Brandywine Realty Trust (BDN) Q1 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Brandywine Realty Trust First Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your host today, Gerard Sweeney, President and CEO. Please go ahead, sir.

Michelle, thank you very much. Good morning, everyone and thank you for participating in our First Quarter 2022 Earnings Conference Call. On today's call with me are George Johnstone, our Executive VP of Operations; Dan Palazzo, our 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. 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. While the world has changed quite a bit since our last call. The record inflation increased constructional labor costs, an unpromoted attack by Russia on Ukraine sovereignty, further disruption of global supply chains and a dramatic increase in baseline interest rates have all created a near-term outlook different than only several months ago. Our portfolio stability evidenced by our low forward rollover protection from expense increases on 70% of our leases due to their structure, the preponderance of triple net leases we have in the portfolio and our pragmatic approach to development, including below market land basis and options, position us well for these events. In our business those macro concerns are somewhat counterbalanced by the removal of federal and state COVID mandates leading our portfolio to higher levels of physical occupancy. Even more encouraging, we have also seen much stronger tenant interest in high quality work environments. Our tour levels, lease negotiations and deal executions remain on a very positive trend line. Those trends position our existing portfolio and development pipeline extremely well. In fact, 25% of our operating portfolio pipeline is comprised of tenants looking to upgrade from lower quality less amenitized buildings. During our prepared remarks, we'll review first quarter results, provide an update on our '22 business plan and some color on recent activity. Tom will then review our first quarter results, frame out the key assumptions driving the balance of our '22 guidance. And after that Dan, George and Tom and I are available for any questions you may have. The first quarter has gotten off to a very solid start. Results are in line with our '22 business plan. During the quarter, we executed 428,000 square feet of leases, including 287,000 square feet of new leases. For the first quarter we posted rental mark-to-market of 20.4% on a GAAP basis and 12.9% on a cash basis. Our full-year mark-to-market range is remain between 16% and 18% on a GAAP basis and 8% to 10% on a cash basis. As outlined in our 2020 operating plan we rolled that out last quarter, we had 252,000 square feet of known move-outs or negative absorption scheduled to occur in the first quarter. Approximately 57% of that space has been re-let with scheduled second through fourth quarter 2022 occupancies and the mark-to-market on those backfilled tenancies was 26% on a GAAP basis and 11% on a cash basis. In looking at our numbers, while quarterly same store cash outperformed our business plan range. The full-year impact of known -- of these known move-outs and that free rent on Blank Rome's renewal occurring subsequent quarters and as such we're keeping our range in place. First quarter Capital Costs were in line with our business plan, retention was 56%, slightly below the bottom end of our full-year forecast, but we are again, as with the other metrics, maintaining our range. Core Occupancy and lease targets were also within our ranges. We ended the quarter at 92.4% leased and 89.4% occupied, which was in line with our projection for the first quarter. It's interesting to note, when you look at our operating portfolio and look at filled up CBD, University City, the Pennsylvania suburbs and Austin, which covers 88% of our portfolio NOI. We are combined 94.8% leased and 91.8% occupied. Spec Revenue remains in the $34 million to $36 million range, with 29.4 million or 84% the midpoint achieved. Spec Revenue range represents approximately 2 million square feet of leasing, of which we are 1.4 million or 70% complete. Over the last couple of years, we have reduced our forward rollover exposure through 24 to an average of 7.5%. Further, our annual rollover exposure through 2026 is below 10% and both of these metrics clearly indicate core portfolio stability. On an FFO basis, and Tom will amplify this, we posted first quarter FFO of $0.35 per share, which was $0.01 above consensus. From an EBITDA standpoint, based upon the increased 2022 leasing activity, higher develop in a redevelopment spend, we are maintaining our projected EBITDA range in the range of 6.6x to 6.9x. As we framed out last quarter, the majority of this leverage increase is purely transitional, coming primarily through debt attribution from our joint venture and development activity. To amplify this point on page 3 of our SIP, we segment our EBITDA metrics between core and combine. The core EBITDA range of 6.0x to 6.3x focuses on our core portfolio by eliminating our joint venture and the active development projects and is a much more accurate measure of how we manage our core portfolio. Turning to leasing activity. We continue to be encouraged by the increasing pace of on-the-ground activity. Tours in the first quarter of 2022 outpaced the fourth quarter of 2021 by 30%. We had a total of almost 1800 virtual tours, inspecting over 470,000 square feet, which was up again 22% from our fourth quarter results. Our overall leasing pipeline stands at $4.1 million square feet, broken down between $1.3 million on our operating portfolio and $2.8 million square feet on our development projects. The $1.3 million square feet pipeline on our existing portfolio has approximately 350,000 square feet in advanced stages of negotiations with, as I mentioned a moment ago, 25% of that pipeline consisting of prospects looking to move up the quality curve. The leasing pipeline on our development projects of $2.8 million square feet increased 493,000 square feet or 20% during the first quarter. Deal conversion rate in the first quarter was up from Q4 and trailed pre-pandemic levels only by single-digits. So quite a close in the last couple of quarters. We do see tenants starting to accelerate their decision timeline. During this past quarter the median deal cycle time improved by two weeks and is now within two weeks of the pre-pandemic levels. And looking at liquidity and dividend coverages, we have excellent liquidity. Even with our targeted development spend in apps and other financing or redeployment sources, we anticipate having $350 million available on our line of credit at year-end '22. And as Tom will touch on, we have efforts underway to renew both our line of credit and our term loan. The dividend is well covered with the first quarter payout of 54% on the FFO and a CAD payout ratio of 74%. We anticipate that coverage improving significantly as future leases commence and development redevelopment projects stabilize. From a capital allocation standpoint, we made progress on several fronts. We continue selling non-core land parcels. During January we sold one parcel for $1.4 million, generated $900,000 gain and subsequent to the quarter end, we sold our land parcel in the Riverfront district of DC for $29.7 million, generating a $3.4 million gain that we will recognize in the second quarter. We deployed $28.6 million of these land sale proceeds into a 20% equity stake in Cira Square, which is an 863,000 square feet property located adjacent to our Cira South and Schuylkill Yards Projects in University City. You may recall we acquired the former post office project a number of years ago for $28 million, redeveloped