Q3 2024 Brandywine Realty Trust Earnings Call
Good day and thank you for standing by welcome to Brandywine Realty Trust third quarter 2024 earnings call. At this time, all participants on listen only mode. After the speaker's presentation there'll be a question answer session and instructions will be given at that time.
Please be advised today's conference is being recorded.
I would like to hand, the conference over to your Speaker today, Jerry Sweeney President and CEO. Please go ahead.
Jerry Sweeney: Michelle Thank you very much and good morning, everyone and thank you all for participating in our third quarter 24 earnings call on today's call with me as usual are George Johnstone, Our executive Vice President of operations.
Jerry Sweeney: Dan Palazzo our senior Vice President Chief Accounting Officer, and Tom Wirth, Our executive Vice President Chief Financial Officer.
Jerry Sweeney: Prior to beginning certain information discussed on the call today.
Jerry Sweeney: May constitute forward looking statements within the meaning of 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.
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 well first and foremost we hope that you and yours are well and with summer now behind US, we're looking forward to an ever improving into 2024.
Jerry Sweeney: During our prepared comments today I will briefly review third quarter results and our 2000 and for business plan. Tom will then briefly review our financial results for the for the quarter and frame out the key assumptions driving our fourth quarter 2000 Ford guidance after that.
Jerry Sweeney: Dan George Tom and I are available for any questions.
Similar to last quarter I want to start off by addressing the key themes that guide our business plan.
Jerry Sweeney: Our focus remains on three key areas liquidity development lease up and portfolio stability.
Jerry Sweeney: First on liquidity, but we're really in excellent shape with no unsecured bond maturities for over three years, we anticipate maintaining minimal balances on our line of credit over the next several years to ensure that ample liquidity continues in our forecast liquidity does include proceeds from our asset sale program.
Jerry Sweeney: During the quarter as you noted in our set.
Jerry Sweeney: We did so we did sell a class b portfolio located in the Pennsylvania suburbs for a little more than $65 million. We have several other transactions in progress and as such we did raise our 24 sales target to a midpoint of $150 million our view some detail on that in a few moments.
Jerry Sweeney: The majority of our operating joint ventures, which we spoke about earlier in the year had been restructured we have no operating joint venture debt maturities for quite some time as well.
Jerry Sweeney: And this combined activity has reduced our operating JV debt attribution by $159 million since the beginning of the year not touch on that in a few moments as well.
Jerry Sweeney: Second on development lease up which remains a top priority for the organization.
Jerry Sweeney: <unk> on each project continues to build.
Tour volume and issued proposals increased during the quarter at Schuylkill yards, we remain in advanced stages of negotiation with over 200000 square feet of prospects with continued advancement in the ever building strong pipeline.
Jerry Sweeney: The residential component continues to perform on pro forma in terms of absorption in rents.
Jerry Sweeney: The office component at our Uptown ATX pipeline numbers now stand at over 600000 square feet with tenant sizes, ranging between six and 200000 square feet.
Jerry Sweeney: The Schuylkill yards residential project, which we call. The Bureau has met our year end target of being over 80% leased.
Jerry Sweeney: So we hope to make more progress in the ensuing two months.
Jerry Sweeney: Uptown residential we opened in September and we will be delivering finished units through December and we are already about 15% leased as I noted in the past. These projects remained top of market. They are attractive to a broad range of our customer targets.
Jerry Sweeney: And we remain confident of hitting our pro forma returns, we certainly recognize both the earnings drag and balance sheet impact of carrying this non revenue producing capital and continue our aggressive marketing efforts on each project to the upside upon stabilization. These projects will generate about a 15 five.
Jerry Sweeney: <unk> increase to our existing income stream. So they do remain a key growth driver for the company.
Jerry Sweeney: We do anticipate as Tom will touch on that with interest capitalization periods expiring until these office projects the interest treatment on residential deliveries and the expensing of our preferred returns in those in those development joint ventures, there will be increased expenses attributed to this pipeline before stabilization.
Jerry Sweeney: <unk>.
Jerry Sweeney: And a final the final third leg of that dry powder portfolio stability, which again remains a top priority.
This strong operating metrics, we posted again this quarter reflect the underlying stability of that core portfolio.
Jerry Sweeney: Austin continues to face near term challenges, but intermediate term growth prospects or dynamics.
Dynamics of that market remains strong.
Jerry Sweeney: Heavy levels have picked up in our product quality and will be a strong participant in that market.
Jerry Sweeney: Eventual recovery, Philadelphia, which is one of the lowest vacancy rates among large cities in the country continues to perform very well for us.
Our wholly owned portfolio leasing level and occupancy levels are about 94% and that reinforces the strength of our product in Philadelphia.
Looking ahead, we have only a 5% annual rollover through 2026.
Jerry Sweeney: Then one of the lowest in the office sector are 24 revenue plan has finished ahead of schedule. We have increased our spec revenue range to $26 $3 million and also.
Jerry Sweeney: <unk> raised our annual retention rate are 24 spec revenue target is up $1 8 million or seven 4% over our original 2000 and for business plan, our mark to market capital ratios and same store numbers all performed at strong levels as they have done for the last several quarters.
Jerry Sweeney: With that said the momentum we think we have built has led to overall to our operating results to perform in line with or above our 24 original business plan. Just a few quarterly highlights we did post second quarter <unk> 23 per share.
Jerry Sweeney: As I mentioned, our original spec revenue target of $26 $3 million is up from $25 million to $26 million last quarter, and it's 100% executed or.
Jerry Sweeney: Our combined leasing activity for the quarter totaled 558000 square feet.
Jerry Sweeney: During the quarter, we executed 298000 square feet of leases, including 125000 square feet of new leases within our wholly owned portfolio.
Jerry Sweeney: Total leasing activity wholly owned leasing and new leasing all exceeded second quarter levels. So good signs of continued recovery in our various markets.
Based on our efforts as I touched on a moment ago. During the first nine months of the year, we have eliminated $159 million of debt attribution from our joint ventures. So that's significantly significantly exceeded our targeted $100 million target for 2020 for Consol.
