Brandywine Realty Trust (BDN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Brandywine Realty Trust First Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the call over to your speaker today, Jerry Sweeney, President and CEO. Please go ahead.

Michelle, thanks. Actually Jerry Sweeney, but that's quite all right. Good morning, everyone, and thank you for participating in our first quarter 2023 earnings call. On today's call with me, as usual, 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 today 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. 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. So to start off with our prepared comments, we'll review first quarter results and progress on our 2023 business plan. Tom will then review first quarter financial results and frame out some of the key assumptions driving our 2023 guidance for the balance of the year. And then after that, Dan, George, Tom and I are certainly available to answer any questions. The first quarter has gotten year off to a very solid start. Results are in line with our 2023 business plan. During the quarter, we executed 357,000 square feet of leases, including 179,000 square feet of new leasing activity. For the first quarter, we posted rental rate mark-to-market of 14.9% on a GAAP basis and 4.2% on a cash basis. Our full year mark-to-market range remains at 11% to 13% GAAP and 4% to 6% cash. As outlined in our '23 operating plan, we did have 109,000 square feet of negative absorption for the quarter due to known move-out and early termination activity. While quarterly gap in same-store -- while quarterly GAAP same-store outperformed and cash same-store slightly underperformed our business plan ranges, we're keeping our ranges in place based on leases executed, but not yet commenced as well as some forecasted activity. First quarter capital costs were in line with our business plan, about 8% this first quarter, which is excellent for us. Tenant retention of 45% was slightly below the bottom end of our full year forecast, fully anticipated so we're maintaining our existing range at our forecasted levels. Core occupancy and lease targets were in line with our business plan. Spec revenue remains $17 million to $19 million, with $12.8 million or 71% at the midpoint achieved. The speculative revenue range represents approximately 1.1 million square feet, of which 628,000 square feet is done. So we're 57% complete on that metric. From an occupancy and leasing standpoint, our Washington D.C. portfolio continues to underperform. Conversely, our Philadelphia CBD, University City, Pennsylvania suburbs and Austin portfolios, which cover 94% of our NOI are 91% occupied and 92% leased. So fundamentally operating platform is solid with a stable outlook. We've reduced our forward roller of exposure through '24 to an average of 6.6% and through '26 to an average of 7.4%. We continue to see the quality curve thesis play out as our physical tour volume has been very, very encouraging. First quarter physical tours exceeded our 2022 quarterly average by 40% and also exceeded our pre-pandemic levels by 27%. So more tenants are in the market looking for quality space. We think that portends great things for our portfolio going forward. Additionally, during the first quarter, 126,000 square feet were a direct result of this flight to quality. Tenant expansions continue to outweigh tenant contractions in the quarter, and we are projecting, as we had in 2022, a positive expansion to contraction ratio. Our total leasing for the quarter is up 23% from last quarter, and our pipeline stands at 3.3 million square feet. That pipeline has broken down between 1.3 million square feet on our existing portfolio, so up about 100,000 feet and 2 million square feet on our development projects, which is up 200,000 square feet from last quarter. The 1.3 million square foot existing portfolio pipeline includes approximately 138,000 square feet in advanced stages of lease negotiations. Also for the quarter -- or the pipeline, about 30% of that new deal pipeline are prospects looking to move up the quality curve. In looking at our EBITDA, our first quarter net debt to EBITDA increased from the fourth quarter, but again, in line with our business plan and as occupancy increases during 2023, we anticipate this ratio will decrease to our business plan range. And as we always note in specifying in our SIP, this ratio is transitionally higher due to development spend and debt attribution from our joint ventures. And to further amplify that point, our core EBITDA metric, which is our operating portfolio, excluding joint venture debt attribution and development and redevelopment spend ended the quarter at 6.4x within our targeted range. With economic uncertainty and rate volatility at top of mind, leasing and liquidity remain our key focal points. And as Tom will touch on the liquidity front, since year-end, we made significant progress raising over $315 million of proceeds. In January, as previously disclosed, we closed a 5-year $245 million secured financing collateralized by 7 wholly owned properties. This to note, while secured has flexible release provisions and prepayment provisions after March 2025. And as we noted in our previous call, we took the secured route solely due to pricing differences between the secured and unsecured market as we do plan to remain an unsecured investment-grade borrower. And then during February, we executed a $70 million unsecured term loan to further bolster our liquidity. As a result of these and other financings done late last year, our consolidated debt is 93% fixed at a 5.1% rate, and we have no consolidated debt maturities until our October 2024 $350 million bond. We continue to have full availability on our $600 million unsecured line of credit and approximately $97 million of unrestricted cash on hand. And as noted on Page 13 in our SIP based on development spend projections, business plan execution after fully funding remaining development spend in dividends, all TI and leasing costs, we still -- we project that full availability on our line of credit at year-end '23. In terms of the dividend for the quarter, at the guidance midpoint, our $0.76 annual dividend were $0.19 per quarter, represented a 66% FFO payout ratio and an 81% CAD payout ratio. We have had great -- we had a great quarter controlling capital spend. To be conservative