it as a single-tenant property for the Federal government, sold that property in 2016 and generated $115 million gain. That owner that we sold to decide to sell, so this presented us with an unplanned opportunity to further solidify our University City market position. The property was purchased for $383 million at a well-below replacement cost of $440 per square feet and a mid-5 cash cap rate range and north of a 7% GAAP cap rate range. Our two partners, each owning a 40% stake, our sovereign wealth fund and a family wealth office. The project is 100% occupied by the GSA through August of 2030. The existing lease rate is at least 40% below existing market rates and the GSA has no renewal rights upon expiration. As such as we evaluated this acquisition, it's really a proxy for either a material mark-to-market profit opportunity or a significant repositioning into a Life Science facility at the gateway to University City and adjacent to 30th Street Train Station. Based on current assumptions either a renewal at Market or conversion of Life Science will generate at least a mid-teens IRR and equity multiples ranging between 3x and 5x. The University City Science Market, Life Science Market rather, as you all know has strengthened considerably since we sold this property in 2016. So acquiring this property created a preeminent profit and repositioning opportunity and bring in two high-quality partners for 80% ownership stake also minimize our direct investment and effectively make this a leverage neutral transaction. And looking at our other development opportunity in SIP, at 405 Colorado in downtown Austin, we signed over 66,000 square feet of leases during the quarter. The project now stands at 81% leased. An additional full-floor leases out for signature and an executed LOI for half a floor, so we do expect to be somewhere between 91% and 95% leased during the second quarter. Rental rates held strong in the mid '40s and concession packages remain very much in line with our pro forma. Given permitting delays with the City of Austin and the timing of several these occupancies, we have shifted the stabilization to the first quarter of '23. In the Pennsylvania suburbs, Radnor submarket, our 250 King of Prussia Road project is on time and on budget. We are now over 29% pre-leased, having signed 35,000 square feet of lease -- of Life Science leases this past quarter. Our current pipeline is north of 200,000 square feet including 12,000 square feet in lease negotiations. You may recall this project is our first delivery in our Radnor Life Science Center, which will consist of more than 300,000 square feet of Life Science space in the region's best performing submarket. Our B.Labs project at Cira Center, the 50,000 square feet incubator opened in January and is 97% leased to 12 companies. It's doing very well and based on tenant feedback, we do anticipate between 150,000 square feet to 200,000 square feet of demand out of these tenants in the next 12 to 24 months. Based on this success, we do plan to add another floor, a mid-tour incubator totaling approximately 27,000 square feet by year-end '22. And in addition to that, plans are underway to add another 78,000 square feet of Life Science capable space through Floor 9 in the Cira Center project. The target delivery of that space is the second quarter of '23. In looking at some of our development of Schuylkill Yards and Uptown ATX, Schuylkill Yards West, our Life Science office and residential tower is on time and on budget for a Q3 '23 delivery. We have an active pipeline totaling about 550,000 square feet, that's up significantly from the previous quarter for both the -- that's for the Life Science and the office components. And we expect that pipeline to continue to progress as construction continues to move forward. Our entire equity commitment in that project of $56.8 million is fully funded and our partners' equity investment is currently being made with the first funding into construction loan occurring in the second quarter of '22. Our life science push does continue at Schuylkill Yards. As we've noted before, we can develop between $3 million square feet and $4 million square feet of Life Science space. And we do anticipate our next start will be 3151 Market Street, a 424,000 square feet dedicated Life Science building, buildings fully designed and fixed price. We have a leasing pipeline of about 350,000 square feet on that project, which is up about 150,000 square feet from last quarter and our goal does remain to start that project in the next couple of quarters. Turning the attention down south to Uptown, which is our 66-acre mixed use community, where we have the development capacity approaching close to $7 million square feet. Construction is underway on Block A, which as we've identified in the SIP is 348,000 square feet Office, 341 residential units and 15,000 square feet of ground floor retail. We anticipate completion of that office component in the third quarter of '23 and the residential component a year later in the third quarter of '24. Important to note here as well, Brandywine equity commitment of $57 million only has a remaining balance to be funded of $1 million, which will occur in the second quarter. The CapMetro train station, Uptown ATX that will provide direct access to downtown Austin had our groundbreaking, we're expecting that to be opening for service in 2024. We further anticipate that the first phase of Block F, which is 272 apartment units will be starting in the second quarter of '22. Just a general comment about our forward development pipeline given macro conditions. Yes, we do have significant development opportunities ahead of us, that we believe can create significant shareholder value. But we also have tremendous flexibility. Our land base at Uptown is about $5 in [FAR] foot, which is obviously well below market value, which affords us the opportunity for not only a land profit but also minimizing carry on that land through the development cycle. And our land control Schuylkill Yards, as you know is via options, so there is very few verbal carry costs on those land holdings. And we had to take down based on the milestone schedule with significant extension options. So both of these facts provide us with significant flexibility to develop a real estate and capital market demand drivers. The second key point is the diversity of the product in our forward development pipeline as we highlighted on page 13 of our supp. Of the 14.2 million square feet we can build, only about 25% is dedicated office with the ability to do between 3 million square feet and 4 million square feet of Life Science space and incorporating that in that square footage pipeline is the ability to do that 4,000 apartment units. So further, further our overlay approvals on both of those sites, give us a degree of flexibility to further adjust that mix to meet future market demand drivers. So key takeaways, low basis land under option, low carrying cost and demand driver flexibility. Looking at the, at the investment market, our '22 plan does not incorporate any dispositions or additional acquisitions, but we do anticipate being active on these fronts. As we have done thus far, this year we do anticipate continue to self-select non-core land parcels. With the office recovery underway we believe we have several opportunities to harvest profits with low cap rate sales. We also anticipate sales of select properties out of our existing joint ventures and dollars generated from these activities we'll use to fund our development pipeline, reduce leverage and where appropriate redeploying the higher growth opportunities. So, Tom will now provide an overview of our financial results.

