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spk00: Welcome to the Brandywine Realty Trust Second Quarter 2022 Earnings Conference Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touchstone phone. I will now turn the call over to Mr. Jerry Sweeney, President and CEO. Mr. Sweeney, you may begin.
spk04: Hilda, thank you very much. Good morning, everyone, and thank you for participating in our second quarter 2022 earnings call. On today's call with me, as usual, are George Johnson, our Executive Vice President of Operations, Dan Palazzo, our Vice President and Chief Accounting Officer, and Tom Worth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements. within the meaning of the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports that we follow at the FCC. Well, since our last call, our economy has seen record inflation, continued global supply chain disruption and a dramatic increase in baseline interest rates. These conditions have created significant cost increases and uncertainty in the equity and debt financing markets, at least in the near term. Our portfolio stability, evidenced by our low forward rollover, provides protection from operating expense increases on 81% of our leases, and that positions us as best as possible for this changing environment. Our operating and development business plan remains strong and very much on target. While overall return to work has been slower than we would like, we are benefiting from a decided tenant focus on quality. We continue to experience higher physical occupancy across our portfolio, with the highest level of density being in our Pennsylvania suburbs and DC operations. Tenant interest in high quality work environments is accelerating. We see that every day in our tour levels, lease negotiations, and deal execution. In fact, 32% of the new deals in our operating portfolio pipeline are tenants looking to upgrade from lower quality, less amenitized buildings. During the call this morning, Tom and I will review second quarter results, provide an update on our 2022 business plan and our guidance. After that, Dan, George, Tom and I are available to answer any questions. During the second quarter, we executed 686,000 square feet of leases, including 423,000 square feet of new leasing activity. We also posted rental rate mark to market at 18.4% on a GAAP basis, and 7.8% on a cash basis. Our full year mark to market range remains at 16 to 18% on a GAAP basis and 8 to 10% on a cash basis. Absorption for the quarter was positive and tenant retention was 70%. Second quarter capital costs were in line with our business plan range. Core occupancy and leasing targets were also within forecasted ranges and we ended the quarter 92.1% leased and 89.6% occupied. It's further worth noting that our Philadelphia CBD, University City, Pennsylvania Suburbs, and Austin portfolios, which comprise 93% of our NOI, are combined 93.8% leased and 91.9% occupied. Our spec revenue target remains in the range of $34 to $36 million, with 33.7 million or 96% of the midpoint achieved. This speculative revenue range represents approximately 1.8 million square feet, of which 1.6 million has already been leased, so 89% done on that metric. The portfolio is stable, and our forward rollover exposure through 2024 averages 7.2%, which ranks at 6 out of 17 office REITs. Further, our annual rollover through 26 is below 10 percent, ranking a 7 out of 17 office REITs. From an FFO standpoint, we posted first quarter results of 35 cents per share, which was one cent above consensus estimates. And looking at our 2022 guidance, Tom will articulate in greater detail, but the bottom line is our original 2022 business plan projected interest expense between $70 and $72 million. We have met that assumption for the first half of the year. However, looking to the second half, due to the rapid increase in short-term rates, our interest expense, including our share of joint ventures, will increase by about 3 cents per share. So while our operating plan remains fully on track, based on the rise in interest rates, We are narrowing and adjusting our FFO range from 137 to 145 per share to 136 to 140 per share. As I mentioned, Tom will articulate more detail on that in a few moments. Based on our 2022 leasing activity and development spend, we continue to project our debt to EBITDA range will be between 6.6 and 6.9 times. That leverage increase, the majority is transitional. coming through debt attribution, particularly on the development side. So to amplify that point, our core EBITDA range remains between 6.0 and 6.3 times by limiting our joint venture and active development and redevelopment projects. As we mentioned in the last call, we believe this is a more accurate measure of how we manage our core stabilized portfolio. Looking a bit ahead, despite the ongoing skepticism on Ford office demand drivers, our leasing velocity actually remains fairly encouraging. During the second quarter, physical tour volume equaled first quarter levels, with overall volume up over 30% from our previous year. Virtual tour volume was up 27% from the first quarter, and our total leasing pipeline is 4.8 million square feet. broken down between 1.4 million square feet on our operating portfolio and 3.4 million square feet on our development project. The 1.4 million square feet leasing pipeline on the existing portfolio is up 100,000 square feet from last quarter with approximately 130,000 square feet in advanced stage of lease negotiations. I should note that as an example of building velocity, Out of last quarter's pipeline, we executed 430,000 square feet of leases, while during the quarter, adding over 500,000 square feet of new prospects to the current pipeline. Also, 32% of our new deal pipeline are prospects looking to move up the quality curve. And we did experience this trend in terms of leases executed during the second quarter, where 67%, of the new leasing activity we executed were flight to quality tenants. The leasing