for now, we are keeping our CAD range in place. Additionally, our business plan projects $100 million to $125 million of sales activity that may generate additional gains. With liquidity needs substantially addressed our sale activity on target, conservative underpinnings to our coverage ratios. We kept the dividend to $0.19 for the first quarter. Certainly, as our business plan progresses, the Board will closely monitor capital market conditions, overall liquidity, sale activity progress and our payout levels as they evaluate the dividend going forward. We also from additional liquidity enhancement plan to enter into 2 construction loans this year, one in our 100% fully leased 155 King of Prussia Road and our life science project in Schuylkill Yards later this year. On the joint venture front, as disclosed in the SIP, we have 2 nonrecourse loans maturing during '23. We are well underway with our refinancing efforts for those loans. The first is a $200 million loan in our Commerce Square joint venture. This is a lower levered financing with over 12% current debt yield. We have received a short-term extension from the existing lender and anticipate closing the new financing during the second quarter. The second maturity occurs in August of '23. Again, it's nonrecourse in a joint venture that we are a 50% partner in and refinancing efforts are underway there as well. In looking at our development pipeline, we currently have $1.2 billion under active development. Of that, our wholly owned development pipeline of $302 million is 30% life science and 70% office. This wholly owned development portfolio is 83% leased with a remaining funding requirement of $77 million, which is built into our '23 capital plan. Our joint venture development is 31% residential, 41% life science and 28% office. Brandywine has now fully funded our equity position with $52 million of equity remaining to be funded by our partners. Furthermore, other than fully leased build-to-suit opportunities, as I mentioned on the last call, future development starts are on hold, pending both more leasing to our existing joint venture pipeline and also to the point more clarity on the cost of debt capital and cap rates. Looking ahead, though, given the mixed-use nature of our master planned communities, primarily at Schuylkill Yards and Uptown ATX and as identified on Page 14 of our SIP. Our expected forward pipeline product mix is 21% life science, 36% residential, 27% office and 16% support retail and other uses. And over time and certainly subject to capital market conditions and tenant demand drivers, we do plan to develop about 3 million square feet of life science space. Upon that completion, we'll have about 7.5% of our portfolio square footage in life science when the existing projects are completed and our objective is to grow our Life Science platform to about 21% of our square footage. Just a quick review of our specific development projects. 2340 Dulles is 92% pre-leased, $33 million of remaining funding is in our capital plan. 250 King of Prussia Road in our Radnor Life Science Center remains 53% leased. We have $28 million of remaining funding. We have a strong pipeline of over 220,000 square feet for the remaining space, and that pipeline is 100% life science, and we are still projecting a stabilization date in Q1 '24. 3025 JFK or Life Science office residential tower is on time and on budget for delivery in the second half of this year. We have a current active pipeline totaling 625,000 square feet on that project, which is up 153,000 square feet from last quarter. That's for the -- obviously, for the life science and office components. The project continues to see great activity as the construction progresses. Superstructure now complete lobby finishes are going in. We've done over 134 hard hat tours. We also expect to start delivery of the first block of residential units in the second half of this year. So all remains on schedule there as well. Our dedicated life science building at Schuylkill Yards 3151 market. We have a pre-leasing pipeline of 423,000 square feet, again, up from last quarter. That project will be delivered in the second quarter of 2024, and we have plans underway to obtain a construction loan in the 50% loan-to-cost range later this year. Our Block A construction at Uptown ATX is also on time and on budget. On the office component, our leasing pipeline is 538,000 square feet. This pipeline is up from last quarter. And as noted on our last call, with some larger tenants putting their requirements on hold, we're also very much focused on smaller multi-tenant floor prospects. That approach is beginning to bear fruit as our pipeline now has 5 prospects in the 30,000 to 60,000 square foot range. During the quarter, we also started the next phase of our B.Labs expansion at Cira Centre by beginning the conversion of our ninth floor to graduate lab space. That project will be completed in the first quarter of '24. Total cost is $20 million. The expected yield is about 11%, and we're already at 28% pre-leased. Our 2023 business plan also includes $100 million to $125 million of property dispositions. We are making good progress in the challenging market earlier than expected, but we still expect the bulk of the sales activity to occur in the second half of the year. We have $200 million to $300 million of assets in the market for price discovery, as I mentioned. Right now, we have $50 million moving through contract negotiations and about $75 million nearing the end of the bid solicitation process with several active bidders. We do continue to sell noncore land parcels during the year. And on our joint venture operating projects, as I noted in the discussion on EBITDA, we have about $470 million of debt or 18% of our total debt levels coming from our JVs with about $420 million of that coming from our operating JVs. We have discussions underway and plan to recapitalize several of these joint ventures later in 2023, with the goal to reduce that attributed debt from operating joint ventures by $100 million or 24%. Dollars generated from these liquidity activities will be used to fund our remaining development pipeline, commitments to reduce leverage and redeploying the higher growth opportunities, including stock and debt buybacks on a leverage-neutral basis. At this point, Tom will now provide an overview of our financial results.

