Welcome to the 10:15 A.M. session of Citi's 2024 Global Property CEO Conference. I'm Michael Griffin with Citi Research, and we're pleased to have with us Brandywine and CEO Gerry Sweeney. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desks. For those in the room or the webcast, you can go on liveqa.com and enter code GPC24 to submit any questions if you do not want to raise your hand. Gerry, we'll turn it over to you to introduce Brandywine and the team, provide any opening remarks, and then we'll get into Q&A.
Great. Thank you very much, Michael. And with me today is Tom Wirth, our executive manager at Executive Vice President and CFO as well. So thank you all for coming and listening in. Just a couple of brief overview comments before we end the Q&A. Look, the major focus of the company right now is really leasing and balance sheet strengthening. I think as we look at our leasing program, our pipeline for prospects is greater than it's been since before the pandemic.
Oh, there you go. You can hear me before the mic went on? Yeah. All right. So really the focus is leasing and strengthening the balance sheet. Right now we have a very high-quality portfolio. We are outperforming our competitive set in our markets. 41% of our new deal activity is coming from flight to quality tenants. Our physical tour volume was up in the fourth quarter over the third quarter by about 42%. For the year, we're targeting occupancy levels in the 87%-88% range, and that's after accounting for 8 of our properties that account for about 53% of our vacancy. So we have plans in place to accelerate occupancy or conversions on those properties.
And the other thing that we reached out into the maturity curve a number of years ago, so as we look at the portfolio between now and 2026, we only have about 6.2% of annual rollover. We've been experiencing very good mark-to-market. We've kept our capital ratios in the 10%-13% range, and the operating climate we think is improving with more and more tenants entering the market. Certainly, the return-to-work dynamic we think is moving along at a good clip, particularly with our smaller-sized companies or tenants in our property. On the balance sheet right now, we are focused on; we have a bond maturity in October of 2024.
As we get into the Q&A, we can address some specific tactics we're looking at with that, but we think that's well in hand. We're also very much focused on the high level of debt attribution we have on our portfolio coming from joint ventures, as well as the amount of capital we have tied up in development right now that's not producing any income. As we've talked on the earnings call, one of our objectives is to exit or streamline some of those joint ventures during the next couple of quarters that will reduce that level of debt attribution, and we continue to make good progress on our development projects that will generate, upon stabilization, about $60 ,000,000 of additional NOI. So with that, Michael, really I'll turn it back to you for Q&A.
Great. Thank you so much, Jerry. We're starting off each of these roundtable sessions with the same question: What are the top reasons investors should buy your stock today?
I think the three top reasons I would mention are existing portfolio quality and the growth projections. I mentioned very low rollover, higher occupancy than our peers. We've been targeting and achieving very good cash and GAAP mark-to-markets. We've kept our capital costs well below our peer group. And then we take a look at our forward growth projections. Those eight properties I alluded to earlier are about 500 basis points of occupancy for us. So we're running our core quality portfolio in the 92%-94% range. With the mark-to-markets and the capital control, we think there's some very good embedded growth into the existing portfolio. So that would be number one. I think number two is when we take a look over the next several years, we have tremendous portfolio diversification opportunities available to us.
Our forward growth we can do on our development pipeline is broken down: 42% residential, 27% life science, 10% retail and other hospitality uses, and 21% office. So we really do believe that even though the development climate is adverse to more starts now, that given our market position at Schuylkill Yards, Schuylkill Yards in Philadelphia , Uptown ATX in Austin, Texas, and the growth of our university business, the best evidence of that is our program with the University of Maryland, we have tremendous ability over the next few years to diversify our revenue mix. The final one is that we think we are incredibly well positioned to take advantage of life science growth as it returns to the marketplace. Philadelphia has moved up significantly the last few years to be the number 5 life science market in the country.