pipeline on our development projects is at 3.4 million square feet and that did increase over half a million square feet or 28% during the second quarter. Deal conversion rates in the second quarter was up to 38% from 33% the last quarter. And another good sign is that tenants continue to accelerate their decision timeline. This past quarter, the median deal cycle time improved by an additional week and is now within five days of our pre-pandemic levels. From a liquidity standpoint, even with our targeted development spend and absent any other financing or sales sources, we anticipate having $300 million availability under our line of credit. And along those lines, during the quarter, we did renew both our $600 million line of credit and our $250 million term loan on very similar terms to those that were previously existing. Our 76 cents per share annual dividend is well covered, is a very attractive yield in our current stock price, and is accompanied by a 54% FFO payout ratio. In looking at capital allocation, we made progress on several fronts. We continued during the quarter and will continue to sell non-core land parcels. During the last quarter, we sold our land parcel in the riverfront district of D.C., generating a $3.4 million gain. We also sold some non-core buildings and land in New Jersey, generating an incremental $800,000 gain. In looking at our development opportunity set, our remaining Brandywine net funding obligation on all of our active development projects is just about $110 million. Our equity requirements on Schuylkill Yards West and uptown ATX Block A is fully funded. We have $24 million to fund on our new start at 3151 market. The balance of that remaining funding requirements really tie directly to leasing activity. During the quarter, we did commence the redevelopment of 2340 Dulles Corner. That property is 85% leased under an 11-year lease. and we anticipate completing that project by the fourth quarter of 23. 405 Colorado made incremental progress during the quarter. We're now 91% leased based upon the 22,000 square feet of leases that we signed during the quarter. We have two leases out for final execution that will completely fill the building. So we're happy to deliver that project at our original anticipated yield. 250 King of Pressure Road, which is our first life science delivery in the Radnor sub-market, is now over 36% leased. Current pipeline totals 237,000 square feet, and we're making great progress as that building approaches final delivery. In looking at our developments at Schuylkill Yards and Uptown ATX, Schuylkill Yards West which is our life science office residential tower on time, on budget for a Q3-23 delivery. The project will continue to deliver a 7% blended yield. As I mentioned a moment ago, our entire equity commitment is fully funded. Our partners' equity investment is also fully funded, and the first funding of the construction loan recently commenced. You may recall in Schuylkill Yards, we can develop about 3 million square feet of life science space. And as another step towards realizing that vision, we are excited to announce the start of our 3151 Market Street project, a 440,000 square foot dedicated life science building. The building has an estimated cost of $308 million, will deliver a yield of 7.5%, and we are targeting a second quarter 2024 completion. Our leasing pipeline on that project right now is over 400,000 square feet. We have obtained an equity commitment from our existing institutional partner at Schuylkill Yards and the 3151 structure is consistent with our existing Schuylkill Yards West project with Brandywine having a 55% ownership stake and our partner having a 45% ownership position. Looking at Uptown ATX Block A, the first phase of our 66 acre development is underway. Construction there is also on time and on budget. And we certainly anticipate that that project will continue to generate additional leasing activities as we go through the development pipeline. In fact, even this early in the process, our leasing pipeline stands at 1.6 million square feet. In addition to those ongoing developments, we have seen an increase in tenant interest in several of our build-a-suit projects. and we are exploring several opportunities in both the Pennsylvania and Austin regions. Two key points just to close out on our development discussion on our forward pipeline is our low land basis per FAR and our product diversity. Of the 14.2 million square feet that we can build, only about 25% is office, with the ability to do between 3 to 4 million square feet of lifestyle space and over 4,000 apartment units. Furthermore, the overlay approvals we have on both of those master plan communities gives us a degree of flexibility to further adjust that mix to meet market demand drivers. So our key takeaways on the development pipeline is a very quantifiable forward funding basis, a low land basis, low carrying costs, demand driver flexibility, and product diversity. And in terms of generating additional liquidity, while 2022 business plan does not incorporate any additional disposition, we do anticipate being active on these fronts. We anticipate continuing to sell select non-for land parcels. And even with the recent volatility in the debt markets in particular, we believe that we have ongoing opportunities to harvest profits from the sale of several properties. As such, we are currently testing the investment market with several assets for sale. Obviously, volatility in the debt markets over the last 45 days has slowed that process, but we remain confident of being able to generate additional liquidity over the next several quarters. We also anticipate the sales of select properties out of some of our existing joint ventures over the next four quarters. Dollars generated from these activities will be used to fund our development pipeline, reduce leverage, and redeploy into higher growth opportunities. Tom will now provide an overview of our financial results.
