Brandywine Realty Trust Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2024

There are 9 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Brandywine Realty Trust First Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Session.

Operator

Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker today, Jerry Smee, President and CEO. Please go ahead.

Speaker 1

Kevin, thank you very much. Good morning, everyone, and thank you for participating in our first quarter 2024 earnings call. On today's call with me are George Johnson, our Executive Vice President of Operations Dan Palazzo, Senior Vice President and Chief Accounting Officer 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 assurance that the anticipated results will be achieved.

Speaker 1

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 we filed with the SEC. 1st and foremost, we thank you for participating and hope that you and yours are well and looking forward to a a successful and ever improving 2024. During our prepared comments, we'll briefly review first quarter results and the progress on our 2024 business plan. Tom will then briefly review Q1 financial results and frame out the key assumptions driving our 20 24 guidance. After that, Dan, George, Tom and I are available for any questions.

Speaker 1

But prior to addressing the quarter in our 2024 business plan in any detail, we did want to address the key themes that guide our thinking every day. From a business risk management standpoint, our focus is really on 3 key areas liquidity, development lease up and portfolio stability. First on liquidity, as we will outline in both my comments and Tom's, our recent bond issuance cleared the decks on any additional bond maturities through 2027. As such, we do anticipate maintaining minimal balances on our line of credit over the next several years to ensure continued ample liquidity for the company. On our operating joint ventures, we have several non recourse mortgages still in negotiations.

Speaker 1

While those discussions are taking longer than we originally planned, we do anticipate constructive outcomes that will improve both our balance sheet and our revenue stream. 2nd, on development lease up, we are within several quarters of having our entire development pipeline fully delivered. As I will note later, the pipeline on all projects continues to build with both number of tours and issued proposals increasing during the quarter. Each of these projects are top of their market, attracted to a broad range of customers and we remain confident of hitting our target return on costs. We certainly recognize both the earnings drag and the balance sheet impact of carrying $260,000,000 of non revenue producing capital and continue our aggressive marketing efforts on every project.

Speaker 1

To the upside, upon stabilization, these projects will generate approximately $54,000,000 of additional GAAP NOI or 15.5% increase to our existing revenue stream. So they do remain a key growth driver for our company. Finally, looking at portfolio stability, continued strong operating metrics reflect the underlying stability of our core portfolio. While our 80% occupied Austin portfolio will face near term challenges, fundamental growth dynamics in that market remain and we will be a strong participant in that market's recovery. Philadelphia, which has one of the lowest vacancy rates among largest cities in the country continues to perform well and are 94% leasing level and occupancy level of 91% reinforce that point.

Speaker 1

Looking ahead, we have less than 6% of annual rollover through 2026. Our 2024 revenue plan is running ahead of schedule. Our mark to market capital ratios and same store numbers all continue to perform at relatively strong levels as they have done over the past couple of years. We fully recognize the challenges facing the commercial real estate space and have taken and will continue to take the steps necessary to ensure strong performance on our 2024 business plan as well as achieving our longer and intermediate term growth objectives. With that overview, the Q1 has gotten the year off to a great start.

Speaker 1

Results are in line with our 2024 business plan. A few quarterly highlights. We posted Q1 FFO of $0.24 per share in line with consensus. Our speculative revenue range of 24 $25,000,000 is 98% complete at the midpoint. As noted, we did resolve our 2024 bond maturity.

Speaker 1

And as Tom will elaborate, recently we completed a $400,000,000 5 year unsecured bond offering. Proceeds will pay off our outstanding bond due October 2024, repay the small amount outstanding on line of credit and provide additional forward liquidity. Our combined leasing activity for the quarter totaled almost 500,000 square feet. During the quarter, we executed 359,000 square feet of leases, including 101,000 square feet of new leases within our wholly owned stabilized portfolio. Based on recent efforts with 2 of our joint ventures, we have eliminated a 61.6 $1,000,000 of debt attribution during the quarter, which contributes towards our goal of eliminating $100,000,000 of venture debt attribution by year end 2024.

Speaker 1

And as noted on Page 13 of our SIP, our 2024 business plan anticipates having full availability of our line at year end 2024. Consolidated debt is 94% fixed at a 6.1% rate. Quarterly rental rate mark to market was 16.9% on a GAAP basis and 3.3% on a cash basis. We did end the quarter 87.7 percent occupied and 89% leased sequentially down from year end, but very much in line with our business plan expectations. Page 4 of the supplemental highlights the high occupancy of more of the majority of our portfolio.