There's tremendous NIH private capital flowing into the market for life science. University of Pennsylvania, Wistar, Children's Hospital, among others, are curating a number of cell and gene therapy companies. There's a number of public policy initiatives underway in the Commonwealth of Pennsylvania to devote more money to life science growth, and we think we're well positioned for that. Our B.Labs initiative is about 110,000 sq ft now. We just delivered another 60,000 sq ft. 30,000 is fully leased upon delivery, and the remaining 30,000 that will be delivered later this year, we have a lease under negotiation for the full amount of space. So we think those three elements really differentiate us from our traditional office peers.
Thank you, Gerry. With the headwinds facing the office macro environment broadly, how is Brandywine differentiated, whether it's the composition of the portfolio, the tenant makeup, or any growth opportunities that differentiate yourself from the competition?
Yeah. I mean, I think the underlying foundational point is the quality of the portfolio and its positioning relative to our competitive set. As I mentioned, we have about 41% of our pipeline really coming from tenants looking to move up the quality curve. And when we say move up the quality curve, it's not just the building itself, but it's also the quality of the sponsorship. To give you a good example, we see our competitive set shrinking in almost every single submarket we're in. There are 12 buildings looking just at Philadelphia CBD; you have 12 buildings that comprise 55% of the vacancy in the marketplace. Five of those properties are in special servicing. Several others are close to that. So our sponsorship, relative capital strength, our on-the-ground leasing efforts, I think will continue to generate some additional activity for us.
To wit, in 2023, we had more expansions than contractions, which continue the trend line we had in 2022. While the overall vacancy rate in Philadelphia is about 16%, in the Trophy-Class inventory we're in, it's about 9%, and Brandywine's running about 5%. So we think our portfolio and the quality of our delivery platform, Michael, will continue to add sq ft to our pipeline. We still are targeting about 33% of the proposals we issue turn into leases. So that's back to pre-pandemic levels. Our deal cycle time is back to about 90 days, which was pre-pandemic. So we actually think with the additional activity in the marketplace that we are seeing, we'll be able to generate some more leasing activity going forward.
Maybe turning to your markets next. What makes both Philly and Austin relatively more attractive office markets compared to other gateway or Sunbelt markets?
Yeah. I mean, actually, Philadelphia has shown a fairly high degree of resilience over the last several years. It's never been a high-beta market. It's a marketplace that still is characterized by service companies and eds and meds . There have been no real additions to inventory other than build-to-suits in the last decade, so the inventory base has been fairly stable. We do continue to see growth, particularly in Philadelphia, in the financial services and life science sectors, which we've benefited from. So I talked a few moments about a point of differentiation, but we definitely see an uptick in activity on the life science front. It was slower in the second half of 2022 and slower in 2023, but we're definitely seeing a pickup so far in 2022.
So we think the relative stability of Philadelphia, the quality of our portfolio positioning in that regional marketplace, with the green shoots of growth in financial services and life science, will continue to provide some good growth for our portfolio going forward. Austin's a different dynamic, a much higher-beta marketplace. It's right now suffering from the double hit of oversupply and under-demand, but you still had about 140 people a day move into Austin, Texas, last year. There's still over 50 companies looking to make Austin their headquarters, including about 19 life science companies. It's become the number one leader in STEM-based jobs over the last decade. So we think that the growth dynamics in Austin, even while temporarily impacted by this disequilibrium, provide a great long-term landscape for the company.
So the combination of the high beta in Austin with the relative stability of Philadelphia, we think, provides a great prescription for growth going forward.
You talked about the pickup you're seeing in terms of demand for life science. Is that mostly coming from smaller tenants, or have larger tenants started looking at taking more space?
Yeah. Great question. I think for the most part, it's still kind of tenants in the 10,000-25,000 sq ft range. I know in several of our developments in the Philadelphia marketplace, we are talking to a range of companies that are between 100,000 to 150,000 sq ft, but they definitely tend to be more the outlier than the norm. Most of our targeted tenant prospects are between 25,000 and 50,000 sq ft. In Austin, historically, that's been a market moved by larger tenant requirements. Most of those were tech-driven. For the most part, they're all on hold right now. So actually, most of our tenant activity in Austin right now is really coming in the tenant sizes below 25,000 and 30,000 sq ft.
