45% was slightly below the bottom end of our full year forecast fully anticipated. So we're maintaining our existing range in our forecast at levels.
Our occupancy and lease targets were in line with our business plan.
Spec revenue remains $17 million to $19 million with $12 8 million or 71% at the midpoint achieved.
Respectful speculative revenue range represents approximately one point.
1 million square feet of which 628000 square feet is done so we're at 57% complete on that metric.
From an occupancy and leasing standpoint, our Washington, DC portfolio continues to underperform, Conversely, our Philadelphia CBD University City.
Pennsylvania suburbs, and Austin portfolios, which cover 94% of our NOI or 91% occupied and 92% leased.
So fundamentally operating platform is solid with a stable outlook, we have reduced our forward rollover exposure through 'twenty four to an average of six 6% and through 'twenty six to an average of seven 4%.
We continue to see the quality curve thesis play out as our physical tour volume has been very very encouraging.
First quarter physical tours.
Our 2022 quarterly average by 40% and also exceeded our pre pandemic levels by 27%. Some more tenants are in the market looking for quality space and we think that portends, great things for our portfolio going forward. Additionally.
Additionally, during the first quarter 126000 square feet.
A direct result of this flight to quality.
Tenant expansions continue to outweigh tenant contractions in the quarter and we are projecting as we had in 2022, a positive expansion contraction ratio.
Our total leasing for the quarter is up 23% from last quarter and our pipeline stands at $3 3 million square feet that pipeline is broken down between one 3 million square feet on our existing portfolio, so up about 100000 feet.
And.
And 2 million square feet on our development projects, which is up 200000 square feet from last quarter.
The one 3 million square foot existing portfolio of pipeline includes approximately 138000 square feet.
In advanced stages of lease negotiation.
Also for the quarter.
The pipeline about 30% of that new deal pipeline, our prospects looking to move up the quality curve.
Looking at our EBITDA, our first quarter net debt to EBITDA.
The increase from the fourth quarter, but again in line with our business plan and as occupancy increases during 2023, we anticipate this ratio will decrease to our business plan range and as we always.
No.
And specifying our and our Sip this ratio is transitional a higher due to development spend and debt attribution from our joint ventures and to further amplify that point.
Our core EBITDA metric, which is our operating portfolio executing joint venture debt attribution and development and redevelopment spend ended the quarter at six four times within our targeted range.
With economic uncertainty and rate volatility at top of mind leasing and liquidity remain our key focal points and as Tom will touch on the on the liquidity front since year end, we've made significant progress raising over 315.
$15 million of proceeds in January as previously disclosed we closed a five year $245 million secured financing collateralized by seven wholly owned properties. This note while secured has flexible release provisions and prepayment provisions after March 2000.
25.
And as we noted in our previous call. We took the secured route solely due to pricing differences between secured and unsecured market as we do plan to remain an unsecured investment grade borrower.
And then during February we executed a $70 million of unsecured term loan that further bolster our liquidity.
As a result of these and other financings done late last year, our consolidated debt is 93% fixed at a five 1% rate and we have no consolidated debt maturities until October 2024 $350 million bond.
We continue to have full availability on our $600 million unsecured line of credit and approximately $97 million of unrestricted cash on hand and.
And as noted on page 13 in our Sip based on development spend projections business plan execution. After fully funding the remaining development spend in dividends, all Ti and leasing costs, we still we project our full availability on our line of credit at year end 'twenty three.
In terms of the dividend for the quarter at the guidance midpoint are 76%.
Annual dividend of <unk> 19 per quarter represented a 66% <unk> payout ratio and an 81% CAD payout ratio.
We have had great we had a great quarter controlling capital spend to be conservative for now we are keeping our CAD range in place. Additionally, our business plan projects $100 million to $125 million of sales activity that may generate additional gains.
With liquidity needs are substantially addressed our sale activity on target conservative underpinnings to our coverage ratios. We kept the dividend the 19 for the first quarter certainly as our business plan progresses. The board will closely monitor our capital market conditions overall liquidity.
Sale activity progress and our payout levels as they evaluate the dividend going forward.
We also from additional liquidity enhancement plan to enter into two construction loans. This year one in one.
100% fully leased 155, King of Prussia Road, and our life Science project in Schuylkill yards later this year.
On the joint venture front as disclosed in the Sip, we have two non recourse loans maturing during 'twenty three we are well underway with our refinancing efforts for those loans. The first is a $200 million alone in our Commerce square joint venture. This is a lower levered levered financing.
With over 12% current debt yield we have received a short term extension from the existing lender and anticipate closing the new financing during the second quarter. The second majority occurs in August of 23 again as non non recourse and a joint venture that we are at 50%.
Partnering and refinancing efforts are underway there as well.
And looking at our development pipeline, we currently have $1 $2 billion under active development.
At our wholly owned development pipeline.
$302 million is 30% life science and 70% office.
This wholly owned development portfolio is 83% leased with a remaining funding requirement of $77 million, which is built into our 'twenty three capital plan.
Our joint venture development.
Is 31% residential 41% life science and 28% office.