Jerry Sweeney: Consolidated debt is 94% exited six 2% rate.
Jerry Sweeney: Our quarterly rate Mark to market was 14, 9% on a GAAP basis, and eight 9% on a cash basis.
Jerry Sweeney: Our new leasing Mark to market was a strong 18% and two 9% on a GAAP and cash basis, respectively.
Jerry Sweeney: We ended the quarter right in line with our 2024 business plan expectations.
Jerry Sweeney: So the business plan remains in various existing portfolio remains in very solid shape Ford rollover through 25 has been further reduced to about four 6%.
Jerry Sweeney: And the 26 average through about five 2% more importantly, we do not have any tenant lease expiration greater than 1% of revenue through 2026.
Jerry Sweeney: So we're in very good shape from that standpoint.
And along those lines to give you a little bit more color on the market. We do continue to see encouraging signs on the leasing front certainly evidenced by the stats I just mentioned, but also by these metrics the increase in physical tours has been very positive.
Jerry Sweeney: Third quarter physical towards exceeded second quarter towards by 7%, which also exceeded our trailing four quarter average by 22%.
Jerry Sweeney: Also tour activity remains above pre pandemic levels by 36%.
Jerry Sweeney: On a wholly owned basis during the third quarter, 62% of all leases all new leases were results of this flight to quality for 2024 flight to quality deals represented 60% of our new leasing activity.
Jerry Sweeney: Execute at renewal and expansion activity has enabled us to again raise our retention target by 300 basis points. So up from our original 51% to 53% range to now 62% to 63%.
Jerry Sweeney: Total leasing pipeline through the company remained strong the operating portfolio leasing pipeline stands at 2 million square feet.
Jerry Sweeney: <unk>.
Jerry Sweeney: And that includes about 218000 square feet in advanced stages of negotiations.
Jerry Sweeney: Development project pipeline again remained strong and 32% of our operating portfolio new deal pipeline, our prospects looking to move up the quality curve.
Jerry Sweeney: In terms of looking at some of our leverage metrics, our third quarter net debt to EBITDA ratio decreased to seven five times, which benefited Thomas touched on from our third quarter operating results and sales activity, partially offset by increased investment in our development projects our core EBITDA.
Jerry Sweeney: Metric, which we monitor very closely ended the quarter at six six times within our targeted range.
Jerry Sweeney: Based on our operating results for the first three quarters of the year.
Jerry Sweeney: We are adjusting and narrowing our 2004 <unk> guidance to $89 92 per share the change in our <unk> guidance is based on a change in our guidance for 2020 for land sales, which we did anticipate to be about <unk> <unk> a share for 2004.
Jerry Sweeney: Based upon a couple of deals not coming to fruition. We now anticipate no further land gains in 2024.
Jerry Sweeney: And looking at our liquidity and sales activity.
Jerry Sweeney: Our initial business plan projected $80 million to $100 million of sales activity occurring in Q4 with minimal dilution.
Jerry Sweeney: During the quarter, we did sell a noncore class b portfolio.
Jerry Sweeney: In the Pennsylvania suburbs for about six a little more than $65 million.
Jerry Sweeney: Facilitate that sale, we did take back about $15 $5 million of seller financing at an initial rate of 8.25% with subsequent rate increases over its term.
Jerry Sweeney: In addition to that sale, we have a number of other sales that we believe will close during the fourth quarter. Therefore, as we noted in our supplemental package. We have increased our sales target to a midpoint of $150 million none of the additional contemplated sales will require any seller financing. In addition, if these <unk>.
Fans actions close as currently contractually anticipated, we expect $150 million to occur at a blended 8% cap rate.
Jerry Sweeney: Properties and the sale pool are in Pennsylvania, Pennsylvania, and Austin suburbs.
Jerry Sweeney: And looking at our developments as I noted our development pipeline remains strong we are very focused on getting some of the leases in negotiation across the finish line.
Jerry Sweeney: Tour velocity continues to pick up particularly at.
Jerry Sweeney: Uptown ACX and 30 25 JFK.
Jerry Sweeney: Looking at our developments, we have about $1 billion under active development.
Jerry Sweeney: Of that our wholly owned development in Radnor, which is about $80 million in cost is 100% leased fully funded and the tenant has the process taking occupancy during the fourth quarter.
Jerry Sweeney: Looking ahead, given the mixed use nature of our master planned communities. We are expected forward development pipeline product mix is about 27% life science, 42% residential 22% office and 9% support retail enter.
Jerry Sweeney: Attainment hospitality of course any further development starts are conditioned our condition purely upon us leasing up the existing pipeline as well as overall marketing market and capital market conditions.
Jerry Sweeney: Specifically looking at some of the projects $3 25, our residential office.
Jerry Sweeney: Residential tower is fully delivered on the commercial component work currently 23% leased with an active pipeline of well over 200000 square feet.
Jerry Sweeney: Including leases in negotiation, we continue to see steady traffic and leasing activity for a beer or a residential component.
Jerry Sweeney: We currently have 278 leases executed for about 80% of the project, which is up from 237 leases were 73% leased on our last call just about three months ago.
Jerry Sweeney: We're also seeing very good renewal rates for some of our existing tenants where we are.
Jerry Sweeney: In excess of a 60% renewal rate at an average increase in the high double digits. We have already met on the Europe, our year end lease target of being between 80% to 85%, but we're certainly continuing to push for more leasing activity in the ensuing months.
Jerry Sweeney: For Uptown block, a residential which we call Soliris House, we did have some last minute permitting delays. So we did not open up units for occupancy until late September that being said, we currently at $15 52 leases executed or.
Jerry Sweeney: Were 15, 3% for the project, which is up from about 6% on the last call. We are still projecting even with the delayed opening that the residential component will be between 20% and 25% leased by the end of this year.
Jerry Sweeney: $31 51, Mark our life Science project is scheduled for delivery.
Jerry Sweeney: This quarter, we have a leasing pipeline there, including some leases under negotiation, which we are working to get across the finish line.
Jerry Sweeney: Uptown ATX.