And then just in terms of leasing expectations, what are tenants looking for or asking for today that they might not have been 6-12 months ago and have more tenants started coming back to the market, or are many real estate decision-makers still dragging their feet?
No. I definitely think there's more tenants in the marketplace. Certainly, year-over-year, if we were in March of last year, I think there were a lot of companies that were still trying to figure out their work schedule: hybrid versus remote, three versus four, two versus three. And I think we've seen a tremendous increase in the level of clarity in what tenants are deciding to do. That's very helpful because that accelerates their decision-making process for new space. So certainly, I think that the drivers of demand are better this year than this time last year. I think what tenants are looking for is, as I touched on, the good quality buildings, but also looking for good quality landlords. Now, if you think about it in the production cycle, most tenants are represented by brokers.
Most brokers want to get paid leasing commissions. Most brokers who are representing tenants want to go to landlords that have demonstrated financial capacity to not only pay broker commissions but also provide the money for the tenant improvement costs. So when I alluded to earlier, the competitive set is shrinking. We are definitely seeing that dynamic across the board. So we're able to give those companies assurances that we can stand financially behind our promises. We have a long demonstrated track record of making capital investments in every one of our projects that we can clearly show to tenant prospects. So I think the quality bias and the sponsorship of the landlord are very, very important. We really have not seen, Michael, a big increase in requirements for additional free rent, and TI commitments have held pretty much static year-over-year.
You talked about having a pretty manageable lease maturity schedule over the next couple of years. I think you said it was about 6% per annum. As those leases come due, do you think you'll have the ability to push rents, or do tenants still have a lot of leverage when it comes to those renegotiations?
Well, it depends on the market, but I think generally, we're seeing the ability to generate higher net effective rents, particularly in our CBD Philadelphia, our University City projects, as well as some of our core suburban markets like Radnor and Conshohocken. Again, primarily due to some of the dynamics we talked about. In Austin, Texas, I would say that we do not have the ability to move effective rents at this point, that market, given its higher level of vacancy, slowdown, and tenant demand. We tend to be a price taker there right now versus a price driver. But we are still projecting in our 2024 business plan positive mark-to-markets in our core markets, with the exception of Austin.
For those, I believe it was eight buildings that you highlighted in your earnings supplemental that make up about 50% of the vacancy. Can you talk about some initiatives that you're undertaking to try to lease up those buildings and have them contribute more on the occupancy and NOI front?
Sure. They run the gamut from some of our higher quality buildings with temporary or transitional vacancy to buildings with some structural issues in terms of market demand. So for example, we have 2 of those projects actually, 3 of those projects we're undergoing legal zoning and architectural review to see whether there are good conversion opportunities to residential, including potentially taking down a couple of the buildings where we feel as though the physical plant that's in place now does not meet the quality standards required today. So that represents several of the properties on that list that we identified in our supplemental package. We have a couple of other properties in Austin that have lost major tenants there.
We've accelerated our leasing programs, embarked on a couple of capital renovations for lobby improvements, bathroom improvements, additional landscaping improvements to present those properties better and being more aggressive on the rental curve. We have one of the buildings on that project, Cira Centre, which is one of our premier properties. As you know, we're converting the lower bank of that building, first 9 floors, to life science. Most of that vacancy that we show right now are the spaces we're converting to life science and pre-leasing. So we think that that will take care of itself during 2024. And then a couple of other properties, again, are in Austin, Texas, where we're under lease right now. So each project has a specific plan, either marketing, conversion, renovation, to make sure we accelerate the lease up of those properties.
Of course, some of those properties we're certainly willing to sell as well. We're exploring a number of other options with those. Even on the residential conversions, for example, whether once we get clarity that we can get the properties rezoned, redesigned, that doesn't necessarily mean that we will do that work ourselves. We may figure that's an optimal value point for us to exit those properties.
If you were to sell those properties, and then maybe this can just be a comment on disposition cap rates overall, but where would you expect to transact at? And if cap rate isn't the right metric, what kind of valuation do you think investors could be looking at in terms of dispositions?