Speaker 1

It does identify 7 properties that do comprise over 50% of the company's vacancy. As noted on that page, these properties affect our occupancy numbers by over 400 basis points. We are implementing plans on each of the projects that we outlined on that page ranging from accelerated leasing initiatives, capital investment programs and conversion and sale opportunities. The operating portfolio remains in very solid shape. Our forward rollover exposure through 2025 has been further reduced to less than 6% and through 2026 is down to an average of 5 0.8%.

Speaker 1

And by renewing 1 of our largest near term expiring tenants, we now have no tenant lease expiration greater than 1% of revenues through 2026. So our portfolio quality, service delivery platform and submarket positioning remain key competitive advantages. And similar to recent quarters, the quality curve thesis continues to gain strength as reflected in the overall pickup in our leasing activity. And we do continue to see encouraging signs on the leasing front as evidenced by the following metrics. Physical tours increase has been very positive.

Speaker 1

1st quarter physical tours exceeded 4th quarter tours by 20%, also exceeded our trailing 4 quarters average by 48% and also tour activity remains above pre pandemic levels by over 38%. On a wholly owned basis, during the Q1, 55% of all new leases were the result of this flight to quality. Tenant expansions continue to outweigh tenant contractions during the quarter. Our executed renewal and expansion progress has enabled us to raise our annual retention target by 600 basis points. So from 51% to 53% is a range to 57% to 59% is a new range.

Speaker 1

Our total leasing pipeline is up for the 4th consecutive quarter and stands at 4,900,000 square feet. Our leasing pipeline is up 400,000 square feet last quarter and stands at 2,400,000 square feet on our wholly owned portfolio. On the development projects, our pipeline is up 310,000 square feet from last quarter and stands at 2,500,000 square feet. The existing portfolio pipeline also includes of our operating portfolio new deal pipeline are prospects looking to move up the quality curve. And in terms of pipeline staging, which is clearly very important, proposals outstanding are up 153,000 square feet over last quarter, So that 900,000 square feet of outstanding lease proposals and we have leases and negotiations that are up 59,000 square feet from the last quarter as well.

Speaker 1

So very good positive trend lines on the leasing and deal conversion front. Looking at our leverage, our Q1 net debt to EBITDA was up to 7.9 times, up from our 4th quarter number, primarily due to an increase in development and redevelopment costs. And as we always expected higher first quarter G and A and lower other income. Our core EBITDA metric ended the quarter at 6 point eight times and currently within our targeted range. Looking quickly at our joint ventures, as I mentioned, we did reduce our investment balances at year end in one joint venture and at year end in other joint venture, our basis was reduced to the scheduled Q1 cash distribution.

Speaker 1

As such, we have now eliminated both joint ventures from our operating reporting metrics and will record no further operating results. This also eliminates the corresponding non recourse debt lowering our debt attribution by, as I mentioned previously, $61,600,000 And as we noted on Page 37 in the SIP, we do have 2 other operating joint ventures with loan maturities during the first half of twenty twenty four. Both of those loans are secured solely by the real estate and are non recourse with no obligation for our partner or Brandywine to fund any additional money. That being said, we do believe the ventures present valuable opportunity as the debt and real estate markets recover and as such along with our partners, we continue to be engaged in productive conversation with each lenders. While these discussions are progressing slower than we originally anticipated, we do expect a full resolution within the next quarter.

Speaker 1

We did as a side note receive a 3 month extension from our lender on Sierra Square and are working with our partners to refinance that property during the extension timeframe. In terms of guidance, as Tom will elaborate further, but as a result of our bond financing occurring 3 months early and being $50,000,000 above our business plan target, we forecast an additional $0.03 per share of interest expense. Based on that higher expense, we have reduced the upper end of our FFO guidance by that $0.03 So our revised FFO guidance is now $0.90 to $0.97 per share as opposed to our initial FFO range of $0.90 to $1 per share. And based on that revised range, our $0.60 per share dividend, our FFO and CAD payout ratios were at 63% 86% respectively. And at the midpoint, our 1st quarter coverage ratios were better than our 2024 business plan forecast.

Speaker 1

We do still continue to expect that between $80,000,000 $100,000,000 of sales during the year. As I mentioned last quarter, we do expect those sales to occur in the 4th quarter with minimal dilution. And during the year, we do plan to have about $200,000,000 to $300,000,000 of sales in the market for price discovery. We are targeting sales in the Met DC and Pennsylvania suburban marketplaces and we'll also continue to sell non core land parcels that we did last year. And looking at our developments, as I noted, our development leasing pipeline is 2,500,000 square feet, which is up 14% from last quarter.

Speaker 1

We also saw an increase in the status of that pipeline. So as of now, we have 122,000 square feet under early lease negotiations, 900,000 square feet of proposals outstanding and 300,000 square feet undergoing space planning. Tour velocity continues to pick up. The commercial components of 1 UP 10 and 3,025 JFK are now delivered and those activity levels continue to increase. However, given the length of time to complete space plans, obtain permits and construct the space, our 2024 financial plan does not include any spec revenue coming from these two projects.