Thank you, Jerry, and good morning. Our first quarter net loss totaled $5.3 million or $0.03 per share, and FFO totaled $50.8 million or $0.29 per diluted share and in line with consensus estimates. Some general observations regarding the first quarter results. While the results were in line with consensus, we had several moving pieces in several variances compared to our fourth quarter call guidance. Our termination and other income totaled $2.4 million and was $400 million above our fourth quarter forecast, primarily due to some onetime income items. Interest expense totaled $23.7 million or $800,000 below our fourth quarter guidance, and that was primarily due to higher capitalized interest. Our management leasing and development fees totaled $3.4 million and was $900,000 above fourth quarter projections, primarily due to lease commission income. And we forecasted land sales to generate $1.5 million of gains. One of those transactions was delayed. However, we anticipate that transaction to occur in the second quarter. And our first quarter debt service and interest coverage ratios were 2.9% and 3.1%, respectively. And net debt to GAV was 41.1%. Our first quarter annualized core net debt to EBITDA was 6.4x, within our '23 range, and our annualized combined net debt to EBITDA was 7.4% and [indiscernible] above our guidance range of 7 to 7.3x. As far as portfolio changes, we anticipate that we will bring 405 into the core portfolio in the second quarter as it stabilizes. And on the financing side, as Jerry outlined, we continue to make progress on the financing front in addition to the previously announced transactions, we closed on a $70 million term loan that matures in 24 months, including an extension option. The execution of the term loan provide us some additional liquidity to ensure that the $600 million line of credit remains undrawn whether development and redevelopment projects commence operations and begin to provide us incremental cash NOI. While we were successful in obtaining this financing, we continue to see challenges within the financing market. In the traditional banks, we are allocating that -- we see them allocating very little to new originations in the new office loan market, except for certain situations such as fully leased build-to-suit properties. We think some lenders will be in to be flexible and will provide loan extensions on performing portfolios. With the Silicon Valley Bank and Signature Bank concerns, the CMBS market has been very slow. However, activity has picked up and transactions are focused on lower level loan-to-value office assets. Life companies have also been selective in underwriting new loans with a focus on lower loan-to-value and a preference for longer weighted average lease terms. Regarding our joint venture debt, we currently are working on our 23 maturities, including an active completion of our Commerce Square loan, which will occur, we expect to close later this quarter. We are also working with our partners on the 24 maturities to possibly extend the current maturity date with our existing lenders while also considering some massive sales to lower leverage. For '23 guidance, our general assumptions for the business plan is the property sales. As Jerry mentioned, scheduled to occur in the second half of the year. With minimal dilution this year, no property acquisitions, no anticipated ATM or share buyback activity and the share count will approximate 174 million diluted shares. Looking more closely at the second quarter, we have the following general assumptions. Our property level operating income to total about $76 million and will be $3.4 million ahead of the first quarter primarily due to the occupancy in cranes at 405 Colorado, 250 King of Prussia and the balance from the portfolio. FFO contribution from our unconsolidated joint ventures will total $3.3 million for the second quarter. The sequential decrease is primarily due to the forecasted higher interest expense primarily due to the anticipated refinancing at Commerce Square. G&A for the second quarter will be $9 million, slightly below the first quarter. Total interest expense will approximate $24.7 million and capitalized interest will approximate $3.5 million. Termination and other fee income will total $0.5 million, a $1.5 million decrease from the first quarter primarily due to several first quarter onetime items that we had highlighted on the last call. Net management fee and leasing development for the quarter will be $2.5 million. The sequential $1 million decrease is primarily due to lower leasing commission volume. And our land sale gains and tax provision will net at $0.5 million. Looking at our capital plan, we experienced a better-than-forecasted CAD payout ratio of 81%, primarily due to leasing capital costs being below our business plan range. While we experienced some first quarter movement that was lower, our annual 2023 CAD range remains at 95% to 105%. Our capital plan is very straightforward for the balance of the year. It's comprised of $130 million of development and redevelopment, $99 million of common dividends at current rate, $22 million of revenue maintain capital, $40 million of revenue create capital and $19 million of equity contributions to our joint ventures. The primary sources will be $148 million of cash flow after interest payments, $42 million use of current cash on hand and $120 million of land and property sales. Note that we have no -- based on the capital plan outlined above, we project having full line availability by year-end. We also project that our net debt-to-EBITDA will be in the range of 7 to 7.3x with an increase primarily due to the incremental capital spend on development projects. Our debt to GAV will be in the range of 40% to 42%. And our core net debt to EBITDA of 6.2 to 6.5 at the end of the year excludes our joint ventures and our active development projects. We continue to believe this core metric better reflects the leverage of our core portfolio and eliminates our more highly levered joint ventures and our unstabilized development and redevelopment projects. We believe these projects are elevated on a growing development pipeline. And we believe once these developments are stabilized, our leverage will decrease back towards our core leverage ratio. We anticipate our fixed charge and interest coverage ratios of approximately 2.7% for the year, which represents a sequential decrease, but that's primarily due to higher interest rates. With that, I'll turn it back over to Jerry.