Jerry Sweeney: Has the leasing pipeline that remains approximately more than double the space. We have available that does include a mix of prospects ranging from a low of 6000 square feet to a high of about 200000 square feet. We did recently complete a floor of spec suites and are in the process of leasing those suites.
Jerry Sweeney: Our next phase of the labs expansion on the $8 four year at Sierra Centre is nearly complete and we are in the final stages of negotiations with several tenants for these graduate lab opportunities.
Speaker Change: So with that let me turn the floor over to Tom to review our financial results.
Tom Wirth: Thank you Jerry and good morning, our third quarter net loss of $165 5 million or <unk> 96 per share and third quarter <unk> totaled $39 8 million or 23 per diluted share our third quarter net income results were impacted by several impairment charges totaling 161.
Tom Wirth: $4 million or <unk> 93 per share our third quarter <unk> results were one penny per share below consensus estimates and some general observations for the third quarter G&A totaled $12 6 million $3 6 million above our second quarter re forecast primarily due to higher <unk>.
Tom Wirth: Noncash equity compensation amortization, the increase is due to higher than forecasted vesting and we expect this amount to decrease in the fourth quarter.
Tom Wirth: Interest expense was $1 2 million below our re forecast primarily due to higher capitalized interest.
Tom Wirth: <unk> due to the delay in commencing our multifamily development in Austin, partially offset by higher projected borrowings on our unsecured line of credit.
Tom Wirth: <unk> contribution from our unconsolidated joint ventures with.
Tom Wirth: With projected to be negative $2 million and it ended up being basically breakeven the improvement was due to the timing on commencing operations for our multifamily project in Austin and some delay in some improvement in the operating portfolio.
Tom Wirth: Our third quarter debt service and interest coverage ratios were two four times slightly above projection with net debt to JV or 47, 3% our third quarter annualized core net debt to EBITDA was six six times and this is within our 2024 range and our annualized combined.
Tom Wirth: Net debt to EBITDA was seven five times also within our guidance range.
Tom Wirth: Our leverage ratios were.
Tom Wirth: Basically improve based on our higher cash EBITDA.
Tom Wirth: Folio and joint venture exchanges are wholly owned core portfolio was reduced in the third quarter by the sale of our <unk>.
Campus in the suburbs.
Tom Wirth: Our joint venture portfolio now includes $4 one our joint venture portfolio now includes $4 1 million preferred investment for the recapitalization of our <unk> joint venture, we anticipate adding $1 55, King of Prussia Road to our core portfolio in the fourth quarter as we anticipate the tenant will take occupancy during the quarter and the <unk>.
Property is 100% leased.
Tom Wirth: <unk> activity as Gerry highlighted earlier, we've eliminated any material near term maturity risk with no unsecured bonds maturing until November 2027 are wholly owned that is now 93, 9% fixed with a weighted average maturity of three nine years.
Tom Wirth: Looking closer more closely at fourth quarter <unk>.
Tom Wirth: <unk> guidance.
Components are operating portfolio a portfolio level operating income will total approximately $72 5 million and will be roughly $1 3 million below our third quarter, primarily due to reduced NOI related to our asset sales in the third quarter and projected sales in the fourth quarter.
Tom Wirth: <unk> contribution from our unconsolidated joint ventures will total a negative $2 $5 million. The increased loss is primarily due to $23 25, JFK office being operational for more than 12 months ending capitalization are commencing operations of our multifamily project in Austin, Texas.
G&A, our fourth quarter, G&A will approximate $9 million due to lower equity compensation amortization.
Tom Wirth: Total interest expense will increase to $33 5 million due to primarily due to lower capitalized interest totaling about $3 $2 million lower capitalized interest is partially due to joint venture and wholly owned development projects, becoming operational.
Tom Wirth: Termination fee and other income will total roughly $6 million for the fourth quarter, which includes some incremental transaction income.
Tom Wirth: Net management and leasing and development fees should be about $3 million.
Tom Wirth: Land gains, which we're going to be $5 million for the year is now projected to be zero interest and investment income will be zero point.
$8 million and our share count should approximate $176 five.
Tom Wirth: Diluted shares.
Speaker Change: As Jerry outlined previously we have lowered the midpoint of our guidance by <unk> <unk>, primarily due to the anticipated land gains totaling $5 million that will no longer be included in our business plan, while we plan to continue to monetize our noncore cash holdings.
Speaker Change: Non core land holdings, none will close in 2024.
Speaker Change: For run rate guidance as our development projects transitioned to operating properties, we will lose the ability to capitalize certain costs that will now be included in future earnings.
Speaker Change: We'll provide further guidance with our 2025 business plan, we anticipate that certain fourth quarter run rates will continue into 2025.
Speaker Change: Interest expense with the development projects, becoming operation our capitalized interest will decrease in future interest expense will be consistent with our projected fourth quarter.
Speaker Change: Run rate.
Speaker Change: <unk> contribution from our joint ventures, with certain developments, becoming operational and others, increasing NOI through lease up our JV joint venture contribution on a quarterly basis will be consistent with our projected fourth quarter level.
On our capital plan.
Which totaled $109 million for the first nine months of our 2020 for CAD payout ratio was 95, five and our full year range remains 90 to 95.
Speaker Change: Uses for our capital for 2020 for fourth quarter $35 million of development $26 million of common dividends.
Speaker Change: <unk> thousand $14 million of revenue maintain $9 million of revenue create and $25 million contribution to our joint ventures, primarily related to Commerce square.
Speaker Change: Primary sources, our $28 million of cash flow after interest payments $85 million of land and other sales and $12 million of construction loan proceeds.
Speaker Change: Based on the capital plan outlined above cash on hand should increased $16 million on our line of credit is expected to be.
Speaker Change: Undrawn at the end of the year, our projected cash balances at the end of the year have been positively impacted by the incremental lease lease increased sales activity, partially offset by our.
Speaker Change: Stellar financing and planned additional contribution to Commerce square, we also project our net dividend net debt to EBITDA ratio will range between $7 578, and our net debt to JV approximately 47%.