spk05: Thank you, Jerry. Our second quarter net income totaled $44.5 million, or $0.03 per diluted share, and FFO totaled $60.5 million, or $0.35 per diluted share, and $0.01 above consensus estimates. General observations regarding our second quarter results. Our second quarter results were above consensus. We had some moving pieces and several variances to the first quarter guidance. On GNA, 1.7 million below that forecast, primarily due to the timing of expenses, and we have not changed our range for the full year. Portfolio operating income totaled approximately 69.2 and was slightly below our first quarter guidance of 70 million. Land gains were above forecast by 600,000 due to a higher gain on the sale of our New Jersey portfolio. Our second quarter fixed charge interest coverage ratios were 3.7 and 4.0, respectively, and sequentially below the first quarter results, but in line with forecasted results. Our first quarter annualized net debt to EBITDA was 7.4, above the high end of our range. However, we are not changing that range at this time. As looking at our guidance for the rest of 22, as Jerry mentioned, we narrowed our guidance ranges for both net income and FFO by 4 cents a share. In addition to that narrowing our guidance, we also reduced the midpoint of the guidance by 3 cents per share. The reduction is due to a higher interest expense based on, you know, we issued guidance, the interest rate curve forecasted at that time for the third and fourth quarter. were 71 basis points and 92 basis points, respectively. Current curve is higher by approximately 175 basis points in the third quarter and 240 basis points in the fourth quarter. Through that, we have anticipated floating rate debt averaging $500 million in the third quarter and $695 million in the fourth quarter, which includes about $148 million of JV floating rate debt in the third quarter and $125 million in the fourth quarter. Our fourth quarter increase in floating rate debt is primarily due to the $250 million term loan, which is fixed through mid-October 22, and floating thereafter, and partially offset by some in-place caps in our joint venture properties. We believe there will be opportunities to mitigate some of the floating rate interest through hedging and potentially asset sales that will lower our line of Looking to the third quarter of 2022, we have some following assumptions. Our portfolio operating income will approximate $71 million and will be above the second quarter as we anticipate net absorption to continue through the balance of the year. FFO contribution from our unconsolidated joint ventures will be $6.5 million for the third quarter. G&A will remain unchanged roughly at $8 million. Total interest expense will increase to $19 million, primarily due to the anticipated higher rate, and capitalized interest will approximate $2 million. Term fee and other income will approximate $2 million. Net management fee and development income will be $3.5 million, and we do have a land gain sale and tax provision that will net around $1.5 million per little area of it. Refinancing activity, as Jerry mentioned, we did recently refinance the $600 million credit for June of 2026 and our $250 million term loan for June 2027 on very similar terms to the current facility. Looking at our capital plan, fairly straightforward and totals $200 million. Our 2022 CAD payout ratio will continue to be 84% to 95% and likely be at the higher end of that range. The 22 range is above our historical run rate, primarily due to higher capital costs associated with higher leasing activity in our wholly owned and joint venture portfolio. The uses for this remainder of the year is $74 million of development and redevelopment projects, $65 million of common dividends, $30 million of revenue maintained, and $20 million of revenue create capex, and $10 million of net equity contributions to our joint ventures. Primary sources are $90 million of cash flow after interest, $81 million use of the line of credit, and $29 million cash on hand. Based on the capital plan outlined above, our line of credit balance will approximate $300 million at the end of the year, leaving $300 available. This needs to be adjusted in our SIP where we have $330 million. We'll be adjusting and reposting that SIP this morning. We also present our net debt to EBITDA range of 6.6 to 6.9, but the main barrier will be timing and scope of our development activities. With regards to liquidity, we have ample capacity through our line of credit. We do expect to invest an incremental $96 million in our active development project after 2022. And our plan is to complete targeted asset sales later this year and into 2023 to lower that line of credit balance. We anticipate our fixed charge ratio to be approximately 3.5 and our interest to be 3.8, a slight decrease from the prior quarter, and our debt to GAV will be between 40% and 41%. We believe these ratios are elevated due to our growing development and redevelopment pipeline, and we believe they are transitory, and once these developments are stabilized, they will decrease. To further highlight how the investment in future development is impacting our current leverage metric, as outlined in our development page, we currently have $397 million invested in development projects that are providing none or minimal 2022 earnings. That $397 million investment has a 1.4 times increase to our leverage at the end of the quarter. We anticipate those projects generating $57 million of cash NOI over time and are confident on reaching those stated investment yields. Once these active projects are stabilized, we forecast that that leverage will go back down into the low six range. As mentioned above, we plan to partially offset the current development leverage with some targeted sales in 2022 and 2023. While the above development activity takes place, we included an additional metric of core net debt to EBITDA, which was 6.6 at the end of the quarter, which excludes our joint ventures and active fully-owned development projects. I'll turn the call back over to Jerry.