Brandywine has now fully funded our equity position with $52 million of equity remaining to be funded by our partners.
Furthermore, other than fully leased build to suit opportunities as I mentioned on the last call future development starts are on hold pending both more leasing to our existing joint venture pipeline and.
Also to the point more clarity on the cost of debt capital and cap rates looked.
Looking ahead, though given the mixed use nature of our master planned communities, primarily at Schuylkill yards, and Uptown ATX and as identified on page 14 of our Sip our expected fourth pipeline product mix is 'twenty, one like 21% life science.
36% residential, 27% office, and 16% support retail and other users and.
And over time, and certainly subject to capital market conditions and tenant demand drivers, we do plan to develop at a 3 million square feet of life Science space.
Upon completion, we will have.
About seven 5% of our portfolio square footage and life science when the existing projects are completed and our objective is to grow our life science platform to about 21% of our square footage.
A quick review of our specific development projects.
$23 $40 is 92% pre leased $33 million of remaining funding is in our capital plan.
250, King of Prussia Road in our Radnor Life Science Center remained 53% leased we have $28 million of remaining funding we have a strong pipeline of over 220000 square feet for the remaining space and that pipeline is.
It's a 100% life science and we are still projecting a stabilized stabilization date in Q1 24.
325, JFK, our life Science office residential tower is on time and on budget for delivery in the second half of this year.
We have a current active pipeline totaling 625000 square feet on that project, which is up 153000 square feet from last quarter.
That's for the obviously for the life Science and office components that project continues to see great activity as the construction progresses superstructure now complete lobby finishes are going in we've done over 134 hard hat tours.
We also expect to start delivering the first block of residential units in the second half of this year. So all remains on schedule there as well.
Our dedicated life science building at Schuylkill yards, $31 51 market.
We have a pre leasing pipeline of 423000 square feet again up from the FERC.
From last quarter that project will be delivered in the second quarter of 2024, and we have plans underway to obtain a construction loan and a 50% loan to cost.
Our range later this year.
Our block a construction at Uptown ACX is also on time and on budget on the office component. Our leasing pipeline is 538000 square feet. This pipeline is up from last quarter and as noted on our last call with some larger tenants putting their requirements on.
Hold we're also very much focused on smaller multi tenant floor prospects that approach is beginning to bear fruit as our pipeline now has five prospects in the 30% to 60000 square foot range. During the quarter. We also started the next phase of our <unk> labs expansion at <unk> Center.
By beginning the conversion of our non Florida graduate lab space that.
That project will be completed in the first quarter of 'twenty. Four total cost is $20 million do you expect that yield is about 11% and we're already at 28% pre leased.
Our 2023 business plan also includes $100 million to $125 million of property dispositions.
We're making good progress in a challenging market earlier than expected, but we still expect the bulk of the sales activity to occur in the second half and the second half of the year.
We have $2 million to $300 million of assets in the market for price discovery as I mentioned right now we have $50 million moving through contract negotiations and about $75 million nearing.
Nearing the end of the bid solicitation process.
With several active bidders.
We do continue to plan to sell non core land parcels during the year and on our joint venture operating projects.
As I noted in the discussion on EBITDA, we have about $470 million of debt or 18% of our total debt levels coming from our jv's with about $420 million of that coming from our operating JV as we have discussions underway and plan to recapitalize. Several of these joint ventures later in two.
'twenty three with the goal to reduce that attributed debt from operating joint ventures by $100 million or 24%.
Dollars generated from these liquidity activities will be used to fund our remaining development pipeline.
Our commitment to reduce leverage and redeploy into higher growth opportunities, including stock and debt buybacks on a leverage neutral basis.
At this point in time will now provide an overview of our financial results.
Thank you Jerry and good morning.
First quarter net loss totaled $5 3 million or <unk> <unk> per share and <unk> totaled $50 8 million or <unk> 29 per diluted share and in line with consensus estimates some general observations regarding the first quarter results. While the results were in line with consensus we had several moving pieces in several very.
As compared to our fourth quarter call guidance or termination and other income totaled $2 4 million and was up $400 million above our fourth quarter forecast, primarily due to some one time income items.
Interest expense totaled $23, seven or 800000 below our fourth quarter guidance and is primarily due to higher capitalized interests are.
Our management leasing and development fees totaled $3 4 million and was 900000 above fourth quarter projections, primarily due to the lease commission income and.
And we forecast that land sales to generate $1 5 million of gain one of those transaction were delayed however, we anticipate that transaction to occur in the second quarter and our first quarter debt service and interest coverage ratios were two nine and three one respectively and net debt to JV was.
<unk> 41, 1%.
Our first quarter annualized core net debt to EBITDA was six four times within our 23 range and our annualized combined net debt to EBITDA was 704 and 110th of a turn above our guidance range of 7% to seven three as.
As far as portfolio changes we anticipate.
We will bring 405 into the core portfolio in the second quarter as it stabilizes.
On the financing side as Jerry outlined we continue to make progress on the financing front. In addition to the previously announced transactions we closed over $70 million term loan that matures in 24 months.
<unk> an extension option.
The execution of the term loan.
