Brandywine Realty Trust (NYSE:BDN) Q2 2023 Earnings Call Transcript

Brandywine Realty Trust (NYSE:BDN) Q2 2023 Earnings Call Transcript July 26, 2023

Operator: Good day and thank you for standing by. Welcome to the Brandywine Realty Trust Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there’ll be a question-and-answer session. [Operator Instructions] 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.

Gerard Sweeney: Tania, thank you very much. Good morning, everyone, and thank you all for participating in our second quarter 2023 earnings call. On today’s call with me are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Senior Vice President 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 that federal securities law. Although, we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports that we file with the SEC.

During our prepared comments, Dan will review our second quarter results and progress on 2023 business plan. Tom will then review second quarter financial results and frame out the key assumptions driving our 2023 guidance for the balance of the year. And after that Dan, George, Tom and I are certainly available for any questions. So, moving to our prepared comment, the second quarter saw continued leasing momentum throughout our portfolio. During the quarter, we executed 568,000 square feet of leases, including a 177,000 square feet of new leases within our wholly-owned portfolio. Our joined venture portfolio achieved a very strong 401,000 square feet of lease execution including a 139,000 square feet of new leases. The combined activity totaled 969,000 square feet.

And as we showed on Page one of our SIP, these are highest combined leasing volumes for the past four quarters. The operating metrics were strong as well. For the second quarter, we posted rental rate mark-to-market of 17.6% on a GAAP basis and 5.8% on a GAAP basis. As we look at the balance of the year, our mark-to-market will vary by region with CBD Philadelphia at a 17% cash and 30% GAAP rental rate increase. The PA suburbs will be a 2% cash positive and 9% GAAP positive. Our mark-to-market in Austin, we anticipate a negative on both the cash and a GAAP basis given the current market conditions. This quarter we did have an 18,000 square feet of positive absorption, we currently stand at 89.4% occupied and 91.1% lease based on the 224,000 square feet we have a four lease commencements.

More importantly, as we view our portfolio, our core markets at Philadelphia CBD, University City, the Pennsylvania suburbs and Austin, which comprise about 94% of our NOI or 91.2% occupied and 92.7% lease. During the quarter, both our GAAP and cash same-store outperformed our business plan ranges, the second quarter capital cost were also in line with our business plan ranges, and tenant retention came in at 71% above the top end of our full-year forecast but we are maintaining our existing range based on forecasted activity between 49% to 51%. Spec revenue range remain $17 million to $19 million with $16.1 million or 89% at the midpoint already achieved. The speculative revenue range represents approximately 1.1 million square feet of which 787,000 square feet or 72% is already completed.

Our operating platform is solid with a stable outlook, we further reduced our forward rollover exposure through 2024 to an average of 6.6% and through ’26 to an average annual rate of 7.3%. We are definitely seeing a pickup in activity, converging the lease execution remains frustratingly slow with overall velocity, a starting point to any leasing cycle continues to improve. A several key points we like to highlight for you. One, is the quality curve thesis remains intact as our physical tour volume has been very encouraging. Second quarter physical tours exceeded the first quarter by 5%, exceeded our 2022 quarterly average by 47% and also exceeded pre-pandemic levels by significant margin as well. On a wholly-owned basis, during the second quarter an 118,000 square feet of our new leasing activity were 67% of on or those leases were a result of the flight to quality.

We also saw tenant expansions continue to outweigh tenant contractions during the quarter. I think its further evidence of the emerging market recovery, our total leasing portfolio is up 21% from last quarter and stands at 3.5 million square feet. And that excludes the 1.3 million square feet we have on our joint venture pipeline which is also up from last quarter by over 200,000 square feet. The wholly-owned pipeline is broken down between 1.3 million square feet in our wholly-owned operating portfolio and 2.2 million square feet on our development project which again like the joint venture pipeline is up over 200,000 square feet from last quarter. The 1.3 million square foot existing portfolio pipeline includes approximately 160,000 square feet in advanced stage of lease negotiation.

Also, in that pipeline, 31% of our operating portfolio new deals or our prospects looking to move up the quality curve. As we noted on Page 01 of our supplemental package, we did receive notice during the quarter from in a state of taxes that they terminated their lease at our Uptown ATX campus effective August 31st, 2023. The state currently occupies a 100% of one of our building there with that in an anticipated lease expiration date of October 26. The state has relocated their employed into a state-owned building, we are still assessing if that notice was provided in accordance with the requirements of the lease. And while we continue to make that assessment, as we determine we are entitled to additional rent or remedy, we have conservatively assume that we will not receive any rent after August and then remove that income from our FFO range.

The overall impact of the early termination will be over $14 million as in terms of reduction in total forecast of rent over the remaining lease term and that includes about in a $1.5 million in 2023 and $4.4 million in 2024. In addition, we’ll also need to write off approximately $370,000 in straight-lining rent over that 90 day period and then to the extent it is ultimately determined that that lease was effectively terminated in accordance with our Uptown ATX Master Plan we would plan on taking that building out-of-service, similar as we did in the 905 building as it would not be available for any re-leasing activity consists with our Master Plan development program. Turning to our EBITDA. Our second quarter net debt-to-EBITDA increase to 7.6 time, which is up from 7.4 from the first quarter primarily due to increased development spend of about $75 million.

