Q2 2023 Brandywine Realty Trust Earnings Call
Yeah.
Yeah.
Good day, and thank you for standing by and welcome to the Brandywine Realty Trust second quarter 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
You will then hear an automated message you bought them at your hand is raised to withdraw your question. Please press star. 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.
Tanya Thank you very much.
Good morning, everyone and thank you all for participating in our second quarter 2023 earnings call.
On today's call with me are George Johnstone, Our executive Vice President of operations, Dan Palazzo Our senior 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 assurances that the anticipated results will be achieved.
For further information on our on factors that could impact our anticipated results. Please reference our press release as well as our most recent.
Annual and quarterly reports that we filed with the SEC.
During our prepared comments they will review our second quarter results and progress on 2023 business plan. Tom will then review second quarter financial results and frame up the key assumptions driving our 'twenty three guidance for the balance of the year and after that Dan George Tom and I are certainly available for any questions.
So moving to our prepared comments the second quarter saw continued leasing momentum throughout our portfolio.
During the quarter, we executed 568000 square feet of leases.
Including 177000 square feet of new leases within our wholly owned portfolio, our joint venture portfolio achieved a very strong 401000 square feet of lease executions.
<unk> 139000 square feet of new leases, the combined activity totaled 969000 square feet and as we as we showed on on page one of our ship. These are our highest combined leasing volumes for the past four quarters.
The operating metrics were strong as well for the second quarter, we posted rental rate mark to market of 17, 6% on a GAAP basis, and five 8% on a GAAP basis as we look at the balance of the year, our mark to market will vary by region with CBD Philadelphia at a 17% cash in.
30% GAAP rental rate increase the ph suburbs will be at.
2% cash positive and 9% GAAP positive our mark to markets in Austin, we anticipate being negative on both a cash and a GAAP basis.
Given the current market conditions.
This quarter, we did have about 18000 square feet of positive absorption. We currently stand at 89, 4% occupied and 91, 1% leased.
Based on the 224000 square feet, we have a for lease commencements.
More importantly, as we review our portfolio our core marks that Philadelphia, CBD University City, the Pennsylvania suburbs in Austin, which comprised about 94% of our NOI are 90, 191, 2% occupied and 92, 7% leased.
During the quarter, both our GAAP and cash same store outperformed our business plan ranges.
The second quarter capital costs were also in line with our business plan ranges.
<unk>.
And tenant retention came in at 71% or above.
Above the top end of our full year forecast.
Well, we are maintaining our existing range based on forecasted activity at between 49% to 51%.
Spec revenue range remains 17% to $19 million was $16 1 million or 89% at the midpoint already achieved the speculative revenue range represents approximately one 1 million square feet of which 787000 square feet or 72%.
<unk> already completed.
Our operating platform is solid with a stable outlook, we have further reduced our forward rollover exposure through 'twenty four to an average of six 6% and through 'twenty six to an average annual rate of seven 3%.
We are definitely seeing a pickup in activity conversion to lease execution remains frustratingly slow, but overall velocity the starting point to any leasing cycle continues to improve.
Several key points, we would like to highlight for you.
One is the quality curve thesis remains intact as our physical tour volume has been very encouraging.
<unk> quarter physical tours exceeded the first quarter by 5% exceeded our 2022 quarterly average by 47% and also exceeded pre pandemic levels by a significant margin as well.
On a wholly owned basis during the second quarter of 118000 square feet of our new leasing activity or 67% of all of those leases were a result of the flight to quality. We also saw tenant expansions continue to outweigh any contractions during the quarter.
I think it's further evidence of the emerging market recovery. Our total leasing portfolio is up 21% from last quarter and stands at $3 5 million square feet and that excludes the $1 3 million square feet. We have in our joint venture pipeline, which is also up from last quarter by over 200000 square.
It feeds the wholly owned pipeline is broken down between one 3 million square feet in our wholly owned operating portfolio and $2 2 million square feet on our development projects, which again like the joint venture pipeline is up over 200000 square feet from last quarter.
The one 3 million square foot existing portfolio of pipeline includes approximately 160000 square feet in advanced stages of lease negotiations also in that pipeline, 31% of our operating portfolio new deals our prospects looking to move up the quality curve.
As we noted on page one of our of our supplemental package. We did receive notice during the quarter from the state of Texas that they have terminated their lease at our Uptown ATX campus effective August 31 2023.
<unk> currently occupies a 100% of one of our buildings there.
They had an anticipated lease exploration date of October 26.
The state has relocated their employees into a state owned building we are still assessing it that notice was provided in accordance with the requirements of the lease.
And while we continue to make that assessment, we determine to determine if we're entitled to additional rent or remedies. We have conservatively assumed that we will not receive any rent after August and remove that income from our <unk> range. The overall impact of the early termination will be over 14 million.
<unk>.
In terms of reduction in total forecast at rent over the remaining lease term and that includes about a one $5 million in 'twenty three.
$4 4 million and 24. In addition, we will also need to write off of approximately $370000 in straight line rent over that 90 day period, and then to the extent that it is ultimately determined that that lease was effectively terminated in accordance with our Uptown Ats.