spk04: Great, Tom. Thank you very much. So just to wrap up, key takeaways are we're very mindful of the tone on the office market and the impact of return to work and hybrid work schedules. And we're working on that battle every day. I do think we are seeing some very encouraging signs that evidence this real flight to quality. I think the real bias on a lot of large and small employers on making sure that they provide the right physical platform to execute their business plan. And our portfolio is in solid shape. We have excellent visibility for forward growth. As I mentioned earlier, our average rollover is very low through 2024, actually through 2026, with strong mark-to-market, very manageable and demonstrable capital spend, and accelerating leasing velocity. Our forward growth drivers remain increasing NOI out of our existing portfolio and executing our development pipeline. So as usual, we'll end where we start in that we really do wish All of you and your families are doing well and having a chance to enjoy the summer. And with that, we are delighted to open up the floor for questions. As we always do, we ask that in the interest of time, you limit yourself to one question and a follow-up. Thank you very much. Tilda?
spk00: Thank you. We will now begin the question and answer session. If you have a question, please press 01 on your touchstone phone. If you wish to be removed from the question queue, please press 02. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 01 on your touchstone phone. And we have a question from Anthony Poloni from JPMorgan. Please go ahead.
spk01: Thanks. Good morning. My first question. It relates to, Jerry, you mentioned 32%, I think, in the pipeline looking for, I guess, improved space or highly amenitized space. Can you talk a bit more about specifically what they're looking for and maybe perhaps the type of space they're coming out of and whether they're keeping the same footprint, shrinking? What exactly is changing there?
spk04: Yeah, George, you want to pick up on that? Yeah, Tony would be glad to. I mean, you know, we're seeing the predominance of that flight to quality, you know, coming more from, you know, the B inventory. So in downtown Philadelphia, kind of taking the jump from B inventory up to Trophy. But even in the suburbs, we're starting to see, you know, tenants taking advantage of space opportunities that we have in Radnor, Conshohocken. even Plymouth meeting coming out of some of the second tier sub markets in the suburbs. I think it's not only the management of the buildings, but it's the building systems, the elevator systems, HVAC systems, technology within the building, the overall I think the majority of those tenants are probably dialing back space a little bit, but nothing, I would say, significant, maybe 5% to 10% reduction in footprint. The typical build-outs, our second quarter kind of spatial analysis on pretty much the same. We had been trending kind of 65% workstation, 35% offices. During the second quarter, we kind of saw that trend to 60-40, so not a dramatic shift between workstation and office, but a little bit more space planning focused on pathways and turning radius and things along those lines. But again, nothing of significance to the general footprint. Yeah, I think just to add on to that, Tony, you know, Certainly, quality of landlord location of building are key. And also, you know, a demonstrated track record of capital reinvestment in the project. I mean, some of the highlighted items, in addition to what George mentioned, with the real keen focus on, you know, HVAC, vertical transportation systems, are, you know, really a very crisper focus on, you know, more interior daylighting, which typically comes from higher ceilings, more glass, some level of indoor-outdoor component. We're certainly seeing that in our new development projects where a full-service amenity program is very attractive to both office, life science, and residential tenants. Structured parking is becoming a key issue now, the ability to have covered parking. I think all those things are more prevalent in portfolios like ours are key parts of every one of our development projects. I think that those items as well as I think the reputations of respective landlords have are key decision points that make their final determination.
spk01: Got it. Thanks for all that. And then just for Tom. you laid out the pieces of the floating rate debt and the cost impact to guidance, but just thinking bigger picture, like where do you think you should be over time in terms of the amount of your debt floating? And also thinking about it as we start to look into next year, because I think you have some bonds coming due earlier in the year as well.
spk05: Yeah. So, Ty, on the floating rate debt piece, I do think that we will look at, at least on the term loan, is a good example. I think that is something we will look to fix, whether it be now or in the future, as we take a look at the curve, which has been moving pretty volatile. But I do think we should be above 90% on a fixed rate debt, and we'll get back up into that level, which is where we historically have been. I think the combination of the... on the wholly owned portfolio. On the JV portfolio, I do think we will continue to float as we do development and as we have some of these joint ventures. So that one will probably stay in the same range that it's in now. But we have mitigated a little bit of that with some tasks and hedging that we've already put in place. I think on the bonds, Tony, we will probably look to refinance those. I'm not sure if we're going to refinance them with 10-year bonds, but But we're monitoring the market, and we'll probably look to refinance those with public funds early next year.
spk01: Okay. Thanks for the call.
spk05: Thanks, Tony.
spk00: Thank you. Our next question comes from Jamie Feltman from Bank of America. Please go ahead.
spk02: Great. Thanks, and good morning. Can you talk more about the development and redevelopment start? Just kind of what gives you conviction here? I know the... you've got pretty good leasing and the redevelopment, but just kind of what gives you conviction on starting projects here in terms of the leasing outlook and maybe even more importantly, the cost outlook. And what have you done in these projects that kind of hedge against inflation risk?