Speaker 1

To accelerate revenue recognition, however, we are building 2 floors of spec suites in each building that will be completed by mid year. In looking at the projects specifically at 3025 JFK, when the commercial component, we remain 15% leased, but with an active pipeline totaling approximately 650,000 square feet. The delivery of the residential units continue. Activity levels on the residential front remain good. Tours are occurring daily and we currently have about 43% of the project leased, which is a nice step up from last quarter.

Speaker 1

3,151 Market, that building is scheduled for delivery later this year and we have a leasing pipeline is up slightly from last quarter with 120,000 square feet in early lease negotiations. Uptown ATX Block A Construction is on budget. We did slide the completion date into Q1, twenty twenty four due to a slight delay in some perimeter infrastructure work that needed to be done and affected building accessibility. Our leasing pipeline is approximately 700,000 square feet, which includes a mix of prospects ranging from 5,000 square feet to 300,000 square feet. We did commence the 4 spec suites and have a second floor under advanced stage of design.

Speaker 1

The multifamily component of that project of 3 41 units will begin phasing in during the Q3 of 2024 and we do anticipate the residential component will be about 50% pre leased by year end. Our next stage of DLAD's expansion at Sierra Center is underway and nearing completion and we are the final stage of lease negotiation with a single tenant for the entire 8th floor. Tom will now provide an overview of financial results. Thank you, Jerry, and good morning. Our first quarter net loss totaled $16,700,000 or $0.10 per share and Q1 FFO totaled $41,200,000 or $0.24 per diluted share.

Speaker 1

Our FFO results met consensus and we have some general observations regarding the Q1 of 2024, highlighting 2 variances compared to our 4th quarter guidance. Contributions from our joint ventures was $1,200,000 above our reforecast, primarily due to a one time pickup at 1 of our joint venture projects. G and A totaled $11,100,000 $1,100,000 above our reforecast, primarily due to higher compensation expense recognition. This quarterly variance continues to be a timing variance and we anticipate the full year number to be relatively consistent with guidance. Our first quarter debt service and interest coverage ratios were 2.5 and net debt to JV was 44.1.

Speaker 1

Our first quarter annualized core net debt to EBITDA was 6.9 and our annualized combined net debt was 7.9. Also it was just above our range of 7.5 to 7.8. Portfolio and joint venture changes, while we made no changes to our core portfolio this quarter, we have removed 2 of our joint ventures from our reporting metrics to reflect recent accounting treatment. The accounting treatment for those 2 ventures was based on the following considerations. As of twelvethirty one, we wrote off our existing investment balance.

Speaker 1

Because of the write off, we will not recognize any future income or loss from those joint ventures and that debt is non recourse. For financing activities, as Jerry highlighted earlier, we completed a 400,000,000 dollars bond offering that closed on April 12. And the issue and with this issuance, we were able to eliminate a material near term maturity risk with no subsequent bond maturities until November 2027, improve liquidity by increasing the bond issuance to $400,000,000 from our anticipated $350,000,000 enforcing our goal of remaining an unsecured borrower and the higher proceeds help support our objective to have our outstanding line of balance close to 0. We maintain a high percentage of our wholly owned portfolio to be fixed. And after this issuance, we have 96% of our debt fixed at 6.1% with a weighted average maturity of 4.6 years.

Speaker 1

We're in the process of tendering for our 2024 bonds and we'll know those results this coming Friday. The balance of the bonds that are not tendered will then be redeemed in the next 5 to 6 weeks. While the bond pricing was in line with our 2024 business plan, we increased the increase this will increase interest expense by about $5,000,000 or $0.03 per share, primarily to account for the timing of the new bond issuance and the increase of the interest rate curve for our floating rate debt. As such, we lowered the upper end

Speaker 2

of our FFO guidance by

Speaker 1

$0.03 With the bond transaction complete at this point, we are not pursuing a secured financing transaction. Regarding our 2024 joint venture debt maturities, as Jerry mentioned, we are working with our partners on the 2024 maturities to potentially extend the current dates with our existing lenders. We commenced marketing efforts with other lenders and have put certain properties on the market for sale to lower JV leverage. We did extend our maturing Sierra Square mortgage 90 days through July 1. Looking more closely at the Q2 of 2024, we had the following general assumptions.