Master plan, we would plan on taking that building out a service similar as we did in the nano a five building as it would not be available for any re leasing activity consistent with our master planned development program.
Turning to our EBITDA, our second quarter net debt to EBITDA increased to seven six times, which is up from $7 four from the first quarter, primarily due to increased development spend of about $75 million, however, as occupancy and NOI increases during the balance of 'twenty three.
We anticipate this ratio will decrease to our business plan range with asset sales taking place in the second half of the year and our targeted $100 million reduction in Duke JV debt attribution also occurring by the end of the fourth quarter.
As we did note in the set.
This ratio has been higher due to development spend and debt attrition from joint ventures based upon our development pipeline investment at quarter end, we have $338 million of capital invested in $93 million of JV debt generating really no meaningful NOI at this point.
If we remove that investment from our seven six metric our leverage would be six four times well within our core portfolio range.
On the liquidity front, we also made solid progress on our both our joint venture debt maturities and development financings during the quarter.
In June our Commerce square joint venture closed a five year $220 million secured financing with a seven 875% coupon, which replaced a $204 million mortgage loan.
Given the state of the financing market the rate was higher than we initially anticipated earlier in the year, but that loan had some flexibility that is open for prepayment. After June 25, and it does provide additional proceeds to fund current and future leasing costs in connection with that refinancing we did make it.
$50 million contribution to the venture to both fund closing costs.
Redeem a portion of our preferred equity partners equity interest and paid down all accrued but unpaid partner preferred dividends that put that joint venture on very solid financial footing.
In the quarter and our map joint venture is finalizing a short term extension on our $180 million loan from the current lender that we will take that maturity through October one of 'twenty three that extension will provide additional time to work on a recapitalization strategy with both that lease.
<unk> lender and the fee owner of the properties we.
We are also in advanced discussions on a construction loan on our $1 55, King of Prussia Road project, and we anticipate that loan will close in August .
On our other joint operating joint ventures, we do have $70 million of overall investment.
With $620 million of nonrecourse mortgages maturing next year before any extension options are exercised.
Of that $620 million about $112 million is attributable to brandywine as our ownership stake range between 15 and 20%.
We are working very closely with all of our partners and our lenders on loan extensions and refinancing efforts and would expect to report additional progress on these nonrecourse financings in the coming quarters.
Currently our consolidated debt is 93% fixed at five 3% and we have no consolidated debt maturing until October 24.
On <unk>.
$350 million bond.
We also have no outstanding balance at the end of the quarter, our $600 million unsecured line of credit and we have approximately $32 million of unrestricted cash on our balance sheet.
As we noted on page 13 of our Sip based on our projected development spend our business plan. After fully funding remaining development spend all Ti and leasing costs, We project and Tom will amplify that we will have full availability on that $600 million line of credit by year end.
2023.
For the quarter, and our guidance midpoint or or <unk> 19 per share dividend represented per quarter dividend represented a 66% <unk> payout ratio and an 84% CAD payout ratio. So another great quarter controlling capital spend as such as we noted in the Sip we have changed.
We're changing our CAD range to 90% to 100% down from 95 to 105, and we anticipate our coverage to be at the low end of the Newark New range.
I'll talk about in a few moments our business plan projects, a $125 million of sales that will generate some.
Additional liquidity as well as some gains.
Certainly as our business plan progresses.
We will closely monitor capital market conditions, both company and market overall liquidity sale activity progress and our dividend payout levels as we assess the dividend going forward.
Looking at our development pipeline.
Our wholly owned development pipeline aggregates $302 million of cost and it's 30% life Sciences and 70% office. These wholly owned developments are 83% leased with a remaining funding requirement at $51 million, which is built into our capital plan.
The majority of that spend is for tenant improvement and leasing commission costs that would only be spent at <unk>.
And into lease executions.
Our joint venture developments.
Brandywine share of $512 million at full cost. This pipeline is 32% residential 38% life science and 30% office.
As we noted the Sip higher interest cost than originally contemplated will impact our total cost and based on the current so far so for curve. We currently estimate the cost increased due to higher rates will approximate $23 million based on the preferred structure of those.
Joint venture developments, it's anticipated that Brandywine will likely be required to fund those additional costs and we notice that we've noted those increases on the development page and et cetera.
Further as I stated last quarter as well as we're stating the obvious given the volatility in capital markets other than fully leased build to suit opportunities future development starts are on hold pending more leasing on our existing pipeline and more clarity on the cost at both debt capital and cap rates look.
King ahead, given the mixed use nature of our master planned communities, primarily at Schuylkill yards in Uptown ATX as we identified on page 14 of the Sip are expected forward product pipeline mix is 27% life science, 42% residential 22% office and nine.
Percent support retail entertainment and hospitality and also as you identified back on page six of the Sip. Our objective is to grow our life science platform to over 23% of our square footage based on land, we currently own or control and approvals currently in place.
Just a quick review of specific projects.
On page $723 40, Dulles corner is 92% pre leased with $23 million of remaining funding 250, King of Prussia Road remains 53% leased with $20 million of remaining funding that 53% leased did not change quarter over.