spk04: Yeah, a great question, Jamie. A couple of things on the first on the cost side, I think as we've talked on previous calls, we don't start anything unless we're fully locked and loaded on the cost. So for example, uh, Jamie, on 3151, we have executed a guaranteed maximum price contract with a general contractor we know very well. We're close to 89% bought out at the sub-trade level. We do build in contingencies both within the GC contract as well as at the owner level to make sure that we can account for any kind of last-minute changes that take place. We're very focused on running all of our projects, including kind of the prospective development pipeline, you know, all the way through the entire design development process. And as part of that, we're pricing two to three times before we kind of put pencils down. So even in that number that Tom outlined, that close to $400 million number on the development investment. Some of that money is basically for design development work on projects that are next in the queue to make sure that we're fully locked down in the cost equation. In terms of the, and happy to add any additional color to you on that point. On the conviction for the starts, I think they really come from a couple different vantage points. One, we know the markets very well. We have great recon and visibility to what we think that both the current and prospective pipeline is. So in the case of our redevelopment at 2340, that obviously was conditioned upon getting that 85% lease done. We'll complete that over the next couple quarters, deliver that building, and that will create a good capital event opportunity for us with that building. And certainly having that building, which had been previously vacant, now 85% lease, which is the two top floors to lease, We think that puts us in a very good position to generate either a great NOI stream over the next 11 years or a great capital event sometime in 2023. In terms of 3151, the combined pipeline we have for both Schuylkill Yards West and the 3151 start is very strong. It's very diverse in terms of size of tenants. the type of sponsorship, be that institutional, public company, established company. So when we take a look at where we think the timing requirements of these prospects are, they're very keen on delivery timelines, which us starting the project gives us the ability to meet. The other thing, as you know, we take into account, is take a look at the forward supply pipelines. And certainly one of the options we have here at Schuylkill Yards is to be able to kind of preempt maybe some future development starts by competitors by starting our project given the existing pipeline. So we kind of assess all those risk factors as we go through the equation to actually make the decision to start the project. Uptown ATX, look, certainly there's always a lot of construction in Austin, Texas in every product type, but I think from our perspective, knowing the full range of development capacity we have at Uptown ATX, starting that office residential component of Block A, we've already got over a million plus square feet of prospects in tow for the 350,000 square feet of office components there. So right now we're frankly evaluating, do we break the building down for single floor tenants or hold off for a larger scale tenant? which tends to take a little bit more time to go through the gestation evaluation process. Uh, so hopefully that answers your, your, uh, your question.
spk02: Yeah. Thank you very much. Um, and then just, it sounds like you're considering some additional asset sales. Um, you know, how should we think about the potential impact on earnings for the back half of the year? Maybe even into 23, you think it would, you know, can you mitigate the dilution or do you think that's actually downside to numbers?
spk04: Our hope as we go into all these things is to minimize the dilution. We do think we have a couple of assets that we're marketing for price discovery. Now, there are fairly low cap rate sales. A couple may go to users. We may have other joint ventures we can sell out of. So the game plan there, Tony, is to kind of sequence those sales and to manage the dilution as much as we can, but then also balance that against you know, optimal pricing as well as liquidity generation.
spk02: Okay. All right. Thank you. Thank you.
spk00: Thank you. The next question comes from Michael Griffin from Citi. Please go ahead.
spk06: Hey, it's Michael Billerman here with Michael Griffin. Jerry, I wanted just to sort of step back and just think about sort of the enterprise as a whole. And you talked a little bit about the sort of lease rollover and how that's more or less than peers. And you talked a little bit about the development adding accretion. But when you look at the right-hand side of your balance sheet, you have not only the exposure on the floating rate side, which you've addressed in this year's guidance, But you have $1.8 billion gross of debt rolling over the next two and a half years, of which your share is $1.1 billion. You've got $1.1 billion in the JVs, and you've got $700 million of the two bonds that come due, one early next year and one in 2024. And when you look at that, 55% of your debt book, and you are more highly leveraged than your peers, 44 percent on a net effective basis it would appear as though you know everybody was issuing debt the last few years to refinance upcoming maturities and you guys sort of sat still and I'm just trying to better understand sort of risk mitigation on the balance sheet side because it would appear you know this could have a significant impact on earnings as you refinance and I know you're going to get development accretion but it will largely be offset by the dilution from refinancing on top of the dilution from, uh, potential asset sales. So how should investors think about, um, the risk that this has posed to the enterprise today?