Speaker 1

Our portfolio operating company, our portfolio level operating income will total approximately $74,000,000 and be roughly in line with our Q1 results. Our FFO contribution from our unconsolidated joint ventures will total a negative $2,000,000 in the second quarter. The sequential reduction is due to the one time income pickup in the Q1 and commencing late in the quarter our ATX residential operations. G and A for the 2nd quarter will decrease to $9,500,000 The sequential improvement is consistent with our prior years and is primarily due to the timing of deferred compensation expense recognition. Total interest expense will approximate $33,000,000 Capitalized interest will be $3,000,000 Termination fees and other income will total roughly $2,000,000 Quarterly NOI from our net management leasing and development fees will be roughly $3,000,000 And we do expect interest and investment income total approximately $1,200,000 that increase coming from the excess cash we will hold until the 24 bonds are paid.

Speaker 1

On tender, we generate we believe we'll generate a one time net gain, totaling roughly $800,000 to $1,000,000 buying the bonds back at something less than par. Land sales gains, tax provision will be not material and our share count will approximate 176,000,000 diluted shares. Our capital plan is fairly straightforward and totals $580,000,000 and our CAD range remains at $90,000,000 to $95,000,000 For our capital plan, the primary uses are going to be $70,000,000 of development and redevelopment costs, dollars 80,000,000 of common dividends, dollars 35,000,000 of revenue maintaining, dollars 30,000,000 of revenue creating CapEx, dollars 25,000,000 of contributions to our joint ventures and the $340,000,000 unsecured bond redemption. Primary sources for those will be $105,000,000 of cash flow after interest, dollars 3.91 net secured loan proceeds from our bond offering, land sales at the midpoint of $90,000,000 and $25,000,000 of construction loan proceeds related to 155 King of Prussia Road. Based on the capital plan outlined, cash on hand should increase roughly $31,000,000 and our line of credit is expected to end the year undrawn, leaving full availability.

Speaker 1

We also project that our net debt to EBITDA will fall within the range of 7.5% to 7.8% with an increase primarily due to incremental capital spend on development projects with minimal project income by year end. Our net debt to JAB will approximate 45%. In addition to our core net debt, our metric of net debt to EBITDA, our core net debt range is 6.5% to 6.8 for the year and excludes primarily our joint ventures as well as all of our active development projects that will be completed shortly. We believe the 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 development projects reach stabilization and we continue to reduce exposure to our current joint ventures.

Speaker 1

We anticipate our fixed charge and interest coverage ratios of approximately 2.2, which represents a decrease from the Q1, primarily due to the higher forecasted interest expense from our recent unsecured bond issuance, projected capital spend and the stabilization of our joint ventures. I now turn the call back over to Jared. Great, Tom. Thank you very much. So I guess the key takeaway is portfolio remains in solid shape, very minimal annual rollover exposure through 20 26, I think presents a very solid foundation.

Speaker 1

We anticipate having strong mark to markets, continue to manage our capital spend effectively. And we do anticipate accelerating leasing velocity in portfolio. So we're executing a baseline business plan that continues to improve liquidity as evidenced by our actions in the past 30 days, keeps our portfolio operating portfolio in a very solid footing, recognizing the challenge in leasing space. We have a great team of people both on the leasing, the property management front that are in touch with our customers every day and the pipeline continues to build and a clear focus on leasing up our development projects to generate forward earnings growth. So as usual and where we started and that we wish you and your families well.

Speaker 1

And with that, we are delighted to open up the floor for questions. We ask that in the interest of time, you limit yourself to one question and a follow-up. So Kevin, we're prepared to answer questions at this point.

Operator

Thank you. Our first question comes from Steve Sakwa with Evercore ISI. Your line is open.

Speaker 3

Thanks. Good morning, everyone. I guess first, Jerry, maybe could you just elaborate a little bit more on kind of the discussions you're having, particularly on the development side, both for Austin and the Schuylkill Yards projects. I'm just curious how corporates are thinking about the economy, interest rates. We've seen in other sectors, there's a little bit of indecision making and kind of pausing on leasing activity.

Speaker 3

So I'm just curious the proposals and pipelines have been pretty high, but obviously you haven't converted those. And I'm just wondering kind of what the holdup is or is it getting those projects further to completion? Is it more just the squirrelliness of the economy that's keeping people at bay?

Speaker 1

Yes. Good morning, Steve. Good question. Thank you. Look, I think it's a combination of a lot of the factors you mentioned.

Speaker 1

I think there's no question that leasing velocity continues to accelerate in the higher quality properties of which obviously these developments are top of the market. And that's also juxtaposed against what we're seeing is a decline in our competitive set because of those other building owners having some financial difficulties and our strong financial stability is actually a magnet for bringing more traffic our portfolio. So we feel very good about the near and intermediate term outlook for generating additional leasing prospecting through our portfolio. And our leasing teams have done an amazing job of outreach, networking, to make sure that we see every possible deal that's even whispered, as taking place in all of our core markets. So I think the capture SIB is working very, very effectively.

