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spk01: Good day and thank you for standing by. Welcome to Brandywine Realty Trust's second quarter 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. Please go ahead.
spk06: Gigi, thank you very much. Good morning, everyone, and thank you for participating in our second quarter 2024 earnings call. On today's call with me are George Johnstone, our Executive Vice President of Operations, Dan Palazzo, our Senior Vice President and Chief Accounting Officer, and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information 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 file with the SEC. Well, first and foremost, we hope that you and yours are doing well. Your summer's off to a great start and are looking forward to a successful and ever-improving second half of 2024. During our prepared comments, we'll briefly review our results for the quarter. and progress in our 2024 business plan. Tom will then briefly review second quarter financial results and frame out the key assumptions driving the balance of our 24 guidance. After that, Dan, George, Tom, and I are available to answer any questions. Well, similar to last quarter's call, we want to start off by addressing the key themes that guide our thinking every day. Our focus remains on three key areas, liquidity, development lease-up, and portfolio stability. First, on liquidity. Our recent bond issuance cleared the decks on any bond maturities through November of 2027. During the quarter, we fully redeemed our October 24 bonds. As such, we anticipate maintaining minimal balances on our line of credit over the next several years to ensure ample liquidity and believe that that liquidity will be further enhanced by our asset sales program and other deleveraging initiatives. On our operating joint ventures, we have resolved two of our non-recourse mortgages. On our Sierra Square JV, we refinanced our existing mortgage that was matured this month with a new $160 million mortgage, which now expires in June of 29. Each partner funded a provided share of the equity required to reduce the outstanding mortgage balance and put that project in a cash flow positive position. On our MAP joint venture, a few items to highlight. We have reduced, restructured, and extended the existing leasehold mortgage. The mortgage was reduced by $26 million and extended through March of 2029. In addition, the amended loan provides the lender receives a 95% participation in the operating results, reducing our economic interest to 5%. The combined activity of the leveraging on Sierra Square and the restructuring of the MAP joint venture reduced our debt attribution by $101 million. To facilitate that restructuring on MAP and to provide capital for the debt pay down of $26 million, Brandywine and the fee owner formed a joint venture to purchase 14 flex and industrial properties. This new entity is completely unencumbered and we are currently marketing that portfolio for sale we anticipate being self be able to sell those properties over the next several quarters second on development lease up the pipeline on all projects continues to build with the number of tours and issued proposals increasing during the second quarter versus the first quarter we are in the advanced stages of lease negotiations with approximately 200 000 square feet of tenants with a strong pipeline building behind that the residential components continue to perform on pro forma in terms of both absorption and rents. Each of these projects are top of market, attractive to a broad range of customers, and we remain confident of hitting our targets. We certainly recognize that both the earnings drag and balance sheet impact of carrying this non-revenue producing capital and continue our aggressive marketing campaign on each project. To the upside, upon stabilization, These projects will generate approximately $50 million of gap and $45 million of cash NOI, or a 15.5% increase to our existing income stream. So they do remain a key driver to our company, and we're crisply focused on having those projects reach their stabilization. And on to stability, certainly our portfolio stability is always top of mind. The strong operating metrics we posted again this quarter reflect the underlying stability of the core portfolio. And while certainly our 80% occupied Austin portfolio still faces near-term challenges, fundamental growth dynamics in that market remain. In fact, activity levels in Austin have picked up. A second consecutive quarter of positives works in that marketplace, and we plan to be a strong participant in that market's recovery. Philadelphia, which is one of the lowest vacancy rates among large cities in the country, continues to perform well as evidenced by our 94% leasing level and occupancy level of 91%. Looking ahead, we have less than 6% annual rollover through 2026, one of the lowest in the office sector. Our 2024 revenue plan is running ahead of schedule. As such, we have increased our speculative revenue range by a million dollars and also raised our annual retention range. Our mark-to-market capital ratios and same-store numbers all continue to perform at relatively strong levels as they have done over the last several years. We fully recognize the liquidity and valuation challenges facing our sector, in fact, the entire commercial real estate space, and continue to take steps necessary to ensure performance on our business plan and achieving all of our growth objectives. With that background, the momentum from the first quarter continued into the second quarter and the years off to a very solid start. All operating results are in line or above our 2024 business plan. A few highlights. We posted second quarter FFO of 22 cents per share in line with consensus. Our speculative revenue range, as I mentioned, of $24 to $25 million has been increased to $25 to $26 million, with $25.6 million already executed. Our 24 bond maturity has been fully redeemed. Our combined leasing activity for the quarter totaled 500,000 square feet. During the quarter we executed 164,000 square feet of leases, including 101,000 square feet of new leases within our wholly owned portfolio. Based on our efforts during the first six months of the year, we have eliminated $163 million of debt attribution from our joint ventures, which exceeds our $100 million target. And as noted on page 13 in our SIP, our business plan does anticipate