Great. Thank you, Tom. So key takeaways are our portfolio is in solid shape, clearly facing some headwinds in the office market, but pipeline activity is up significantly and advancing through our various stages of leasing efforts at a nice pace. The portfolio is also in a very stable position with an average rollover as I mentioned, through '26 of only 7.4%. We continue our long-standing track record of posting strong mark-to-markets, managing our capital spend very well. And as I mentioned, some accelerating leasing velocity both in the operating portfolio and the development pipeline as well. Since last quarter, we've made significant progress on our wholly owned near-term liquidity needs, put ourselves in a very strong liquidity position with 0 drawn on our line of credit and $90-some million of cash on the balance sheet and increasingly solid visibility of executing our '23 business plan that will improve liquidity and keep our operating portfolio in a very strong footing. So as usual and where we started in that we really -- we wish all of you and your families well. And at this point, Michelle, we're delighted to open the floor for questions. We always ask in the interest of time, you limit yourself to 1 question and a follow-up. Thank you.

[Operator Instructions] And our first question comes from Anthony Paolone with JPMorgan.

I guess, Jerry, my first question relates to just looking at occupancy going forward. I mean you gave some pretty good stats on expansions versus contractions and the growth in the pipeline. But just trying to see how you bridge that sort of situation with the sentiment that over the next 1 to 2 years or whatever it may be, office cash flows are likely to decline quite a bit or at least that seems to be the indication from either the stocks or just I think most people's thinking out there.

Tony, George and I will tackle this. I mean, look, the -- there's no question that conventional thinking is that there's going to be some significant headwinds. In fact, some days I wake up and I think the headwinds are so strong, it's blowing the hair off my head. But no question, office is going through a shift driven by increased employee mobility, shift in space preferences and there will be winners and losers. So we definitely expect more selective demand drivers over the next couple of years. And we continue to believe that, that tenant focus will be on quality, driven by superstructure, presentation of the building, its location, amenities. Increasingly, we're seeing more and more that landlord quality and reputation, their ability to fund improvements and their stability in terms of long-term ownership are increasingly up the priority checklist for a lot of our tenants. So even with the secular shifts would seem to be there and the demand muting effect of, I guess, a slowing economy, we still believe we'll be in very good position to perform well. I guess when you take a look at -- there's a lot of information out there on the office sector. A lot of brokerage firms have good reports out there on the state of the office market. And I guess as we look at it, a recent report was identifying the total office inventory in the United States being about 6 billion square feet. About 15% of that being top quality garnering premium rents, about 24% or $1.3 billion kind of being middle -- top middle, very good from a competitive standpoint. About 15% kind of attractive to cost consumers. And then the balance, they need upgrades, repositioning or functionally obsolete. We believe all of our inventories in the top 2 tiers, so he's going to garner premium rents or it's good enough to compete given the location, the investment we made. We also think not much is going to be built unless driven by specific demand drivers that over the cycle, that will improve the competitive position of our existing inventory. So the high-quality inventory, we think, even with the secular headwinds, their competitive position gets stronger due to supply-demand imbalance. And I think statistically, you're starting to see that with even some of the rent disparities between the A and the B space. So look, we continue to forecast good cash mark-to-market, portfolio occupancy and leasing stability. We have excellent control on our capital costs. And even some of the macro statistics out there nationally, which we're certainly seeing in our own portfolio, is that rent premiums on leases greater than 7 years has doubled over the last 2 years from 16.4% to 35% in Class A inventory. And even the suburbs, new assets are performing better than older assets with rent premiums close to 50%. So when you take a look at CBD new assets over the last couple of years, rents are up 3.6%, while in the Class A trophy class where they're down 10% in the Class B. Newer assets in the suburbs, rents on average were up about 6.8% and down about 3% in the older quality inventory. So we do think that the office sector is going through a shift, very similar to what we saw in some of the other product types. A number of years ago, an 18-foot clear warehouse was state-of-the-art. It's no longer state-of-the-art. We certainly think that in the office sector, there will be some significant accelerated obsolescence that will have a muting effect on overall demand, but also for the well-positioned portfolios, put them in a higher capture rate of bringing in tenants and it seems to be statistically that tenants will continue to pay higher rents to be in a higher quality workplace, certainly seeing a much more pronounced return to office trend across our portfolio. There's been some national news on some of the major corporations bringing people back to work. We continue to see very minimal hoteling or hot desking throughout the portfolio. So look, there's no question conventional thinking is that office is really back on its heels, and we're positioning the company to deal with that dynamic. We've increased our marketing campaign. We've increased our investment in some of our existing assets. I think the evidence of that is beginning to bear fruit through some of the increase that we've seen in our pipeline just in the last couple of months. That pipeline, again, is advancing through past touring in the response to RFPs to paper being exchanged. So we're fully cognizant of the fact that it's a challenging macro environment and we have work to do. But we also think that the portfolio repositioning that we've done over the last dozen years has really put the company in a very strong position to weather the storm, achieve our business plan objectives, which are conservatively pulled together and use that foundational platform to spring into higher growth as market conditions improve. I don't know, George, you've anything to add to that?