Yeah. I think what we experienced in first of all, it's a challenging market to sell because of the overhang on how people are viewing the office sector, but also the lack of available debt financing. So debt financing tends to be a significant gating issue, certainly being one of the issues we ran into in 2023 in trying to sell some properties. Our cap rates in 2023 range from mid-single to high-single digit cap rates based upon really the occupancy level and the weighted average lease term in each of those buildings. So we are assuming somewhere in the 7%-9% cap rate was probably the right target for some of the things we're trying to sell. That can vary by property and by submarket.
We have indicated in some cases a willingness to take back seller financing if the quality of the buyer is high and the rate of return we can get on our seller financing is good. We did build $80 ,000,000-$100 ,000,000 of sales into our 2024 business plan, targeting the second half of 2024 to get those sales done.
Gotcha. And then just maybe expanding a bit more on capital allocation opportunities. Can you give us any sense if we could see potential acquisition or development opportunities in the year ahead, or does the math and the economics still not pencil for those?
Yeah. I think for us right now, our major focus, as I mentioned, is on leasing and balance sheet improvement. We are not really focused on looking at any other properties to buy right now. We have a, I think, a fairly well-thought-out sale program in place. The properties we have under development right now, most of the capital is already funded on those developments, so there's very little capital call going forward, with the exception of monies for TI work as leasing occurs. And frankly, from Brandywine's standpoint, we don't really see any additional developments unless there's significant fully leased build-to-suit for the foreseeable future, until we lease up our existing developments, get better clarity in where interest rates and resulting cap rates are going.
So you would have to really see a kind of market shift in where the macro environment and demand is currently to then want to start a future spec development?
We would need to see that for sure, along with making sure that we leased up our existing development set. As I mentioned, that can generate about $60 ,000,000 of incremental NOI for us. That's a huge growth driver for us. So I think the sole focus for the company, from a leasing standpoint, is getting those projects leased up. Some of the other considerations are purely secondary.
Maybe we can just turn to the balance sheet now. I think you've done a good job addressing some of the upcoming maturities. We can talk about the October bond coming due as well. But for the remainder of debt, call it over the next two or so years, particularly on the JV side, how should we think about refinancing expectations for this going forward? And with secured versus unsecured debt, would any one of those look kind of more appealing as those refis come up?
Yeah. Certainly, Tom. Why don't you pick up on that for us?
Yeah. So on the unsecured, the bond that's coming due here in October 2024, we do expect to refinance that in the next, call it, 60-90 days. We are looking at both secured and unsecured as an option. Part of that's going to be a function of pricing. We do think the bond market is open for us. We do believe we could get a bond deal across the finish line. But we're also looking at unsecured I mean, secured, which we think has a better rate on the loan. So we're kind of looking at both. We may do both as opposed to just one or the other, depending on our capital thinking for the next couple of years. And then we have no maturities until 2027 after that.
What would kind of the rate differential be secured versus unsecured debt, if you were to issue one versus the other?
We're seeing about 150 basis points.
Gotcha. That is helpful. ESG has become a very important focus of mind for many investors these days. Can you highlight some important ESG initiatives that Brandywine is undertaking?
Sure. We have a dedicated senior executive who really leads all of our ESG initiatives, working with all of our property managers, leasing agents, and corporate support functions. So we've actually already received some excellent recognition for ESG. We have the highest ISS governance score at 1. We were awarded the ISS ESG Corporate Ranking Prime status last year. We have 17,200,000 sq ft are green certified. We're GRESB Green Star Award for the ninth year in a row, and we're awarded five stars for the last two years in our reporting. We're a committed member of the CEO Action for Diversity and Inclusion. We were awarded the Green Buildings United Groundbreaker Award last year for sustainable building operations for our Cira Centre location in Philadelphia. We're a Green Lease Leader Platinum Award winner in 2022 and 2023.