However, as occupancy and NOI increases during the balance of 2023, we anticipate this ratio will decrease to our business plan range, with asset sales taking place in the second half of the year and our prior-year $100 million reduction in JV debt attribution also occurring by the end of the fourth quarter. As we did note in the SIP, this ratio has been higher due to development spend and debt attribution from joint ventures based upon our development pipeline investment at quarter end we have a $338 million of capital invested in $93 million of JV debt generating really no meaningful NOI at this point. And if we remove that investment from our 7.6 metric, our leverage would be 6.4 times well within our core portfolio range. On the liquidity front, we also made solid progress on both our joint venture debt maturities in development financings during the quarter.

In June, our Commerce Square joint venture closed to five-year $220 million secured financing with a 7.875% coupon, which replace a $204 million mortgage loan. Given the state of financing market, the rate was higher than we initially anticipated earlier in the year but that loan has some flexibility and open for pre-payment after June of 2025 and it does provide additional proceeds that fund current and future leasing costs. In connection with that refinancing, we did make a $50 million contribution to the venture to both fund closing costs, redeem a portion of our preferred equity partners, equity interest, and pay down all accrued but on pay partner preferred dividend to put back the joint venture on very solid financial footing. Subsequent to quarter end, our MAP joined venture is finalizing a short-term extension on our $180 million loan from the current lender that we will take that maturity through October 1st of 2023, that extension will provide additional time to work on a recapitalization strategy with both that leasehold lender and the Fee Owner of the properties.

We are also in advanced discussions on a construction loan on our 155 King of Prussia Road project and we anticipate that loan will close in August. On our other joint operating joint ventures, we do have $70 million of overall investment with $620 million of non-recourse mortgages maturing next year before any extension options are exercised of that $620 million we got a $112 million is attributable to Brandywine as our ownership stake range between 15% and 20%. We’re working very closely with all of our partners and our lenders on loan expansions and refinancing efforts and would expect to report additional progress on these non-recourse financings in the coming quarters. Currently our consolidated added 93% fixed at 5.03% or you have no consolidated debt maturities until October 24 bond, $350 million bond.

We also have no access to any balance at the end of the quarter on the $600 million unsecured line of credit and we have approximately $32 million of unrestricted cash on our balance sheet. As we noted on Page 13 of our SIP, based on our projected development spend, our business plan, after fully funding remaining development spend all TI and leasing costs, we project and Tom will amplify that we will have full availability on that $600 million line of credit by year-end of 2023. For the quarter, at our guidance mid-point are $0.19 per share dividend represented a per-quarter dividend, represented a 66% FFO payout ratio and an 84% cap tier ratio. So, another great quarter controlling capital spend as such as we noted in the SIP, we’re changing our CAD range a 90% to a 100% down from 95% to 105% and we anticipate our coverage to beat the low-end at the newer new range.

I have to talk about a few moments, our business plans projects a 100 million to 125 million of sales that will generate additional liquidity as well as some gain. Certainly as our business plan progresses, the Board will closely monitor capital market condition both company and market overall liquidity, sale activity progress and our dividend payout levels as we assess the dividend going forward. Looking at our development pipeline, our wholly-owned development pipeline aggregates $302 million of cost and its 30% life science and 70% office. This wholly-owned developments are 83% lease with remaining funding requirement of $51 million which is built into our capital plan. The majority of that spend is for tenant improvement and leasing commissioning costs that would only be spent attending to our lease executions.

Our joint venture development have a Brandywine share of $512 million, at full cost this pipeline is 32% residential, 38% life science, and 30% office. As we noted in the SIP, higher interest cost and originally contemplated, will impact our total cost, and based on the current so for curve, we currently estimate the cost increase due to higher rates, will approximate $23 million. Based on the preferred structure of those joint venture developments, it’s anticipated that Brandywine will likely be required to fund those additional costs and we noted such we noted those increases on the development page in the SIP. Further, as I stated last quarter as well, we’re saving the obvious given the volatility in the capital market other than fully leased build-to-suit opportunities, future development, so and so on whole pending more leasing on our existing pipeline and more clarity on the cost of both debt capital and cap rate.

Looking ahead, given the mixed use nature of our Master Plan communities primarily at Schuylkill Yards and Uptown ATX as we identified on Page 14 of the SIP, our expected forward product pipeline mix is 27% life science, 42% residential, 22% office, and 9% support retail entertainment and hospitality. And also is identified back on Page 06 of the SIP, our objective is to grow our Life Science platform to over 23% of our square footage based on land we currently own or control and approvals currently implies. Just a quick review of specific projects, on Page 07. 2340 Dulles Corner is 92% pre-lease with $23 million of remaining funding. 250 King of Prussia Road, remains 53% leased with $20 million of remaining funding that 53% lease did not change quarter-over-quarter but we do have a strong pipeline of about 200,000 square feet of deals in that pipeline of which a 100% of that pipeline is life science.