No. I mean great commentary. I think a couple of things I would -- we're outperforming in just about every submarket in Philadelphia and the Pennsylvania suburbs in terms of our overall occupancy as compared to the market. And even in downtown Philadelphia, including our joint venture holding at Commerce Square, I mean, we've got about a 6.6% vacancy factor in a market that's between 15% and 20%, depending on the brokerage research house. So good levels of outperformance there. I do think the portfolio is situated well to accommodate the trend of people moving up the quality curve. And in terms of our own business plan, we have a path to get us to our occupancy guidance range, but keep in mind, the note that Jerry mentioned in his prepared commentary, the small amount of holdings we still have in Northern Virginia and in Wilmington, Delaware, are impacting our overall company occupancy by about 170 basis points. So at 92% lease portfolio of basically Philadelphia, the Pennsylvania suburbs and Austin, Texas at 92%, I think, really is the headline.

Great. I guess just my other question relates more to life sciences. Wondering with B.Labs, if you're at a point where any of those tenants are converting into prospective tenants into your Schuylkill Yards developments at this point or if it's just too early? Or just any other broader comments on the life science component of leasing.

Yes. Tony, good question. And we do. We think that there's a number of tenants who are currently occupy space at B.Labs that remain interested in looking at 3025 and 3151. Frankly, one of the dynamics driving the conversion of the ninth floor was that some of those tenants had an immediate need for additional growth capacity, but weren't quite at a financial stage where they -- where we would underwrite them as a credit tenant in a new building. So we're being very careful how we do our underwriting on the life science front. As we've talked about on previous calls, we had an operating partnership agreement with the PA Biotech Council, which has been around for a couple of decades as a scientific advisory board. They're very much part and parcel of helping us assess the financial viability of some of these life science tenants, but I think the success of B.Labs and its continued full occupancy and the high return on cost that we're getting, certainly is emblematic of the growth track record that we see taking place as we move forward with the deliveries of the building of Schuylkill Yards.

Thank you, and our next question comes from Nick Joseph with Citigroup.

Jerry, you mentioned making progress on the dispositions. I was just wondering if you could provide some more color on the process thus far kind of the size and composition of the bidder pool? Any pricing indications, any additional comments you have there?

Yes, sure, Nick. The -- yes, we put a number of properties in the market for Discovery, which is that $200 million to $300 million range. Some in Pennsylvania, CBD Philadelphia, Northern Virginia as well as in Austin, Texas. And while we're still getting visibility -- deal pipeline, you should say the timing of getting bids has been, as we would expect, fairly protracted. But as of right now, we have one building that the buyer is an investment group and a tenant. We have that moving through contract negotiations, that's in the $50 million range. So we think that transaction will get across the finish line in the first half of the year. And then we are evaluating bids from 3 different prospects on a suburban Philadelphia complex that we'll kind of reach the inclusion of that in the next several weeks. So it seems that somewhere around $100 million right now, we feel are pretty getting to the level of the advance. Certainly $50 million is pretty advanced at this point. So that's a pleasant surprise to us because we really weren't really forecasting much to happen until the second half of the year. So this first foray of properties in the market, as we outlined on the last call, was really just kind of test the appetite and see what's out there. So feedback has been, while it's been slow to come in at a number of fronts, certainly, I think we're pretty happy with the progress we're making so far. We have a couple of other properties in Northern Virginia that we're waiting for some feedback on some potential bidders. That process is moving a bit slower in all candor, primarily driven by that market really has not performed that well anyway. Then you layer in the financing market challenges, that seems to be moving as we would have expected, a little bit slower, but at least we're gaining visibility on how to deal with that dynamic later in the year.

That's very helpful. And then maybe just on the financing market. I know you walked through kind of the lower loan to values what's happening on the CMBS side as well. But just can you touch on the current pricing difference that you see right now between secured and unsecured debt?

Nick, this is Tom. I think for us right now, I think it's -- the secured debt will be inside of the unsecured debt. Hard to say where that is. As I mentioned, the CMBS market has been opening up, since having some slowdown from the banks that we're closing. But I still think it's at least 100 to 200 basis points and -- but you will see how we come out on pricing with some of the transactions we're looking at right now.

Yes, I think just to add on to that, the unsecured market really is kind of the bank market and the public bond market. And I think the unsecured bank market, while it's certainly more constrained than it was, I think, given relationship lending, I think the team did a great job getting that $70 million unsecured financing across the finish line. The public bond market right now is gapped out to be much wider in terms of spreads versus banks. So we'll see how that plays out over the next couple of quarters.

Our next question comes from Michael Lewis with Truist.

