Q4 2023 Brandywine Realty Trust Earnings Call
Yeah.
Good day, and thank you for standing by and welcome to the Brandywine Realty Trust fourth quarter 2023 earnings call.
At this time all participants are in a listen only mode.
Later, we will conduct a question answer session and instructions will be given at that time.
Please be advised that today's conference is being recorded.
Like to hand, the conference over to your Speaker today, Jerry Sweeney President and CEO. Please go ahead.
Michelle Thank you very much good morning, everyone and thank you for participating in our fourth quarter 2023 earnings call once.
On today's call with me are George Johnstone, Our executive Vice President of operations, Dan 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 that will be discussed during our call may constitute forward looking statements within the meaning of the federal Securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved for further information on factors that could.
Impact our anticipated results. Please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC.
First and foremost we hope that you and yours are well and I'm looking forward to a successful and ever improving 2024.
During our prepared comments will briefly review our fourth quarter results and then spend time outlining the key assumptions of our 24 business plan after that Dan.
Dan, Tom, Georgia, and I will be available to answer any questions and looking at 2023 we posted fourth quarter FFL up 27 cents per share and full year <unk> of $1 15 per share our combined leasing activity for the quarter totaled 550000 square feet joined us.
Quarter, we exited 240000 square feet of leases, including 66, 66000 square feet of new leases at our wholly owned portfolio and our joint venture portfolios. We achieved 312000 square feet of lease executions, including 140000 square feet of new leasing activity.
Our quarterly rental rate Mark to market was 13, 4% on a GAAP basis and seven five on a cash basis, our full year Mark to market was 13, 5% on a GAAP basis, which outperformed our business plan and our full year cash Mark to market was at four 8% within our range.
We ended the quarter, 88% occupied and 89, 6% leased a 100 basis points below our previously announced targets that occupancy and lease percentage was lower due to two things.
We anticipated December move ins that slid until January that was about 50 basis points of that change and the anticipated portfolio sale that we had under agreement did not come to fruition that was under lease portfolio and that impacted our occupancy by 50 basis points on the other hand occupancy.
Our core market of Philadelphia.
<unk> University City, Pennsylvania suburbs in Austin, which comprised 93% of our NOI are 89% occupied and 91% leased and looking just at our urban and suburban operations, we are 93% leased.
As we highlighted in our supplemental package on page four eight of our wholly owned properties comprised over 50% of our overall vacancy impacting our occupancy numbers by almost 500 basis points.
Hands are well underway to address each of these projects range from accelerated leasing and capital investment programs as well as continuing to explore sale and conversion opportunities are 23 spec revenue was $17 1 million.
At the bottom end of our range. The metric was at the lower end of this range due solely to lower leasing volumes in our Austin, Texas operation.
The operating portfolio does remain in solid shape, our forward rollover exposure through 'twenty. Four is now an average of six 4% and through 26 in average of six 2%.
Several points to amplify and green shoots if you will the increase in physical tours had been very encouraging.
Fourth quarter, physical tours exceeded third quarter towards by 54% exceeding our trailing four quarter average by 55% or over 200000 square feet per quarter and also our tour activity remains above pre pandemic levels by 42%.
On a wholly owned basis, 55% of our new leasing activity was a result of a flight to quality.
Tenant expansions continue to outweigh any contractions in our total leasing pipeline is up for the third consecutive quarter and stands at $4 2 million square feet that pipeline is broken down between 2 million square feet in our wholly owned portfolio, which is up 300000 square feet from <unk>.
The 2 million square feet in our existing portfolio of pipeline includes approximately 250000 square feet in advanced stages of lease negotiations.
And also about 41% of our operating portfolio new deal pipeline, our prospects looking to move up the quality curve.
While the timeline for lease execution remains more protracted than we would like tour velocity and the composition of those tours, which as you know is the starting point for the leasing cycle.
Can use to improve in terms of staging through the portfolio proposals that we have outstanding are up 200000 square feet quarter over quarter and leases and negotiations are up 170000 square feet from last quarter.
Turning to the balance sheet, our year end net debt to EBITDA was seven five times, which is up a 10th 10th of a point from the third quarter, primarily due to our delay and anticipate a reduction in debt attribution from our unconsolidated joint ventures asset sales being below our 23 Todd.
And a slight increase in our development and redevelopment spend.
As a counterbalance to that our core EBITDA metric, which excludes joint venture debt attribution and development or redevelopment spend ended the year at six three times within our targeted range.
Looking at liquidity.
On the liquidity front controlled capital spending and our refinancing efforts have enabled us to maintain excellent liquidity as we closed at 23 and look forward to 'twenty four.
For 'twenty three we achieved our goal of having full availability on our $600 million unsecured line of credit. We also closed the year with approximately $58 million of unrestricted cash on hand.
More importantly, as noted on page 13 of our Sip.
Based on our 2020 for business.
Land, we expect that full availability on our line of credit at year end 2024.
During the quarter.
Also bought back $10 million of our 24 unsecured bonds at a slight discount.
We did complete $25 million of sales during the quarter. We did end the year about $78 million of sales and was below our business plan range. While we received good investor interest the lack of attractive lender financing resulted in pricing levels below our expectations and given our strong liquidity position.