Based upon that pipeline, we did slide the stabilization date of that project by one quarter. In addition, when you take a look at our overall pipeline development activity, that pipeline of our development project is up 10% quarter-over-quarter and as I mentioned earlier stance at 2.2 million square feet. Lease execution even with the pipeline building have been slow in coming, and we have a number of leases in various stages of negotiation and are working hard to get them across the finish line. Giving mix dynamic, we did slide the stabilization date on 3025 JFK by one quarter and given the market conditions in pipeline activity in Austin did slide the one Uptown office component by two quarters in their stabilization date. On 3025, to touch on that, we have a current active pipeline that’s up slightly from last quarter for the life science and office component, we’ve done an amazing number of tours through the project, that tour activity continues to deliver the first block of residential units is underway this quarter with a good level of activity since our marketing launch several weeks ago.

Our 3151 life science project is under construction, Schuylkill is up to the fifth level. We have a leasing pipeline there of almost 400,000 square feet and all systems will go there in terms of the number of core net towards we’re doing as well. Turning to Austin. Our Uptown ATX Block A construction, from a construction standpoint is on time and on budget. On the office component, our leasing pipeline is at standard 721,000 square feet which is up an 180,000 square feet from last quarter. That pipeline includes a mix of prospects ranging from as low as 5000 square feet to as largest 200,000 square feet. So, as that curtain wall and the building is going up and the lobby finishes are being completed, we’re seeing an uptick in activity there as well.

Our next space of B.Labs or on the nine floor Cira Center’s well underway. This conversion a gradual lab space is now 66% lease. The full conversion will be completed in the first quarter of next year, the total cost which we built into our capital plan are $20 million and we expect a return on cost there of an 11%. Just a quick look at the sales market. There is no question that the sales market has been impacted by a challenging rate environment, a pullback by lenders on commercial real-estate financings particularly office and negative macro overtones on the office sector itself. In spite of this, based on our pre-marketing efforts, we are still maintaining our $100 million to $125 million sale target as we originally noted at the when we announced our 2023 business plan, we did anticipate those sales occurring in the second half of the year.

We do have about $200 million of properties in the market for sale now. Those properties are in our mid D.C. and Pennsylvania suburban markets. We also have several joint venture properties on the market at the same time as well. This quarter, we did gain certainty on the sale of an asset in Austin and expect that $53 million sale to close in the next several weeks. We have several other properties moving through contract negotiation, a couple of which main assessed a some level of short-term seller financing. In general, we continue to see a good list of bidders, the primary challenge being getting acquisition financing at both the cost and the loan to value range that make sense for the buyer but we continue to work with our buyers and their potential lenders to try come up with a good solution.

We do plan to continue to sell non-core land fossils during the balance of the year. And in the joint venture front, as I allude to really about 20% of our total debt is coming from our JVs through debt attribution. We do plan to recapitalize several of these JVs during the second half of 2023 with a goal to reduce our attributed debt from our operating JVs like 24% or approximately $100 million by the end of the year, that will certainly be additive to improving our EBITDA multiple. Dollars generated from those activities will be used to fund our remaining development pipeline commitment and obviously reduce leverage and improve the Company’s liquidity. With those comments, I’ll now turn it over to Tom to provide an overview of our financial results.

Thomas Wirth: Thank you, Jerry, and good morning. Our first quarter net loss totaled $12.9 million or $0.08 per share, and FFO totaled $49.6 million or $0.29 per diluted share and $0.02 above consensus estimate. Some general observations regarding our second quarter results, being above consensus we have several moving pieces and several variances compared to our first call guidance. Our management and leasing development fees totaled $3.7 million or $1.3 million above our first quarter projections primarily due to higher third-party lease commission income. Our portfolio of operating income totaled $75 million, $1 million below our $76 million forecast due to some leasing commencing slightly behind budget. FFO contribution from our joint ventures totaled $4.5 million and was $1.3 million above our forecast primarily due to lower interest expense from the delay in completing the Commerce Square mortgage to June of 2023.

Termination in other income totaled $1.4 million and was $900,000 above our first quarter forecast. We anticipate the second quarter result will be a good run rate going forward. We also forecasted one land sale to generate $600,000 gain and that’s been delayed until the third quarter. Our second quarter debt service and interest coverage ratios were 2.9 and 2.8 respectively, slightly better than our forecast, and net debt to JV was 41.7%. Our second quarter annualized core net debt EBITDA were 6.5 times and within our 2023 range and our annual combined net debt to EBITDA was 7.6, 3/10s return above hence our guidance. However, we anticipate the metric to improve with higher EBITDA and the forecast of asset sales. Regarding the portfolio, as highlighted last quarter, 405 Colorado is now included in our core portfolio for the second quarter.

As Jerry outlined, we continue make some progress on our financing front as anticipated, in June our joint venture refinanced the Commerce Square property with a five year first mortgage at a rate of 7.75%. The mortgage totaled $220 million and replaces the previous $204 million mortgage maturity providing $60 million of good news capital for existing and forecasted leasing activity. While the rate is above our forecasted rate, the CMBS market was open which allowed us to complete this financing refinancing despite the recent bank failures. While we were successful in completing the Commerce Square financing, we continue to see challenges in the financing market for office properties. The traditional banks are allocating little or no money to new originations for new office loans except for certain situations such as fully leased build-to-suit properties and good relationships with the bank, with the sponsor.