having full availability on our $600 million line of credit at year-end 24. Along those lines, our consolidated debt is 95% leased I'm sorry, 95% fixed at a 6.2% rate. Our quarterly rental rate marked to market was 10.8% on a gap basis and negative 0.4% on a cash basis. It's worth noting this metric for the quarter was impacted by a larger lease renewal we did in Austin with a roll down in rental rate, which we accepted in lieu of any tenant improvements. Our new leasing mark to market was a strong 28% and 15.5% on a gap in cash basis, respectively. We ended the quarter at 87.3% occupied and 88.5% leased, sequentially down from last quarter, but right in line with our 24 business plan projections. So the operating portfolio remains in solid shape. Our forward rollover exposure through 25% has been further reduced to 5.8% and is noted through 26 through down to 5.7%. Also, we do not have any tenant lease expirations greater than 1% of revenue through 2026. So we believe our asset quality, service delivery platform, and sub-market positioning remain a key competitive advantage. Similar to prior quarters, the quality Curve thesis continues to gain strength as reflected in the overall pickup and leasing activity. In addition, given some of the stress our competitive landlords are facing, we have in several submarkets seen our competitive set shrink and the quality operating and financial stability of our platform has continued to separate us from the pack, both in the minds of prospective customers, existing tenants and brokers. Along those lines, we continue to see encouraging signs on the leasing front as evidenced by the following metrics. The increase in physical tour activity has been very positive. Second quarter physical tours exceeded first quarter by 22%, also exceeding our trailing four-quarter average by over 11%. Also, tour activity remains above pre-pandemic levels by 27%. On a wholly owned basis during the second quarter, 68%, 68% of all new leases were a result of this flight to quality. Tenant expansions continued to outweigh tenant contractions during the quarter. Our executed renewal and expansion activity has enabled us to raise our annual retention range by 150 basis points from 57% to 59% to 59% to 60%. The total leasing pipeline continues in a strong position. The operating portfolio leasing pipeline is up 100,000 square feet from last quarter and stands at 2.3 million square feet. This includes approximately 282,000 square feet in advanced stages of negotiations. Our development pipeline remains at the same levels as last quarter, and also 32% of our operating portfolio New Deal pipeline our prospects looking to move up the quality curve. Looking at EBITDA, our second quarter net debt to EBITDA remained at 7.9 times. Compared to the first quarter at the same level, as increased investment in our development projects was offset by our JV recapitalizations, our core EBITDA metric ended the quarter at seven times, slightly above our current targeted range. Based on our operating results for the first half of the year, we have narrowed our 2024 FFO guidance from $0.90 to $0.97 per share to $0.91 to $0.96 per share. And also looking at the dividend, based on our $0.60 per share dividend, our second quarter FFO and CAD payout ratios were covered at 68% and 97% respectively. And at the midpoint, our first six-month CAD payout ratio was better than our 2000 business plan projection. Looking at sales activity, our business plan does contemplate us executing between 80 and $100 million of sales. We had targeted those to occur in the fourth quarter. We have about $200 million of properties in the market for price discovery. Given the reaction to that activity thus far, we do anticipate posting actual results within our targeted range. And while we will also anticipate continuing to sell non-core land parcels, We did have several land agreements terminated during the quarter through the buyer's inability to obtain financing. In looking at our developments, the development pipeline remains strong. As of now, we have approximately 200,000 square feet in active lease negotiations, 900,000 square feet of proposals outstanding, and 300,000 square feet of space undergoing test fits. Tour velocity continues to pick up. and activity levels have continued to increase on our recently delivered project at 1 Uptown. Given the length of time to complete the space plans I noted last quarter, we still need to obtain permits, construct space. Our 24 financial plan does not include any spec revenue coming from either 1 Uptown or 3025 JFK. To accelerate revenue recognition, however, we're nearly finished building out two floors of spec suites at 1 Uptown, and one floor spec suites at 3025. Looking at 3025, that property is fully delivered. On the commercial component, we're currently 15% leased with an active pipeline and, again, 100,000 square feet or so under active lease negotiations. On the residential component, we continue to see steady traffic and leasing activity for that residential component, which we call Avira, has 237,000 leases executed, or just shy of 73% of the project. That's up significantly from last quarter's call. About 151 of those leases have taken occupancy. That's pro forma rental rates. We still project this residential component will be between 80% and 85% leased by year-end 24. We have begun pre-leasing for one uptown's block A residential component called Solaris House and continue to see steady traffic. We have 22 leases executed. No lease have taken occupancy yet as the first move-ins are scheduled for later in August. And we continue to project that project will be between 20% and 25% leased by year-end 24. 3151 Market is... scheduled for delivery in the fourth quarter of this year. We have a leasing pipeline of over 350,000 square feet on that, with 110,000 square feet in lease negotiations. Uptown ATX, the office component, we have that in a joint venture, and our leasing pipeline there approximates 1.2 million square feet, with prospects ranging from 3,000 to 300,000 square feet. As I just said, we did complete a floor of spec suites with the second floor underway, and things are moving on track there as well. Our next phase of B-Lab on the eighth floor of Cirrus Center is well underway, and we remain in the final stage of negotiating a lease with a single tenant for that entire floor. Tom will now provide an overview of our financial results.