Speaker Change: Our additional metric of core net debt to EBITDA will range between $65 68, which will now which does exclude primarily just our joint ventures as our active development projects will be complete we believe that our core leverage metric better reflects the leverage of our core portfolio and eliminate some more highly levered joint.
Speaker Change: <unk> and our unstable is development and redevelopment projects.
Speaker Change: During 2025, our core net debt to EBITDA should begin to equal our consolidated net debt to EBITDA as the Holly as our wholly owned development projects reach stabilization, we anticipate our fixed charge and interest coverage ratios will approximate to two by the end of the year, which is slightly below our third quarter results.
Speaker Change: I'll now turn the call back over to Gerry.
Jerry Sweeney: Hey, great. Thank you Tom.
Jerry Sweeney: So I think the key takeaways really are that.
Jerry Sweeney: Overall market dynamics in our sector continued to improve with a clear bifurcation of.
Jerry Sweeney: Class a versus class B properties, our portfolio remain operating portfolio remains in solid shape. I mean, we think we have got a very very solid foundation for continued improvement over the next several years.
Jerry Sweeney: Evidenced by the average annual rollover, which is only five 2% through.
Jerry Sweeney: Through to 2006, the strong mark to markets very manageable capital spend to get new leases executed so being able to grow net effective rents.
Jerry Sweeney: And we think stable and hopefully continued acceleration of overall leasing activity.
Jerry Sweeney: We're actually a baseline business plan that continues to improve both liquidity improve our market position keeps that operating portfolio on very solid footing with a major focus in the company on obviously leasing up our development projects. So we're in a great position to generate forward earnings growth.
Jerry Sweeney: So as usual and where we started which is that we wish you and your families well and with that we're delighted to open up the floor for questions. We do ask that in the interest of time, you limit yourself to one question a follow up Michelle.
Speaker Change: Thank you if you'd like to ask a question. Please press star one one.
Speaker Change: If your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
Speaker Change: Our first question comes from Steve Sochua with Evercore ISI. Your line is open.
Steve Sochua: Yes. Thanks, Good morning, Gerry I was just wondering if you could comment a little bit more on the demand in particular in Austin and I'm just curious.
Steve Sochua: The 600000 feet that you've got kind of in the pipeline are those kind of tenants that are already kind of in the Austin market that are expanding.
Steve Sochua: These new requirements, just trying to get a feel for kind of the likelihood of them executing and.
Steve Sochua: We've heard another sector or is there some hesitancy to kind of commit to new deals and so trying to figure out are these relocations or new commitments and are they in the market or coming into the market.
Speaker Change: Yeah, Steve Good morning.
Speaker Change: George and I can tag team I guess as we're looking at the pipeline the majority of the deals.
Speaker Change: Working through at one of our deals that are in the market.
Speaker Change: They are.
Speaker Change: Some significant expansions.
Speaker Change: Or one off type one uptown can accommodate the expansion requirements.
Speaker Change: The overall market.
Speaker Change: It's been improving albeit slowly I mean theres about 90.
Speaker Change: <unk> are about 3 million square feet of prospects in the market.
Speaker Change: Opportunity Austin.
Speaker Change: Still represents.
Speaker Change: Putting about 275 hot active prospects look at Austin for new in migration of about 22% of that is office for that.
Speaker Change: It's up a bit quarter over quarter.
Speaker Change: But the pipeline primarily remains kind of Austin base at this point, but George any other color you want to.
Speaker Change: In the overall Austin market pipeline, there probably are some some out of Citi.
Companies in that pipeline, but specific and as Gerry mentioned, our uptown portfolio was really in market.
Speaker Change: With a predominance of expanding and growing in market.
Speaker Change: Tenants.
Speaker Change: So we're extremely pleased with the level of activity.
Speaker Change: Okay.
Speaker Change: As we said our buildings can accommodate the future growth these tenants have.
Yes.
Speaker Change: In our pipeline, we have on a regular basis.
Speaker Change: Brokers and site selectors coming through looking for large requirements.
And we certainly give them a tour, we follow up with them, but their gestation cycle tends to be a lot longer with no real definitive occupancy base. So we've really we make are focused very crisply on tenants that we know have leases that are expiring. We know they need expansion stay put may be an option, but there is an opportunity for us to kind of convince them to move up.
Speaker Change: The quality curve. So the primary focus in that pipeline today is on definable requirements that are currently within the within the city of Austin.
Speaker Change: Great. Thanks, good color, maybe just as a quick follow up for you or Tom just on all the dispositions I guess that were done in our plan can you provide kind of a GAAP and cash cap rate on kind of what you expect those deals to be done at I don't think I saw anything as it relates to cap rates in the press release.
Speaker Change: Yes, I think Steve if we if we achieve the new sales target, which we're obviously confident because we put it out there.
Speaker Change: We think the blended <unk>.
Speaker Change: Cash and GAAP cap rate is going to be right around 8%.
Speaker Change: Great. Thank you that's it.
Speaker Change: Youre welcome. Thank you.
Speaker Change: Thank you our next.
Speaker Change: Question comes from Anthony <unk> with Jpmorgan. Your line is open.
Speaker Change: Yes. Thanks. Good morning, just if we can get back to Uptown ATX you said.
Pipeline there ranges from 6000 square feet to 200, and there has been all the discussion out there around and video working for over 300000 square feet with something like that be considered in your pipeline or is that.
Speaker Change: Not.
Speaker Change: No look I think any tenant who is and I think it's safe to say Tony and good morning.
Speaker Change: That any tenant who has a whisper.
Speaker Change: Meeting office space in Austin, we're all over them, so I don't know.
Speaker Change: Again, the specifics of any one deal versus another deal but.
Speaker Change: We have a very very good talented team of in house leasing folks on their augmented by strong external team. So we track every single potential transaction that market, whether where theyre looking at the southwest and northwest CBD. So we've been very pleased with the level of.
Speaker Change: Tour activity to Uptown, we clearly know we need to get it leased.
But now with the road improvements done.
Speaker Change: Residential component open the amenity floor done.
Speaker Change: The project really does show incredibly well.
No.