Thank you, Gerry. Our first quarter net income totaled 5.9 million or $0.03 per diluted share and FFO totaled 60.3 million or $0.35 per diluted share and $0.01 per share above consensus estimates. Some general observations regarding our first quarter results. While our first quarter results were above consensus, we had a number of moving pieces and several variances from our guidance in the fourth quarter. Portfolio operating income totaled $70 million and was below our fourth quarter guidance of 2 million -- of about $2 million, primarily due to higher seasonal Portfolio Operating expenses, but sequentially flat as compared to the fourth quarter despite the 252,000 square feet of negative absorption. Land gains were below forecast by $400,000 due to the delay of one land sale. We anticipate the second land sale to occur in the second quarter. Termination and other income totaled $6.5 million, it was 3 million above our fourth quarter forecast, primarily due to an accelerated ensure, due to accelerated insurance proceeds that we anticipated receiving throughout 2022. Our first quarter fixed charge and interest coverage ratios were 4.3 and 4.0 respectively and sequentially better than our fourth quarter results. Our first quarter annualized net debt to EBITDA was 7.0 and slightly above our, slightly above the high end of our 6.6% to 6.9%, 6x guidance. Our net debt to EBITDA was negatively impacted by the acquisition of Cira Square in mid-March. Based on a normalized quarterly income from Cira Square the ratio would have been 6.9. For 2022, our full-year same-store portfolio increased by two properties, which were the Bulletin Building and 426 West Lancaster. Regarding '22 guidance as Gerry mentioned, we have maintained our guidance ranges for both net income and FFO. Normally we narrow our guidance throughout the year. However, we do have several reasons for not doing that. Timing of capital spend and the anticipated significant rise in interest rates, we have increased our interest expense range by $1 million at the midpoint. We also have potential asset sales and related redeployment opportunities, those are the reasons for not narrowing our guidance range. Turning to the second quarter guidance. Looking more closely at the general assumptions, our property-level operating income will total approximately $74.5 million and be slightly above the first quarter as we estimate net absorption will now occur through the remainder of the year. FFO contribution from our unconsolidated joint ventures will be 6.5 million for the second quarter. G&A for the second quarter will remain flat at $10 million. Total interest expense will approximate $17 million and capitalized interest of approximately $1.9 million. While we believe we have forecast interest rates throughout the balance of '22, where we have some incremental exposure in the second half of the year, our assumptions are too low and the Federal Reserve increases rates at a more aggressive pace. Termination and other income will total about 1.5 million. We think net management, leasing and development fees for the quarter will be 3 million and we do have land sales and that net of tax provision of 3.5 million. Our capital plan is fairly straightforward for the balance of the year and totaled 335 million. Our 2022 CAD ratio will continue to be 84% to 95%, the range is above our historical run rate, primarily due to the high capital cost associated with the higher leasing activity for this year and our wholly-owned and JV portfolios. The uses of cash are primarily going to be for development, 155 million, 99 million of common dividends, 45 million of revenue maintaining capital, 30 million of revenue creating CapEx and 10 million of equity contributions to our joint ventures. The primary sources for that are going to be cash flow from interest --cash flow after interest payments of 130 million, 108 million use of our line of credit. We -- our cash on hand of 39 million and 33 million of land sales, of which two of those are going to happen in the second quarter. Based on the capital plan outlined, our line of credit balance will be approximately 250 million, leaving 350 million of availability. We also project that our net debt to EBITDA ratio will still range between 66 and 69, with the main variable being the timing and scope of our development activities and our net debt to -- net debt to GAV is 39% to 40% range. In addition, we anticipate our fixed charge ratio approximate 3.8 and our interest coverage will approximate 3.7, which represents slight decreases from the prior quarter. While we believe these three ratios are elevated due to the growing development and redevelopment pipeline, we believe they are transitory and once the developments are stabilized, we expect our leverage, overall leverage to decrease. Therefore, we have included an additional metric of core net debt to EBITDA, which was 6.2 as of the end of the quarter and excludes our joint venture and active development projects. We believe this core leverage metric better reflects the leverage of our core portfolio and eliminates our more highly-leveraged joint ventures and our unstabilized development and redevelopment projects. And time to the call back over to Jerry.