Provide us some additional liquidity liquidity to ensure that the $600 million line of credit remains undrawn, while the development and redevelopment projects commence operations and begin to provide us incremental cash NOI.
While we were successful on obtaining this financing we continue to see challenges within the financing market.
The traditional banks, we are allocating that we see them allocating.
Very little to new originations in the new office loan market, except for certain situations such as fully leased build to suit properties. We think some lenders will be into the flexible and will provide loan extensions on performing portfolios.
With the Silicon Valley Bank and signature bank concerned to see MBS market had been very slow. However activity has picked up and transactions are focused on lower level loan to value office assets.
<unk> life companies have also been selective in underwriting new loans with a focus on lower loan to value at a preference for longer weighted average lease terms.
Regarding our joint venture that we currently are working on our 'twenty three maturity, including.
And active completion of our commerce square loan which will occur.
We expect to close later this quarter.
We are working with our partners on the 24 maturities, possibly extend the current maturity dates with our existing lenders, while also considering some asset sales to lower leverage.
For 'twenty three guidance, our general assumptions for the business plan is the property sales.
No anticipated ATM or share buyback activity and the share count will approximate 174 million diluted shares.
Looking more closely at the second quarter, we had the following general assumptions are property level operating income should total about $76 million and will be $3 4 million ahead of the first quarter, primarily due to the occupancy gains at 405, Colorado.
And the pressure and the balance in the portfolio.
<unk> contribution from our unconsolidated joint ventures will total $3 3 million for the second quarter.
<unk> decrease was primarily due to the forecasted higher interest expense, primarily due to the anticipated refinancing at Commerce square.
G&A for the second quarter will be.
The $9 million slightly below the first quarter.
Total interest expense will approximate $24 7 million and capitalized interest will approximate 3.5.
Termination and other fee income.
All totaled $5 million.
One $5 million decrease from the first quarter, primarily due to several first quarter, one time items that we had highlighted.
On our last call.
Net management fee and leasing development for the quarter will be $2 5 million. The sequential $1 million decrease is primarily due to lower leasing Commission volume.
And our land sale gains and tax provision will net at $5 million.
Looking at our capital plan, we expect experienced a better than forecast a CAD payout ratio of 81%, primarily due to leasing capital costs being below our business plan range, while we experienced some first quarter.
Movement or.
That was lower our annual 2023 CAD range remains at 95% to 105% our capital plan is very straightforward for the balance of the year.
Comprised of $130 million of development and redevelopment.
$99 million of common dividends at the current rate.
$22 million of revenue maintain capital $40 million of revenue create capital and $19 million of equity contributions to our joint ventures. The primary sources will be $148 million of cash flow after interest payments $42 million use of current cash on hand.
And $120 million of land.
And property sales.
Note that we had no.
Cap.
Based on the capital plan outlined above we project, having full line availability by year end. We also project that our net debt to EBITDA will be in the range of seven to seven three with an increase primarily due to the incremental capital spend on development projects.
Our debt to JV will be in the range of 40 to 42.
And our core net debt EBITDA of $60 to 65 at the end of the year excludes our joint ventures, and our active development projects.
We continue to believe this core metric better reflects the leverage of our core portfolio and eliminates a more highly leveraged joint ventures at our own stabilized development and redevelopment projects.
We believe these product.
Our elevated on our growing development pipeline and we believe once these developments are stabilized our leverage will increase back towards our core leverage ratio.
We anticipate our fixed charge and interest coverage ratios were approximately $2 seven for the year, which represents a sequential decrease but thats, primarily due to higher interest rates.
With that I'll turn it back over to Gerry great. Thank you Tom So key takeaways our portfolio is in solid shape clearly facing some headwinds in the office market, but pipe up but pipeline activity is up significantly in advancing through our various stages of leasing efforts at a nice pace.
The portfolio is also in a very stable position with an average rollover as I mentioned through 26 of only seven 4%.
Continue our longstanding track record of posting strong mark to markets.
Managing our capital spend very well and as I mentioned.
Some accelerating leasing velocity, both in the operating portfolio and the development pipeline as well.
Since last quarter, we've made.
<unk> made significant progress on our wholly owned near term liquidity needs put ourselves in a very strong liquidity position with zero drawn on our line of credit and $97 million of cash on the balance sheet and increasingly solid visibility.
Executing our 23 business plan that will improve liquidity and keep our operating portfolio and a very strong footing. So.
As usual and where we started and that we really we wish all of you and your families well and at this point Michelle we're delighted to open up floor for questions. We always ask in the interest of time, you limit yourself to one question and a follow up thank you.
Thank you if you'd like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
And our first question comes from Anthony Cologne with Jpmorgan. Your line is open.
I guess, Jeremy My first question relates to just looking at occupancy going forward. I mean, you gave some pretty good stats on expansions versus contractions in the growth in the pipeline, but just trying to see how you bridge that.
Sort of situation with the sentiment that for the next one to two years or whatever it may be office cash flows are likely to decline quite a bit or at least that seems to be the indication from either the stocks are just you know.
I think most people's thinking out there.
Hi, Tony George and I will tag team. This I mean look the.