spk07: Thank you, Jerry, and good morning. Our second quarter net income totaled $29.9 million, or $0.17 per share. and second quarter FFO total 38 million or 22 cents per diluted share. Our second quarter net income results were impacted by a 53.8 million dollar or 31 cent per diluted share one-time non-cash income gain from the restructuring of our MAP joint venture. Our FFO results met consensus and we have some general observations regarding our second quarter highlighting a couple variances compared to our first quarter guidance. Interest expense was $2.2 million below our reforecast, primarily due to higher capitalized interest and lower projected borrowings on our unsecured line of credit. G&A totaled $8.9 million, $600,000 above our reforecast, primarily due to compensation expense. This quarterly variance continues to be a timing variance and we still anticipate the full year number to be consistent with our guidance. Our first quarter debt service and interest coverage ratios were 2.2 and net debt to GAB was 45.2, both in line with projections. Our first quarter annualized core net debt to EBITDA was 7.0 and is two tenths of a turn above our range. And our annualized combined net debt to EBITDA was 7.9, just above the high end of our range of 7.5 to 7.8. Regarding portfolio and joint venture changes, we have made no changes to our wholly owned core portfolio in this quarter. Financing activity, as Jerry highlighted, we completed a $400 million bond offering that closed on April 12th. And with this closing, we've eliminated a near-term maturity risk with no unsecured bonds maturing until November, 2027. Our wholly owned debt is now just under 95% fixed with a weighted average maturity of 4.2 years. Regarding our 2024 joint venture maturities, as Jerry mentioned, we have made progress with our partners and lenders on the 2024 maturities. We've refinanced our loan with Cirrus Square and setting that maturity date till 2029. We recapitalized the MAP joint venture by acquiring our partner's interest, reducing the existing loan by $24.5 million, and then executing a new loan through 2029. These transactions continue our goal of reducing our investment exposure to our operating joint ventures and, just as importantly, also reducing the net debt attributed to these ventures by well over $100 million in this quarter. In addition, in connection with the MAP recapitalization, we formed a 50-50 partnership with the current ground owner and acquired the leasehold interest in 14 property portfolio located in Richmond, Virginia, totaling approximately 642,000 square feet for $44 per square foot. That is over 99% occupied. Portfolio is primarily flexed industrial properties with a weighted average lease term of 7.5 years. Portfolio is 44% occupied by S&P 500 biotechnology company. We intend to market this portfolio for sale, and based on the profile of the portfolio assets, we expect to sell the assets within the next couple of quarters. The joint venture portfolio is unencumbered. Looking more closely at our third quarter of 2024, we have the following general assumptions. Our portfolio operating income will total approximately $75 million and roughly $1 million above our second quarter operating income number. FFO contribution from our unconsolidated joint ventures will total a negative $2 million, which again approximates our second quarter results. Our G&A for the third quarter will be up sequentially, although it will be flat, sorry, at $9 million. Our interest expense will approximate $33 million with capitalized interest of $3.5 million. Termination and other income will approximate $7.5 million in the third quarter. The sequential increase is due to anticipated transactional income that we forecasted in our full-year guidance, which was $11 million. Net management, leasing, and development fees will be $3 million for the quarter. We don't expect any land or tax provision to be material. Interested investment income will total $300,000, or $1.2 million sequentially below the second quarter. The second quarter had excess cash from the timing of the April bond offering, the bond tender, and the final June bond redemption. Our share count will approximate 176 million shares. And for our capital plan, Our capital plan is fairly straightforward, $180 million. Our CAD range remains at 90 to 95. Uses for this remainder of the year is $55 million for development and redevelopment projects, $52 million for common dividends, $28 million of revenue-maintained capital, $20 million of revenue-create capital, and $25 million of equity contributions to our joint ventures. The primary sources are 77 million of cash flow after interest payments, 90 million of land sales, and 17 million of construction loan proceeds related to 155 King of Prussia Road. Based on the capital planned out line above and cash on hand, we should have $4 million of cash on hand and our line undrawn at the end of the year. We also project to have that debt to EBITDA ratio ranging between 7.5 and 7.8, and our debt to GAV will approximately 45%. Our additional metric of core net debt to EBITDA is still ranging between 6.5 and 6.8, and excludes primarily just our joint ventures as all of our active development projects will be complete. We believe this core leverage metric better reflects the leverage of our core portfolio and eliminates our more highly leveraged joint ventures and our unstabilized development and redevelopment projects. During 2025, our core net debt to EBITDA should begin to equal our consolidated net debt to EBITDA as our wholly owned development projects reach stabilization and we continue to reduce our exposure to the current joint ventures. We anticipate our fixed charge and interest coverage ratios will approximately be 2.2, which is equal to the second quarter. I will now turn the call back over to Jerry. Great.