Speaker Change: As soon as we know any prospect is looking at space EBIT.
Speaker Change: Even if we're not on their initial toward because we're looking at different sub market. We are on top of them, we're getting them marketing materials videos were visiting them. So.
Speaker Change: Again, I want to name any specific tenant because theres a number of larger users kicking around the marketplace, but I think it's a safe assumption on your part.
Speaker Change: Assume that we are talking to every 10 in the marketplace.
Speaker Change: Okay got it and then just my other one was on Zero Center.
Speaker Change: It seems like Youre going up another four on the lab space. There can you just remind us like how much of the building now as lab and where sort of the limitation is there.
Speaker Change: You guys had already hit that but I guess, there is still a bit more room.
Speaker Change: Yes, Tony It's George we delivered what.
Speaker Change: While we delivered a full floor of graduate labs on the ninth floor.
Speaker Change: So the building in total is 27 floors, the lower bank I'm floors or what.
Speaker Change: And targeted for life science.
Speaker Change: 94 <unk>.
Speaker Change: Delivered fully leased and occupied the eighth floor nine.
Speaker Change: 99% done in terms of bill.
Build out with Florida.
Speaker Change: <unk> different prospects with.
Speaker Change: Leases.
Speaker Change: Currently being negotiated that would leave us really just with the seventh floor and a portion of the six floor left as potential.
Speaker Change: Either office expansion for those life science tenants or given.
Speaker Change: Pipeline needs the opportunity for additional graduate lab expansion.
Speaker Change: Okay, great. Thank you.
Thank you Tony.
Speaker Change: Thank you. Our next question comes from Michael Griffin with Citi. Your line is open.
Speaker Change: Great. Thanks.
Michael Griffin: I wanted to circle back to kind of the development pipeline leasing for exact.
Michael Griffin: You think that you might have to really ratchet up concessions in order to entice tenants with signed leases and then maybe just on the concessionary environment broadly have you started to see concessions paper offer is it fair to say they are pretty elevated.
Michael Griffin: Yeah.
Speaker Change: I think it varies a bit by the different marks I think in.
Speaker Change: In the Philadelphia area on the development projects, you really haven't seen concessions kick up.
Speaker Change: I think where we've seen increased requests for Ti for tenant improvement dollars, we're able to amortize out as part of the rental income stream.
Speaker Change: So haven't really seen any material change there at all Austin, it's a competitive market. So I think there were were seeing.
Speaker Change: US as well as our competitors keeping face rates annual bumps lease terms around the same where we're probably and not a huge increase in free rent either mic, Hawaii, we're seeing that a little bit of pressures on the increased ti side.
Speaker Change: Most tenants they want a higher level of tenant improvement allowance and.
Speaker Change: In many cases, we're able to get longer lease terms, but in terms of upfront load, we're definitely seeing a little more of upward pressure, particularly in Austin on the Ti side.
Thanks, Gerry appreciate the color there and then just on the disposition pipeline is it fair to assume the properties and there are similar to the portfolio that you sold in Plymouth meeting.
Speaker Change: And I know that you mentioned, probably theres now youre not going to be any seller financing subsequent transactions.
Speaker Change: The Plymouth meeting deal.
Speaker Change: Is there a need for that seller financing due to a lack of debt capital available for the transaction.
Yeah, Great question, I guess stepping back for just a second if I might I mean, a couple of key points I think.
Speaker Change: Because we do get investor inquiries on our Investor.
Speaker Change: Oil program.
Speaker Change: I mean look we're as I mentioned, we're in a very strong liquidity position.
Speaker Change: And really as a result, we're only really marketing properties for sale that we really view as non core due to either change in sub market conditions their position of submarkets asset physical superstructure infrastructure limitations et cetera.
Speaker Change: And we also recognize that valuations are in a state of flux due to both uncertainty on some demand drivers for some of the inventory and certainly as you touched on the state of the <unk>.
Speaker Change: Financing markets.
So as such we're really focused on using kind of its time period.
Speaker Change: To improve our overall competitive position for the company.
Speaker Change: On our best assets of which we have many and then really culling the portfolio of properties, even at a bit of a discount to improve our overall competitive position for the organization rich.
Reduced for capital spend.
Speaker Change: And then generate some incremental liquidity.
Speaker Change: So I think the when I looked at the deal like we did in the Pennsylvania suburbs.
Speaker Change: We're in a time in the market, we really do need to recognize the reality.
Speaker Change: Even if it's something you don't particularly like and I think when we do.
Speaker Change: <unk>.
Speaker Change: Help us think through that reality.
Speaker Change: We take a look at.
Speaker Change: What the net present value of us holding any single asset is.
Speaker Change: In terms of downtime some expense cost base.
Speaker Change: Base building Ti capital required et cetera.
Speaker Change: And we come up with a range of we think the net present value of that asset hold period is and if we go to the marketplace and the marketplace gets within that strike zone. We typically will sell even if we don't necessarily like where the price was versus our previous expectations. It's the right financial decision for the company.
Speaker Change: In some cases based upon the profile of the property and this property sold was one of them given that Ford rollover given the overall state of the financing markets given the capital requirements to get that transaction closed we needed to augment that with some seller financing good quality buyer.
Speaker Change: Very good capital plan from their standpoint, we think the positions very secure great coupon rate price that ramps up over time, so that facilitate us achieving our larger picture, which is to better improve our competitive position overall with our inventory selling an asset like that made a lot of sense for us.
Speaker Change: Great. That's it for me thanks for your time.
Speaker Change: Thank you Michael.
Thank you. Our next question comes from Michael Lewis with <unk> Securities. Your line is open.
Great. Thank you.
Michael Lewis: So I cover apartment and office Reits and I get questions from investors in both sectors about residential conversions.
Michael Lewis: Your two largest.
Michael Lewis: Building vacancy on page four of your supplemental.
Michael Lewis: Say that you are evaluating the feasibility of a residential conversion.
Michael Lewis: I think this is the fifth quarter in a row at.
Michael Lewis: At those.
Michael Lewis: I've said that.
Speaker Change: So I thought maybe you could just give a little color into what the processes and the timetable.