Over quarter, but we do have a strong pipeline of about 200000 square feet of deals in that pipeline of which a 100% of that pipeline is life science based upon that pipeline. We did slide the stabilization date of that project by one quarter.
In addition, when you take a look at our overall pipeline development activity.
That pipeline of our development projects is up 10% quarter over quarter and as I mentioned earlier stands at $2 2 million square feet lease executions, even with the pipeline building have been slow in coming and we have a number of leases in various stages of negotiation and are working hard to get them across the fin.
<unk> lines finish.
Finish line.
Given this dynamic we did slide the stabilization date on 30, 25, JFK by one quarter and given the market conditions and pipeline activity in Austin did slide the one Uptown office component by two quarters in their stabilization date.
$130 25 to touch on that we have a current active pipeline.
Is up slightly from last quarter for the life Science and office components, we've done an amazing number of tourist through the project.
Tour activity continues to deliver the first block of residential units is underway this quarter with a good level of activity since our marketing launch several weeks ago. Our $31 51 life Science project is under construction steel is up to the fifth level.
We have a leasing pipeline there of almost 400000 square feet.
And all systems are go there in terms of the number of hard hat tours were doing as well turning to turning to Austin, our Uptown ATX block a construction.
I'm a construction standpoint is on time and on budget.
On the office component our leasing pipeline is stands at 721000 square feet, which is up 180000 square feet from last quarter.
That pipeline includes a mix of prospects ranging from as low as 5000 square feet to as large as 200000 square feet. So as that curtain wall and the building is going up in the lobby finishes are being completed we are seeing an uptick in activity there as well.
Our next phase of the labs on the ninth floor at <unk> Center is well underway.
This conversion to graduate lab space is that 66% leased the bulk conversion will be completed in the first quarter of next year. The total cost which are built into our capital plan, our $20 million and we expect a return on cost there of 11%.
Just a quick look at the sales market. There is no question that the sales market has been impacted by a challenging rate environment have pulled back by lenders on commercial real estate financings, particularly office and negative macro overtones on the office sector itself in spite of this base.
Our pre marketing efforts, we are still maintaining our $100 million to $125 million sales target as we originally noted at the when we announced our 23 business plan. We did anticipate those sales occurring in the second half of the year we.
We do have about $200 million of properties in the market for sale now those properties are in our met DC in Pennsylvania suburban markets. We also have several joint venture properties on the market.
At the same time as well this quarter, we did gain certainty on the sale of an asset in Austin and expect that $53 million sale to close in the next several weeks we have several other properties moving through contract negotiations a couple of which may necessitate some level of short term seller.
<unk> and.
In general we continue to see a good list of bidders the primary challenge being getting acquisition financing at both a cost and a loan to value range that makes sense for the buyer.
But we continue to work.
With our buyers and their potential lenders to try and come up with a good solution. We do plan to continue to sell non non core land parcels during the balance of the year and in the joint venture front.
As I alluded to we're only about 20% of our total debt is coming from our jv's through debt attribution, we do plan to recapitalize several of these jv's during the second half of 'twenty three with the goal to reduce our attributed debt from our operating jv's by 24% or approximately $100 million by the end of the.
A year that will certainly be additive to improving our EBITDA multiple dollars generated from those activities will be used to fund our remaining development pipeline commitments, and obviously reduce leverage and improve the company's liquidity.
With those comments I'll now turn it over to Tom to provide an overview of our financial results.
Thank you Jerry and good morning, our first quarter net loss totaled $12 9 million or <unk> <unk> per share and <unk> totaled $49 6 million or <unk> 29 per diluted share and two cents above consensus estimates.
General observations regarding our second quarter results being being above consensus we had several moving pieces in several variance as compared to our first call guidance, our management and leasing and development fees totaled $3 7 million or $1 3 million above our first quarter projections, primarily due to higher third party.
Lease Commission income.
Our portfolio operating income totaled 75 million $1 million below our $76 million forecast due to some leasing.
Mensing slightly behind budget.
<unk> contribution from our joint ventures totaled $4 5 million and was $1 3 million above our forecast primarily due to lower interest expense from the delay in completing the commerce square mortgage to June 23 termination.
Termination and other income totaled $1 4 million and was 900000 above our first quarter forecast, we anticipate the second quarter.
Result will be a good run rate going forward. We also forecasted one land sale to generate $600000 gain and thats been delayed until the third quarter.
Our second quarter debt service and interest coverage ratios were two 9% to eight respectively slightly better than our forecast and net debt to JV was 41, 7% or.
Our second quarter annualized core net debt to EBITDA was six five times and within our 2023 range and our annual combined net debt.
EBITDA was 763 tenths of a turn of.
Our guidance. However, we anticipate the metric to improve with higher EBITDA and the forecast of asset sales.
Regarding the portfolio has highlighted last quarter 405, Colorado is now included in our core portfolio for the second quarter.
As Jerry outlined we continue to make some progress on our financing front as anticipated in June our joint venture refinance the Commerce square property with a five year first mortgage at a rate of 775% the mortgage totaled $220 million and replaces our previous $204 million mortgage maturity.