Speaker 1

I do think to some degree in the development projects, Steve, to your point is, until the projects were really done, it was really hard to generate either a sense of urgency or a sense of true excitement. And I think that's why I mentioned with the we're reaching the full delivery of a number of these projects now where the lobbies are completely done, the premier landscaping is done, All the amenity spaces are in their very final stages. That captures the imagination of tenants and does create a sense of motivation on their part to kind of get leases, particularly when the pipelines tend to be as strong as they are. There is no question, however, as we talked on the last call about the macro uncertainty really has continued to play into the extended cycle times that we're seeing on particularly the larger tenants. The smaller tenants we seem to not really be experienced that, but you're in the 100,000 square foot larger tenant.

Speaker 1

Certainly, the macro climate, the lack of clarity on the economic picture where rates are going certainly plays into that. That being said, as we point out, we're doing a lot more space planning this quarter than we did before the end of the year. We have a number of proposals outstanding that we think will gain some traction. So we do hope that in the near term we can convert some of this pipeline to actually lease executions. Even on the spec suites we're building out, we're seeing great activity on that because that tends to be a more compressed cycle time.

Speaker 1

But I think we're happy with the level of activity we're seeing through all three of the activity we're seeing through all three of the core development projects on the commercial side, anxiously pushing every possible prospect to get leases across the finish line and actually are very happy with the level of velocity we're seeing on our 30, 25 residential component as we're kind of moving into key leasing season with the uptick in both tour activity and lease execution there.

Speaker 3

Okay, thanks. And then just one follow-up, I don't know if you can really comment on this, but I know IBM had signed a lease to move to a competitor project in the same submarket in Austin. And I'm just wondering, given the challenges of getting financing, what are the prospects or chances that and maybe the timeline of maybe that deal not happening? And I guess are there rising prospects that maybe IBM could stay in Uptown ATX?

Speaker 1

Well, look, I obviously cannot speak to either IBM's direct intentions or the other developers financing efforts. Certainly, there's a lot of rumors in the marketplace as to whether that deal will proceed or not. What I will say, Steve, is we continue to track that on a regular and active basis, whether there's any change in the direction with IBM in that new location remains to be seen. The way I look at there are smart people on both sides of that table. If there's a way to figure out how to get that project financed whether IBM takes more space or they reduce the size of the building, I can't speak to specific motivations on that transaction.

Speaker 1

But from our perspective, we do remain in very close touch with IBM. They've been a long time tenant of ours. Our local team has very rich and robust relationships with the senior leadership team. So we continue to monitor it and if there's an opportunity, rest assured that we'll be there to take advantage of

Speaker 3

it. Great, thanks. That's it.

Operator

One moment for our next question. Our next question comes from Anthony Filoni with JPMorgan. Your line is open.

Speaker 4

Yes, thanks. Good morning. Jared, you mentioned some pretty specific stats around the flight to quality. I think it was 55% moving up. Can you maybe just talk a bit about when you're seeing tenants move up the quality spectrum, are they taking less space than they had before?

Speaker 4

Are they trying to keep their total rent dollars the same? Like are they willing to just take on more rent? Just trying to understand that behavior a bit better.

Speaker 1

Yes. Hi, Tony. And George and I will tag team. I think what we're seeing is a continued dynamic of employers really want to bring their employees, not just back because most of them are back at this point, but kind of really position their employees in a quality workspace that helps to find their brand and their culture. Very, very important to have the physical platform serve as that connected issue between productivity, brand and culture.

Speaker 1

So we think that's an inescapable dynamic going forward. And I think that's why you've seen such a disparity in the performance of lower quality and kind of Class A properties throughout almost every market in the country. And you've seen the same dynamic on rental rate increases. You're certainly seeing higher pressure on rental rates across the board in the higher quality properties. So real growth in effective rents in a number of our markets.

Speaker 1

George, maybe you can speak to some of the things that you're seeing on the leasing front.

Speaker 2

Yes. I think Tony to the specific of your question, I mean, I do think the prospects who are taking that flight are focused on getting the right footprint, is kind of their primary objective. And if the rental expense for them remains the same, they're okay paying that higher per square foot to be in the better building with those better systems. And so we're seeing that both downtown in our trophy set. We're seeing that obviously in our Radnor portfolio, where we continue to see not only new tenants coming into those buildings and markets, but we're also seeing a good number of expansions occurring at the same time.