When we decided to postpone several sales until market conditions improve at.
As Tom will touch on our consolidated debt is 96% fixed at a five 1% rate. We do continue to assess our options to refinance our 24 bond maturities and we're evaluating a secured mortgage financing on several of our properties.
Secured offering we expect to finalize that plan in the next 90 days and our 24 business plan does assume this refinancing occurred by 630 24 at a mid 8% interest rate.
As noted on page 38 of our Sep we.
We do have four operating joint ventures with loan maturities during the first half of 'twenty four.
Our ownership stake in those ventures ranges between 15% to 50%.
All of these loans are.
All of these loans are secured solely by the real estate in a non recourse with no obligation for either our partner or Brandywine to fund any additional money that being said, we do believe these ventures present, a valuable opportunity as the debt and real estate markets recover as such along with our partner.
We are engaged in productive conversation with each lender and while these discussions are progressing slower than we originally anticipated. We do expect a full resolution on each of these ventures within the next 90 to 120 days and given the nature of those discussions we still do anticipate our overall joint venture.
At attribution will be reduced by over $100 million.
Looking at our dividend, we closed that the 23 with full year, <unk> and CAD payout ratios well covered at 63% and 80% respectively. As we noted in our supplemental package, we did record an impairment charges totaling $151 million during the fourth quarter that wholly owned.
Impairment charge is really based on several assets located in our DC operation really representing shorter hold periods, which is evidenced of our intention to sell those assets as soon as permitted by market conditions and then given certainly the unresolved loan renegotiation status on several of our unconsolidated.
<unk> operating joint ventures, we are recognized impairment on several of those ventures on assets located in Virginia, Maryland, and suburban Pennsylvania.
Looking at our 2024 business plan, we are providing 24 guidance with an <unk> range of 90 to $1 per share with a midpoint of 95 per share the primary drivers of this.
Guidance is additional interest expense equaled a <unk> 15 per share represents a full impact of refinancings done in 'twenty three.
Our consolidated and our joint ventures, and the anticipated refinancing of our $350 million 24 bonds.
We will also with our two of our residential projects entering the lease up phase, we will recognize charges against earnings.
<unk> <unk> a share during 2024, that's really based on as you know is once residential projects are delivered capitalization thesis and we will be recognizing those operating in carry losses. During the lease up there were several other items, including one time items in 'twenty three we don't expect to occur in 'twenty four slightly higher G&A.
Spence is offset by additional land sales and other items that comprised the remaining one.
And looking at the operating metrics, our 2024, GAAP NOI will approximate 23 levels.
The.
Our core portfolio year end occupancy is expected to remain flat year over year, we do have several known move outs during the year. So our average occupancy during 24 will be slightly below our average occupancy in 'twenty three.
Our cash mark to market range will be between zero and 2%.
Mark to market range will be between 11% and 13% while the cash range is lower than our 23 levels is driven purely by the regional composition of our projected 24 leasing activity.
Our mark to market in CBD and University city, and in Pennsylvania suburbs will perform above our business plan range, while Austin will be below that targeted range. We do expect spec revenue will range between $24 $25 million, which is up 43% from 23 levels. We are currently.
$19 million or 79% at the midpoint achieved that midpoint level is above our historical averages and we believe that puts our operating plan in excellent shape at looking at the at the current year occupancy levels with between 80 and 87% 88%.
Lease levels will be beaten.
88%, 89% retention will be impacted by a couple of move outs during the year and we target range an improvement over 'twenty, three but still in that 51% to 53% range.
Same store cash.
NOI growth will be 1% to 3%, we anticipate a thing between negative one 1% on a GAAP basis capital control will remain a key focus point and we anticipate that our capital spend as a percentage of lease revenues will be about 12% slightly above our 23 result.
<unk> excuse me result.
Based on increased 24 leasing activity.
Continued development of redevelopment spend we do project, our net debt to EBITDA to be in the seven 5% to seven eight range.
We do exit with the 60% 60 per share dividend will represent a 63% payout ratio and a 92% CAD payout ratio a bit at the business plan midpoint, our business plan does project $80 million to $100 million of sales activities to occur in Q4 with the minimal <unk>.
Lucian and while that CAD ratio was slightly above the 23 level that is well covered particularly as additional development revenue comes online.
Looking at some financing.
Certainly with a more favorable tone to the interest rate financing climate, we do expect the investment sales market to improve as the year progresses.
Such we do plan to have a.
A number of assets in the market for price discovery, and as bill $80 million to $100 million of sales into our capital plan with again as I just mentioned those sales occurring primarily in the fourth quarter. We are targeting sales of the met DC in Pennsylvania suburban markets. We also anticipate continuing to sell.
Non core land parcels.
And looking at our developments.
As noted earlier, our development leasing pipeline stands at $2 2 million square feet.
Up 5% from last quarter, while we only executed several leases during the quarter. We did see the pipeline of that I'm, sorry, we did see the status of that pipeline advance as of now we have about 120000 square feet of leasing under early negotiations 800000 square feet of proposals.
Outstanding and 240000 square feet of space undergoing test sets.
Tour velocity does continue to pick up our objective is certainly to get our prospects across the finish line, while continuing to build that pipeline.