Providing $16 million of good news capital for existing and forecasted leasing activity.
While the rate is above our forecasted rate the <unk> market was open which allowed us to complete this financing.
Financing refinancing despite the recent bank failures.
We were successful in completing the commerce square financing, we continue to see challenges in the financing market for office properties. The traditional banks are allocating little or no money to new originations for new office loans, except for certain situations such as fully leased build to suit properties.
And good relationships with the with the.
Sponsor, we think some lenders will be flexible and provide shorter term loan extension is on performing portfolios with good sponsorship.
Regarding our joint venture that we are working with our partners on the 2024 maturities to possibly extend the current maturity dates with existing lenders. We're also considering some asset sales.
Within those portfolios to lower leverage and we have commenced marketing efforts with new lenders on a couple of our joint venture properties.
We anticipate executing a short term extension of our $100 million first mortgage on a map portfolio. As you know we are 50% partner in the joint venture, which owns a leasehold position in a portfolio of assets and we are working with the lender to recapitalize that loan along with talking to the joint venture.
Lender as well as the ground owner.
Regarding 23 guidance, we have narrowed our guidance by <unk> <unk>.
Maintaining a midpoint of $1 16, and the range is mainly attributable to the variability of our asset sales program. Both in terms of volume and timing as well as our projected land sales and related gains are.
Our 2023 business plan includes the following assumptions $100 million to $125 million.
Second half sales with dilution is not being significant no new property acquisitions, no anticipate ATM or share buyback activity and the share count is estimated to be 174 million diluted shares.
Looking more closely at the third quarter of 2023, we have the following general assumptions property level operating income will total $77 million and be $2 million ahead of the second quarter, primarily due to increased occupancy at 405, Colorado 250, King of Prussia Road and the balance of the portfolio are.
<unk> contribution from our Uncas out of that joint ventures will total $1 5 million for the third quarter. The sequential decrease was primarily due to higher interest rate expense, primarily commerce squares refinancing and then higher interest rates on our map JV as a very favorable swap matures.
August 1st and a slightly negative impact for the commencing of our residential operations.
Our G&A expense will decrease from our second quarter to $8 million due to reduced restricted share compensation.
Our interest expense, including deferred financing costs will approximate $26 million and capitalized interests interest will approximate $3 million.
Termination fee and other income will total $1 5 million for the quarter net management and leasing development fees will be $3 4 million as we continue to forecast higher third party lease Commission income.
Land gain sales and tax provision will net to a $1 million gain representing $2 forecasted land sales.
As we look at our capital plan as Jerry mentioned, we experienced better forecast at CAD payout ratio of 84%, primarily due to leasing capital costs being below our business plan range since our first half CAD payout rate was better than forecasted we have adjusted our annual 2023.
CAD range from 95% to 105% to 90% to 100% our capital plan for the second half of the year is very straightforward and totaled $220 million.
More importantly, we continue to prioritize liquidity and still project no borrowings under 600 $600 million unsecured line of credit at the end of 2023.
Uses for the balance of 'twenty three are comprised of $90 million of development and redevelopment projects.
$66 million of common dividends $10 million of revenue create capital $30 million of revenue.
Sorry, $10 million of revenue maintain capital $30 million of revenue create capital and $24 million equity contributions to our joint Venture's primary sources, our $105 million of cash flow after interest payments.
$10 million.
Projected on a construction loan for $1 55, King of Prussia Road.
$15 million increase in cash.
We will be the result, and we do have a $120 million of land and other property sales.
Based on this capital plan outlined above we project, having full line available at the end of the year. We also project that our net debt to EBITDA will fall at the upper end of our range of seven out of seven three.
And then the minimal projected income by year end under development projects, our debt to JV will be in the $40 to 42 range and our core net debt to EBITDA range of six 2% to 65% by the end of the year, which excludes our joint ventures and our active development projects. We continue to believe this core leverage.
Metric reflects the leverage of our core portfolio and only emulates more highly levered joint ventures at our on stabilized development and redevelopment projects.
We believe these ratios are elevated due to our growing development pipeline and believe that once these developments are stabilized our leverage will decrease back towards the core leverage ratio.
Anticipate our debt service and interest coverage ratios to approximate $2 seven which represents a sequential decrease in our coverage ratios due to our projected development spend and higher interest rates.
I'll now turn the call back over to Jared.
Thanks, Tom.
I guess the key takeaways would.
The portfolio is in solid shape.
We do recognize there remains some negative over talents on office in the future of office, but we are seeing an increasingly buildup in our pipeline as well as tour activity.
Major challenges getting decisions made but.
It cleared dynamic of the flight to quality I think we're benefiting from throughout our portfolio.
We've also taken a number of steps over the last.
Number of quarters to make sure that our annual average square foot rollover exposure through 'twenty six is only seven 3%.
Strong mark to markets manageable capital spend and hopefully a continued acceleration of our leasing velocity. We have covered all of our wholly owned near term liquidity needs.
It worked.
This plan is predicated upon ensuring ample liquidity by keeping our line of credit at zero. We are actively pursuing a whole range of other financing activities to ensure that liquidity position and our leverage metrics continue to improve and our business plan is based upon improving liquidity.