spk06: Thanks, Tom. So the key takeaways are the portfolio remains in very solid shape. Average rollover exposure, as I mentioned, is one of the lowest in the sector. Demonstrated ability to manage our capital spend and stable and accelerating leasing velocity. including a proposal to conversion rate that continues to improve over our pre-pandemic levels. So we remain very focused on executing a business plan that continues to improve liquidity, keeps our operating portfolio on a solid footing, with obviously a very clear and daily focus on leasing up our development projects to generate that forward earnings growth. As usual, and where we started, we wish you and your families are doing 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 and a follow-up.
spk01: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our first question comes from the line of Anthony Paolone from J.P. Morgan.
spk04: Thanks. Good morning. Jerry, maybe I want to go back to the leasing pipeline for the three commercial projects under development. If I go back a couple quarters, it looked like 33025 had about 700,000 square feet, 3151, I think you guys talked about 400,000 square feet in ATX space. He had a couple hundred thousand square feet. It sounds like you still have the pipeline, but the conversion to lease has been on the slow side. I mean, maybe can you talk a bit about, you know, if anything's really changed in terms of, you know, the prospective tenant behavior or just, you know, your confidence level on getting some of these things over the finish line, might be?
spk06: Yeah, Tony, good morning, and great question. Thank you. Yeah, look, I mean, the pipeline has been – pretty strong on these properties all the way through, which I think reflect their sub-market positioning, the quality of what we're delivering. Some of the buildings, for 3025, the amenity floor wasn't done until late last year. One uptown, we actually had some significant infrastructure improvements being done offsite that limited access to the property. But they're both in excellent shape now, and 3151 is on track for a full delivery by the end of this year. So the projects present themselves very well. Traffic in terms of tour activity remains very strong. The flight to quality thesis seems like it's, as I mentioned in our operating portfolio, seems to have a level of continued validity. it's just taking tenants long to make up their minds. I mean, we do have several larger leases under active lease negotiations, so we've moved from proposal to lease negotiations. I do think the pipeline for 3025, Tony, and 3151 has remained fairly stable in terms of square footage, you know, moving tenants and prospects in and out. I think the real pleasant surprise is in the last couple quarters, We've seen a dramatic uptick in one uptown. With that building being delivered now, there's a real increase in the number of showings, the number of proposals that are being issued, and the overall level of activity. In that market, we are seeing a return of a couple of larger tenants. Clearly, in a market that is over 20% vacancy, we're still competing against other products and sublease space. We're very pleased with the pickup in activity at one uptown over the last couple of quarters. We still have work to do, and we're focused on that with active engagement by top management and our leasing team and all these tours and lease negotiations. I think on the residential front, I know you didn't address that specifically, but we continue, I think, to make very solid progress at 3025 with... good uptick in activity quarter over quarter. And when Solera's house really effectively rolls out with the first occupancies later this month, we think we'll get a good building pipeline there as well.
spk04: Okay. Thanks for that. And then just follow up, you talked about the limited rollover in the next few years in the portfolio. And just given your historical level of leasing, it would seem like that sets up pretty well to absorb some vacancies. So just wondering if, you know, what We should think of if there are any impediments to that being the case, whether it's lower retention or anything you're thinking about there that could stand in the way.
spk06: I think we feel like the operating portfolio should be in a very solid shape going forward. We clearly spiked out a couple of higher vacancy projects in the supplemental information package, and we continue to make progress on each of those projects. You know, Austin remains in the operating portfolio 80% lease, which is well below our historical run rate. Again, I guess we're looking at the level of tour activity that's increased in our properties quarter over quarter. The market's finally had two consecutive quarters of positive absorption and an increase in leasing activity. That market seems to be getting some additional green shoots. But the other thing we take a look at the portfolio is no tenant with an expiration is greater than 1% of revenues. But George, maybe you can add some color to that. Yeah, I mean, staying on the theme of expirations, I mean, our largest expiration in 2025 is a 50,000 square foot tenant in Radnor, which we have a lease issued to them. And we look to announce this execution in the third quarter. And then as Jerry said, I mean, really the opportunity is with the Austin
spk10: portfolio and it's 20% vacancy level.
spk06: The current operating pipeline breaks down kind of 60% between Philadelphia and the Pennsylvania suburbs and 40% in Austin.
spk10: So, you know, we've had a number of move outs over the last kind of five to seven quarters.
spk06: We think, you know, the end is close to being, you know, over for some of those rollouts and And now it's a matter of converting that New Deal pipeline to occupancy.
spk04: Okay. Thank you.
spk06: Thank you.
spk01: Thank you. One moment for our next question. Our next question comes from the line of Steve Sakwa from Evercore ISI.
spk03: Thanks. Good morning. Maybe to follow up on Tony's question, Jerry, just as you think about the pipeline, can you help maybe frame out what percentage of the tenants or deals or square footage that you're talking to are kind of new-to-market tenants where they need to make a decision or need to pick space versus maybe that are exploration-driven? And is there a real difference in the discussions you're having on the new side versus kind of the lease expiration-driven discussions?