We opened 2024 with the commercial components of one Uptown and 30 25 JFK delivered so we do anticipate activity levels to continue to increase.
However, given the length of time to complete space plans obtained permits and then construct this space are 24 financial plan does not include any spec revenue coming from these two projects to accelerate revenue recognition. We are building one to two floors of spec suites and each building that will be complete.
By mid year.
When we take a look at our total development pipeline from a cost standpoint that pipeline is 31% residential 41% life science and 28% office as we noted in the supplemental package our remaining funding obligation on this entire pipeline is only 11 million.
Yeah.
And looking at looking at specific projects 30, 25, JFK, which are residential office life Science tower as I mentioned delivered late Q4 'twenty three on the commercial component work currently 15% leased with an active pipeline totaling 770.
Square feet, which is up 88000 square feet from last quarter to deliver additional residential units continues with a balanced phasing in over the next quarter activity levels remained good tours are occurring daily and we currently have 83 leases executed for about 25% of the project.
73% of those leases have taken occupancy.
We do project the residential component of that project will be between 80, and 85% leased by year end 'twenty four.
And looking at $31 51 market or 440000 square foot life Science building that is again on schedule and on budget.
<unk> is scheduled for delivery in very late Q2 for Q2 'twenty four.
We have a pipeline totaling 357000 square feet with about 120000 square feet and early lease negotiations and 90000 square feet at the proposal stage. So a good advancement of that pipeline in the last quarter. We do continue to seek a construction loan.
55% loan to cost range and expect that to close sometime by mid year looking at our Texas projects Uptown ATX block a construction is also on time and on budget.
Our leasing pipeline there includes a mix of prospects ranging from 5000 to 200000 square feet. We did commence a floor of spec suites and during the quarter executed 12000 square foot lease. We are also proceeding on building out an additional four spec suites.
The multifamily component of 341 units will begin phasing in during the third quarter of <unk> 24, and we anticipate that residential component will be 50% leased by the end of 'twenty four or.
Our next phase of the labs expansion on the ninth floor is now complete.
That is also 100% occupied we have now shifted focus and commenced construction on the eighth floor of 27000 square feet and we have three active prospects and they're very advanced stages of lease negotiation negotiation, there as well so with that I'll now turn the.
Presentation over to Tom to provide an overview of our financial results.
Thank you Jerry and good morning, our fourth quarter net loss was $157 million or <unk> 91, a share and our results were impacted by several noncash impairment charges totaling about $153 million or <unk> 89, a share our fourth quarter <unk> totaled $47 2 million or <unk> 27.
<unk> per diluted share and our full year <unk> totaled $198 3 million or $115 15 per share and was within our range of $1 15 to $1 70 guidance range. Some general observations regarding the fourth quarter during the quarter, we had several moving pieces in several variance.
To highlight the contribution from our joint ventures was $2 2 million below re forecast primarily due to increased costs to commence the lease up of our multifamily project at Schuylkill yards, and a onetime charge at one of our joint venture properties.
Recurring <unk>.
Interest expense was 600000 below re forecast primarily due to some higher capitalized interest. We also had forecasted two vacant land parcel sales to generate $1 billion of earnings.
One of those land parcels has been delayed to 2020 foreclose.
On impairments as Jerry mentioned, we recorded impairments on both our wholly owned properties and joint ventures.
We owned impairments were based on shorten anticipated hold periods and the D. C Metro area, primarily in D. C Metro area and the joint venture impairments were based on the uncertain outcome related to the recapitalization of those partnerships. However, we do believe the ultimate success or a capability of those investments.
Our fourth quarter debt service interest coverage ratios were two five and two six respectively and net debt to JV was 43.4.
4%.
Our our fourth quarter annualized core EBITDA was six three times and was within our range that we've given and our combined net debt to EBITDA was 752 times above our seven one to 703 high end of our range our leverage was.
Within our target range, we didn't achieve that due to 2023 business plan sales targets, but that attribution, we had anticipated being reduced due to some of the recapitalization events that we hope to take place in the first half of 'twenty.
Four and continued capital spend on the development projects during.
During the quarter $23, four Dulles was stabilized and added to our core portfolio.
On the financing side, we remain focused on the 24 bonds and.
And continue to evaluate funding on both the secured and unsecured financing market with an objective of completing the financing in the first half of the year.
We're exploring some property level secured financing options, including another wholly owned see MBS transaction, we anticipate our ongoing sales and joint venture liquidation strategy will also generate additional capacity.
As we've discussed in the past we prefer to remain an unsecured borrower borrower and we'll continue to monitor the unsecured market as well given.
Given the above we are seeing improved pricing for both secured and unsecured financings since our first call. We will continue to seek the most efficient capital source with a bias towards the unsecured market.
Regarding the upcoming joint venture maturities as Jerry mentioned, we are working with our partners on the 2024 maturities.
To potentially extend those current maturity dates with our existing lenders and commenced marketing efforts with some new lenders on certain properties for sale to help lower JV leverage.
Go into 24 guidance at the midpoint, our net loss 31 cents per diluted share and <unk> will be 95.
Per diluted share based on our 24 guidance range. This is a decrease of <unk> 20 per share is primarily driven by our interest expense going down.