Speaker 2

So this quarter we renewed a 40,000 square foot tenant in Radnor who at the same time expanded by an additional 12,000 square feet. So already in a high quality market at a very good rental rate for us and made the decision that they actually needed more space to get all their people back and get them back in the way they wanted them to operate their business. And just a final point on

Speaker 1

that, Tami. Look, there's no question tenants are really assessing how much space they need and we're really not seeing a lot of hot desking or office sharing or reduction in workstation sizes. I think one of the contributing factors that you see sometimes, and we certainly seen that in, particularly in CBD Philadelphia, is when tenants are moving from some of the older buildings, the efficiency of the floor plates that we have are so much better than where they're moving out of that they can actually fit the same number of people with the same amount of square feet per people and kind of less almost less space than they had before because of the efficiency of the floor plates. So look, there's no question we've seen a number of tenants, particularly law firms contract in size and that they don't need the size law libraries. They're changing some of their office space configuration.

Speaker 1

So there's clearly that dynamic taking place. But I do think that some of the situations we've seen, it's really a function floor plate and overall building efficiency and better control over operating expenses have been a major driver in the space they take.

Speaker 4

Okay, great. That's a lot of good color. Thank you. And then just my follow-up is maybe for Tom, just kind of understand on the guidance for the year, understand interest costs taking the top end down. Just wondering again if you can just crystallize why the bottom is staying where it is?

Speaker 4

And also whether or not if we look at your speculative revenue, it's still pretty early in the year and you guys have basically knocked it out. Like is there any upside from there?

Speaker 1

Well, I'll let George handle the spec revenue. But I think on the guidance, I think we just wanted to be at least look at the range and say we want to take one side of it down and the interest expense was fairly calculable. This quarter specifically is going to have some double interest and that's really what's driving it. I mean, there may be a little we used the line and we do have a couple of floating rate instruments. The rate curve is certainly moved out a little bit, showing less rate cuts, if any, this year.

Speaker 1

So we kind of left it alone for now, Tony, and then we'll see how the year progresses. We do have as part of our business plan some transactional activity. So we just wanted to leave the range where it was for now and see how it plays out going into next quarter.

Speaker 2

Yes, Toni, it's George again. I think on spec revenue, as we touched on, we're 98% at the midpoint, 96% at the top end of the range. I think to kind of outperform that top end, a couple of opportunities for us. One would be that tenants that have expressed the likelihood to not renew ultimately decide to maybe kick the can even if it's only for another year. So we can kind of bridge some of what was perceived to be downtime.

Speaker 2

The other thing is we've got a number of spec suites already in the portfolio. Just every region has maybe 4 to 5 existing spec suites that are basically plug and play. So all we need somebody to do is select the building and they can immediately move in and start to generate revenue for us. As opposed to normal vacancy where we're going to have to go through a permitting process, a build process after we get the prospect and negotiate the lease. And already kind of being, call it, May 1, the calendar is quickly closing in terms of additional revenue for 2024.

Speaker 4

Got it. Thank you.

Operator

One moment for our next question. Our next question comes from Michael Griffin with Citi. Your line is open.

Speaker 3

Great, thanks. I wanted

Speaker 5

to go back to Uptown ATX for a bit. I saw in the supplemental, the stabilization was pushed out by a quarter. Can you maybe give some more color as to why this was the case and the property is about 350,000 square feet or so. What size tenant would you need to see take down a large chunk of space to kind of justify your thoughts around hitting those stabilized yields?

Speaker 1

Well, as I mentioned, the pipeline now is that Michael has tenants ranging from 5,000 square feet up to several 100000 square feet. So certainly, the larger the tenant that signs, the quicker we can stabilize. But I think given the pipeline that we are seeing, the increase in tour velocity, the number of proposals we put we have issued, we do think that that's a realistic goal for us to achieve. Obviously, we'll continue to monitor that. The marketplace is clearly in disequilibrium right now between a lot of supply coming online and a real pullback in demand.

Speaker 1

I mean, this is the Q1 in a few where there's actually been positive absorption in the marketplace. But decided pickup in tour activity during the Q1 versus the last versus the 3rd Q4 of 2024. So we are encouraged by the fact that a couple of large users have surfaced for that project, which were not around at the end of the year. But look, it's going to be a challenge to get space leased in Austin given the overall dynamics in that market. We do believe that the fundamental demand drivers are very strong there.

Speaker 1

So we're comfortable with continuing to invest money in Austin. Last year, I think there's about 135 or so people a day that moved into Austin. The business development group is analyzing a number of more than 50 different relocations. So that is a market that can is high beta, but can change very quickly. And we think our project is top of market in terms of its presentation efficiency, amenity package and location.

Speaker 1

So we feel very confident that with that project now being complete, the amenity floor is done, the residential opening up soon, that that neighborhood creation that we aspire to is actually going to become a reality and that will generate some additional leasing activity. Yes.