spk06: Steve, is this on the operating portfolio and the development portfolio or just the developments?
spk03: Sorry, I was really focused on the developments, Jerry.
spk06: Okay. Look, I think a number of the prospects that we're talking about are in, let's say, Schuylkill Yards, are tenants who are existing in the market but need significant expansions. So there is some urgency on their timeline to accommodate that. We have a couple of tenants who are new to the market. And I'm always trying to figure out if new to the market means there's more of an urgent timeline or there's more deliberative steps they need to go through. But our experience has been the folks that we're talking to seem to have some urgency in making a decision. We are talking to a few, I'll call them institutional type of tenants, which have a pressing need, but they tend to move slower. So we're staying very much in touch with them. And look, I think one of the things that we track is what proposals we have outstanding and how much square footage we have going through space planes. That's really where it starts to get very serious. And we've seen some delays on the programmatic side. where prospects are still trying to figure out how much space they need. Are people back three days a week, four days a week? Should they have larger common areas, smaller common areas? So the space planning process today is more protracted than it was pre-pandemic. And I think that's part of the delaying mechanism here. Again, at one uptown, again, a number of tenants are, most of the prospects are in-market tenants who have pending maturities, so they do have significant pressure to make decisions in the near term.
spk03: Okay, and maybe just to follow up on the Schuylkill Yards between the two different buildings, because, you know, one's really geared to traditional office, and obviously 3151's life science. Just maybe on the life science front, you know, what are you seeing – kind of from both institutions and maybe traditional life science. Obviously, the funding environment has gotten better. We haven't seen as much public market IPO activity, but VC funding has gotten better. So just what are the discussions like for 3151 with that building delivering kind of later this year?
spk06: Yeah, I think the discussions there are very constructive. Again, we have a major prospect who we're in negotiations with. And that is a high-growth potential tenant. And then a few of the institutions who are also prospects for 3151, again, have pressing needs and are tracking through the space planning, deliberative processes they're going through. I think overall, you know, we take a look at lab users in the markets. At the beginning of the year, there was about a million square feet of prospects floating through the various life science submarks in the region. That's now down to about 800,000. Now, some leases have been executed, but we are very encouraged with what we're hearing on the capital raising front because we believe that that will generate some additional activity in the near term. Our B-Labs incubator and graduate space programs continue to perform well. So we're seeing a very healthy pipeline of there. And of course, their growth aspirations are really driven primarily by their ability to raise capital. So with more capital starting to come back into that market, we're hoping that we'll get some near-term growth opportunities coming out of B-Labs incubator and B-Labs graduate level spaces.
spk03: Great. That's it for me. Thanks. Thank you.
spk01: Thank you. One moment for our next question. Our next question comes from the line of Michael Griffin from Citi.
spk10: Great. Thanks. Jerry, I think in your prepared remarks, you mentioned the tour activity is notably above where we were relative to pre-COVID. So I guess, can you kind of give some insight? I mean, is that greater demand for space that those stores are indicating, or is it really just tenants out in the market looking for a better deal? Any color there would be helpful.
spk06: Yeah, I think it's a combination of a couple of factors, and George, you and I can tag team this. I think one of the things that we're seeing, and we're seeing it statistically in the pipeline, is we're picking up a lot of additional activity because of the flight to quality Companies want to bring tenants back to high-quality space. We're certainly seeing, as I alluded in the comments, I mean, the competitive set shrinking a bit. So I think part of the pipeline activity, Michael, is not – I wouldn't necessarily categorize it as net new demand. I would indicate it as more shifting demand from lower to higher-quality space. And I think we're very well positioned to take advantage of that pipeline. I think even in the comments, we're talking over 60% of our lease executions during the quarter were tenants moving up the quality curve. I anticipate that accelerating near term, just taking a look at the detail of our pipeline. We are hearing from more and more prospects that they are concerned about the financial stability of their landlord. They're concerned about the financial structuring of the building they're in. Brokers who tend to be... a fairly forward thinking and aggressive in terms of make sure to get deals done are very focused on getting paid. So we're seeing a number of RFPs come out requiring some type of credit support for the brokerage commission, looking to get some additional underwriting support for TI dollars being available. We're in a great position on all those fronts. So when you combine that financial flexibility, and the quality of our portfolio. And then, frankly, you know, I think the quality of our on-site property management and leasing teams, we're presenting a much different, much safer, much higher quality presentation than a lot of our competitive cities. And that really is predominantly in Philadelphia CBD, University City, the Pennsylvania suburbs, and we're starting to even see some of that in the other sub-marks we're in as well. So I wouldn't say, George, maybe you have a perspective on it, but it's a tremendous increase in net new demand as opposed to a shifting within the marketplace. Yeah, Michael, I would agree. I think it's more rotational, and I think building ownership and sponsorship is really one of the key drivers of what prospects are looking for.