Going up and they are on both the wholly owned and JV side.
Our 24 range is built on some general assumptions overall portfolio. Our operations remained very stable with property level, GAAP, NOI totaling roughly $305 million or an increase of around $5 million compared.
Compared to the prior the prior year full year impact of $23 $40 405, Colorado will benefit is about $6 million. We continue to see the lease up of 250 King of Prussia generating several million dollars 155, King of Prussia will commence operations in the fourth quarter and.
Generate about $1 million.
Offsetting that is about $4 million.
Reductions due to the 23 sales activity, including losing the state of Texas, So that $4 million as income that was in 2023 that will not be in 'twenty four and will also be a modest increase in the same store portfolio.
<unk> contribution from joint ventures will total of negative $8 million to $10 million. This loss is primarily driven by our multifamily lease up on stabilization.
Up to stabilization and will total about $9 million also higher interest costs on the operating portfolio in 'twenty three that are anticipated to occur in 'twenty four G&A expense will be between 35, and a half from $36 $5 million.
Total interest expense, including $4 5 million of deferred financing costs will approximate $122 5 million due.
Due to the refinancing of the bonds, which Jerry outlined will increase quarterly interest expense by roughly $4 million.
Forecasted higher use of our line of credit to fund development.
Until our speculative second half asset sales takes place and forecasted higher interest rates compared to <unk> 23.
Capitalized interest will total about 6 million <unk>.
Decreased about $6 billion to $10 million as current development redevelopment projects are completed and become operational.
Land sales and tax provisions, we estimate between $4 million to $6 million as we anticipate further progress on selling noncore asset parcels.
Termination and other fee income will be between $10 million to $12 million, which is slightly below our 23 levels due to some one time activities into 'twenty three.
Results net management leasing and development fees will be between 11 and $12 million slightly.
Slight decrease due to this lower forecasted third party fees expected property sales eight to $80 million to $100 million will take place primarily in the second half of the year with no.
Cereal dilution.
And anticipated.
We anticipate no property acquisitions, we anticipate no use of the ATM or buyback activity and we believe our share count will be roughly 174 million shares looking at first quarter guidance.
Property level operating income will total approximately $74 million will be below the fourth quarter operating number by 2 million $2 million, primarily due to some of the fourth quarter asset sales and higher operating costs in some of our portfolios.
<unk> contribution from our joint ventures, with total of negative $1 million.
For the first quarter again, primarily due to the.
Ramp up of leasing at our multifamily project here at Schuylkill yards.
G&A expense for the first quarter will total about $10 million.
Sequential increases consistent with prior years and is primarily due to the timing of deferred compensation expense recognition.
Total interest expense will approximate $26 million capitalized interest will be about right.
Termination fees and other income will total about $2 5 million.
Net management fee and development fees will be about $1 million and a half and we have no land gain sale.
Projected for the first quarter to be material.
Turning to our capital plan, it's pretty straightforward, it's about $660 million or 2020 for CAD range will be between 90 and 95.
The main contributors to the higher range is primarily higher interest rates and expense and interest on the loss and losses on our joint ventures.
Looking at the larger uses we saw about $110 million of development spend which includes spend on $1 55.
King of Prussia Road, we have a $105 million of common dividends.
$35 million of revenue maintain capital $30 million of revenue, creating capital $40 million of equity contributions to our joint venture partners. That's both for capital, but also for some recapitalization of the joint ventures that we expect to occur in the first half of the year.
And at $340 million.
Bond redemption.
The sources for those are going to be $145 million of cash flow after interest payments $343 million of net loan proceeds either secured or unsecured.
It'll decrease our cash by about $50 million as mentioned.
<unk> at the midpoint $90 million of proceeds coming from land and other sales and $32 million of construction loan proceeds to offset the spend 155 King of Prussia.
Based on the capital plan above our line of credit is expected to end the year Undrawn, leaving full availability. We also projected our net debt to <unk>.
EBITDA will range between $7 five and seven eight with an increase with increased primarily due to the incremental capital spend on our development projects with minimal project income forecasted by the end of the year.
Our debt to JV will approximate 45%.
Additional metric of core net debt to EBITDA should be 665 to six eight times.
We anticipate our fixed charge and interest coverage ratios will be roughly $2, two which represents a sequential decrease from this year again due to some higher interest costs.
We continue to see stabilization within our joint venture developments this year and we hope that that leverage will then begin to improve as we go into 'twenty into next year I will now turn the call back over to Gerry.
Thanks, Tom.
So look the key takeaways are.
The operating portfolio and solid a solid shape.
Again, we have very manageable rollover exposure through 26, we will continue to have realm.
Relatively strong mark to markets good control over capital spend and certainly.
We are very.
Pleased with the level of leasing activity through the pipeline that we are that we are seeing we recognize that we are executing a baseline business plan that will continue to improve on our liquidity. It keep we will keep our operating portfolio on very solid footing with real clear focus on leasing.
Our development projects to generate for earnings growth.
So as usual and where we started which is that we really do wish you and your families well and Michelle with that were delighted to open the floor for questions. We do asset and the interest of time you limit yourself to one question a follow up thank you.
Thank you if you'd like to ask a question. Please press star one one.