There is no question that conventional thinking is that.
There's going to be some significant headwinds affect Sundays I wake up and I think the headwinds are so strongest blown the air off my head but.
No question office is going through.
<unk> driven by increased employee mobility shifting space preferences, and there will be winners and losers.
So we definitely expect more selective demand drivers over the next couple of years.
We continue to believe that that tenant focus will be on quality driven by superstructure free.
Presentation of that building its location amenities in.
Increasingly we're seeing more and more that landlord quality and reputation their ability to fund improvements and there is stability in terms of long term ownership are increasingly.
The priority checklist for a lot of our tenants.
So even with this with the secular shifts which seem to be there and the demand using effective I guess, a slowing economy. We still believe we'll be in very good position to perform well.
I guess when you take a look at it there's a lot of a lot of information out there on the office sector.
A lot of brokerage firms have good reports out there on the state of the office market and I guess as we look at it though a recent report was identifying of the total office inventory United States being about 6 billion square feet.
About 15% of that.
Being top quality garnering premium rents.
About 24% or $1 3 billion.
Being middle top middle very good from a competitive standpoint.
About 15% kind of attractive to cost consequences and then the <unk>.
Balanced day needs upgrades repositioning or functionally obsolete.
We believe all of our inventories in the top two tiers, so he's going to garner premium rents.
It's good enough to compete given the location of the investment we made.
We also think not much is going to be built.
Unless driven by specific demand drivers.
But over the cycle that will improve the competitive position of our existing inventory.
So that high quality inventory, we think even with the secular headwinds there are competitive position gets stronger due to supply demand in balance and I think statistically youre starting to see that with even some of the rent disparity between the <unk> space. So, but we continue to forecast good cash mark to market.
Portfolio occupancy and leasing stability, we are accident controlling our capital costs and even some of the macro statistics out there nationally, which we're certainly seeing in our own portfolio.
No rent premiums on leases greater than seven years has doubled over the last two years from 16, 4% to 35% in class a inventory and even in the suburbs new assets.
Are performing better than older assets with rent creams close to 50%.
So when you take a look at CBD new assets over the last couple of years.
Rents are up three 6%.
While in the class a trophy class.
Where theyre down 10% in the class eight.
Newer assets in the suburbs rents on average were up about six 8%.
And down about 3% in the older quality inventory. So we do think that the office sector is going through a shift.
Very similar to what we saw in some of the other other product types.
No.
A number of years ago, an 18 foot clear warehouse with state of the art, it's no longer state of the art, we certainly think that in the office sector there'll be some significant.
Accelerated obsolescence that will have a muting effect on overall demand, but also for the well positioned portfolios put them in a higher capture rates.
Bringing in tenants and it seems to be statistically.
Tenants will continue to pay higher rents to be in a higher quality of workplace.
Seeing a much more pronounced return to office trend across our portfolio. There's been some national news on some of the major corporations, bringing people back to work.
We continue to see very minimal hotels are hot desking throughout the portfolio.
Theres no question conventional thinking is that office is really back on its heels and we're positioning the company to deal with that dynamic we've increased our marketing campaign, we've increased our investment in some of our existing assets.
And I think the evidence of that is beginning to bear fruit through some of the increase that we've seen in our pipeline just in the last couple of months.
That pipeline again is advancing through past touring and the response to Rfps to paper being exchange. So we're fully cognizant of the fact that it's a challenging macro environment.
And we have work to do.
But we also think that the portfolio repositioning that we've done over the last dozen years as it relates to put the company in a very strong position to weather the storm.
Sure.
Achieve our business plan objectives, which are conservatively pulled together and.
Use that foundational platform to spring into higher growth as market conditions improve Adam George anything to add to that no.
Great commentary I think a couple of things I would.
We're outperforming in just about every sub market in Philadelphia in the Pennsylvania suburbs in terms of.
Our overall occupancy as compared to the market.
Even in downtown Philadelphia, including our joint venture Holdings at Commerce Square I mean, we've got about a six 6% vacancy factor.
Market bids.
15% to 20% depending on.
On the brokerage research house.
So good levels of outperformance there I.
I do think the portfolio is situated well to accommodate the trend those.
People move up the quality curve and in terms of our own business plan, we have a path to get us to our occupancy guidance range, but keep in mind. The note that Jerry mentioned in his prepared commentary.
The small amount of.
Holdings, we still have in northern Virginia, and in Wilmington, Delaware are impacting our overall company occupancy by about 170 basis points so at 92%.
Lease portfolio of basically Philadelphia, the Pennsylvania suburbs in Austin, Texas at 92% I think really is the is the headline.
Great. Thanks, Thanks for all that I guess, just my other question relates more to life Sciences wondering with be labs, if youre at a point where any of those.
Tenants.
We are converting into perspective tenants into your Schuylkill yards developments at this point or if it's just too early or just any other broader comments on on the life science component of wasting.
Yes, Tony Good question, Yes, we do we think that there is a number of tenants who are at or currently occupy space at <unk> labs.
That remain interested in looking at 32 $531 51.
Frankly, one of the dynamics driving the conversion of the ninth floor was that some of those tenants had an immediate need for additional.