spk10: I appreciate that. That's helpful. And then just circling back on the development pipeline, you know, obviously I think these projects are substantially completed, but, you know, if the leasing is not there, can we see stabilization dates pushed out or the expectation to realize expenses and stop capitalizing these things, you know, four or five quarters after completion?
spk07: I'm sorry, Tom, go ahead. Yeah, Michael, on the capitalization, just so, you know, our methodology, and I believe it's pretty standard, is that once we hit our substantial completion date, and this is on the commercial side, we basically have a 12-month window where we continue to capitalize costs on the vacant space, and that capitalized cost will be OPEX as well as interest. Once the property hits that one-year window, regardless of where it is on a stabilization basis, which we put in kind of the 90-95% range, we will still, at the end of the one-year window from substantial completion, it becomes operational. And therefore, interest in OPEX that may have been capitalized while it was vacant will shift to being part of operations.
spk06: And I think, Michael, from a business standpoint, I think when you take a look at what our projected stabilization dates are, I mean, that's really being driven off of what, you know, the activity and discussions we're having with the existing pipeline of tenants. So to the extent, for example, that a tenant would accelerate their move-in decision, that might accelerate one of those dates, or if they would delay it by a quarter or two, that might impact that as well. But the key folks we have right now is to get some of these – these leases and proposals executed so we have certainty that income stream coming in in 25 and 26. Great. That's it for me.
spk10: Thanks for the time. Thank you, Michael.
spk01: Thank you. Our next question comes from the line of Dylan Berzinski from Green Street.
spk08: Hi, guys. Thanks for taking the question. I guess just going back to sort of the decision on the mass venture and continuing to own those assets, I guess, can you guys just kind of talk about the reasoning behind that as opposed to sort of just walking away from those assets?
spk06: Sure, happy to. Look, I guess as a way of background, this has been a fairly successful investment for us as evidenced by the fact that we recognize the $50 million plus nine cash income. So it's been a very fairly profitable investment. transaction for us over the years and I think they'll recall this was a structured transaction where the fee and the leasehold were separated so it was a fairly complicated transaction so as we were contemplating what the best path for us was we felt that their their debt reduction and restructuring provided a couple different pathways one was we obtained a five-year period to reposition those assets and, as part of that plan, embark on a programmatic liquidation effort of assets over that five-year period of time. An important driver in that was creating a mechanism to ensure that both the leasehold and the fee ownership interest were aligned, so there was some embedded liquidity that was created by this restructuring of that gave us the ability to kind of move assets out the door. It also provided a solid revenue stream for Brandywine from a management leasing, construction management standpoint that would yield some upside potential for us while eliminating really the debt attribution. I mean, one of our key issues in this restructuring was to reduce a significant amount of debt attribution, which is one of the trade-offs that was made with the lender in providing them the cash flow participation. So it was really an effort to ensure that existing relationships were preserved. There was no downside to Brandywine to doing this. It created a profit opportunity going forward. And I think the structure we wound up with whereby we were able to achieve the $26 million debt pay down with the fee owner uh say it's kind of brandywine's a leasehold owner the fee owner worked together to uh generate 26 million dollars to pay down the mortgage uh i think created a great runway as tom touched on those assets are 99 percent leased a strong weighted average lease term of over seven and a half years the investment base double digit cap rate on the acquisition we think creates a positive spread recovery for us in the near term on that debt pay down. So I think all those pieces played into in terms of maintaining the relationship, ensuring there's no downside to Brandywine, creating a future profit opportunity, both through the program liquidation plan, the revenue stream from the property and leasing services, as well as the profitability that may come out of this new joint venture that's sitting there unencumbered and those assets are entering the market for sale today.
spk08: Appreciate that, Keller. And then maybe one last one for me. On the $200 million of assets that you guys are currently marketing, I know you guys have sort of been in the marketing process for a couple hundred million dollars of assets over the last 12 to 18 months. Just curious sort of how those discussions have changed over the, over that time period and, and whether or not sort of bidding tents are, you know, more full of the day versus last year's same amount. Just curious how things have progressed on that front.
spk06: Yeah, I think we've seen a slight uptick in buyer interest. And I think that's been primarily driven by a couple of things. One, I think the lending environment, which, which is still challenging is getting marginally better, uh, particularly for smaller size deals. Uh, So I think, you know, with the CMBS market, the debt funds, they're providing, you know, a regulated and unregulated source of capital that I think continues to improve quarter over quarter. We're seeing some of the life companies get back into the marketplace. So I think the financing market is marginally better. I think there's also, that's one factor. The another factor is, you know, a number of office investors are sensing that a bottom's been hit in terms of valuation. And they're seeing the operating metrics across the sector not deteriorate as much as they were in previous quarters. So there seems to be a little bit more interest in trying to lock away good deals today. We are also seeing, as a third piece, a number of users who are looking to acquire assets given that their cost of capital could be lower than their landlords, and they're able to effectively buy properties and reduce their ongoing occupancy costs. So I think lending environment getting marginally better, the psychology beginning to shift towards the market bottom, and I think just the relative cost of capital that we're seeing between some of our larger prospects, larger investors, larger users looking to buy assets versus enter into leases. Hopefully that's helpful.