Your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
Our first question comes from Anthony <unk> with Jpmorgan. Your line is open.
Alright, great. Thanks.
I guess maybe for Tom.
Yes, I think you quantified the drag from the apartments being about a nickel and so I'm. Just wondering if you can give us a sense like when those are fully stabilized is that nickel drag does it become.
Few pennies positive or like what what sort of a bounce off of I guess, what seems like maybe the.
The 24 is perhaps the worst impact of bringing those things online.
Yes, Tony.
Tony I do think it will turn into a positive.
A sense once it's stabilized I think there's two sets of timing I think that we will have.
Some of those hits for Schuylkill yards, taking place in the first and second quarter.
Since they opened up.
End of the third quarter. So we'll begin to see positive NOI as we looked at Schuylkill yards as we enter the second half of the year, but first half of the year, we will see a majority of those charges that we've talked about and then separately we expect.
To be fully open on the project.
One uptown, so again second probably third quarter Youll see some charges starting to hit their for that project.
While it leases up and I think as you get towards the end of the year, though and go into next year. We see you should see a couple of cents of positive momentum moving into.
At the beginning of 'twenty five.
Okay. So we should think about almost like I don't know.
Seven cents of swing from 24 into 25 from those is that like order of magnitude yes.
Yes, I think thats the order of magnitude because right now the NOI.
It's coming online is being offset by our preferred equity and interest expense and until that NOI and so.
Ours is not high enough in the beginning.
To offset that but yes, I think it's probably going to be about 7% swing as you go into 'twenty five.
Okay, and then just second one maybe for Jerry the $4 2 million square foot leasing pipeline that you talked about can you maybe give us a little more color as to the nature of the tenants driving that maybe their industries type of space are working for and such.
Yes.
George and I will tag team it, but we really haven't seen any any perceptible change in the composition of the tenancies quarter over quarter.
Our primary pipeline here in Philadelphia remains.
Life science institutional requirements.
As well as.
Law firms accounting firms engineering firms et cetera.
Down in Austin the pipeline there is actually.
Less tech reliance and.
And more service related.
Whether it be insurance companies financial service firms.
Insurance companies along those lines so.
We've seen a fairly large drop off in the larger tech requirements in Austin.
But certainly even as we saw 405.
<unk> building that was leased up primarily to non tech tenants, we're actually given the dearth of new tech requirements and frankly, the managed sublease space in that market currently controlled by tech tenants, we've really shifted our focus.
As you mentioned a couple of quarters ago to smaller sized tenants that are very much service base versus technology, driven hence the reason we're building out a couple of floors, but George maybe you can add some additional color to that yes, I think you hit the nail on the head I mean professional services seems to be the <unk>.
Predominant industry leaders.
Whether that's financial services law firms and then obviously as Jerry mentioned life science almost exclusively at at $31 51.
But professional service.
Pretty much everywhere else around the company.
And then just one other point of color on that I mean, we continue to see a lot of these traditional service firms looking for a better better corporate home. So that quality thesis, we do continue to see.
We think that.
The quality of the space we're presenting.
As well as the relative stability of our company from a financial standpoint, compared to a lot of private firms.
<unk> is definitely narrowing the competitive set which is I think one of the reasons why we're seeing the pipeline build at such a rapid rate. The challenge. We have is to get that pipeline across the finish line and I think we've.
We're very clearly focused on that.
And want to make sure that we meet all of our leasing objectives.
Okay, great. Thank you.
Yes.
Thank you. Our next question comes from Michael Griffin with Citi. Your line is open.
Great. Thanks.
Jeremy in Europe in your remarks, you talked about how tour activity is notably above recent quarters, how quickly could we see that actually translate into demand.
Singapore space.
Not quick enough for me Michael.
We are putting a full court press we are.
Spine to a lot of Rfps.
RFID.
Level of tour activity has picked up but given in Austin, Texas I mean, the amount of tour activity. We've seen just thus far this year and it's only really one month under the belt is equal to about two thirds of what we saw last year. So we are beginning to see.
A number of as I term green shoots.
And the major challenge I was just getting them across the finish line.
A data point that is helpful. I think as our spec revenue target. This year is well above what the spec revenue target was last year, we are entering this year.
Close to 80% done on that spec revenue target that provides a very solid basis for us to try and generate some additional leasing revenue coming in in the second half of the year. We have also started to take a more aggressive approach.
On.
Pre building some of our spaces.
Not necessarily spec suites, but doing whatever we can within our buildings to get as much done as possible. So that we compressed the time.
From lease execution to.
To occupancy we have expanded our internal space planning team, which is extraordinary so we're able to turn space have plans very quickly based upon those preliminary space plans, we're able to.
Drive any long lead order times for tenants. So the name of the game is I think the theme that you hit on which is how do we compress tour proposal to occupancy and Thats.
That's a whole company initiative from our leasing teams to our legal teams are in our space planning folks.
Our construction development team. So we recognize the urgency of getting additional revenue into our portfolio.
So every every building has been examined to make sure that we've got every vacant space in great shape.
We are tracking toward volumes were following up at a senior executive level with all of our key prospects.
As I mentioned, a full court press at every level of the company to continue to build that pipeline through our social media and marketing outreach programs and then capture more than our fair share of transactions that come through the door.