We've also achieved some significant savings from an operating standpoint to reduce water usage, energy usage, and greenhouse gas emissions by over 15% in the period from 2018 to 2025, 30% from an energy standpoint, 35% from greenhouse gas, and 23% for water. So it's a major initiative. We work very much hand in glove with a lot of our larger tenants to make sure as they work through the design and construction of their tenant improvement costs, all the sustainable construction protocols are used. And we continue to expand that. We have a very good ESG report we issue to all of our stakeholders every year and actually connect with many of our larger tenants to dovetail our initiatives with the initiatives they use within their space.
We had a question just come in from live QA. Just turning back to the balance sheet, do you still plan to reduce joint venture debt by $100 ,000,000, which I think was something that y'all had guided to last year?
Yes, we do. We have a number of operating joint ventures that we're working through with our partners and our lenders for overall restructurings. While those restructurings will take longer than we would have liked, we were open to get some of those, Tom, last year. All of the discussions with the lenders are very, very constructive. I think the lenders are clearly focused on quality of the sponsorship they have. We're working with our partners and our lenders on effective debt restructurings and extensions that will provide us the ability to reduce our ownership stake in a number of those ventures. As I mentioned earlier on our balance sheet, we have about $400 ,000,000 of debt attributed to our balance sheet coming through non-recourse financings in our ventures. We're determined to at least meet that $100 ,000,000 target this year, if not exceed it.
We think we're well on the path to do that.
Maybe just expanding on that a bit, if you couldn't find viable financing or the economics wouldn't make sense, could you look to give back the keys on some of those assets that you do have a mortgage on?
Certainly, that's always an option given the structure of those debt instruments being completely non-recourse. I think from our perspective, relationships are important. A lot of these ventures are financed with banks we do a lot of business with. So our hope is that we'll be able to work out mutually agreeable resolutions that work for us as well as for the bank. To the extent we're not able to do that, that's certainly an option that's on the table. But I'd rather have the banks make that call versus us. I think we're focused on creating capital structures in each of those joint ventures that provide a justifiable path back to full loan recovery and potential equity recovery as the years progress.
We had another question come in from live QA. Can you give any update on the lawsuit related to the state of Texas and Austin and what the plan is for that, I guess, lease and property going forward?
Yeah. There's no real significant update there. We're going through the legal process there. The background there is the state of Texas had a large lease with us. I forget the exact square footage. Do you remember that, Tom?
It was about 150,000 sq ft.
Yeah. Fairly large lease that they terminated based upon their assertion that they did not have budgetary authority through the legislature. We did research. We disagree with that assertion. So we have filed a suit against the State of Texas. The first real step for that is going through the legal process that will determine the right of the sovereign, whether the sovereign has the ability to unilaterally cancel leases, even though some of the conditions pursuant to that may not have been met. But don't really have any more update on that than it's going through the normal process. We continue to pursue what we think is a justified course of action.
Maybe we can just touch a bit on the development opportunities, both at Schuylkill Yards and Uptown ATX. I think you did some leasing at 3025 JFK recently that you disclosed. But how has demand been for those properties there? And we can touch on both the office component, the resi component, and life science as well.
Yeah. Taking them in sequence in terms of delivery, the first project we delivered was 3025 JFK, which is our first vertical development at Schuylkill Yards. It's 200,000 sq ft of commercial space, 100 spaces of underground parking, some retail, and 326 apartment units. The apartments are right now over 30% leased, so very much running in line with pro forma. Of the 200,000 sq ft in the commercial space, we have about 60,000. I'm sorry, 35,000 sq ft leased. We have about 160,000 sq ft left. We have a pipeline of about 700,000 sq ft for that space. We have active discussions underway with a variety of tenants ranging from 10-120,000 sq ft. So we're optimistic now that that project's been fully delivered. Lobby is done. The amenity floor is done. Parking is operational. The adjoining pocket park is done.