We think some lenders will be flexible and provide shorter-term loan extensions on performing portfolios with good sponsorship. Regarding our joint venture debt, we are working with our partners on the 2024 maturities to possibly extend the current maturities with existing lenders, we’re also considering some asset sales within those portfolios to lower leverage and we have commenced marketing efforts with new lenders on a couple of the joint venture properties. We anticipate executing a short-term extension on our $100 million first mortgage on a MAP portfolio as you know we are 50% partner in the joint venture which has lease full position in the portfolio assets and we are working with the lender to recapitalize that loan, along we’re talking to the joint venture lender as well as the ground owner.

Regarding 2023 guidance, we have narrowed our guidance by $0.04 maintaining a midpoint of 116 and the range is mainly attributable to the variability of our asset sales program both in terms of volume and timing as well as our projected land sales and related gain. Our 2023 business plan includes to have the following assumptions, a $100 million to $125 million of second half sales with dilutions not being significant. No new property acquisitions, no anticipated ATM or share buyback activity and the share count is estimated to be a 174 million diluted shares. Looking more closely at the third quarter of 2023, we view the following general assumptions. Property level operating income will total $77 million and be $2 million ahead of the second quarter primarily due to increased occupancy at 405 Colorado, 250 King of Prussia Road, and the balance of the portfolio.

Our FFO contribution from our unconsolidated joint ventures will total on $1.5 million for the third quarter. The sequential decrease is primarily due to higher interest rate expense, primarily Commerce Square refinancing and then higher interest rates on our MAP JV as a very favorable spot matures on August 1st. And a slightly negative impact for the commencing of our residential operations. Our G&A expense will decrease from our second quarter to $8 million due to reduced restricted share compensation. Our interest expense including differed financing costs will approximate $26 million and capitalize interest will approximate $3 million. Termination fee and other income will total $1.5 million for the quarter, net management and leasing development fees will be $3.4 million as we continue to forecast higher third party lease commission income.

Land gain in sales and tax provision will net to a $1 million gain representing two forecasted land sales. As we look at our capital plan and as Jerry mentioned. We experience better forecasted CAD payout ratio of 84% primarily due to leasing capital cost seen below our business plan range. Since our first half CAD payout rate was better than forecasted, we have adjusted our annual 2023 CAD range from 95% to 105% to 90% to 100%. Our capital plan for the second half of the year is very straightforward and totals $220 million. More importantly, we continue to prioritize liquidity and still project no borrowings on the $600 million unsecured line of credit at the end of 2023. Uses for the balance of 2023 are comprised of $90 million of development and redevelopment project, $66 million of common dividends, $10 million of revenue create capital, $30 million of revenue — sorry, $10 million of revenue maintain capital, $30 million of revenue create capital, and $24 million equity contributions to our joint ventures.

Primary sources are $105 million of cash flow after interest payments, a $10 million are projected on a construction loan for 155 King of Prussia Road, $15 million increase in cash will be the result and we do have a $120 million of land and other property sales. Based on this capital plan outline above, we project having full line availability at the end of the year. We also project that our net debt to EBITDA will fall at the upper end of our range of 7.0 to 7.3. And then the minimal projected income by year end on the development projects. Our debt to GAV will be in the 40 to 42 range, and our core net debt EBITDA range of 6.2 to 6.5 by the end of the year, which excludes our joint ventures and our active development projects. We continue to believe this core leverage metric reflects the leverage of our core portfolio and eliminates more highly leveraged joint ventures and our unstabilized development and redevelopment projects.

We believe these ratios are elevated due to our growing development pipeline and believe that once these developments are stabilized our leverage will decrease back towards the core leverage ratio. We anticipate our debt service and interest coverage ratios to approximately 2.7, which represents a sequential decrease in our coverage ratios due to our projected development spend and higher interest rates. I’ll now turn the call back over to Jerry.

Gerard Sweeney: Thanks, Tom. So just the key takeaways would be the portfolio is in solid shape. We do recognize there remains some negative over turns on office and the future of office. But we are seeing an increasingly build up in our pipeline as well as tour activity, major challenges getting decisions made but the clear dynamic of the flight the quality I think we’re benefiting from throughout our portfolio. We’ve also taken a number of steps over the last number of quarters to make sure that our annual average square foot rollover exposure through 26 is only 7.3% with strong mark-to-markets manageable capital spend, and hopefully a continued acceleration of our leasing velocity. We have covered all of our wholly owned near-term liquidity.

We’ve worked our business plan is predicated upon ensuring ample liquidity by keeping our line of credit at zero. We are actively pursuing a whole range of other financing activities to ensure that liquidity position and our leverage metrics continue to improve. And our business plan is based upon improving liquidity and keeps our operating portfolio on very solid footing with a good forward leasing pipeline to continue executing over the next couple of quarters. So as usual, and where we started, we really do wish you and all your families well. And with that we’re delighted to open up the floor to questions. Tanya, we do ask that in the interest of time you limit yourself to one question and a follow up.

Q&A Session

Operator: Gentlemen, [Operator Instructions]. And please limit yourself to one question and a follow up. One moment while we compile the Q&A roster. And our first question will come from Steve Sakwa with Evercore ISI. Your line is open.

Steve Sakwa: Thanks. Good morning, Jerry and Tom.