But you haven't seen tenants.
They are still taking a while to make the decisions right. They haven't shorten their time frame in terms of leasing of searching through to seeing more inbound in Macquarie. This correctly.
Yes, I hate to give you a generalization because it really is so anecdotal.
Some companies that make decisions very quickly and move very quickly we've had other ones, particularly the larger ones that tend to be a little more.
Over deliberative and kind of thinking through their space with George do you have any.
Color on that yes, I mean, I think the cycle times.
Remained relatively unchanged I do think as Gerry mentioned that the larger the tenant oftentimes that decision has taken a little bit longer because they're sometimes going through the analysis of combining several locations into one and we've seen that with a number of tenants kind of taken that flight to quality.
Okay, we're going to move out of two different buildings into this one and then going through their demographic studies of commuting times and things like that but.
The one thing we are encouraged by us in terms of converting tours into proposals, we're running at about a 40% success rate and then once we've got somebody at the proposal.
Running at about a 30 low 30% conversion to an executed lease. So so we do kind of feel that once we get somebody into the building get them comfortable with the space We've got it.
Right opportunity that converted.
But again as we've discussed.
The entire decision isn't solely ours.
Got you that's helpful. And then maybe just one on the desktop for Tom.
The JV debt.
Coming due and it's already passed do you talked about kind of conversations that youre, having with your lenders right now.
Does it make sense to put additional financing on it or would you almost be better off kind of any back.
Of those properties.
Yes, I think that we would probably not want to put additional financing on I do I do couch that by if there was a potential for us to put in capital that would be at a level that we would recover that ahead of us.
Ahead of the data ahead of a portion of the debt that may be something we would consider but I think to for most of them to put in an additional debt or.
That would not be a preference, although I will say one of the financings that we will look to do this year, we probably will look to lower the balance of that refinancings debt and that may come in the way of contributions from the partners to refinance that property. So there is one situation, where I think when we do refinance it we will.
You'll see us add capital and we do have that in our liquidity plan.
The other the others.
No it would not be a situation, where we put more debt on those.
Alright, great.
Great. Okay. Thank you.
Thank you. Our next question comes from Dylan Brzezinski with Green Street. Your line is open.
Hi, guys. Thanks for taking the question just wanted to go back to some of the occupancy comments that you had talked about in your prepared remarks.
So we're talking you guys came in 150 basis points below where you guys have targeted coming into the quarter. You had mentioned 100 basis points could you that being occupancy sliding into January and 50 basis points from.
From a portfolio sale that didn't come to fruition. So I guess just curious what was the other 50 basis points drag on occupancy that you guys thought you had when you guys provided guidance last quarter.
Yes, Joe it's George.
The third component really was just not getting pipeline conversion on a number of new deals that have kind of carried into 2004.
We kind of thought we were going to get.
Get those kind of executed in and into the to the least number.
And then I guess just on that portfolio sale can you kind of talk about.
It clearly was it just a reason that they could not get that and that's sort of why the transaction ever happened or can you just give us some additional color on sort of what happened with that particular portfolio.
Sure I'd be happy to.
Call it in under lease portfolio, which remains in our wholly owned stack right at this point it was.
But really to a non institutional grade buyer too.
Was fairly thinly capitalized and was looking for third party financing when that didn't prove out to be the case they proposed that.
We take back a significant piece of seller financing, which we which as we talked on our previous call. We are willing to do but I think the terms of that seller financing were such that we felt.
<unk> that portfolio for short term.
Get some near term lease renewals done wait for better capital market presented a better opportunity for us to recover value it did impact.
The year end numbers.
Obviously that that portfolio does impact our 24 numbers, but.
But we felt from a financial and a return standpoint.
Was the right decision not to proceed with that sale.
Great. Thanks, guys.
Thanks, Tom.
Thank you. Our next question comes from Steve <unk> with Evercore ISI. Your line is open yes. Thanks. Good morning, I guess just following up on Dylan's question, Gerry just help us think through whats the confidence level you have.
The 88%.
On the percent leased in the occupancy for this year given the things you just outlined slower time to get things over the finish line like guess what conservatism.
Buffers have you put into this year's plan maybe versus last year.
Well I think we have a high degree of confidence in the numbers we put out.
And I think it's evidenced by the high percentage of execution, we already have in place.
As well as a thorough review of the status of our entire pipeline. So bottomline confidence level very high I think if we look at sensitivity. We do have some revenue coming in from our Austin, Texas Operation, which is always.
Rich just given the slow velocity in that marketplace now again as I mentioned, we've seen an uptick in activity. We again have a good portfolio to market.
But certainly we would expect that even if that were to be slower we would make up for that as we have in many past years by increased velocity in our Pennsylvania suburban University city, and CBD portfolio, but George maybe you have some additional thoughts yes sure I mean in terms of square footage you know the open plan is roughly 300.
40000 square feet 100 of that our renewals that we feel confident about and then about 240000 square feet of new leasing and.
Again, we've got 55% of that new leasing coming out of Pennsylvania, both the suburban and the <unk>.
Downtown operations and about 42% coming out of.
Out of Austin So.
We think again the fact that.
At $19 $3 million achieved I mean, we've kind of achieved last year's total spec revenue run rate.