Great. Jerry, in the first question that Tony as you kind of combated some investor perception. I think another investor perception is that office building are not financeable. And you talked about the finance market a little bit, but I think your JV maturities are instructive. You mentioned you have 4 in the next 12 months. Commerce Square sounds like it's below LTV and close to getting done. The MAP venture is 78% occupied. Rockpoint 68% occupied. Of course, Commerce and Cira Square is full. So you mentioned kind of possible extensions, some will get refinanced. I mean, I guess my question here is kind of specific to you and then more broadly, I mean, do you think we'll see a lot of loan extensions? You remember during the GFC, everything was blend and extend. Do you think we'll see a lot of defaults that put pressure on values? And so you have some of that in your portfolio and maybe it's applicable to the rest of the universe. So do you have any thoughts on that?

Michael, great question. Look, I think as we're approaching all of these joint venture refinancing discussions. We're talking to each of the lenders who we have great relationships with about the dilemma that the portfolio is facing. None of the dilemma the portfolio is facing is lack of performance effort by Brandywine and our operating partners. It tends to be more of a macro concern. So we can certainly articulate to those lenders exactly where every dollar or every lease has gone over the term of their loan. And to some degree, those banks, Michael, will drive what the ultimate outcome will be, whether they do a short-term extension and reset the rate and the value prop is supported by appraisals. That's kind of track one, whether they wind up doing an AB note structure, providing a window of opportunity for a borrower like our joint venture partners and Brandywine to invest additional capital and get that return as a priority over the B note. I think that will be a likely outcome in a number of situations. I do think, and I'm not sure they're applicable to any of our ventures, but I do think there'll be situations where the borrower and the lender will simply agree that the best solution from the bank's perspective is to take the property back. The borrowers may not be of a mindset to invest additional capital given the quality of the portfolio that's encumbered unless there's an easy mechanism or actually -- unless there's clarity that the additional incremental money that borrower invest can be recovered as a priority of the over-levered situation. So I think a lot of it depends upon the approach that the banks take. That will certainly determine what structures they work through with the borrowers. Yes, I'll tell you, from our standpoint, we have a great joint venture partners between our partners and Brandywine, we have extensive relationships. We've always operated on a very forthright transparent basis. So I think all of our lenders view us as a really high-quality landlord and hey, if it wasn't for the work you guys are doing, the portfolio might not be performing as well as it is. So we think there's a mutuality of interest between borrower and lender to reach the right economic program. But again, that has to work for both parties. So we're going to each of these discussions being constructive and positive and want to work through the right results. All of these mortgages, of course, as you know, Michael, are nonrecourse. Brandywine either has a negative capital account we have, we've made plenty of [indiscernible] marginally -- marginal investment levels. So we'll make the right business decision, both economic and reputationally for the company. And to some degree, that decision, as I mentioned, is going to be driven by what the perspective is of the banks. But certainly, banks recognize that there's a general credit crunch on commercial real estate and that the issue is systemic, not specific. And how they deal with that will be within their own investment committees. But our approach is to get these loans extended, get them restructured, create capital structure that provides an opportunity for both the borrower and the lender to win, and we'll see how that works its way through the process.

And Michael, this is Tom. I think also, I think if we see interest rates kind of hit a peak, I think that some of our -- talking to some of the banks, they feel maybe if they've hit a peak stress level of where the rates are that may also -- again, this is more for the loans in '24 may give us an opportunity to see that sort of normalize and then they have a little more clarity where they may see interest rates going and that can help in the decision-making process as we talk to the lenders as well.

Yes, that makes sense. Those yield curves look like they might start to help a little bit rather than hurt pretty soon. My second question is about the dividend. You last reduced the dividend in 2009. I checked your website and elsewhere. I think that's the only time you've ever lowered the dividend in the company's history. So I apologize if it makes you feel old, but we look back, I think, 30 years, and we only found that 1 cut. And I bring this up because I've argued that there's -- there might not be a reason to pay an 18% dividend yield for very long. But maybe I'm wrong, if anyone is going to be known as a company that as long as the dividend is covered, is going to pay it, it makes that yield that apparently nobody thinks is going to stick around more attractive. And so I guess my question is, is your view that as long as the dividend is covered by cash flow, you'll continue to pay it? Or do you look at it as that high dividend yield isn't doing you any favors and you could retain that capital anyway? How do you kind of think about balancing those things?