And keeps our operating portfolio on very solid footing with a good forward leasing pipeline.
To continue executing over the next couple of quarters, so as usual and where we started.
We really do wish you and all your families well and with that we're delighted to open up the floor to questions. Tanya we do ask that in the interest of time, you limit yourself to one question and a follow up.
Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again and please limit yourself to one question and a follow up one moment, while we compile the Q&A roster.
And our first question will come from Steve Issaquah of Evercore ISI. Your line is open.
Thanks, Good morning, Gerry and Tom.
Good morning, I was wondering if hey, I was wondering if you could just maybe expand a little bit on the <unk>.
Leasing pipeline I mean, those those numbers seem very large in relation to the size of the development pipeline, but obviously you haven't gotten anything over the finish line and I'm just curious from a decision making standpoint, what sort of holding back Ceos Cfos is at this pending recession that continues to get pushed out.
Is it uncertainty over rates like what sort of gets people to finally make this decision.
Steve Great question as Jerry up.
I think a couple of things and George certainly feel free to chime in but.
I think when we look at the development pipeline in particular.
Those buildings are reaching kind of the latter stages of their physical construction. So lobbies are now done.
Entity floors are being completed.
It shows as a real high quality building. So I think we've always seen in all of our development projects over the years, Steve and acceleration of pipeline as the building nears completion.
So that was a trend line, we would expect to see I think were frankly pretty happy.
Even given the slowness of the Austin, Texas market with the size of the pipeline Bill we've had there just in the last quarter.
<unk>.
We are working every moment of every day to figure out the algorithm of how we get people to execute leases.
The major thing that we are seeing is.
That there is general concern about macroeconomic conditions, particularly.
Typically in these larger sized leases. These companies are committing a huge amount of their own capital.
To move into new office and life Science space.
The negative overtones of the lack of clarity on where the economy is going is certainly playing into that theme I've had a number of direct conversation with some of the C suite executives some of our key prospects in.
They walk away incredibly excited about that.
Quality of the project were presenting to them and when they go back to their own offices.
And so through the cost of relocation I think that's giving them a little bit of a pause.
We have not heard anything relative to any of our specific projects. That's holding anything back in fact quite the contrary I think we are generally after a tool we have a very high level of enthusiasm by the prospect it tends to be more as they work through their own financial situation, what they view as the appropriate time to pull the trigger on.
Sign a long term lease.
Tends to be the bigger gating issue.
But the pipeline itself continues to grow very good diversity within that within that pipeline itself between large and small users.
Very happy with what we're seeing here in Philadelphia in terms of the mix between office and life science prospects.
All that being said our focus remains on getting some lease executions done and.
We have a number of prospects and space planning, we have a number of prospects.
We're working through letters of intent on couple in lease negotiations, but.
We remain very anxious to report to all of you some definitive lease signings, we know the prices will lease up.
Even with the increased cost we kept the return on cost metrics. The same because we are meeting very little resistance.
On a rental pricing.
But we know we have some work to deliver there Steve.
Great. Thanks, and then I guess on the follow up you touched on this state of Texas lease.
I guess just to maybe paraphrase it sounds like Youre, not really questioning I guess their ability to cancel the lease but may be did they provide proper notification and kind of when the lease may actually terminate or is there something.
Even questioning the ability to cancel the lease and I guess I'm just trying to make sure is it more of an if they can cancel at or more about when it would get canceled.
Well I want to be careful in my commentary.
But.
The lease we executed with the state of Texas contained a standard provision and off and Allstate. It's actually so it's all I say all to the extent, we can determine all state of Texas leases.
That essentially and we see that a number of other government agency leased as well that gives the sovereign this state of the federal government the right to cancel the lease.
To the extent that appropriations are what's drawn to support that agency.
<unk>.
And in addition to that there are certain other requirements in the lease about.
Filling the space with other state agencies and complying with some other notice requirements as.
As well as providing evidence of non appropriations. So at this point I don't want to say, whether they have if they have the right to cancel or if they do when that would be effective I think given the lateness of this notice.
Bill tracking down both from a business political and legal front, what the most appropriate steps for us to take our.
This lease termination could have significant implications in the state of Texas since as I mentioned, most if not all of the state leases have this provision and then to the extent we've been able to determine its never been exercised before.
So we have a lot of work to go through before we determine if the notice we received was valid or not but in the interest of full disclosure as soon as we receive that and we thought it was appropriate to disclose that to our shareholders immediately and.
As a consequence, we've taken those Ford revenue.
<unk> would receive under that lease out of our revenue projections and <unk> four for the balance of 'twenty three.
So worked at work to do there as well and certainly we are collaborating with the various agencies to try and come to the right answer.
Great. Thank you that's it.
Thanks.
And our next question will come from Camille Bonnell of Bank of America. Your line is open.
Good morning can you talk to the retention dynamics during the quarter I noticed you held your guidance on this so just trying to understand.
Any particular tenant or at least contributed to this are you seeing stickier behavior keeping guidance in case of situations like ATX.
Yes. Good morning. This is George I'll handle that one.