Speaker 5

And then I guess the first part of my question, why was the stabilization quarter pushed out 1 quarter relative to last quarter?

Speaker 1

Yes, I think it's just our best guess at this point on how we're seeing some of these tenants sequence in. Okay. Given the amount

Speaker 2

of time to get permits

Speaker 1

done and the amount of time to build out the space.

Speaker 5

Got you. That's helpful. And then maybe just on the JV properties that were restructured, I believe it was Mid Atlantic and Rock Point. Should we think about this as handing back the keys? And I think you talked about some other potential JVs that you could see debt attribution from later this year.

Speaker 5

Should we read that as the MAP Venture or what which of those JVs should we keep an eye on?

Speaker 1

Yes, great actually great question. And it doesn't necessarily mean that there will not be a successful restructuring of that debt on the 2 ventures that we won't be recognizing operating results on going forward. Discussions are still underway. We're not sure exactly where they will go. But as we assess the situation at the end of 2024, you may recall we wrote our basis in those properties down.

Speaker 1

Given that no investment base by Brandywine, the fact that the mortgages are completely non recourse, discussions are still underway that we thought it was appropriate to not recognize those as continued operations for us. That could change to the extent that there's a recapitalization that makes sense for us. And I think in terms of the other venture you mentioned, MAP, discussions with the lender there continue. They're moving at a slower pace than we would like. But I think the same dynamics are at play there.

Speaker 1

There we have a negative investment base. We've reached a significant amount of profits over the years. But until that debt restructuring is completed or we conclude collectively it cannot be completed, I think we would continue to recognize that as an operating concern.

Speaker 5

Great. That's it for me. Thanks for the time.

Operator

Thank you. One moment for our next question. Our next question comes from Dylan Brzezinski with Green Street. Your line is open.

Speaker 6

Hi, guys. Thanks for taking the question. I guess just sort of going back to the questions on the development pipeline. As we think about the projected cash yields that you guys put in your supplemental, I mean given the lack of leasing volume thus far, do you guys see those at risk of going lower as you start to sign leases or how should we be thinking about that?

Speaker 1

Yes, great question. Look, we assess that with every lease transaction or every proposal we put out. And I think at this point, we still feel confident that those yields will hold firm. We're seeing a slight uptick on potential TI costs. But right now, we're able to project that in our proposal, we'll get compensated for that additional rental rates.

Speaker 1

But the assessment we've made is that, yes, we will achieve those yields. Certainly, we need to make sure that as we start to execute leases, we reevaluate what the level of TI is to get those transactions done. But as of right now, given the visibility we have on all the prospects that are in the pipeline for each of those 3 commercial properties, we feel comfortable with those yields.

Speaker 6

Pipeline and the increases you've seen there over the last several quarters. And I guess just pairing that with your comments on a lack of large lease maturities over the next few years, it sounds like you guys anticipate occupancy bottoming sometime in 2024. Is that sort of a fair characterization or are we missing something?

Speaker 2

I'm sorry, Dylan, you said occupancy?

Speaker 6

Occupancy bottoming in 2020 sometime in 2024.

Speaker 2

Yes, apologies. Yes, I think so. I mean, I think on a couple of different fronts, number 1, those properties that are depicted on Page 4, we do expect something to happen with those and they've got a 400 basis point impact on occupancy today. But again, as noted, the large move outs have fortunately been kind of put in the rearview mirror for us. Our largest rollover in 2025 is the 55,000 square foot tenant that we're currently speaking with about renewal and we have nothing over 50,000 square feet in 2026.

Speaker 1

So I think

Speaker 2

it should only be a rising tide at this point both from where the core portfolio is today and kind of ideally moving some of these conversion and or sale candidates kind of off the books.

Speaker 1

Thanks for the color.

Operator

One moment for you. One moment for our next question. Our next question comes from Omidyohokaseni with Deutsche Bank. Your line is open.

Speaker 7

Yes, good morning. Quick question about the 3,151 development. Just curious about the status of getting the construction loan on that. And if it turns out that you may not be successful in getting that, what are kind of thoughts about future funding to complete the project?

Speaker 1

Sure, Tayo. This is Tom. Think on the 3,151 financing, we had started a process to look at a financing and the market for construction loans has been difficult. However, I think that as we've talked about we have a very good pipeline And as we look at some of the opportunities for an initial lease, we think that that will give us room to then go get that financing done. We've talked to a number of institutions that love the project.

Speaker 1

They just need to see a little bit of leasing done. They need to see us realize the rents as someone asked how is the yield look. And I think then we'll be able to get a loan. We put it in at 55%. I still feel that that's a reasonable loan to cost that we can achieve.