Michael, very fair question. And look, we continue to reflect on how our business plan is progressing and how that relates to existing dividend levels. I think maybe to level set the discussion before the impact of any of our sales, we think our taxable income is kind of in the $0.55 to $0.60 per share range. So the savings would be kind of $27 million to low $30 million range annually. We also think some of these sales could have taxable gains. Maybe there might be some taxable losses too. So we're waiting to get some more clarity on sales of what we'll sell and what gains and losses that we'll have. We do have a strong baseline, and I think conservatively constructed operating plan for '23, and we may very well see some improvement in our capital ratios as we typically see like, for example, last year, our opening range was a CAD payout ratio of 84% to 95%, and we wound up at 84%. So even in the first quarter, we came in at 81%. So it is a challenge, particularly in this type of landscape because I think to answer your question directly, I think the Board will be of the mindset so long as the dividend is covered, we want to continue paying that dividend. The variable to that, which is well beyond our control is what happens in the capital market conditions. So we want to be very disciplined and very mindful of forward liquidity and how we generate additional liquidity to both delever the balance sheet, preserve good credit metrics and keep the business plan moving forward. So philosophically, the answer to your question is yes. But pragmatically, we've got to keep our eye on the bigger picture of things that we can't necessarily control. And I think the other way we look at it, honestly, is we want to keep in mind that despite the irrationally low stock price us and other office companies are having, the average investment base of our shareholders is in the low double digits. So the return to them at the current dividend level is in the 6% to 8% range. So even though spot pricing is much higher, it's actually in a very reasonable range given the investment base of our shareholders who are counting on us to both have the forward focus on addressing liquidity, have the financial discipline to inculcate the right results and to generate additional external liquidity through sales to make sure that we keep the dividend fully covered. So the -- we work for our shareholders and our office shareholders, not just Brandywine, but all office shareholders have been really adversely impacted due to the macro negativity on the tone of what's happening to office, what's happening to the credit markets, what's happening to the economy. So I think we do, and I say we, management and the Board feel an obligation to continue keeping our business plan moving forward to try and return as much value as we can to our owners during this very challenging period of time. I don't know if that answers your question or not, but I think that's how we kind of assess where we are.

And our next question comes from Tayo Okusanya with Credit Suisse.

So quick question just about lease-up of the -- a lot of the JV development projects. You guys -- you talked a lot about kind of active pipeline. The leasing pipeline actually looks like they're expanding, but can you just kind of talk about the kind of final conversion and when we can kind of expect that we start to see some actual buy and leases for some of these assets?

You kind of have a little bit, but I think the question is kind of how we moved through from the pipeline to lease execution. And look, I think the probability of the lease execution is a direct relation to the amount of pipeline we have. So I think while we are -- we wish we had a definitive leasing to present back to you and our shareholders, and we're working on that, and I'll get to that in a second. I think generally, the team is very pleased with the increased levels of activity. Now part of that is the flight to quality construct, part of that is, I think, the tremendously counted leasing teams. We have work on these projects in terms of generating new activity. I think part of it is also these buildings are finally getting to where people can walk through them. So typically, as we've looked at these cycles in the past, if you don't have a pre-lease in place by the time you start, most of the significant leasing activities occurs as the building nears completion and kind of 6 months after it's completed because tenants, unless it's a pre-lease again, they really do want to see what the lobby looks like, the security desk, the turnstile, the elevator cabs, the window lines, all those things that are important to them and creating the value proposition in their minds, at least at a rental rate that's higher than general market given its new construction. So I think from that standpoint, the progression that we've seen through construction folks that can price out a plan, much faster than a lot of our competition. So all the things that we can do to control the process to get them to a lease execution, I think we're doing everything we can. In today's climate, tenants are just -- particularly the larger sized tenants we're talking to are simply slower to pull the trigger on making a long-term large capital commitment for their organizations. So to some degree, some of these companies are waiting for more visibility on how they view their business plan evolving over the next several years before they pull the trigger. So I don't know if that answers your question. It's a hard process because it's not like you can push a button and make a donut. We've got to get people across the finish line by giving them every element of their decision-making process as quickly as we can, so they have the full range of information to make the decisions. The flip side is that on the -- even on the life science market in Philadelphia, if you looked at that under construction or predevelopment pipeline a year ago, the actual properties under construction for delivery in '23 and '24 is much lower than it was when we looked at it back in '21 and '22. So the universe of competitive product is lower and the tenants in the market has remained about the same level. Some of those tenants in the market have put their requirements on hold until they clear FDA approval, they get their financing lined up. So all the national reasons they would make that decision. But for the most part, the supply-demand balance on these projects seems pretty favorable to us in getting some of these prospects across the finish line of getting leases executed.

That's helpful. And then just a follow-up. Tom, in regard to the dividend, again, massive dividend yield today relative to your peers, guidance suggested an FAD payout close to 100%. I mean how does one kind of think about the dividend going -- what exactly is the Board going to really consider to think about what the appropriate dividend level is going forward?

Yes. I think the Board will focus on a couple of very key data points. One is, how is the business plan progressing from an operating standpoint and what visibility do we have on achieving our business plan. Number two, how is the financing and sales campaign going in terms of addressing both current and forward liquidity requirements. And then three, take a look at what their view is of overall capital market conditions as we start to think ahead to '24 and '25 on financing needs. So again, one of those -- the first one is fairly controllable from our management team. The second one, the proof will be in the pudding in terms of what we can deliver in terms of financing some of these joint ventures and getting some sale proceeds across the finish line. And the third is a macro question that certainly management and the Board will evaluate as we think about what the risk management position should be for the company.

Our next question comes from Dylan Burzinski with Green Street.

You mentioned reducing leverage as a possible use of capital should you get some of these dispositions to the finish line. Just curious to know how you guys are thinking about those leverage targets that you have in your 2023 business plan on a longer-term time horizon, is there any desire to sort of lower those?