spk08: No, that was extremely helpful, so I appreciate that detail. Thank you.
spk01: Thank you. Our next question goes to the line of Omotayo Okusanya from Deutsche Bank.
spk09: Hi, good morning. Just wanted to follow up on the MAP-DB question. Again, you know, with all the restructuring, it doesn't seem like it's having a huge impact on your 2024 guidance numbers. But hopefully you can give us a sense of kind of on a going-forward basis how one can kind of quantify what the potential kind of upside is from a numbers perspective on this restructuring.
spk07: Yeah, I'd say, Tom, yeah, the effect on our earnings was not that significant for two reasons. One is... where the portfolio was standing at the time, as well as with the full debt in place, we were not recognizing a large amount of FFO. So the fact that we have now lowered that percentage of the FFO, but then lowered the debt, has kind of put us in the same place. So the effect of having less SFO as a percentage of the JV But it was kind of at a break-even spot as it was. So our hope is now that we have restructured, we're going to have more cash flow with a lower loan balance that we will be able to then put that free cash flow back into the property. So for 24, it was a de minimis change to our FFO results from the joint ventures.
spk09: But on a going forward basis, is there a way one can quantify how it can help 25 and beyond?
spk07: The way it could help 25 and beyond is if we do start doing leasing and get some of the assets stabilized, we will see the FFO increase. I think you'll also, as Jerry mentioned, we are going to be doing the leasing, construction, development, and management of the properties. And so we think It could give us some uplift if we start to see the leasing occur. Again, we'll be managing and leasing the projects, and that should help our third-party revenue stream. Again, not much this year since we just completed the restructuring. We have to get back into the market with some of these properties. And we think that could be an uplift in 2025, but I'm not ready to say how much that may be. But I do expect some marginal improvement as we get into 2025.
spk09: That's helpful. And then with the dividend outlook, again, the CAD payout ratio got tighter again this quarter. I think you did kind of lay out the plans in terms of sources and uses of capital going forward. But how does one kind of think about the dividend, just kind of given the CAD titer, you know, some of your sources next year or this coming year include asset sales and you still have a very tough transactions market. And just on a net basis, you know, The dividend could be an attractive source of capital, but I'm just kind of curious how management is thinking about that going forward.
spk06: Yeah, Jerry, we look at that every quarter. And I think when the question comes up in these quarterly calls, we always provide the same answer, which is it's something that we keep a close eye on. And the components there really are, you know, what the forward capital spend for the company is. And I think that's one of the reasons we track so carefully the capital ratios on all of our leasing. Our development pipeline, as indicated in the supplemental package, our remaining funding there is less than $6 million. So it's pretty much all fully funded. We do, as we were talking about on the call, have I think a very good pipeline of pending lease executions in the development pipeline that will provide some income certainly over the next several years, and it provides a good growth platform for us. The portfolio stability, we think, is one of the best in the office sector in terms of our rollover, our lower capital ratios, our positive mark to markets. And we feel that provides a very solid foundational point for the organization. So we feel evaluating each of those factors, you know, puts the board and the management team in a very good place to have clarity as to what we think our forward capital spend will be. And while the CAD ratio, you know, was higher this quarter, year to date, we're actually below our targeted range. So we're actually performing better against our planned CAD ratio. But, you know, we never lose sight of the fact that every dollar is precious. Every dollar has a relative cost to it. So we certainly want to balance our business plan execution with maintaining a good payout to our shareholders and recognize the value they have invested in the company as well.
spk10: Thank you.
spk06: Thank you.
spk01: Thank you. One moment for our next question. Our next question comes from the line of Michael Lewis from Truist Securities.
spk05: Great, thank you. Back to the MAP-JV, you know, the decision to put in the $26 million to pay down debt and take these 14 properties, you know, can we assume that you're going to sell these, you expect to sell these and get, you know, at least your $26 million back on the sales? And then, you know, the decision to keep the 5%, You know, I think if the assets were all like silly CBD assets, it would be clearer to me. You know, you mentioned there's no downside. I just wonder, you know, what's the upside for the effort here for keeping the interest?
spk06: Yeah, hey, Michael. The answer to your first question is yes, most assuredly. And the answer to the second question is that, you know, the 5% interest again, was really part of our reduction of debt attribution. We do believe that given the programmatic liquidation plan we are putting in place for this portfolio will generate upside for the company. In the meantime, as Tom alluded, we think there's going to be a positive return for us on the property services we provide. So I think it was really those two factors that weighed into the decision to go to the 5%. And certainly the lender and the owner wanted to make sure that Brandy had some level of notional commitment to this portfolio by maintaining a share of the ownership stake.