Speaker 1

And we are starting to see a little bit of lending going on in the room to then get a financing done. Again, the project looks great. And the lenders that we showed it to previously were very interested. They just think that a pre lease will help them get it financed internally.

Speaker 7

That's helpful. And then could you just talk a little bit about how you're thinking about the dividend at this point, just kind of given some of the capital needs versus sources of capital as well?

Speaker 1

Yes. Look, certainly, I think the Board reviews that on a regular basis along with management and we did reduce it down to $0.60 a share, so that $80,000,000 a year in total payments. I think as we looked at the decision back then and certainly as we view it today, one of the key variables was ensuring that we had a clear runway on the loan maturity front. And I think the bond transaction did a couple of things. 1, it reinforced the fact that we can run the company with ample liquidity for the foreseeable future, even that line of credit close to 0.

Speaker 1

2nd, it really did reinforce to all of our fixed income stakeholders on the unsecured side that Brandywine is committed to the unsecured marketplace. And our hope is as the conditions improve, as the debt mark to market becomes positive versus negative, we'll be able to restore our investment grade rating. And that we wind up in a very good position both from a liquidity and a balance sheet improving standpoint. So I think one of the key issues we take a look at is with that liquidity. 2nd was portfolio stability.

Speaker 1

What is going to be the ongoing consumption of capital? And as we've talked with other questions on the call, we have very little rollover going forward and we think a very stable platform. And then when we look at the platform. And then when we look at the development pipeline, there's really very little left to fund. And even to the question on the 3,151 construction loan, I mean the vast majority of money is already invested to kind of deliver that build into core and shell condition.

Speaker 1

The additional capital required is as we say in the business, good news capital tied to leasing activity. So I think those three elements are top of mind for the Board as they think about how to balance delivering a good quarterly return to our shareholders despite the travails of the capital marks and its impact on our stock price as well as what the visibility is on liquidity and alternative investment opportunities within the company. Great. Thank you. Thank you.

Speaker 1

Thanks, Tim.

Operator

One moment for our next question. Our next question comes from Yupal Rana with KeyBanc. Your line is open.

Speaker 8

Great. Thanks for taking the question.

Operator

Could you give us some

Speaker 8

color on how the lease up at 3025 JFKs resi is going? And what you anticipate for 1 uptown when it comes online in 3Q?

Speaker 1

Yes, great question. I think we're pretty pleased with the acceleration of activity at the 30, 25 residential project. I mean, we're kind of doing 20 units a month, which is very much in line with our plan, effective rents are holding. And the demographic of the tenant mix we're seeing in that building is pretty much in line with what we were hoping for. So we think that, that demographic will continue to view the project very favorably.

Speaker 1

And we do anticipate that by the end of this year, we'll kind of be in the 80% to 85% leased range and that's built into our financial plan. Down at Uptown ATX, those units won't really start coming online until later in the Q2, early Q3. The marketing plan and marketing launch has taken place. We're already starting to do hard hat tours. We have a couple of leases out for Signature already, but we do anticipate given the delivery timeline of that project that will be kind of in that 50% occupied range by the end of the year.

Speaker 1

Both the residential market in Philadelphia as well as in Austin is very competitive. So we're keeping a close eye on concession packages and I mentioned up here in Avira, we seem to be doing very well versus our budget. We'll keep a close eye on that down in Austin. We do think we have the quality advantage based on some of our direct competition both in Philadelphia and in Austin. But we'll have to see how the actual traction and the lease executions go on both properties going

Speaker 8

forward. Great. That was helpful. And going back to your renewals and retention rate, you felt comfortable increasing that expectation. And what's really driving the comfort that you have?

Speaker 8

And do you anticipate the higher levels of renewals to get you to positive net absorption in the near term? I know you mentioned you expect occupancy to bottom at some point this year, but maybe a little timing or when do you expect on timing?

Speaker 2

Yes, I think our ability to move the retention range was really based on the fact that we've executed the renewals necessary to make that change. So very little speculative renewal left to kind of get to that new target. It was primarily driven by a couple of leases where early indications were that the tenant may not renew and that's kind of how our original business plan was compiled. And then when we got clarity on the fact that they did in fact renew, we obviously were able to make the adjustments. So even moving that range just further solidifies our comfort that we deliver year end occupancy within the original business plan range.

Speaker 8

Great. Thank you. That's all for me.

Speaker 1

Thank you.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Jerry for any closing remarks.

Speaker 1

Great, Kevin. Thank you. Look, thank you all again for participating in our Q1 2024 earnings call. We look forward to updating on our business plan activities on our Q2 earnings call in this summer. So have a great day and thank you again for participating.

Operator

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.

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Earnings Conference Call
Brandywine Realty Trust Q1 2024
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