Michael Lewis: <unk>.
The evaluation metrics that Youre looking at and if you think those will ultimately be conversions.
Michael Lewis: Just some comments on the process that we might be able to.
Michael Lewis: Apply to Brandywine and to kind of the broader question.
Michael Lewis: Whether we'll see a lot of these.
Yes, Michael.
Michael: Great question I think the two properties really are the <unk>.
Michael: The property, we have in Wilmington, Delaware as well as.
Michael: Complex, we have up in northwest Austin, they're both a little bit of a different circumstance. Let me share with you. The current rating number one we think they both are going to pass the muster for a residential conversion.
Michael: They do require a lot of upfront.
Michael: Architectural design.
Michael: A lot of work on the mechanical side.
To make sure that number one.
Michael: It's feasible to do and then number two what we could deliver as a marketable product that will achieve the rents that we're targeting.
Michael: So we're reaching a conclusion part of that process on both of those projects both projects require some level of approval.
Michael: From the local authorities.
Michael: To attain those approvals also requires a level of our community engagement should have community engagement efforts underway on both of those properties to make sure that that we feel comfortable from an approval standpoint, we get those approvals perfected.
Michael: And move forward with both projects.
Michael: I will tell you we have looked at a number of other opportunities where we don't think the conversions are feasible.
Michael: And I know from a national standpoint, there is.
Michael: A number of initiatives underway in the public sector.
Michael: Bill pending in the ways and means committee of Congress now that provide <unk>.
Michael: Accelerated tax credits for office to residential conversions.
Discussions underway here in the Commonwealth of Pennsylvania to do the same thing. So my guess would be to get some of these to get the volume of office to residential conversions accomplished will require some level of public subsidy.
Michael: And that public subsidy will probably be conditioned upon having some element of affordability in the delivered units.
Speaker Change: So I know on those two properties had been on there for a number of quarters, but we did want to highlight to our investor base that we don't view these properties as necessarily viable office properties for us going forward and we're going down.
Michael: Yes.
Michael: Path to see if we can achieve a residential conversion there.
Speaker Change: Okay got it and then my second question Im kind of makes us up on the fly, but the stocks down about 7%. This morning, the only change I think in the guidance you can correct me if I'm wrong is the land sale gains I don't remember those called out before but even even with those.
Speaker Change: Consensus is at the high end of your revised guidance range.
Speaker Change: People expected some Austin leasing maybe the seller financing concerns people you just said you won't do any more of that so I don't know may be just that opportunity here to talk about whether you think things are improving have gotten better over the last quarter.
Speaker Change: Whether we're not out of the woods yet.
Speaker Change: Just kind of a general sense of where we are when do you think occupancies trough thing.
Speaker Change: Just anything to kind of.
Speaker Change: I think is improving or not.
Speaker Change: Thank you for that question, we welcome the opportunity to look I think at a macro level look the overall landscape is definitely improving.
Speaker Change: The quality thesis has real traction.
Speaker Change: Just look at the percentage of our deals that moved up the quality curve.
Speaker Change: You look nationally statistically.
Speaker Change: Roughly the 100 million square feet of positive absorption has really been in less than 10% of the office stock, which is really driven which reinforces that quality thesis.
Speaker Change: The occupancy spread between a and b quality product is close to a historic high at almost 800 basis points and you can have very very limited supply growth going forward, so even with the.
Speaker Change: Demand remaining somewhat muted, although I think it will pick up they are really good assets, we will see their competitive positions improve over time, and I think lead to a formula of significant upward pressure on both at a notional an effective rent basis I think from a branding standpoint, but we certainly think our occupancies and pretty well.
Speaker Change: <unk>.
Speaker Change: With the delivery now these development projects in the pipeline we have.
Speaker Change: We are very keenly focused on getting some additional leasing done so.
Speaker Change: I do think probably some investors might have been expecting more leasing out of the residential properties or are performing in line.
Speaker Change: We need to get some of these leases and negotiation across the finish line to.
Speaker Change: To provide that quantitative support for these projects will be successful, but the operating portfolio is in very good shape.
Speaker Change: I think we did actually talked about the potential for a deferred land gains last quarter.
Speaker Change: But probably did highlighted to the extent that we probably should have but I think that I think the landscape for brandywine given the positive macro overtimes, but also the strength of our market positioning.
Speaker Change: Ben It by the foundation, we have in the operating portfolio is really very strong going forward.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Paul <unk> with Keybanc capital markets. Your line is open.
Speaker Change: Hi, This is Darby I'm sure Paul could you talk about your plans for the DC market and maybe any expectations on how you plan to reduce exposure down the line there.
Speaker Change: Happy to do that yet.
<unk> has not really been a growth market for us for a number of years, we did a number of.
Speaker Change: We did several joint ventures of our existing portfolio in DC, a number of years ago.
Speaker Change: <unk> joint venture kind of reaching.
Speaker Change: Their natural conclusion point I think we'll be exiting a number of those properties at this point our wholly owned portfolio is really down to three buildings.
Speaker Change: Two and Tyson I missed I'm, sorry, four buildings.
Speaker Change: Three buildings in Virginia, and one in Maryland.
Speaker Change: So we have two buildings in Tysons at $16 76, and $82 60.
Speaker Change: <unk>.
Speaker Change: Our performing well some vacancy there and we're trying to figure it out there's a formula there for us to continue investing money to bring that occupancy level back up we have one remaining wholly owned building out.
Speaker Change: On the toll road.
Speaker Change: Hardening in Dulles corner.
Just going through the process of a major tenant moving in there now.
Speaker Change: And then one building that's fully silver in Maryland.
We'll continue to manage and operate those properties to our high standards of.
Speaker Change: Waiting for the investment market to improve and as that market improves I think our plan would be to sell those assets.
Speaker Change: Over the next couple of over the next couple of years.
Speaker Change: Thank you that's helpful and then as a fall.
Speaker Change: Are you able to provide color on your scheme known move outs looking ahead, and any conversations youre, having with tenants about renewals or other options.
Speaker Change: And then maybe any idea on when you could anticipate net absorption turning positive.