That we'll be able to have some good success in that project in the next couple of quarters. Moving across the street, our 3151 Market Street project will be delivered in the third quarter of this year. That is a special-purpose-built life science project of about 400,000 sq ft. There, we have about 600,000 sq ft of prospects. We are in active discussions with about 140,000 sq ft. So the demand drivers there, we think, will continue to evolve as the building gets finished. The curtain wall just went up, was completed a couple of weeks ago. Lobby amenities will be done midsummer. So we certainly think, as in most projects, as that building presents itself better, we'll generate some additional demand. Down in Austin, Texas, we have a combination office and residential project. The office project is being delivered early this year.
We signed our first lease there last year. The pipeline there is good in terms of number of tenants. Most of the tenants are fairly small, between 10 and 35,000 sq ft. So really, a couple larger users, but their timeline for decision-making is pretty proactive. So we hope as that building is fully delivered, the amenity level is fully completed, we'll pick up some demand drivers there. The residential will be opened up in May of this year. Certainly, the expectation is we can meet pro forma on that as well.
Are there any existing assets in the portfolio that you could look to convert to another use away from traditional office?
There are several. Actually, several of those are on, Michael, that list of the 8 problem children. So we have 3 different properties in there that we think are very viable from a marketing standpoint to convert to residential use. Now, of those 3, 2 are suburban office complexes where we would take down a couple of buildings and build new residential. The third is a building in downtown Wilmington, Delaware, that is a small floor-plate building that converts readily to residential. And we're going through the final pro forma and architectural drawings on that now. We continue to look at a few other properties as well, as well as, frankly, some of our land holdings. I mean, I'll give you a good example. We had a piece of ground, 50 acres, that we had originally designed and programmed for office.
We converted that to zoning for industrial, for two 300,000-sq ft industrial buildings. We completed that entitlement program and, in the fourth quarter of last year, sold that to an industrial developer for a large profit. So we're actively looking at every single piece of our inventory. We have two pieces of land in Austin, Texas, that were programmed for office. We're going through the rezoning evaluation for both of those to convert those to residential as well.
What do you think it's going to take to get larger office space users back into the market?
Well, in Austin, I think that we'll need to see a little bit of the tech overhang dissipate. I think the tech companies are still a mix of remote, hybrid, and in-person work. So I think we need to get a little more legs on how that plays out. And then also, once that happens, get a feel for how much of the space the tech companies in Austin have already leased that, when they leased it, was built for growth requirements versus current demand. So I think looking for the tech companies to kind of come back to work and start hiring again will be a clear indicator of additional large user demand in Austin. In Philadelphia, again, from a life science front and from the office standpoint, we are seeing a couple of 100,000+ sq ft users in the market now.
We think that trend line will continue.
Do you have a sense of where office utilization throughout your portfolio is? I imagine some of your suburban buildings probably don't have keycard swipes. But do you have any sense of how things are trending from a utilization perspective?
Yeah. And you're right. I mean, some of our buildings don't have the card key swipe in the suburbs. So there, we can just anecdotally make an assessment via parking lots. I mean, utilization rate in our suburban buildings is much higher than our downtown buildings, even on Fridays. I mean, I think people in the suburbs still work Fridays, so they come to work. Downtown, we're running between 65%-70%. Anecdotal piece, though, interesting, is our effective occupancy levels now on Mondays are higher than they were last year on Tuesdays. So we're seeing more large companies. Two of the larger employers in Philadelphia, Comcast and Independence Blue Cross, have brought all their employees back three or four days a week. The new mayor in the city of Philadelphia announced last week she's bringing back all municipal workers to the office.
We're definitely seeing a clear trend line of more return to work. I think that's a positive for both street-level activity, retail use, as well as office demand.
Well, if there are no other questions from investors, I've got my three rapid-fires to end the segment. What is the best real estate decision today: buy, sell, develop, redevelop, or pause?
I like lease, which is not one of your options. So given the other four options, I'd say pause. But it's really lease.
What is your expectation for same-store growth for 2025 for the office REIT sector overall?
I think you'll see between 2% and 3%. Lastly, will there be more, fewer, or the same number of publicly traded office REITs a year from now?
I'll say fewer. Great. Thank you so much.
Thank you very much.