We had a very strong quarter in terms of the second quarter at 71%, but we do have two pending move outs still to come.
One is a 55000 square foot tenant.
And our Plymouth meeting portfolio during the third quarter and then another is a 69000 square foot tenant in.
In Radnor, who will vacate in the fourth quarter. So those two known forward move outs are really the reason why we've made.
<unk> maintained the full year retention guidance.
Helpful and my follow up on a different topic.
As you've been to the market a few times this year to execute on different financing as part of your liquidity enhancement program.
You are now looking to execute on the construction loan at 155 King of Prussia I know this asset is 100% pre lease, but do you get a sense from your discussions with the lenders there is still appetite to issue construction loans at the targeted 60% LTV or is this something under discussion.
Hi, Bill it's Tom.
I think on a fully it will depend on the tenant that's going in in the terms of their lease but on this build to suit that we have in particular no I think there is lender appetite.
For the transaction I think they may ask for a little more.
Credit enhancement in the way of of.
Of recourse.
But nothing too significant and so I do think sponsorship is also important and.
And the interest we did get on the loan.
We do expect to close with one of our banks that we have a good relationship with is that we did go to banks that we do now.
So I do think that market is open for a good tenant with good terms on the lease and.
And also good sponsorship.
Thank you.
Thank you.
One moment for our next question.
And our next question will come from Michael Griffin of Citi. Your line is open.
Great. Thanks, I had a question on the Commerce square JV I'm curious if the refinancing was contingent on you contributing more equity and if so do you see more upside in owning more of this property longer term and anything you could add there would be great.
Yeah, Hey, good morning, how are you Jerry.
Tom and I can tap team that's look I think the.
We were delighted to get the financing done it's a challenging market as a big loan.
<unk> had great debt yield coverage normally be a slam dunk, but it was a well.
We were fortunate to see MBS market was open we think that market will remain open so that could be a viable source of future financings as well.
Look I think as we assess commerce and you take a look at the trend line, yes, it's a great asset with significant NOI growth potential we've had excellent leasing the last several quarters with increasing.
Yes.
Really strong positive mark to market rents and good control over capital costs. We think there's a really good pipeline building with leases in process. The neighborhood is also improving.
It's becoming much more of an infill location with new residential and commercial development.
Has great onsite onsite parking a retail base and I guess, our read was.
With our debt service costs, increasing significantly the preferred structure put in place a number of years ago, which was a fairly expensive cost of capital for us the accrual on that preferred continuing to click away. We felt that given what we see is the <unk>.
Increasingly positive trajectory of that property.
And the cost of the new debt and the preferred that given our liquidity position. We were we were in a position to kind of pay down some of that accrual redeemed some of that preferred equity position increase our increase our overall stake and position ourselves to maximize value going forward.
Thanks, and then my next one just on the development pipeline I think you talked about pushing out some of the stabilization dates from last quarter. When do you have to start seeing leasing on some of these properties to be confident to hit those targeted stabilized yields.
Yes, I think in the next couple of quarters I think I think Michael as we went through the the assessment what do you have those stabilization dates we kind of went through the line item by line item in the pipeline and kind of rolled out what we thought we could actually deliver.
So we think in the next couple of quarters, we need to be posting some leasing activity to meet those stabilization dates.
Great that's it for me thanks.
Thank you our next question.
Okay.
And our next question will come from Michael Lewis of Choice Securities. Your line is open.
Thank you.
Gary and Tom you both gave a lot of color on the Commerce square refi.
Some of the work that you have left to do on other JV refinancing.
Maybe there's not much more to say on this but I think it's interesting how office refis are getting done these days.
So I'm curious if you could share a little more about the inner workings.
Why an 8% paid how you settled on how you settled on the asset value.
And maybe share the volume.
Was price.
That 8% interest.
Kind of color on how these deals get done and how they were and maybe commerce square as an example.
Yes.
Hey, Michael Thanks.
Thanks for the question.
Our other JV, let me let me start with then and comment I can talk about commerce as well.
We have partners in all of those commerce is unique because we are a majority partner there.
Share control, so it's an unconsolidated joint.
Joint venture and our other joint ventures on the operating side, we're other than that we're kind of 15% to 20% owners. So number one we have good partners number two we have great relationship of those partners are working with them very closely on the recapitalization strategy for each of those.
<unk> ventures.
All the loans in these ventures are completely nonrecourse.
There is varying degrees of investment position that both.
Brandy wine and our partner have.
And.
In all of the Port in all the joint ventures, the operating performance of those have tended to outperform their respective markets. They're in so we've maintained very good credibility operating in a capital investment standpoint, with our lenders are lenders.
I think our bias is to be cooperative and understand the challenges of getting themselves refinanced out. So I think as Tom touched on we do anticipate that in.
In many of these situations will be able to bridge through until there is more liquidity in the overall capital markets.
And that will be a collaborative discussion with.
With our partner in the lender.
In case of the map joint venture as you know there.
We are a partner with with sculptor.
That loan.
One the lease hold there is a third party that owns the fee. So there we're in a we're in discussion with the owner.
Leasehold lender and our partner on the best way to recapitalize that.