Thank you, Tom. So I guess the key takeaways are the office market continues to show increasing traction, occupy, our physical occupancy continue to increase. There is a variability between markets, but the operating portfolio is in solid shape with excellent visibility to both stability, but also forward growth, given the rollover and metrics we talked about earlier. Given what we were seeing at the pipeline level with prospects, tenants are clearly requiring higher quality space and we believe that new development our trophy stock has and will continue to benefit from that trend. So we will, we will end where we started and we wish all of you and your families are doing well. And as we move into the Q&A session we ask that you, in interest of time, you limit yourself to one question and a follow-up. So with that, we're ready to open up for Q&A. Michelle.

[Operator Instructions] And our first question comes from the line of Steve Sakwa with Evercore ISI. Your line is open. Please go ahead.

Yes, great thanks. I've got a bunch of questions. But, I guess, Jerry, maybe just kind of circling in on Cira square, I mean, I sort of understand, sort of the rationale for why you'd want to sort of land bank this given everything that you're doing at Schuylkill Yards, but you've obviously got a lot of other capital priorities and I realize you use the land sale to kind of fund your equity, but maybe just help us think through a little bit more kind of the potential upside. If I'm doing my math right, I think, net rents are around 24 bucks, 25 bucks. Are you saying that office rents for that building would be 40 and life science rents would be materially higher and if so, what would the cost to convert that to a life science building be?