Yes. I think -- I mean, our game plan is to get our leverage targets -- our overall company leverage kind of in the range of where our core net debt to EBITDA number is in the low 6s. And certainly, as we look at it longer term, particularly some of these developments coming online and hopefully, some recovery in the office market, we continue to target getting below 6x over the course of the next several years. Certainly, one of the immediate tools that we're working on, Dylan, is as I alluded to and Tom touched on was exiting some of these joint ventures, they tend to be more highly levered. So the debt attribution of over $400 million by reducing that, that is a very powerful deleveraging tool we have at our disposal. Some of those joint ventures are coming to the end of their natural life cycle with us. Our ownership ranges from 15% to 50%. So we're evaluating each and every one of those joint ventures that we have identified in the supplemental package as how they can become candidates for us to exit or reduce our ownership stake over the next several years as a way for us to accelerate the deleveraging even in a capital-constrained marketplace.

That's helpful. And then just staying on the dispositions. I think last quarter, you had mentioned that you're targeting cap rates anywhere from the high 6s to low 9s, obviously, depending on market just given that you're already in the market with several hundred million dollars of the assets, is that pricing guidance still relatively in line with expectations today?

Yes, I think so. I mean the project we're moving forward with is as I mentioned, on the sales, is a sub-7 cap rate, which is kind of where we thought it might be. The other one is kind of in the 9% range. But it's 9% based upon kind of leases in place, not necessarily reflecting what we think might roll out of the portfolio. So we do think that the pricing levels are consistent with what our expectation was. Look, I was frankly hoping for better pricing across the board, but it's not there today. But the reality is that the pricing levels that we are getting clarity on are very much in line with what we view to be the net present value to us of holding those assets. And as long as that connection point is made between offer price and internal NPD, I think we view that as a tradable asset for us.

Our next question comes from Steve Sakwa with Evercore ISI.

Jerry, I just want to know if you could provide a little more color on the Austin leasing pipeline for the office building. And I'm just trying to think through like the timing of those leases to the extent that they get executed and the reason I'm asking is, at some point, these projects are going to delever, you can only capitalize interest for so long before you have to start recognizing the income and maybe putting further pressure on the payout ratio or coverage ratio, which then kind of speaks to the dividend. So just trying to sort of get a sense for the timing and the size of some of these tenants and when a lease realistically could get signed and how that might affect the yield, the timing, the CAD ratio as we think about '24.

Yes. Great question, Steve. Look, it's certainly a point that we are very crisply focused on. The pipeline, we're projecting that we'll start to generate some revenue out of Uptown ATX in the second half of '24. That obviously is going to be conditioned upon getting some of these prospects across the finish line. The project to delever in the second half of this year. So we'll essentially have about 12 months of capitalized interest to make sure that we insulate ourselves from that downside risk. But that will clearly be a pressure point and a point of consideration as we look at our revenue numbers going forward. And as you know, I mean, Austin is, well, it has great long-term growth potential. In fact, even as of today with the marketplace being slow, there's 64 new prospects looking at the Austin marketplace as either a regional or a headquarters relocation. There's about 14 new tenants in the market that are over 50,000 square feet and about 7 over 100,000 square feet. So the forward pipeline looks good. We're just kind of all meandering our way through what's been a major pullback by some of the tech companies, the increase in some sublease space. And our team is very much focused on how we can get some of these smaller tenants across the finish line rather than waiting for one of the larger tenants to make a decision of what they want to do. I don't know if that answers your question totally quantitatively, but I think thematically, that's the direction we're moving in.

So Jerry, I guess just maybe not to beat a dead horse here, but on the pipeline, are they mostly existing I guess, Austin tenants that kind of have natural lease expirations and they need to make a decision? Or are these more kind of new-to-market tenants where maybe they don't have to make a decision? Just trying to get a sense for the ability to get things over the finish line versus things to continue to get delayed?

Yes. I mean, look, of those prospects, I mentioned they're kind of the 30,000 to 60,000 square feet. They're all existing tenants in the market with lease expirations that kind of roll into that time line I mentioned.

Great. And then I guess just looking at the change in occupancy, I think there was definitely more weakness in kind of Radnor and Conshohocken in this quarter just sequentially in terms of the occupancy decline. Is there anything specific there to note and, I guess, potential backfill opportunities on some of those?

George?

Sure. Steve. Yes, it was really more Plymouth meeting, where we had 2 kind of 20,000 square foot tenants vacate. In Radnor, we did get one 112,000 square foot space back that we've already got 2 proposals issued to. So the Radnor inventory is in great shape and not really of a concern when we get one back. But -- and then, yes, to your point, we had some additional move outs in Conshohocken, 18,000 square footer was the largest, and we've already got pipeline looking at that space. So...

There are no further questions. I'd like to turn the call back over to Jerry Sweeney for closing remarks.

The only closing remark is that thank you all very much for participating in our earnings call. And we look forward to updating you on our '23 business plan progression on our next earnings call. Thank you very much.

Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.