I think the structure of those operating joint ventures is different than commerce, because theyre all common equity.
<unk> mentioned, they're powered pursued joint ventures Commerce has this preferred structure, which kind of creates a different waterfall, but we're looking at in terms of what's the best approach for us to maximize value out of that venture setup time, you want to add any color to that.
Mike.
Michael on that I guess on the financing itself.
Yes.
We looked at the amount of debt we wanted to put on in fact, we probably could have added a bit more of good news capital.
To that loan and as Terry pointed out we wanted to make sure we were mindful of where the debt service coverage, but go and and our partner was as well being in a preferred equity structure.
In terms of the.
The contribution that we made to the venture was broken down into a couple of pieces. So I know that you had put in some some implied rates.
Per square foot and cap rate and.
For us it was it was a bit lower than that we did repay as Jerry mentioned in his comments.
Some of the accrued preferred dividends that we had in the project there is components to both current and route.
So our contribution not only what the 8%.
Increasing us, but also paid off so improve returns so the metrics are a bit lower than.
The ones you had additives or like mid two hundreds of foot.
And in a cap rate.
Little above a seven so not quite at the numbers that you look at by just taking the $50 million of putting it.
Across the 8%.
Okay. That's.
Thats helpful.
And then my second question.
The same store NOI growth looks like it was driven mostly by lower expenses, particularly real estate taxes was there anything onetime in there or any color on what drove that.
Yes, Michael Good morning, It's George we did have a significant reduction in real estate taxes in our Austin, Texas portfolio.
The Travis County.
Raisin district mix come through.
And had lowered.
Phrased values, so given the triple net nature of those leases.
At our current 86% occupancy in Austin.
A lot of that then also lower tenant reimbursements as we.
Crude.
The reimbursement magnitude tenant, but so that was really kind of a one time.
Event for real estate taxes.
Okay, great. Thank you.
Thank you Michael.
One moment for our next question.
And our next question will come from Bill Crow.
Of Raymond James Your line is open.
Hey, good morning Gerry.
Life Science space has been in the spotlight a little bit here lately I was wondering what your take is on the actual physical returned occupancy levels youre seeing in the overall demand levels.
Science space.
Hey, Bill I mean, certainly the.
The occupancy levels in the.
In the lab and research space are much higher than generally in the office.
They need to be on site to do that work.
And that is really prompted for many of the life science companies that we're dealing with a kind of a full return to the workplace. So there is a quality among the employee base.
And I think Thats a trend line, we anticipate continued to accelerate we are seeing more and more companies generally bring people back three or four days a week.
<unk>.
So I hope that trend line will continue I think on the life science side look demand is.
Is slower than it would have been this time last year.
We have a number of companies who are.
Going through FDA trials, we have a number of companies that are in the process of raising additional financings.
We're seeing all the deals in the marketplace. So the overall pipeline is up.
I think you had a question earlier I think macro conditions are having some level of impact upon when they are able to make.
Make decisions.
But the pipeline.
On the life Science side continues to build particularly here in University City, we're seeing a good pipeline of activity out in our radnor portfolio as well.
And some of those are some I mean, the range of credit worthiness is from AAA.
AAA credits down to emerging emerging growth company. So we're being very very diligent on making sure we understand.
Or the financial condition of some of these tenants.
Working through our be lapsed partners with.
Biotech Council they have a scientific advisory board Theres other scientists so we've gotten involved in helping give us some assessment on the validity of the science and the probability of FDA approval.
In addition to doing our normal balance sheet review.
But while demand is muted.
<unk> is also supply supply levels are down significantly in terms of plant starts down our competition here in University City is really three or four buildings, where.
Four six quarters ago could have been much higher than that so I think.
The supply side has come in significantly I think our location and the quality of the buildings were presenting will hold us in very good stead is.
<unk> demand drivers come to fruition in terms of lease executions.
Thanks, and one quick follow up how much did the.
Tax assessor in the appraiser in.
And Austin lowered values.
How much of the appraiser low the values by.
Bill I'm going to have to follow up with you.
I don't I don't have that information with me okay.
Okay. Just curious average number thanks, that's it from me.
Thanks Bill.
One moment for our next question.
And our next question.
Dylan Brzezinski.
Your line is open demand.
Hi, guys. Good morning, and thanks for taking the question just.
Just curious expectations for net effective rent in the back half of the year and heading into 2024 is this a scenario where we could start to see some relief in growing net effect net effective rent side of things.
Yes. Good morning, it's George again, I'll be happy to take that one yes.
We're seeing net effective rent growth I mean, the fact that we're being able to control capital the way we are.
Asking rental rates have not come under much scrutiny or pressure.
And so I think really across.
Both city and suburbs here in Pennsylvania, we're seeing strong positive net effective rent growth I think in Austin right now I think just given.
16% vacancy.
We are competing a little bit more aggressively there.
We're probably kind of flat to maybe slightly negative on net effective in Austin in the suburban pockets that we have in the operating portfolio.
Thanks, Rich I think to add to that.
I think one of the other dynamics, we're seeing in EMEA, mainly are the same thing from some of the other office peers is.
As tenants are returning to the office more and more they are looking for better quality workplaces.