Growth capacity.
But werent quite at a financial stage, where they were we would underwrite them as a credit tenant in a new building. So we're being very careful how we do our underwriting on the life Science front.
As we've talked about on previous calls we have a <unk>.
Operating partnership agreement with <unk> Biotech Council, which has been around for a couple of decades.
As a scientific advisory board, they're very much part and parcel of helping us assess the financial viability of some of these life science tenants.
I think the success of <unk> labs, and its continued full occupancy in the high return on cost that we're getting.
Certainly is emblematic of the growth track record that we see taking place.
As we move forward with the deliveries of the building at Schuylkill yards.
Got it thank you.
Thank you Todd.
Thank you and our next question comes from Nick Joseph with Citigroup. Your line is open.
Great. Thank you very much.
You mentioned about making progress on the dispositions I was just wondering if you could provide some more color on the process, thus far kind of the size and composition of the bidder pool any pricing indications any additional comments you have there.
Yes, sure Nick how are you.
Yes, we put a number of properties in the market for discovery, which is at $2 million to $300 million range. Some in <unk>.
Pennsylvania.
CBD, Philadelphia, Northern Virginia, as well as in Austin, Texas.
And while we're still getting Vista.
Deal pipeline are safe.
You should say the the timing of getting bids has been as we would expect fairly protracted but as of right now we have.
One building.
That the buyer is an investment group and a tenant.
We'll have that moving through contract negotiations thats in that $50 million range. So we think that transaction will get across the finish line in the first half of the year and then we are.
Evaluating bids from three different.
Prospects on a suburban Philadelphia complex.
Yes.
That will kind of reach a conclusion on that in the next several weeks so it seems that.
Somewhere around $100 million right now we feel are pretty getting to the level there'll be advanced certainly $50 million is pretty advanced at this point. So that's a pleasant surprise to us because we really werent really forecasting much to happen until the second half of the year. So this first foray.
Properties in the market as we outlined on the last call was really just kind of test the appetite and see what's out there.
So feedback has been.
<unk> been slow to come in in a number of fronts.
Certainly I think we're pretty happy with the progress we're making so far we have a couple of other properties in northern Virginia that we're waiting for some feedback on some potential bidders.
That that process is moving a bit slower in all candor.
Primarily driven by that market really has not performed that well anyway, and then you layer in the.
The financing market challenges.
That's easy to move and as we would've expected a little bit slower, but at least we're getting visibility on how to deal with that dynamic later in the year.
Thanks, that's very helpful. And then maybe just on the <unk>.
Lower loan to values, what's happening on the <unk> MBS.
As well.
But just can you touch on the current pricing difference that you see right now between secured and unsecured debt.
This is Tom.
I think for US right now I think its the secured debt will be inside of the unsecured debt.
Hard to say where that is as I mentioned, the CMS market's been opening up.
Having some slowdown from the banks that we're closing that.
I still think it's at least.
Yes.
100, 200 basis points and.
But we'll see how we come out on pricing with some of the transactions. We're looking at right now.
Yes, I think just to add on to that.
The unsecured market really is kind of the bank market and the public bond market.
<unk>.
<unk>.
The unsecured bank market, while it certainly.
More constrained than it was I think given relationship lending.
I think the team did a great job getting that $70 million unsecured financing across the across the finish line. The public bond market right now is gapped out to be much much wider in terms of spreads versus banks.
So we'll see how that plays out over the next couple of quarters.
Thank you very much.
Youre welcome.
Thank you. Our next question comes from Michael Lewis with tourists. Your line is open.
Great. Thank you.
Jerry and the first question. The first question that Tony asked you talked you kind of combat at some investor perceptions I think another investor perception that office buildings are not financed and you talked about the financing market a little bit, but I think your JV maturities are instructive you mentioned you're at for the next 12 months.
Commerce square sounds like it.
Hello, LTV and close the year and done the math venture, 78% occupied rock 68% occupied.
Of course Commerce <unk> full so.
You mentioned kind of.
Possible extensions.
Some will get refinanced.
I guess my question here is kind of specific to you and then more broadly I mean do you think we'll see a lot of loan extensions you remember during the GSP everything is blend and extend.
Do you think we'll see a lot of defaults that put pressure on values.
And so you have some of that in your portfolio and maybe get to applicable to the rest of the universe. So do you have any thoughts on that.
Yeah, Michael Great question look I think as we're approaching all of these.
Joint venture refinancing discussions.
We're <unk>.
Talking to each of the lenders.
Do we have great relationships with about that.
The dilemma that the that the portfolio is facing.
None of the dilemma. The portfolio is facing is lack of performance effort by Brandywine and our operating partners. It tends to be more of a macro concern. So we can certainly articulate to those lenders exactly where every dollar wherever at least has gone over the determined there alone.
And to some degree those banks, Michael will drive what the ultimate outcome will be whether they do.
A short term extension and reset the rates.
And the value proposition is supported by appraisals Thats kind of track one whether they wind up doing a b note structure, providing a window of opportunity for a borrower like our joint venture partners and Brandywine to invest additional capital and get that return is a priority for the B note.