Gerard Sweeney: Good morning.

Steve Sakwa: I was wondering if — hey, I was wondering if you could just maybe expand a little bit on the leasing pipeline. I mean, those numbers seem very large in relation to the size of the development pipeline, but obviously, you haven’t gotten anything over the finish line. And I’m just curious from a decision making standpoint, what’s sort of holding back CEOs, CFOs, is it — this pending recession that continues to get pushed out, is it uncertainty over rates like what sort of gets people to finally make this decision?

Gerard Sweeney: Yes, it’s a great question. It’s Jerry up. I think a couple things and George certainly feel free to chime in, but, I think when we look at the development pipeline in particular, those buildings are reaching kind of the latter stage of their physical construction. So lobbies are now done, amenity floors are being completed. It shows a real high quality building. So I think we’ve always seen in all of our development projects over the years Steve, an acceleration of pipeline, as the building nears completion. So that was a trend line we would expect to see. And I think we’re frankly pretty happy even given the slowness of the Austin and Texas market with the size of the pipeline build we have there just in the last quarter.

We are working every moment of every day to figure out the algorithm of how we get people to execute leases. The major thing that we are saying is that there is general concern about macroeconomic conditions and tripling these larger size leases, these companies are committing a huge amount of their own capital to move into new office and life science space. The negative over turns and the lack of clarity on where the economy is going is certainly playing into that theme. I’ve had a number of direct conversations with some of the C-suite executives, some of our key prospects and they walked away incredibly excited about the quality of the project we’re presenting to them. And when they go back to their own offices, it’s hard to pencil through the cost of relocation, I think that’s giving them a little bit of a pause.

So, we have not heard anything relative to any of our specific projects that’s holding anything back in fact, quite the contrary. I think we have, generally after a tour, we have a very high level of enthusiasm by the prospect, it tends to be more as they worked through their own financial situation, what they view is the appropriate time to pull the trigger and sign a long-term lease tends to be the bigger gating issue. But the pipeline itself that continues to grow very good diversity within that pipeline itself between large and small users. Very happy with what we’re seeing here in Philadelphia, in terms of the mix between office and life science prospects. All that being said, our focus remains on getting some lease executions done. And we have a number of prospects in space planning.

We have a number of prospects, we’re working through letters of intent on couple on lease negotiations. But we’ve remained very anxious to report to all of you some definitive lease signings. We know the prices will lease up even with the increased costs, we kept the return on cost metrics the same because we’re meeting very little resistance on our rental pricing. But we know we have some work to deliver there, Steve.

Steve Sakwa: Great, thanks. And I guess on the follow up, you touched on this State of Texas lease and I guess just to maybe paraphrase, it sounds like you’re not really questioning, I guess their ability to cancel the lease, but maybe did they provide proper notification and kind of when the lease may actually terminate or is there something even questioning the ability to cancel the lease and I guess I’m just trying to make sure is it more of an if they could cancel it or more about when it would get cancelled?

Gerard Sweeney: Well, I want to be careful in my commentary. But the lease we executed with the State of Texas contained a standard provision in all State of Texas lease with all — when I say all to the extent, we can determine all State of Texas leases. But essentially and we see that number of other government agency leases, well that gives the sovereign the State or the Federal government the right to cancel the lease to the extent that appropriations are withdrawn to support that agency. There — in addition to that there’s certain other requirements in the lease about backfilling the space with other state agencies and complying with some other notice requirements as well as providing evidence of non-appropriation. So at this point, I want to say whether they have — if they have the right to cancel or if they do when that would be effective.

I think given the lateness of this notice, we’re still tracking down both from a business, political and legal front, what the most appropriate steps for us to take are. This lease termination could have significant implications in the State of Texas since, as I mentioned most if not all the state leases have these provisions in them to the extent we’ve been able to terminate it’s never been exercised before. So we have a lot of work to go through before we determine if the notice we received was valid or not. But in the interest of full disclosure, as soon as we receive that and we thought it was appropriate to disclose that to our shareholders immediately. And as a consequence, we’ve taken those for revenue that the rents would receive under that lease at of our revenue projections and FFO for the balance of 2023.

So, work to do there as well and certainly we are collaborating with the various agencies to try and come to the right answer.

Steve Sakwa: Great. Thank you. That’s it.

Operator: One moment for the next question. And our next question will come from Camille Bonnel of Bank of America. Your line is open.

Camille Bonnel: Good morning. Can you talk to the retention dynamics during the quarter? I noticed you held your guidance on this. So just trying to understand if any particular tenant or lease contributed to this or are you seeing stickier behavior but keeping guidance in case of situations like ATX?

George Johnstone: Yes, Camille, good morning. This is George. I’ll handle that one. I mean, we had a very strong quarter in terms of the second quarter at 71%. But we do have two pending move outs still to come. One is a 55,000 square foot tenant in our Plymouth Meeting portfolio during the third quarter, and then another is a 69,000 square foot tenant in Radnor who will vacate in the fourth quarter. So those two known forward move outs are really the reason why we’ve maintained the full year retention guidance.