Speaker Change: Sure sure yes.
Speaker Change: As Gerry outlined our forward rollover exposure is.
Speaker Change: Family Law.
Speaker Change: When we look at.
Speaker Change: Our 2025 explorations.
Speaker Change: We have.
Speaker Change: One one tenancy 40000 square feet here in the city of Philadelphia.
The space was being utilized for construction swing space.
Speaker Change: That.
Speaker Change: Lease will end.
Speaker Change: In the third quarter of 2005 outside of that we don't have.
Speaker Change: Any other large explorations.
Speaker Change: The next largest on the list.
Speaker Change: <unk> thousand square footer in Austin.
Speaker Change: We do think occupancy has trough I think.
Speaker Change: During this third quarter, we had 141000 square feet of move outs 100000 square feet of that was a tenant here in Philadelphia that we've already back filled.
Speaker Change: 40% of that space. So so we do think that the work that our leasing teams have done to reduce.
Speaker Change: The forward rollover curve.
Speaker Change: The prospects that we have in the market to replace those that we do in fact lose.
Speaker Change: Bodes well for occupancy gains.
Speaker Change: Thank you. Thank you. Thank you. Our next question comes from Ohio, Bregman with Deutsche Bank. Your line is open.
Speaker Change: Yes.
Speaker Change: Yes. Good morning, this is actually tayo from from DB.
Speaker Change: Thanks for taking the time. The first question I had is on the joint venture is.
Speaker Change: Any additional work that still has to be done in that regard, we tangled up the point, where they have all been recapitalized repositioned restructured.
Speaker Change: We're really close.
Speaker Change: Getting across the finish line I mean, most of those have been resolved.
Speaker Change: We have two more that are in kind of transition that we expected to be resolved by the end of the year.
Speaker Change: In discussion with partners and lenders.
Speaker Change: Would expect to have.
Speaker Change: Those two ventures fully behind us by the time 2024 and <unk>.
Speaker Change: So as I mentioned earlier.
Speaker Change: I'm sorry.
I am sorry, which gerry with two of those and the debt that needs to be refinanced or what has to happen there.
Yes, I think one on one is one small portfolio down in DC.
Speaker Change: And that's and in discussions with the lender at this point.
Speaker Change: Whether that portfolio is sold or restructured is in process right now and then one other property, where we're involved with our partner on a potential sale of our interest.
Okay and then if you can just indulge me.
Speaker Change: Pardon me if I missed this earlier, but could you talk a little bit about the retention rate in the quarter again, it was kind of lower than kind of what you've guided to for the year and then do you actually increased guidance on retention for the year as well. So wondering again about the confidence in <unk> to kind of.
Yet the overall retention for the year higher than you were initially expecting.
Speaker Change: Sure. This is George I'll take that one so so the third quarter retention was was negatively impacted.
Speaker Change: By that 100000 square foot move out here in the city of Philadelphia that that move out was known that move out was.
Speaker Change: In our full guidance range for the year.
Speaker Change: We are confident in meeting that new.
Speaker Change: Provided increased retention rate because the balance of the leasing plan for 2024 is 100% complete at this point. So we know the tenants that are leaving in the fourth quarter and we know the ones that have already signed there their renewals.
The reason we were able to.
Speaker Change: Substantially increase it over the course of the year for the fact that we got some additional tenant expansions done and then we had a number of tenants who in our original business plan, we thought would not stay ultimately opted to stay.
Speaker Change: Thank you.
Speaker Change: Youre welcome. Thank you.
Speaker Change: Thank you. Our next question comes from Dillon Brzezinski with Green Street. Your line is open.
Speaker Change: Good morning, guys. Thanks for taking the question just sort of touching on the disposition guidance I mean, just sort of trying to figure out.
Speaker Change: You guys have gone through the marketing process throughout the year and gotten into contracts to sell the portfolio is in assets that you guys referenced.
Speaker Change: How has that pricing shaken out relative to your initial expectations.
It's actually.
Speaker Change: Our initial expectations when we launched the marketing process for those assets. We have stayed very much on track I think we've got surprised to the upside on one the others were very much within the range of <unk>.
Speaker Change: Both we and the listing broker thought they could achieve so no material change at all from what the launch pricing expectations were.
Speaker Change: And then maybe just touching on on the Commerce Square transactions you guys took up your ownership there I mean is there.
Speaker Change: As we look at as you think about the future of the company and the JV that you guys have in the development pipeline as well as future Commerce square.
Speaker Change: Any desire to continue growing your ownership in the development projects or Commerce square.
Speaker Change: Well I think looking at Commerce square deal and I think I mean.
Speaker Change: You may recall several years ago we.
Speaker Change: We bought an investor in that project.
Speaker Change: In a preferred position and at that time.
Speaker Change: Based on the reporting requirements, we wrote the value of the asset up about $270 million.
Speaker Change: I think as we start to think through.
Speaker Change: <unk>.
Speaker Change: Sources and uses of cash given our liquidity position and frankly the cost of that preferred.
Speaker Change: Bought back a piece of that.
Speaker Change: A few months ago, and when we did that.
Speaker Change: We were required to do an as is appraisal take a look what the appraisal the appraised value was that that's what kind of resulted in the.
Speaker Change: In the.
Speaker Change: The write down.
Speaker Change: Based on the ads is that now we think the asset is valued based on the price is much different than the stabilized value when we lease up the project.
Speaker Change: So it was really the Congress was really driven.
Speaker Change: By the cost of the preferred the strength of our liquidity position, but we believe it is a fairly low and attractive investment base.
Speaker Change: So we thought that was a good transaction in terms of your broader question look I think one of the opportunities we have as a company is to on these these larger joint venture development speed at Schuylkill yards or at Austin.
Speaker Change: An opportunity to bring those assets on balance sheet that we structured those deals.
Speaker Change: On a preferred basis, where brandywine is entitled to.
Speaker Change: 88% to 90% of the upside of those properties. So as those properties approach stabilization. We certainly think that presents a very good opportunity for us to bring those assets on balance sheet.