And we think the balance of the plan is is certainly achievable in and we're doing everything we can every data hopefully outperform that plan, but I think in terms of.
Expectations, we think.
We think these are appropriate given where we are today.
Okay. Thanks for the color.
Jerry I think if we did the math right the leasing on the residential and Schuylkill was pretty slow in the fourth quarter. If we did our math right. Maybe there was 20 leases done and.
In the fourth quarter from the last time, you reported a is that correct and if so why was the leasing so slow on that on that new project I know time of year is a little tough but 'twenty.
In a quarter just seems abnormally low.
Yes, I think Steve.
Great question I think your math is always correct, if I, if I remember correctly, but.
We wound up or <unk>.
Last earnings call was Lat was late October and I think that the numbers, we gave kind of reflect it.
That leasing activity through the earnings date.
So frankly from our standpoint as a backdrop, we were really delight the at that level of activity because a lot of the amenity space in the buildings wont complete until much later in the year.
So we did have a slower November and December.
Primarily as a function of the holidays, but tour activity has picked up.
There is a seasonality to it so we do expect to do 12 to 13, new leases in each of January and February and kind of move into an accelerated pace as the spring leasing season picks up but yes, we really benchmark that based on a number of towards that we've had as many as seven to eight towards a day coming through the project and now.
Again that it's 100% physically done the outdoor Parc areas on the lobbies are finished all the furniture at the amenity floor.
The outdoor amenity deck is fully operational we really do expect to see a good acceleration.
That leasing velocity going into the into the fall season as I mentioned, we do expect it to wind up being about 80% to 85% leased by the end of the year.
And just a quick follow up are the rents that you are achieving in the concession levels consistent with what you had budgeted or have rents <unk> concessions kind of been better or worse than you thought.
We had a level of concessions that were in line with our pro forma to kind of do the opening opening occupancy levels right now.
The average rents around $3200, a month and where we are.
Running right online with our pro forming certainly as we start to move into the.
The leasing season, we hope that.
But concessions, we've we're giving will disappear based upon the tour activity that we're seeing so we are.
High level of comps at the pro forma that we pulled together for this project will be executed.
Great. Thanks, that's it.
Thank you Steve.
Thank you. Our next question comes from Paul <unk> with Keybanc. Your line is open.
Hi, Good morning could you talk about some of the sequential changes you saw on the development pipeline I saw that there were some ownership increases completion and stabilization dates pushed out.
And some additional leasing done so if you can give some color on that that'd be great.
Sure.
And we can tag team that the the increase in ownership as you may recall, those the schuylkill yards and the Uptown ATX developments are in joint ventures. Those joint venture partners are preferred so they had an obligation to fund up to their their level of investment.
Which they've done.
And beyond that.
We make additional capital contributions as we make those capital contributions our ownership percentage to change.
So that's the reason for that.
I think.
There were changes made to.
The development schedule, it's simply reflects what our reassessment has been of the time to get space actually build outs and delivery and we continue to see.
Delays at.
At the regulatory level.
Getting permits approved.
Getting all of the appropriate clearances to actually build out space.
One of the reasons why I was mentioning that were.
We're doing.
Doing a lot of into your space planning inspect build out so we can kind of circumvent that.
That delay process.
Yes.
The reason for that is we do.
Most of those increases that's causing us to put in more capital was really related to interest rates and then carry on the project. So.
When we started these projects we had a certain level of EBIT before we started while we're working on the on the loans.
Certain level of interest based on where the curve is at the time and that kind of got built into the budget.
Certainly as rates went up a little faster than we thought and they are coming back down a little slower than we anticipated.
They have caused that.
That part of the budget to go up and that's that's what we're funding.
Primarily there hasn't been many increases other than just some of the interest numbers related to the loans going up and we've chosen to fund those as Jerry said.
Okay got it thank you.
Follow up could you talk about any updates on the vacancy reduction plan.
The breakdown on some of the assets that you plan on leasing up selling and converting on the illicit assets. I know you mentioned some of the disposition plans and timing. So we want to see if there's any other color.
Color you wanted to add there.
Okay.
Well.
101, West down we have commenced a significant lobby renovation there and common area upgrades that we think will help reposition that property.
300, Delaware excuse me.
Three our Delaware Avenue, we are evaluating the feasibility of the conversion opportunity on that project to residential as we are with a couple of these other projects as well.
So.
I think it ranges across the board.
But I do think we've identified a couple of those is probably more appropriate for a residential conversion opportunity versus continuing to re tenant as office space and then making some capital investments in a couple of projects as well in their lobbies common areas et cetera.
Great. Thank you.
Yes.
Thank you. Our next question comes from Bill Crow with Raymond James Your line is open.
Hey, good morning.
Yes. My first question is when you look at the competitive leasing landscape in the Philly and Austin markets.
Is it your sense that your competitors are getting more desperate urgent and they're leasing less.
Urgent desperate, which the market stand from.
Panic perspective.
Yeah. Good question Bill.
Look I think as I touched on earlier that we are in a very good position given the quality of the product we have.
Our ability to.
Execute both from a.
Our tenant improvement brokerage Commission standpoint.