Even though there may not be the level of net absorption in some of these markets. The levels of leasing activity are still pretty decent and that leasing activity.
Is still willing to pay.
A positive rent premium to where they are moving from because the buildings are more efficient they may actually be taken a lower amount of space.
But the reality is that the physical platform theyre, providing for their employees as a significant improvement over where where theyre coming from that's why I wanted I think when the real strong SaaS. We had this quarter was.
About 60 plus percent.
Of our new leasing activity was coming from tenants moving up the quality curve.
And we were still able to post very good mark to markets and net effective rent growth. So that's that's the stat. We track very carefully because that's that's a harbinger of where we see effective rents can go so as long as tenants continue to be willing to pay up and rent to move into the <unk>.
At our quality buildings, we do see continued progression.
Growth in net effective rents and obviously there is somewhat a different as George touched on with Austin I mean, there there's still sublease space. There, we're competing against some of that sublease space is in high quality buildings and to the extent that they are willing to discount rents that creates a little bit of downward pressure on us which is why in our business plan, we've really assumed.
Negative mark to market for.
For the balance of the year on our on our targeted Boston leasing activity.
And then.
Appreciate your guys' comments on how the lending environment remains challenging for office, but just curious in your discussions with lenders is there a certain debt yield that theyre targeting.
This is Tom I think that we've been seeing that yields that are in the in the low double digits.
And on the property and the tenancy.
But they are in the low double digits in terms of debt yields that they are looking to target.
Yeah.
Great. Thanks Al.
Thank you. Thank you.
Our next question.
And our last question will come from Anthony pay alone.
J P. Morgan your line is open.
Thank you.
I wanted to follow up on the life Science leasing pipeline I think you mentioned 400000 square feet for 31, 51, and it's almost the size of the whole building so that seems positive but just.
What's the alternative universe for the folks looking at that project, but just trying to understand how much share you all might need to get that that project buildup and also I guess relevant for space at $3 25 as well.
Yes, good morning, Tony.
The competitive set.
University City.
Is.
Primarily three other buildings.
Two two others of which are under construction.
We think each building.
Is fairly good and quality their delivery times are different so to some degree where they'll be in the mix or not in the mix with.
Our prospect today will really be based upon their delivery timeframe.
In addition to University city.
Whether we compete with those buildings, sometimes some of these tenants looking in.
In different submarkets, whether it be the navy yard or out in the Pennsylvania suburbs, particularly radnor.
But the universe is much smaller than it was as I mentioned in a previous comment.
Four to six quarters ago, I mean, I think the.
The upside to the downside of the lending activity is that not a lot of price you are getting financed in addition to that given the increase in cost.
The yield requirements are higher as well so that is that the lower supply coming online and the and the increased cost to build these buildings not just from a hard cost, but now from a soft cost standpoint are pushing rent levels up fairly significantly in order to have that number.
<unk> pencil. So we think that trend line will be in place through this through the stabilization dates about $30 25 and $31 51.
We think even within that competitive space, we think the proximity of Schuylkill yards to the train to the regional rail network to 30 Street train station.
Proximity the Super Trail easy walk the CBD and all the amenities there does position us very strongly against the competitive set.
That being said as I mentioned earlier, we know we need to get some of these leasing lease.
Lease prospects across the finish line and Thats our core focus.
Okay. Thank you for that.
And then I guess just follow up one relates to the dividend you talked about the focus on our liquidity, but also a little bit of improvement in the payout I'm. Just wondering is there a point in time, where the board just takes a finer look at the dividend and you all reassess.
Do you think about the calculus around the dividend right now.
Sure.
A fair question and.
Amplify the board takes a hard look at this every quarter.
And some of the factors come into play on that is obviously our own portfolio performance.
Our capital plan is progressing what our forward leasing pipeline looks like in terms of NOI accretion.
And then we spend a fair amount of time really talking about kind of the macro conditions as well as brandy wines overall liquidity needs.
We'll make we'll have that same discussion in September as we start to contemplate the third quarter.
Dividend distribution outlook.
Our capital plan as Tom outlined.
And the ship is doing much better than our original forecast we have done a good job of navigating some challenging waters and the financing markets to meet our financing objectives.
That being said, we still have work to do.
And that work needs to be done against the backdrop of very challenging capital market environment. So.
Variable right now is the pace.
Sales activity.
And the pricing at which some of those sales take place.
Now some of these joint venture loan negotiations go and I think by September will be able to provide the board with some additional clarity on those points and then we will sit down and make a decision on what we think the third quarter and any for dividends may be but the fact that we can cover our dividend today based upon our revised forecast that's a positive.
But we got to keep in mind that Thats, a brandywine specific situation versus us dealing with a very challenging macro market condition.
Okay. Thank you.
Thank you Terry.
Okay.
I would now like to turn the call back to Jerry for closing remarks.
Tanya Thank you very much.
Everyone. Thank you for participating on our second quarter earnings call. We will look forward to keeping you up.
Updated on our next third quarter earnings call in the fall.
Enjoy the rest of the summer and thank you again for your engagement.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
Okay.
Sure.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Yes.