Camille Bonnel: Helpful. And my follow up on a different topic, as you’ve been to the market a few times this year to execute on different financing as part of your liquidity enhancement program. And you’re now looking to execute on a construction loan at 155 King of Prussia. I know these assets 100% pre-release, but do you get a sense from your discussions with the lenders, they’re still appetite to issue construction loans at the targeted 60%. LTV or is there something under discussion?

Thomas Wirth: Hi, Camille. It’s Tom. No, I think on a fully — it will depend on the tenant that’s going in, in the terms of their lease. But on this bill to suit that we have in particular, no, I think there is lender appetite for the transaction, I think they may ask for a little more credit enhancement in the way of recourse but nothing too significant. And I — so I do think sponsorship is also important and the interest we did get on the loan. And we do expect to close with one of our banks that we have a good relationship with is that we did go to banks that we do now. So I do think that market is open for a good tenant with good terms on the lease and it also good sponsorship.

Camille Bonnel: Thank you.

Gerard Sweeney: Thank you.

Thomas Wirth: Thank you

Operator: One moment for our next question. And our next question will come from Michael Griffin of Citi. Your line is open.

Michael Griffin: Great, thanks. I had a question on a commerce for JV. I’m curious if the refinancing was contingent on you contributing more equity? And if so do you see more upside in owning more of this property longer term and anything you got there that would be great?

Gerard Sweeney: Yes. Hey, good morning. How are you? Jerry or — tom and I can tap in this. Look, I think the — we were delighted to get the financing done. It’s a challenging market. It’s a big loan. Had great debt yield coverage normally it’d be a slam dunk, but it was a — we were fortunate the CMBS market was open. We think that market will remain open. So that could be a viable source of future financings as well. Look, I think as we assess commerce need to take a look at the trend line. That’s a great asset with significant NOI growth potential. We’ve had excellent leasing the last several quarters with increasing really strong positive mark-to-market rents and good control over capital costs. We think there’s a really good pipeline building with leases that in process.

The neighborhood is also improving. It’s becoming much more of an infill location with new residential and commercial development has great on site parking and a retail base. And I guess our read was with the — with our debt service costs increasing significantly the preferred structure we put in place a number of years ago, which was a fairly expensive cost of capital for us, the accrual on that preferred continuing to click away. We felt that given what we see as the increasingly positive trajectory of that property and the cost of the new debt and the preferred, that given our liquidity position, we were in a position to kind of paydown some of that accrual redeem some of the preferred equity position increase our overall stake and position ourselves to maximize value going forward.

Michael Griffin: Thanks. Then my next one, just on the development pipeline, I think you’ve talked about pushing out some of the stabilization dates from last quarter. When do you have to start seeing leasing on some of these properties? Are you confident to hit those targeted stabilized yields?

Gerard Sweeney: Yes, I think in the next couple of quarters. And I think I think Michael as we went through the assessment what to do with those stabilization dates, we kind of went through the line item by line item in the pipeline, and kind of rolled out what we thought we could actually deliver. So we think in the next couple of quarters, we need to be posting some leasing activity to meet those stabilization dates.

Michael Griffin: Great. That’s it for me. Thanks.

Gerard Sweeney: Thank you.

Operator: One moment for our next question. And our next question will come from Michael Lewis of Truist Securities. Your line is open.

Michael Lewis: Thank you. Jerry and Tom, you both gave a lot of color on the commerce square refi and some of the work that you have left to do on other JV refinancing. Maybe there’s not much more to say on this, but I think it’s interesting, how office refi they’re getting done these days. So I’m curious if you could share a little more about the inner workings of why an 8% stake how you settled on that? How you settled on the asset value, that maybe share the value that — this priced that that 8% interest, just kind of color on, on how these deals get done and how they were? And maybe commerce square as an example?

Gerard Sweeney: Yes, again Michael, thanks for the question. I mean — our other JVs let me touch — let me start with them. And Tom and I can talk about commerce as well. We have partners in all those. Commerce is a unique, because we’re a majority partner there, we — if the share control so it’s an unconsolidated joint venture. In our other joint ventures on the operating side, we’re — other than that, we’re kind of 15% to 20% owners. So number one, we have good partners. Number two, we have great relations with those partners who are working with them very closely on the recapitalisation strategy for each of those individual ventures. All of the loans that these ventures are completely non-recourse. But there’s varying degrees of investment position that both Brandywine and our partner have.

And in all the joint ventures, the operating performance of those have tended to outperform the respective markets that are in. So we’ve maintained very good credibility from operating a capital investment standpoint with our lenders. So our lenders there — I think their bias is to be a law firm and understand the challenges of getting themselves refinanced out. So I think as Tom touched on we do anticipate that in many of these situations be able to bridge through until there’s more liquidity more capital markets. And that will be a collaborative discussion with our partner and the lender. So in any case, the MAP joint ventures there we are a partner with Sculptor. That — we own the leasehold. There’s a third-party that owns that fee. So they are — we’re in discussion with the fee owner, the leasehold lender and our partner on the best way to recapitalize that.

I think, the structure of those operating joint ventures is different than commerce, because they’re all common equity joint ventures, they’re powered to suit joint ventures. Commerce had this preferred structure, which kind of creates a different waterfall that we’re looking at in terms of what’s the best approach for us to maximize value added at venture. So I don’t know if Tom, you want to add any color to that?