spk05: Hey Michael, uh, it's Tom. Uh, just to start off, I think on the, on the maturities we do have, um, we do have two bonds coming to 350 each. Uh, we're going to look at how the markets play out the rates have gone up significantly spreads have have not moved in fact they've they've gone out further so we are going to have to monitor where that is those bonds are coming off just below four percent and we're probably you know looking at financing somewhere in the five percent area depending on where the market is and what ten are we do those bonds at but i assume we will refinance both of those bonds uh with with new public debt And at current levels, there will be some dilution, you're right. On the other things that are maturing, for example, like Commerce Square, which is $200 million, that one is well underleveled. And we've already been out in the market looking at debt for that. And we feel we can refinance that at a not too dissimilar number at the same level or actually put in some good news capital. And a couple of the other ones, like at Sierra Square, we deliberately put some short-term debt on it based on where the markets were when we bought that property. And we feel very confident with the IRS in there that we can refinance that property as well. There's some others that are there. I don't want to go into each one of them. I can certainly do that at another point. Like a 1919 is an internal loan that two partners have made that can easily be extended. So... And then hopefully, Michael, we are going to do some asset sales. Our line of credit, as you know, in the past has been minimal to actually having cash on the balance sheet. And we haven't done sales in a bit of time. So I think that that's something we will look to do to bring that line balance down now that it's extended. And to the extent we didn't do some financing in the prior years, we did look at those financings. We were watching the bond market increase. you know hindsight maybe we should have done something earlier but we were looking at all a lot of uh you know make holes that had to be made on those bonds and people were paying a lot of money to do that and then at that time we didn't think it was uh worth spending all the extra cash to prepay bonds and thought there was something that we could uh minute you know mitigate that and look at doing them in uh 2022. unfortunately the markets have uh have gone out quite a bit and we can look back and say maybe we should have done some of those bonds earlier. But I think we can still refinance them and we will look to minimize the dilution from those as well just by being very proactive on time.
spk06: It would just seem that from a balance sheet management perspective, how do you leave yourselves exposed with 55% of your total company debt rolling in two and a half years at a time when interest rates were at their all-time lows. Like I understand all the things on an operating basis and you're excited about the developments, but if you're going to give it all back from interest and take the risk on debt, I just don't know when do earnings ever come out. And it just feels like every year there's just something else coming about that takes numbers down. And I'm trying to understand why the company put itself in this position to have their backs against the wall with such dramatic amount of debt coming due at extraordinarily low rates.
spk05: For some of that debt going into 24, we do have 24 months. I don't know that I would say we got our back against the wall. If you go back to the beginning of the year, Michael, we looked at where those interest rates were. They ran up dramatically. and I'm not going to forecast where interest rates are going, but we do have 24 and on to refinance them. Our coverage ratios are in great shape, so we're going to be able to refinance. Where those rates are, we'll find out. But they did move a lot quicker than we thought, but I don't think I would characterize it as our backup against the wall with some of these facilities and what we're going to be able to finance.
spk06: I think more so from the fact that you just talked about how your line was more drawn than you'd like it to be. Most companies run a zero balance on their line and use it during the quarter. Obviously, your equity is constrained, so you can't issue equity. You're talking a little bit more land sales, but all you've done this year is take on more capital commitments and raise leverage rather than the other side. So I guess it is what it is, and I guess as we progress into 2023 and 2024, we'll have to better understand as you refinance $1.1 billion of your pro rata share debt that's under 4%, how much of an impact that will take away from all the good leasing and development project leasing that's coming about. So thank you.
spk00: Thank you. The next question. I'm sorry. We will take the next question. It comes from Brian Spann from Evercore ISI. Please go ahead.
spk03: Hey, thank you. Gary, you talked about physical occupancies, and I think you mentioned the highest utilization levels in Philadelphia suburbs and D.C., but as you talk to tenants, what are your expectations for utilization levels into the back half of the year? And do you think this number's kind of topped off given hybrid work adoption?
spk04: No, I mean, George and I will tag team. I mean, I think we continue. It's interesting. We actually, the more conversations we have directly with tenants, the more encouraging the news seems to be in terms of them bringing people back, you know, three or four days a week, uh, We really haven't, as we've talked on previous calls, had anyone focus on a hoteling concept. There's clearly a desire for more efficient space layouts, which George kind of framed that out. We see some of the space planning working. But we're continuing to see kind of an incremental uptick in people coming back into the offices. Actually, one of the slowest marks we have in people coming back to the office really is down in Austin, Texas. were that a high concentration of tech companies and they seem to be slower than the financial service and the professional service companies in terms of bringing people back into the office. Certainly the healthcare related companies have been back. So we actually, it's something that we myself and some of the other senior folks here and there seems to be this general bias to continue accelerating, bringing people back to the office. I do think it'll be somewhere in that three to four days a week for the most part, and I think to some degree that'll be a function of labor market conditions, specific industry exposure. Even within companies, we're seeing different ground rules for different functional areas. So those... functions that are in very high demand, like IT, we're certainly seeing more flexibility for our tenants to have their IT folks work remotely. But, George, any other color on that? Yeah, I think the one thing we're seeing, and part of it is probably also influenced by the summer, but Tuesday, Wednesday, Thursday right now is kind of the high occupancy phase with lower lower amounts Monday and Friday as one would imagine and expect. But even those companies that have rolled out voluntary return to work, we're starting to see increased you know, term work environment they have. Sometimes they do just want to get back to collaborate. So I think, you know, we kind of keep moving the goalposts a little bit, but I do think end of summer will really be kind of the next, you know, what happens after Labor Day. And I do think it just requires, you know, a couple of, you know, CEOs to kind of just put the gauntlet down and say, hey, it's time to come back. And I think you'll start to see you know, each industry sector, you know, kind of follow the lead.