I think that will be a likely outcome in a number of situations.
I do think and I'm not sure they're applicable any of our ventures, but I do think there'll be situations, where the borrower and the lender will simply agree that the best solution from the bank's perspective to take the property back.
The borrowers may not be of a mindset to invest additional capital given the quality of the product of the portfolio Thats encumbered unless there's an easy mechanism. So unless there is clarity that the additional incremental money that borrower in that.
<unk> can be recovered as a priority of the over leveraged situations. So.
I think a lot of it depends upon the.
The approach that the banks take.
That will certainly determined what structures they worked through with the borrowers.
I would tell you from our standpoint, we have great joint venture partners between our partners and Brandywine, we have extensive relationships.
We've always operated on a.
A very forthright transparent basis, so I think all of our lenders view us as a really high quality landlord and <unk>.
Hey, if it wasn't for the work you guys are doing the portfolio might not be performing as well as it is so we think theres a mutuality of interest between borrower and lender to reach the right economic program.
But again that has to work for both parties. So we're going to each of these discussions.
Being constructive and positive but want to work through the right results. All of these mortgages of course, as you know Michael or non recourse.
For anyone either has a negative capital account, where we have we've made plenty of profit a property or marginal.
<unk>.
Marginal investment levels. So we'll make the right business decision, both economic and reputation for the company.
And.
To some degree that decision as I mentioned it can be driven by what the perspective is that the banks, but certainly.
<unk> recognized that there is a general credit crunch, when commercial real estate and that the issue of systemic not specific.
How they deal with that we will be within their own investment committees, but.
Our approach is to get these loans extended get them restructured capital structure that provides an opportunity for both the borrower and the lender to win and we will see how that works its way through the process.
And Michael This is Tom I think also I think if we see interest rates kind of hit a peak I think that some of our talking to some of the banks. They feel maybe they've hit a peak stress level of where where the rates are at that May also again. This is more for their loans and 24 may give us an opportunity.
<unk> see that set up.
Normalized and then they have a little more clarity, where they may see interest rates going in that can help in the decision making process.
As we talked to the lenders as well.
Yes that makes sense those yield curves look like they might.
Start to help a little bit rather than here pretty soon.
My second question is about the dividend.
<unk> reduced the dividend in 2009, I checked your website and elsewhere I think that's the only time you ever lowered the dividend.
Company's history, so I apologize if it makes you feel a little but we look back I think 30 years.
And we only found that one cut and I bring this up because.
I have argued that there might not be a reason to pay 18% dividend yields for very long.
But maybe I'm wrong at Brandywine is going to be known as a company that as long as the dividend is covered is going to pay it makes that that yield that apparently nobody thinks.
It's going to stick around.
With more attractive and so I guess my question is is your.
Our view that as long as the dividend is covered by cash flow you'll continue to pay it or do you do you look at it.
That high dividend yield isn't too and do any favors in you could retain that back that capital anyway.
How do you kind of think about.
Balancing those things.
Yes, Michael very fair question and look we continue to to reflect.
To reflect on how our business plan is progressing and how that relates to the existing dividend levels.
I think it maybe a level set the discussion.
Before the impact of any of our sales we think our taxable income is kind of in the 55 to <unk> 60 per share range.
So the savings would be kind of 27% low $30 million range annually.
We also think some of these sales could have taxable gains.
Maybe there might be some taxable losses too so we're waiting to get some more clarity on sales of what we will sell and what gains and losses that will have.
We do have a strong baseline and I think conservatively conservatively constructed operating plan for 'twenty three.
And we may very well see some improvement in our capital ratios as.
As we've typically seen like for example last year are opening range was a CAD payout ratio of 84% to 95% and we wound up at 84%. So even in the first quarter, we came in at 81%.
So it is a challenge.
Particularly in this type of landscape because I think.
To answer your question directly.
I think the board would be the mindset. So long as the dividend is covered we want to continue paying that dividend.
The variable to that which is well beyond our control is what happens to the capital market conditions.
So we want to be very disciplined and very mindful of forward liquidity and how we generate additional liquidity at both delever the balance sheet preserve good credit metrics and keep the business plan moving forward. So.
Philosophically the answer to your question is yes.
But pragmatically, we've got to keep our eye on the bigger picture of things that we can't necessarily control and I think the other way we look at it honestly is.
<unk>.
We want to keep in mind that the.
Despite the irrationally low stock price us and other office companies or having the average investment base of our shareholders is in the low double digits. So the return to them at the current dividend level is in the 6% to 8% range. So even though spot pricing is much higher.
It's actually in a very reasonable range given the investment base of our shareholders, who are counting on us to both had the.
Forward focused on addressing liquidity have the financial discipline to inculcate the right results and to generate additional external liquidity through sales to make sure that we keep the dividend fully covered so.
The.
Work for our shareholders and our our office shareholders.
Not just for anyone but all off the shelves have been really adversely impacted due to the macro negativity in the tone of what's happened to office, what's happened in the credit markets whats happening to the economy. So I think that I think we do and I say, we management and the board feel an obligation to continue keeping our <unk>.