And Thats really been one of the wonderful things about having an unsecured balance sheet, which is why Tom I think touched on our preference Serena unsecured borrower. It gives us really good operating latitude I think a lot of our private market competitors have.
<unk> secured financings in place they certainly they may not have the ability to to fund the ti or may be in the middle of loan negotiations.
They may be trying to work work at refinancing programs and all of that just signals a delay in execution to a tenant market that once and this kind of climate, particularly given the macro overtime a high level of certainty of execution. So we think that really is a.
A wonderful competitive advantage for us.
I would not define it as a panic mode at all I think.
Each of these blocks is saying.
More leasing activity absorption numbers still are fairly bleak in most of the markets, where youre seeing more tenants in the market more tenants looking for higher quality space. So I think at the higher ended.
The quality class those properties seem to be performing much better to what are our CBD Philadelphia properties being in the 90% lease range.
Certainly compared to a 20% vacancy is the best evidence we can give that will continue to see deals and even bill where there is a call. It panic mode in the part of one landlord if they don't have the right products, they're not going to get the deal.
Because.
The consumer preferences.
As we've talked.
As change I mean tenants as they are bringing people back to the workplace on a higher quality work environment. They want a very strong management services delivery platform, which we have and they wanted to know that they have confidence that their landlord is going to be there to service their service them through their entire course of their tenancy.
So I think I think the market the macro tone seems to be a little bit more dour than what we're seeing at the ground level, but we recognize that like the other office companies, we need to demonstrate that change in tone through lease executions and that's that's really.
Really the focus for the company.
I appreciate that I do have a follow up for Tom I think if I go back to <unk> question about the cadence and the recovery of the development of <unk> that you outlined and stabilization.
Do you think earnings hit bottom.
This year.
As we kind of go through the asset sales the refinancing.
And then we build off that as it is.
Is the seven that we're going to capture over the course into 2025 to seven duct keep you flat or positive in 2025.
Yes.
If you look at the if you look at the.
If you look at our yields and our and on our multifamily Phil if once they get to stable Asia theyre going to be generating over <unk> of NOI right. So that's kind of like at the hit stimulation, which will occur in the beginning first half of 2025 right now we're projecting for this year for them to do less than three.
The two two and a half set range. So really it's a swing between that NOI, where it is so for example, one of our projects. The one that's going to start up in Austin, they're going to generate negative NOI for 2020.
Four so when you couple that with the lease up that's starting to occur here at Schuylkill yards Youre getting to an NOI number thats <unk> below so the fact that when you turn on both the preferred and the interest expense. That's all getting those or were those losses are coming from as we grow from that two to three <unk> of NOI that we're expecting over the <unk>.
Course of this year Youll start to hit that full nine cents of earnings on the multifamily.
And the first quarter beginning of second quarter of 2005.
So just wondering.
Positive right.
I think overall, yes, that's the NOI growth overall, because we're already taking full hits on the on the.
On the interest and.
The preferreds as you get into the third and fourth quarters, because both projects will be fully available and fully taking those charges.
Alright, perfect. Thank you for your time, Thank you Bill.
Thank you and our last question comes from Amit <unk> with Deutsche Bank. Your line is open.
Yes, good morning, everyone.
I wanted to go back to I wanted to go back to the interest expense.
Forecast for the year.
Tom.
The debt refinancing that you have planned for the year that debt comes due in four Q I'm just curious.
It's going to be refinanced earlier, which is why having a bigger impact of interest expense.
Also wanted to understand what type of so far.
Our forecast we were using on your variable rate debt and how that impacting your interest expense forecast as well.
Sure. So I'll start with the bonds. So we a couple of points on that one is.
As we talked about on our last call, we prefer doing that bond deal a little sooner than later.
However, since the last call, we have seen rates coming quite a bit I think that our borrowing costs have probably come in.
On a secured or unsecured deal at least 150 basis points. So the tenant the tone has been better for us to get a bond deal done or secured deal done I think though we would prefer getting one done earlier than later.
So if you look at that cost if we do one in the second quarter every quarter, we think roughly.
Four plus million dollars of interest expense and additional interest expense by taking out that.
Bonds early would occur so if we think we're going to do a bond deal or a secured financing in the second quarter, whether its unsecured secured that will add about 88 million $8 million over those two quarters to the bond deal in mid October so that is a big charge on the sofa.
Syed.
As we mentioned we may be using the line a little bit more this year versus last year, we do have floating rate debt at the JV level not all of that debt is fixed so we have been taking so for charges. There and then the normalization of the.
And we have been using the curve.
When we go through our numbers, we do try to use the curve.
A little bit of cushion on there.
But I would say also the biggest the biggest thing in the JV was the commerce square alone, which was partially in 'twenty three full year effect of 24. So we're looking at roughly we.
We were looking at over $6 million of interest charges year over year because of that and because of sulfur.
Thank you.
Thank you Sir.
Thank you there are no further questions I'd like to turn the call over to Jerry Sweeney for closing remarks, great well Michelle. Thank you for your help and thank you all for participating in our call.
Wish you a good day and we look forward to updating you on our business plan on our next quarterly earnings conference call. Thank you.
Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.
Okay.
Yes.
Okay.
Okay.
Yes.
Yes.
Okay.
Thanks.