spk05: Okay. And then, you know, you talked a lot about the leasing pipeline and the TOR volume. I think during the quarter, in the second quarter, you executed 164,000 square feet of leases. That seemed low to me. Was that lower than you expected? Is that number, you know, not a concern? I just wonder, you know, if it speaks to, you know, converting the pipeline and, you know, are you seeing something that's shifting in the leasing environment? Or I realize there's a danger in reading into one quarter, but just curious your thoughts on that.
spk06: Yeah, look, I think, and George can add much more color, but I guess as I looked at it, we can never lease enough space. So as George will tell you, I'm always disappointed whenever the numbers come in, but we have a great team working across the company. But as I looked at it for new leasing activity, we're actually up quarter over quarter. The range... was really the spread in the range really was on the renewals. We had a couple of large renewals last quarter versus this quarter. But, you know, what we do track, Michael, like our conversions and, you know, like our conversions from proposal leases is actually running right in line with our 23 and is up from our 22 and pre-pandemic business plans. So I think, we really stayed very focused every day on getting leases done. And again, I was tongue in cheek. I'm never happy with the level. We always want more leasing done. So we always want to move that conversion rate up. But we also want to do that and make money while we're doing the leasing too. So, you know, we have been very focused on maintaining our capital ratios, growing our net effective rents, doing the best we can to get, you know, 2.5% to 3% rent bumps. So we recognize that there's some properties, like a few down in Austin, where we're really purely a price taker. And part of our decision is to cover some costs and create longer-term value. But a number of other properties, I think we hold pretty firm to what the rent levels we require, what our capital spend commitment needs to be, because there we feel we're in a much better position to drive near-term effective rent growth. Yeah, and Michael, this is George. I mean, the lumpiness in that number quarter over quarter oftentimes is the renulls. And we've done such a good job in getting out in front of 25 and 26. We've put a lot of those to bed. So the opportunity set on some of the 25 and 26 renulls is shrinking. So, again, I think, you know, a lot of times we look at it in the context of what was newly saying, you know, for the second quarter at 100,000 square feet, that was comparable to the first quarter on the wholly owned portfolio. So, and the other factor really is kind of Austin. I think, you know, while the pipeline continues to build, you know, the decision making has been a little bit slower there. There's a lot of options for tenants in that market. So, You know, we just continue to work that pipeline ultimately, you know, looking to convert.
spk05: Thank you.
spk06: Thank you, Michael.
spk01: Thank you. Our next question comes from the line of Upal Rana from KeyBank Capital Markets.
spk00: Hi, this is Gabby Horvath on for Upal. Could you provide any update on the properties you had identified prior to help reduce vacancy in the portfolio?
spk06: I'm sorry, you cut out a little bit. Were you referencing the progress we're making on our higher vacancy properties?
spk00: Yes, that's correct.
spk06: Oh, okay, great. Sorry, it just didn't come through clear. Look, I think in terms of, and I'm referencing page four, Gabby, in our SIP, I mean, we have, you know, River Place and Delaware, we are advancing our thought process on residential conversions there. And I think we're going through the design development, the engineering, and the political approval process to ensure that that pathway on those properties is... is viable. Plymouth Meeting, we're looking to market that property for sale, and we hope to have some good progress on that. The building in Conshohocken, which is 101 West Elm, that lobby renovation is close to completion, so that's been completely repositioned, so we're anticipating a pickup and leasing activity there. Sierra Center really is the expansion of our life science space. We expect George to deliver. Yeah, we've got a full tenant user for just shy of 30,000 square feet. They've got a lease in hand. So that lease will actually take Sierra Center off of this lift. And then the last three, two of which are in Austin and then 401 Plymouth Road, You know, we're actively leasing those. We're seeing, you know, good volumes of TOR and pipeline and just really, again, need to, you know, convert some of those opportunities into executed leases. But, you know, I think as Jerry started, you know, the top of the list is certainly more impactful to that overall vacancy level. And, you know, everything's still tracking as noted on the page.
spk00: Great, thank you. And then as a follow up, do you anticipate any impact from the mandate in Philadelphia for government employees to return to the office full time?
spk06: We actually have. They have returned as of mid July. The mayor has required all city employees come back to work. We think that's a very positive messaging. I think the mayor is is fully on board and focused on. rejuvenating Center City and sending a great message to the private business community. I think we've seen some other businesses, based on her leadership, move employees back to the office on a more regular basis. So we view that as a very, very positive announcement for not just Philadelphia, but also for the region as well. So I think the impact has been very positive in terms of perception, in terms of increasing street traffic, in terms of moving towards a more safe, clean, and green environment in the Center City area. So nothing but kudos to our mayor for her leadership on making that very strong decision.
spk00: Great. That's all from me. Thank you for your time.
spk06: Thank you.
spk01: Thank you. And I am not showing any further questions at this time. I'd like to turn the call back over to Jerry for any closing remarks.
spk06: Yeah, Gigi, thank you for your help today. And to all of you, thank you for participating in our second quarter earnings call. And we look forward to updating you on our 24 business plan progress in the fall. Our best wishes to you and your families for an enjoyable balance of the summer. Thank you very much.
spk01: Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.
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