<unk> plan moving forward to try and return as much value as we can to our owners. During this very challenging period of time.
I hope that answers your question or not but I think thats, how we kind of assess where we are.
No. It does that's helpful. Thank you.
Thank you and our next question comes from Tayo Okusanya with Credit Suisse. Your line is open.
Hello can you hear me.
We can hear you tell me how are you.
Hi, how are you.
A question just about <unk>.
Of the.
A lot of the JV development project.
You talked a lot about some of active pipeline.
The pipeline actually looks like they're expanding.
But can you just kind of talk about the kind of final conversion and when we can kind of expect that to be starting to see.
Some not so fine.
Great.
Some of those assets.
You kind of have a little bit, but I think the question is kind of how we we move through from the pipeline to lease execution.
And look I think.
The probability of a lease execution as a director.
Relation to the amount of pipeline, we have so I think.
While we are in it.
We wish we had definitive leasing.
Present back to you and our shareholders.
And we're working on that I will get that in a second.
I think.
Think generally the team is very pleased with the increased levels of activity now part of that is the flight to quality construct part of that is I think the tremendously counted leasing teams. We have work on these projects in terms of generating.
New activity I think part of it is also these buildings are finally getting to what we think we're going to walk through them.
So typically as we've looked at these cycles in the past if you don't have a pre lease in place by the time you start most of this significant leasing activities occurs as the building nears completion and kind of six months after its completed.
Because tenants unless it's a pre lease again, they really do want to see what the lobby looks like the security desk. The turnstiles the elevator cabs the window lines all of those things that are important to them and creating the value proposition in their minds at least at.
At a rental rate that's higher than general market given its new construction so.
I think from that standpoint.
Progression that we've seen through the pipeline and our Schuylkill yards projects has been very very encouraging again, I mentioned 134 hard hat tours the pipeline has grown significantly.
So what we do is once we get a prospect and we do everything we can including meeting with their top C level executives dealing with their broker provide.
Providing them, we have great virtual tours of all of our properties.
Some of our senior executives, including Tom myself, reaching out to their top executives to get them.
Enamored with doing a transaction, becoming a member of the Brandywine family of tenants.
We had very very good in house space planning people that can turn a space plan within a couple of days some very strong internal construction folks that can price at a plan much faster and a lot of our competition. So all the things that we can do to control the process to get them to a lease.
Execution I think we're doing everything we can.
In today's climate.
Tenants are just particularly at a larger size tenants, we're talking to are simply slower to pull the trigger on making a long term large capital commitment for their organizations. So to some degree some of these companies are waiting for more visibility on how they view their business plan evolving over the next several.
Years before they pull the trigger.
So I don't know if that answers your question.
Hard process, because it's not one we can push a button and make a doughnut we've got to get people across the finish line.
By giving them every element of their decision making process.
As quickly as we can so they have the full range of information.
To to make their decision.
The flip side is that.
On the even on the life science market in Philadelphia.
If you looked at that.
Under construction are pre development pipeline a year ago.
The actual properties under construction.
For delivery in 'twenty, three and 'twenty four is much lower than it was when we looked at it back in 'twenty, one and 'twenty two.
So that.
University of competitive <unk>.
Product is lower.
And the tenants in the market has remained about the same level some of those tenants in the market with their requirements on hold until they clear FDA approval they get their financing lined up so all the natural reasons, they would make that decision, but for the most part that the supply demand balance on these projects seems pretty favorable too.
US and getting some of these prospects across the finish line and getting getting leases executed.
That's helpful and then just follow up.
Paul.
The dividend again massive dividend yield.
Relative to your peers.
No.
Guidance suggests.
<unk> payout to 100%.
How does one kind of think about the dividend.
What exactly is the board.
We think about what the appropriate dividend level going forward.
Yes, I think that I think the board will focus on a couple of very key data points. One is how is the business plan progressing from an operating standpoint, and what visible visibility that we have on achieving our business plan.
Number two how is the how is the financing and sales campaign going in terms of addressing.
Our current and forward liquidity requirements.
And then three take a look at what their view is of overall capital market conditions. As we start to think ahead to 'twenty four 'twenty five on financing needs.
So again one of those the first one is fairly controllable.
From our management team the second one the proof will be in the putting in terms of what we can deliver in terms of financing. Some of these joint ventures and getting some sale proceeds across the finish line and the third is a macro question that certainly management and the board will evaluate as we think about what the risk management.
Position should be for the company.
Thank you very much.
Youre welcome.
Thank you. Our next question comes from Dillon Brzezinski with Green Street. Your line is open.
Good morning, guys. Thanks for taking the questions.
Good morning, you mentioned reducing leverage.
Possible use of capital should you get some of these dispositions to the finish line.
Curious how you guys are thinking about those leverage targets that you have in the <unk> business plan on a longer term time horizon is there any desire to sort of lower those.
Oh, Yes, I think I mean.
Our game plan is to get our leverage targets, our overall company leverage kind of in the range of our core net debt to EBITDA number is in the low sixes.
And certainly as we look at it longer term, particularly as some of these developments coming online and hopefully some recovery in the office market.
We continue to target getting below six times.