Thomas Wirth: Mike — Michael, on that, I guess on the financing itself, we looked at the amount of debt we wanted to put on in fact, we probably could have added a bit more of good news capital to that loan. And as Jerry pointed out, we wanted to make sure — we were mindful of where the debt service coverage would go and our partner was as well-being in a preferred equity structure. In terms of the contribution that we made to the venture was broken down into a couple of pieces. So I know that you’d put in some implied rates of per square foot and cap rate. And for us it was a bit lower than that we did repay as Jerry mentioned in his comments some of the accrued preferred dividends that we had in the project there’s components to both a current and approved.

So our contribution not only 48% increasing that, but also paid-off some improved returns. So the metrics are a bit lower than the ones you would had it’s more like mid 200s of foot and then a cap rate a little above 7%. So not quite at the numbers that you look at by just taking the $50 million and putting it across the 8%.

Michael Lewis: Okay, helpful. That’s helpful. And then my second question, the same-store of high growth looks like it was driven mostly by lower expenses particularly real estate taxes. Was there anything one-time in there or any color on what drove that?

George Johnstone: Yes, Michael, good morning. It’s George. We did have a significant reduction in real estate taxes in our Austin, Texas portfolio. The Travis County appraisal district had come through and had lowered appraised values. So given the triple net nature of those leases at our current 86% occupancy in Austin, a lot of that then also lowered tenant reimbursements as we approved the reimbursement back to tenant but the — so that was really kind of a one-time event for real estate taxes.

Michael Lewis: Okay, great. Thank you.

Gerard Sweeney: Thank you, Michael.

Operator: One moment for our next question. And our next question will come from Bill Crow of Raymond James. Your line is open.

Bill Crow: Hey, good morning. Jerry life science space has been in the spotlight a little bit here lately. And I was wondering what your take is on the actual physical returned occupancy levels you’re seeing and the overall demand level for life science space?

Gerard Sweeney: Hey Bill, I mean, certainly the occupancy levels in the lab and research space are much higher than generally in the office. They need to be on site to do that work. And that is really prompted for many of the life science companies that we’re dealing with at full — kind of a full return to the workplace. So there’s equality among the employee base. And I think that’s a trend line we anticipate continue to accelerate, we’re seeing more and more companies generally bring people back three or four days a week. So I hope that trend line will continue. I think on the life science side, we’re — look demand is slower than it would have been this time last year. I mean, the we have a number of companies who are going through FDA trials, we have a number of companies that are in the process of raising additional financings.

We’re seeing all the deals in the marketplace. So the overall pipeline is up. I think the other question early, I mean, I think macro conditions you are having some level of impact upon when they’re able to make decisions. But the pipeline on the life science side that continues to build particularly here in university. We’re seeing a good pipeline of activity out in our Radnor portfolio as well. And some of those are some — I mean, the range of credit worthiness is from AAA credits down to emerging growth companies. So we’re being very, very diligent on making sure we understand the financial condition of some of these tenants. Working through our B labs partners with the PA Biotech Council, they have a scientific advisory board. There’s other scientists that we’ve gotten involved in helping give us some assessment on the validity of science and the probability of FDA approval in addition to doing our normal balance sheet review.

But while demand is muted, it still — so is also supply, supply levels are down significantly in terms of plan starts down. Our competition here in university city is really three or four buildings where four or six quarters ago could have been much higher than that. So I think the supply side has come in significantly. I think our location and the quality of buildings we’re presenting will hold us in very good status is as the demand drivers come to fruition in terms of lease executions.

Bill Crow: Thanks. And one quick follow up. How much did the tax assessor and the appraiser and Austin lower the values by [ph]?

Camille Bonnel: How much the appraiser lowers the values by?

Thomas Wirth: Bill, I’m going to have to follow up with you. I don’t have that information with me.

Bill Crow: Okay. Just curious average number. Thanks. That’s it from me.

Thomas Wirth: Thanks Bill.

Operator: One moment for the next question. And our next question Dylan Burzinsk of Green Street. Your line is open, Dylan.

Dylan Burzinsk: Hi, guys. Good morning, and thanks for taking the question. Just curious, expectations for net effective rent in the back half of the year and heading into 2024. Is this a scenario where we could start to see some relief in growing in the net effective rent side of things?

George Johnstone: Yes, Dylan, good morning, it’s George, again. I’ll be happy to take that one. Yes, I mean, we’re seeing that effective rent growth. I mean, the fact that we’re being able to control capital the way we are asking rental rates have not come under much scrutiny or pressure. And so I think, really across both city and suburbs here in Pennsylvania, we’re seeing strong positive net effective rent growth. I think, in Austin right now, I think just given a 16% vacancy, we are competing a little bit more aggressively there. And we’re probably kind of flat to maybe slightly negative on net effective in Austin, in the suburban pockets that we have in the operating portfolio.

Gerard Sweeney: Yes, I think — thanks for that. I think the add to that Dylan. I think one of the other dynamics we’re seeing and you may hear the same thing from some of the other office peers is, as tenants are returning to the office more and more, they are looking for better quality workplaces. So even though there may not be the level of net absorption in some of these markets, the levels of leasing activity are still pretty decent. And that leasing activity is still willing to pay a positive rank premium to where they’re moving from, because the buildings are more efficient. They may actually be taken a lower amount of space. But the reality is that the physical platform they’re providing for their employees is a significant improvement over where they’re coming from.