Speaker Change: Does that answer your question.
Speaker Change: Yes, that's very helpful. Thanks, Gerry appreciate it.
Jerry Sweeney: Thanks Bill.
Speaker Change: Thank you. Our next question is a follow up from Steve Sochua with Evercore ISI. Your line is open.
Steve Sochua: Yeah. Thanks, Jerry I, just wanted to circle back on the apartments and in particular, I guess Philly because that one's been opened much longer than Austin and you went from 73 to 80 and I know that seemingly was in your kind of Bulls eye of where you wanted to be but that 7% only equates to about 23 unit.
Steve Sochua: If I'm doing my math right about <unk> <unk> per month, which typically just seems like a low slow pace of leasing. So is there something kind of going on in Philly that you're intentionally holding back units is that a price point issue.
Speaker Change: Just a per month would strike me as low for a lease up assets.
Speaker Change: Yes, I'm looking for my notes here. So I thought it was closer to 13 or 14 per month, because we were at.
Trying to find my page here excuse me.
Speaker Change: While im looking the answer is August was slower than we would have hoped.
Speaker Change: But it's only really been Steve it's been less than three months since our last call. So it was late July we're now in October. So I think we are we were really focused on getting to that target.
Speaker Change: By the end of the year.
Speaker Change: And I think we've met that target.
Speaker Change: <unk>.
Speaker Change: Can you see here.
Speaker Change: You guys have been patient.
Speaker Change: So.
Speaker Change: I thought it was I thought it was about 2014.
Speaker Change: 13, 14 units a month.
Speaker Change: When you move away from.
Speaker Change: We're at $2 70, and I thought we were in the.
Speaker Change: And the 235 range.
Speaker Change: We'll get back to that but I think to answer your question.
Speaker Change: We're not holding back anything I mean, we're clearly on a full.
Speaker Change: A full court press.
Speaker Change: Get all of our units same thing down at Soliris apps, where we had a little bit of a.
Speaker Change: Of a permitting delay to open those units subsidized units actually didn't open up until.
Speaker Change: Until mid September so we havent here, Steve sorry.
So we are 200 to 878 leases were $2 37.
Speaker Change: Last year, a 41 over three months were 14 units per month.
Steve Sochua: Okay, I'll go back and double check double check my math.
Steve Sochua: Yes.
Steve Sochua: Sure.
Steve Sochua: Fine.
Steve Sochua: Right now I'm sure you're well.
Steve Sochua: Pretty good summer yet.
Speaker Change: Okay, I guess to go back to Michael Lewis his question about the stock being down.
Speaker Change: I guess there were some comments by Tom maybe just about some dilution and you mentioned, an 8% cap rate the.
Speaker Change: The dilution on the developments coming online I know, you're not giving 'twenty five guidance, but at this point is it fair to assume that.
It's going to be very challenging to have <unk> growth next year, and most likely <unk> growth might dip down and be negative in.
Speaker Change: In 25 before bouncing back in 2006.
Development stabilize given that you haven't.
Speaker Change: <unk> done any office leasing of upsize and Austin and those leases would take time to kick in and $31 51 is nearing completion and unless you get a lease soon.
Speaker Change: Contribute to some earnings dilution next year before stabilizing in 2006 and beyond.
Speaker Change: Yeah look I think as we bring these properties on particularly with the residential properties, where that interest calculation and.
Speaker Change: As Tom and I, both touched on there's going to be some.
Speaker Change: Some some run rate similar to what we'll have in the fourth quarter of 2004.
Speaker Change: Impacting earnings growth for next year now certainly the expectations given the pipeline, we have will be able to announce something definitive leasing activity that provides a clear runway to <unk> growth.
Speaker Change: As I mentioned when these properties come online there will be a huge boost to our asset base.
Speaker Change: Almost $50 million a year.
Speaker Change: From a cash standpoint, so we do anticipate that that trend line will be very very positive, albeit with.
Speaker Change: With a transition period, we'll be recognizing.
Speaker Change: Not capitalizing interest and.
Speaker Change: And the preferred.
Speaker Change: Cost of preferreds.
Speaker Change: Great. Thanks, that's it for me.
Speaker Change: Thank you Sir.
Speaker Change: Thank you. Your next question is a follow up from Tayo Okusanya with Deutsche Bank. Your line is open.
Speaker Change: Yes.
Speaker Change: Quick one on long.
Speaker Change: <unk> line of questioning.
Speaker Change: Again, you guys did increase the guidance for dispositions.
Speaker Change: <unk> from Q kind of <unk>.
Speaker Change: On the outlook for land sales, so I guess I'm, just a little bit curious in regards to why is it that for kind of fee simple asset sales.
Speaker Change: You got maybe a little bit more constructive what's the just like land activity.
Speaker Change: Or is it more difficult to Lasalle.
Speaker Change: Yes, I think.
Short answer is you're in this kind of marketplace land is a challenge to scale, there's really not a lot of financing source that will provide that financing on that.
Speaker Change: There with cap rate uncertainty, whether it's in the multifamily class or the office sector, our industrial sector.
Speaker Change: Excuse me folks aren't really sure what the underwrite.
Speaker Change: The required development yields and wanted to one of the first things that get squeezed. There in terms of valuation is land. So it's a combination of kind of residual cap rate uncertainty.
Speaker Change: Obviously, what the development yields need to be.
Speaker Change: And the challenge financing market so.
Speaker Change: When we develop the business plan for 'twenty four we did expect to have a couple of land sales close based upon where they were in the contract and the contractual and approval process and at the.
Speaker Change: Recent date those deals fell apart because of lack of financing.
Speaker Change: Sounds good thank you.
Thank you.
Speaker Change: Thank you I'm showing no further questions at this time I'd like to turn the call back over to Jerry Sweeney for closing remarks.
Hey, Michelle Thank you and thank you all for participating in this earnings call and we look forward to updating you on our fourth quarter and two.
Speaker Change: 2025 business plan after the first year. So thank you very much and have a wonderful day.
Speaker Change: Yeah.
Speaker Change: Thank you for participating you may now disconnect good day.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.