Over the course of the next several years certainly.
One of the immediate tools that we're working on <unk> is as I alluded to and Tom touched on was exiting some of these joint ventures, they tend to be more highly levered.
So the debt attribution of over $400 million.
Reducing that that has added a very powerful deleveraging tool we have at our disposal. Some of those joint ventures are coming to the end of their natural lifecycle with us our ownership ranges from.
15% to 50%.
So we're about <unk> each and every one of those joint ventures that we have identified the supplemental package as how they can become candidates for us to exit or reduce our ownership stake over the next several years as a as a way for us to accelerate the deleveraging even in a capital.
<unk> marketplace.
That's helpful. Thanks, and then just staying on the dispositions I think last quarter. You had mentioned that you are targeting cap rates anywhere from the high sixes to low nines, obviously, depending on market.
Just given that you're already in the market with several hundred million dollars' worth of assets is that pricing guidance still relatively in line with expectations today.
Yes, I think so.
What projects are moving forward with us.
As I mentioned on the sale of the sub seven cap rate, which is kind of where we thought it might be.
The.
The other one is kind of in the 9% range.
It's 9% based upon.
Kind of leases in place not necessarily reflecting what we think might roll out of the portfolio. So we do think that.
The pricing levels are consistent with what our expectation was look I was frankly, hoping for.
Better pricing across the board, but it's not there today, but the reality is is that the pricing levels that we are getting clarity on are very much in line with what we view to be the net present value to us of holding those assets.
And as long as that connection point is made between offer price and internal NPD I think we view that as a tradable asset for us.
Great. Thanks for the color on that I appreciate it.
Thank you Paul.
Thank you. Our next question comes from Steve <unk> with Evercore ISI. Your line is open.
Thanks, Jerry I just wanted to know if you could provide a little more color on the Austin leasing pipeline for.
The office building and I'm, just trying to think through like the timing of those leases to the extent that they get executed and the reason I'm asking is at some point. These projects are going to deliver you can only capitalized interest for so long before you have to start recognizing the income and maybe putting further pressure on the payer.
Our ratio our coverage ratio, which then kind of speaks to the dividend. So just trying to sort of get a sense for the timing and the size of some of these tenants in.
When a lease realistically could get signed and how that might affect the yield the timing the CAD ratio as we think about 'twenty four.
Yes, Great question, Steve and look at it is certainly a point that we are very crisply focused on.
The pipeline that we're projecting.
We will start to generate some revenue.
Uptown ACX in the second half of 'twenty four.
Sure.
That obviously is going to be conditioned upon getting some of these prospects across the finish line.
The approach to deliver on the second half of this year. So we'll essentially about 12 months of capitalized interest too to make sure that we we insulate ourselves from that downside risk.
But that will clearly be a pressure point and a point of consideration as we look at our at our revenue numbers going forward.
Great long term growth potential.
In fact.
Even as of today with the marketplace thing.
Being slow.
64, new prospects looking at the Austin marketplace.
As either a regional or headquarters relocation.
Theres about 14, new tenants to the market that are over 50000 square feet and about seven over 100000 square feet. So the forward pipeline looks good we're just kind of on the Andrew our way through what's been a major pullback by some of the tech companies.
Greece, and some sublease space.
And our team is very very much focused on.
How we can get some of these smaller tenants across the finish line.
Rather than waiting for one of the larger tenants to make a decision on what they want to do.
I don't know if that answers your question totally quantitatively, but I think fanatically, that's the direction we're moving in.
So Jerry I guess, just maybe not to beat a dead horse here, but on the pipeline are they mostly existing I guess Austin tenants that kind of have natural lease explorations and they need to make a decision or are these more kind of new to market tenants, where maybe they don't have to make a decision just trying to.
Get a sense for the ability to get things over the finish line versus things to continue to get delayed.
Yes.
Those prospects I mentioned, they're kind of a 30 to 60000 square feet, they're all existing tenants in the market with lease explorations that kind of roll into that timeline I mentioned.
Great and then I guess just looking at the change in occupancy I think there was definitely more weakness in kind of Radnor conshohocken this quarter just sequentially.
In terms of the occupancy declines that anything specific there to note and I guess potential backfill opportunities on some of those.
George.
Sure Stephen Good morning, Yes, it was really.
Excuse me more Plymouth meeting where.
Where we had to kind of 20000 square foot tenants.
Vacate.
In Radnor, we did get one 112000 square foot space back that we've already got.
Two proposals issued two so the radnor inventory.
As it is in great shape.
Not really have a concern when we get one back but.
And then yeah.
To your point, we had some additional move outs in conshohocken.
18000 square footer.
As the largest and we've already got.
Pipeline looking at that space so.
Great. Thank you.
Thank you Steve.
Thank you there are no further questions I'd like to turn the call back over to Jerry Sweeney for closing remarks.
The only closing remark is thank you all very much for participating in our earnings call and we look forward to updating you on our two three business plan progression on our on our next earnings call. Thank you very much.
Thank you. This concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
Okay.
Okay.
Sure.
Yes.
Okay.
Thanks.
Okay.
Yes.