And so, when I think that when the real strong stats we had this quarter was about 60 plus percent of our new leasing activity was coming from tenants moving up the quality curve and we were still able to post very good mark-to-markets and net effective rent growth. So that’s a stat we track very carefully, because that that’s a harbinger of where we see effective rents can go. So as long as tenants continue to be willing to pay up in rent to move into the better quality buildings, we do see continued progression of growth the net effect of rents. Now, obviously, there’s some more so different as George touched on with Austin, I mean, there still sublease space there we’re competing against some of that sublease spaces in high quality buildings.

And to the extent that they are willing to discount rents, that creates a little bit of downward pressure on us, which is why in our business plan we really assumed negative mark-to-market for the balance of the year on our targeted Austin leasing activity.

Dylan Burzinsk: And then — appreciate you guys comments on how the lending environment remains challenging for office. But just curious in your discussions with lenders is there a certain debt yield that they’re targeting?

Thomas Wirth: Dylan this is Tom. I think that we’ve been seeing debt yields that are in the low double-digits. It’ll depend on the property and the tenancy. But the — but they are in the low double-digits terms of debt yields that they are looking to target.

Dylan Burzinsk: Great. Thanks all.

Gerard Sweeney: Thank you.

Thomas Wirth: Thank you.

Operator: One moment for our next question. And our last question will come from Anthony Paolone of JPMorgan. Your line is open.

Anthony Paolone: Thank you. One of the follow up on the life science leasing pipeline, I think you mentioned 400,000 square feet for 31 51. And it’s almost the size of the whole building. So that seems positive. But just what — what’s the alternative universe for the folks looking at that project, like just trying to understand how much share you all might need to get that that project build up? And also, I guess, relevant for the space of 3025 as well?

Gerard Sweeney: Yes, good morning, Tony. The competitive set and university city is primarily three other buildings two others of which are under construction. We think each building is fairly good in quality, their delivery times are different. So the some degree will that be in the next or not in the mix with a prospect today will really be based upon their delivery timeframe. In addition to University City, whether we compete with those buildings, sometimes some of these tenants should look in different sub marks, whether it be the Navy Yard or out in the Pennsylvania suburbs strictly Radnor, but the universe is much smaller than it was, as I mentioned in a previous comment four to six quarters ago. I mean, I think the upside to the downside of the lending activity is that not a lot of pressure getting financed.

In addition to that given the increasing costs, the yield requirements are higher as well. So that it’s — that the lower supply coming online and the increased cost to build these buildings not just from a hard cost, but now from a soft cost standpoint, they are pushing rent levels up fairly significantly in order to have their numbers pencil. So we think that trend line will be in place through this — through the stabilization dates of both 3025 and 3151. We think even within that competitive space, we think the proximity of Schuylkill yards to the regional rail network, to 30 Street train station proximity the [Indiscernible] easy walk the CBD and all the amenities there does position us very strongly against the competitive set. That being said, as I mentioned earlier, we know we need to get some of this leasing — lease prospects across the finish line.

That’s our core focus.

Anthony Paolone: Okay. Thank you for that. And then I guess, just a follow-up, one relates to the dividend. You talked about focus on our liquidity, but also a little bit of improvement in the pay out. I’m just wondering, is there a point in time where the board just takes a finer look at the dividend and you all reassess just how to think about the calculus around the dividend right now?

Gerard Sweeney: Sure. Look, a fair question. But the board takes a hard look at this every quarter. And some of the factors that come in to play on that is obviously our own portfolio performance. How our capital plan is progressing. What our core leasing pipeline looks like in terms of NOI accretion. And then we spend a fair amount of time really talking about kind of macro conditions, as well as Brandywine’s overall liquidity needs. We’ll make — we’ll have that same discussion in September, as we start to contemplate the third quarter dividend distribution. Look, our capital plan as Tom outlined and as referenced the SIP is doing much better than our original forecast. We have done a good job of navigating some challenging waters in the financing markets to meet our financing objectives.

That being said, we still have work to do. And that work needs to be done against the backdrop of very challenging capital market environment. So variable right now is the pace of sales activity and the pricing in which some of those sales take place, and how some of these joint venture loan negotiations go. And I think by September, we’ll be able to provide some additional clarity on those points. And then we’ll sit down and make a decision on what we think the third quarter in any core dividends may be. But the fact that we didn’t cover our dividend today based upon a revised forecast. That’s a positive, but we got to keep in mind that that’s a Brandywine specific situation versus us dealing with a very challenging macro market condition.

Anthony Paolone: Okay. Thank you.

Gerard Sweeney: Thank you, Tony.

Operator: I would now like to turn the call back to Jerry for closing remark.

Gerard Sweeney: Tanya, thank you very much. Everyone, thank you for participating in our second quarter earnings call. We will look forward to keeping you updated on our next third quarter earnings call in the fall. Enjoy the rest of the summer. And thank you again for your engagement.

Operator: This concludes today’s conference call. Thank you for participating You may now disconnect.