spk03: Okay, thanks. And just on the incubator, Jerry, can you remind us, I think, you know, there were a couple floors that you had planned to expand there, and is that still on track? And I guess, you know, what are you hearing from these tenants, and how are you monitoring the health of these tenants and their appetite to expand, just given the pullback in funding that we've seen?
spk04: Yeah, we're monitoring them daily, and they all seem to be doing pretty well. But certainly we're mindful of the fact that with the index, the public company index down 27% and some of the venture capital pullback, that there's certainly a higher risk for some of these tenants. We're seeing some near-term expansion requirements by some of those tenants. As you know, the B-Labs is 50,000 square feet We've got 12 companies in there. We're 98% leased. And we do anticipate, based on feedback from those tenants, somewhere between 80,000 to 150,000 square feet of future demand drivers there over the next 12 to 24 months. But certainly, the point you raised is a fair one that's the top of mind for us as well, which is with some of this pullback and kind of more negative macroeconomic overtones. We're very closely tracking how these tenants are doing, how their trials are going, how their capital base is going, their burn rate. And that's really where our partnership with PA Biotech has been helpful as well. They know the science. They know these companies. So we can assess them through the window that we know real estate. They can help us assess them. the future viability and growth expectations of these tenants from a scientific and talent standpoint. So it's been a very effective partnership on that front. The last piece of your question, we do plan on expanding the incubator. Contrary to some of the negative early times, we're actually trying to work with trying to move some office tenants into other buildings where their leases don't expire until the mid part of 23. So to some degree, our timing of delivering that additional square footage is going to be a function of how we can relocate those tenants. We do have some work taking place on one of the floors within SEER to facilitate some known tenants. We would expect that to take place over the next several quarters.
spk03: All right. Thank you very much. Thank you.
spk00: Thank you. The next question comes from Omotayo Okusanya from Credit Suisse. Please go ahead.
spk09: Yes, good morning, everyone. Could you just talk a little bit about, you know, build to suit, you mentioned that you may actually start something on that front. A little bit about where that demand is coming for build to suit. I'm specifically interested in maybe if it's coming from the lab biotech side. and also just how big that opportunity could be in the near term and how that would potentially be funded.
spk04: I'm certainly happy to answer that. The Build-A-Suits I alluded to are primarily in some of our production assets, so they're kind of in the 100,000 to 150,000 square foot range. They would be potentially full building users on 10 to 15 year leases. Development is really an elective decision, so I think as we look at the landscape today, certainly having those smaller buildings lots away from a full tenancy standpoint would be attractive. One key prospect we're talking to is a life science company who is looking for significant expansion opportunity. And the other was a larger regional relocation and consolidation of some existing older space. So they're looking to kind of create a newer corporate image and to do that in a newer building that has all the amenities that are going to be top of mind for all key tenants now.
spk09: Great.
spk04: Those projects from a capital standpoint are kind of in the $75 million plus range. We can deliver those within typically four quarters, could be four or five quarters depending upon the complexity of it out. So the delivery cycle between the investment of the money and the recovery of the NOIs is much less protracted than we're seeing on these larger scale developments.
spk09: Gotcha. Thanks.
spk04: Thank you.
spk00: Thank you. The next question comes from Bill Crow from Raymond James. Please go ahead.
spk08: Good morning. Thanks. Jerry, can you just highlight the pipeline for life science buildings in Philly and what the risk is that we may see some overbuilding given some of the challenges in VC funding, smaller company financing?
spk04: Yeah, sure, Bill. As we're looking at the pipeline we have, there are a number of properties that are currently under development. There have been several that have been announced. We're not sure that some of the ones that have been announced will actually get the financing or the tenancies to actually get the project started. So right now there's probably four or five core competitive projects between University City Science Center down to Philadelphia Navy Yard, which tends to be lower-rise projects. There tend to be more manufacturing versus lab space. And then there's a number of other properties that are kind of between the Navy Yard, the near-end Pennsylvania suburbs, and CBD Philadelphia that are either being talked about still as life science conversions, getting a tenancy in place, or starting the design development process. So look, we're very mindful of the fact that life science seems to have more clarity to the demand drivers than traditional office. So a number of office developers or holders of land that was deemed to be office are looking at life science opportunities. As we kind of assess our risk, You know, we do think that Schuylkill Yards, given our location, next to the train station adjacent to the major institutions, next to interstate highways, our location tends to be top tier. And based upon the feedback we've gotten from the prospects that we are talking to today, we know that that locational driver is very important. In addition to that, When we took a look at a design level on a project like 3151, we'll be introducing some technical components to that building in terms of riser, HVAC capacity, vibration, dynamic glazing, oversized elevators with a higher speed, things that Philadelphia market really hasn't seen before. And we think that those design elements and the efficiency, the footprint, in addition to the locational advantage, will put us in a... in a very good position to attract more than our fair share of tenants to fill these buildings up.
spk08: I appreciate that comment. If I could just add on a question on the return to office rate, I used the CASEL systems data, and you may disagree with the data itself, but it shows Philadelphia at 38%, and it showed Philadelphia at 38.1% on December 1st, which would imply no real improvement. I'm wondering, A, disagree with the data, or B, maybe you could tell us what's going on with parking revenue and maybe how far below it is from 2019. Yeah, sure.
spk04: Bill, this is George. I'd be happy to. I mean, look, the CASEL report, you know, it's hit or miss kind of market to market. I mean, we monitor our own, you know, turnstile data. Fourth quarter report, From 21, we were about 25%, and we're currently at about 40% right now. So we are kind of at that castle number, but we actually were a little bit lower than their number. So we have seen some improvement. Parking is a good segue because we are seeing those people that are coming in the predominance of them are using the garages that we have in both Commerce Square over at Logan Square and a couple of other ancillary garages within the city. I mean, our garage occupancies are, you know, about 92%, and we're just about all the way back to kind of pre-pandemic parking revenue numbers.
spk08: Great. Thanks. Appreciate the time. Thanks, John.
spk00: Thank you. And we have a question from Michael Griffin from Citi. Please go ahead.
spk07: Hey, thanks for taking the follow-up and excited to be on the call. Just curious, on the $2340 redevelopment, you know, why does that make sense to own as opposed to, you know, exiting the greater D.C. market entirely and focusing on Austin or Philly?
spk04: Yeah, no, look, I think that's the question. I alluded to that. I thought in one of my answers where Look, the building for us had a major tenant move out. It's that vacant for a period of time. We were successful in attracting a major tenant. It was actually the largest lease done in Northern Virginia this year. And the game plan is to essentially complete that renovation with the high probability of creating a capital event there. I think, as you may know from looking at the company, We have sold a significant portion of our DC portfolio over the years and it's now down to a fairly small percentage of our revenue stream. I think with a 2340, we're definitely saying that that is an opportunity to harvest some significant liquidity on a building that, for all intents and purposes, you need to look at it almost as a land play right now. It's actually generating negative net NOI for us through the carrying cost. Our selling that building would actually generate a significant liquidity event for the company. And to even go back to the debt refinancing question, that gives us the ability to generate a fairly significant amount of money with no earnings dilution and at a cost of capital that layers very well into a refinancing program that we'll add over the next several years. And we think we, frankly, have a couple of those opportunities within the company, where we have properties that are, frankly, ripe for sale. They could be in joint ventures or wholly owned that we can generate fairly high proceeds off a fairly low cap rate. So the buildings are generating fairly low returns to us right now, and they're good value-add acquisitions for other companies. that can actually layer into the financing strategy that we're going to lay out over the next 12 to 24 months.
spk07: Gotcha. I appreciate the color on that. And then I also noted that the sublease space in your portfolio picked up slightly sequentially to 3.3%. Kind of how should we expect this to be trending sort of going forward and sort of what led to the slight increase quarter over quarter? Yeah, I mean, this is George. I'll take that one.
spk04: I mean, you know, I... I think it's probably going to continue in that low single digit. Obviously, sublease space requires a little bit of term to it to really attract somebody. I think we've got a number of tenancies who would desire to sublet their space, but again, I think given the term and the like, just have not been successful to date. But again, I think based on our historic run rate, I still think it's a low single-digit proposition for us.
spk07: Okay. That's it for me. Thanks for the time. Thank you.
spk00: Thank you. And at this moment, we show no further questions. I would like to hand the call over to Mr. Sweeney for final remarks.
spk04: Great, Hilda. Thank you very much. And thank you all for participating on the call. We look forward to making continued progress in our business plan. and updating you on that at our third quarter conference call. Enjoy the rest of the summer. Thank you.
spk00: Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Speakers, please stand by for your debrief.
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