Yes, Steve, I'm certainly happy to do it. Happy to walk through that and explain the rationale more detail. Look, we thought it was a preemptive opportunity to really both controllable below-market revenue stream with a AAA credit tenant. With significant upside when that lease comes up for renewal, which we think will create either a lease renegotiation for the entire building at a mark-to-market. It is in that range that you mentioned from an office, and remember, this is a significant infrastructure has already been put in place, all upgraded mechanicals, great life safety systems, first class operation that is houses several thousand employees. So we certainly believe that there is a great direct mark-to-market opportunity. As we look at the conversion costs, given all the work that was done in that building before, it would, it would be somewhere if you take a look at kind of $230 escalated be somewhere just south of $100 million. We think that that could generate rents in the $60 plus range, which puts us in a position to generate high-teens IRR, as well as a fairly significant equity multiple. These floor plates are 4 acres in size, the building has a central core that was put in, that's part of our GSA renovation rates down well on a multi-tenant basis is as you know right across from 30th Street Train Station. So we think it was really an excellent proxy, as I mentioned, for either a great multiple near-term profit opportunity by doing a lease renewal or by preserving a fairly significant size inventory of readily convertible space and AAA location, certainly given what else we would expect to see happen between 2022 and 2030 University City. So it would certainly something that wasn't necessarily part of our business plan, but when it became available and we're able to identify really two incredibly high quality equity sources to help us finance the acquisition. We kept our ownership stake at 20%, having finance it off of land sales. It's essentially, as Tom touched on, a leverage neutral transaction. So while it does preserve some -- does consume some capacity when we took a look at the benefits we get from controlling that piece of real estate, It was a very effective trade-off near-term and then we certainly think it's the market for Life Science continues to have here at University City. This becomes a major potential receipt of our site in the event that the GSA would elect to move out.

Thank you. And our next question comes from the line of Jamie Feldman with Bank of America. Your line is open. Please go ahead.

Great, thank you. I guess just a follow-up on Steve's question. So the 7% GAAP cap rate, is that assuming releasing at a higher rent? I don't know if there is -- I thought they weren't rent bumps in that lease.

No, Jamie, this is Tom. No, there are no rent bumps of the lease, so it isn't flat, traditional flat GSA lease. For purposes of GAAP we, we do mark the lease to market. So we do pick up an adjustment for that in, into our GAAP revenue or GAAP NOI calculation.

Okay. I. And then I guess, shifting gears, you talked about tour levels of negotiations of 31% quarter-over-quarter. You talked -- I think you said there is 350,000 square feet in advanced negotiations for the operating platform. Can you talk about the advanced negotiation number for the developments? I think you said there is 2.8 million square feet of interest.

Yes, George, do you want to pick up on that?

Yes, I mean on the development that's still includes 405 Colorado starting with the near-term delivery. So we've got, obviously, the pipeline, Jerry alluded to there. To kind of close out that building at 250 Radnor we've got a lease out for 12 and then we've got some advanced dialog with some other Life Science companies of about 100,000 square feet and then at Schuylkill Yards and kind of some early negotiations and discussions at 3151, we've got an ever-increasing building pipeline there. Haven't issued any leases on those properties yet, but we've had continued dialogue.

And it's pretty healthy exchange if I might jump in for a second, George, with just on exchanging proposals back where to responded to a number of RFPs, Jamie, which is usually good, a good sign, certainly when you're responding to a kind of a shorter list. I think we, we feel pretty good about where we stand with the Schuylkill Yards West. And it up the economy, there are a number of investors have been back and forth between Austin in the last couple months. Yes. With that just announcing, we really having to start to build that significant pipeline. We're really, we're really responding to a lot of inquiries and kind of early marketing activities on the, on the blockade Uptown ATX.

Okay. Yes, I guess, as a follow up, we were just down in Austin ourselves and it seems like you kind of outer ring, suburban assets, leasing there seems pretty slow. Maybe there's more interest for either downtown or domain area Uptown ATX type project. Would you say that's common across all your markets? Like if you think about Philly and you think about Austin, where, where would you say it's kind of surprisingly slow versus actually picking up a lot more to get to that 31% increase.

Yes, Jamie, it's George, I'd be glad to take that one on. I mean, look, I think when we look at suburban Austin, we are a bit surprised that activity has kind of slowed down a little bit there, given all of the other positive momentum in that market, but we think that's kind of temporary. We did have two kind of 30,000 square feet move-outs in Austin, in the suburban ring of properties during the first quarter. We're seeing tour activity. But I would say that that submarket is probably a little bit slower and kind of converting tour to proposal for lease. Conversely, in the Pennsylvania suburbs activity remains steady and we're seeing great levels of activity really in all of the sub-markets, Radnor, Conshohocken, Plymouth Meeting, King of Prussia. During the quarter we signed 23,000 square feet lease in King of Prussia. We basically don't have any existing vacancy in our King of Prussia submarket right now in the operating portfolio. Good levels of activity as well in Plymouth Meeting. We had a tenant give us back almost 60,000 square feet at 401 Plymouth Road and we've backfill 100% of that, that move-out occurs, actually occurred on March 31. And that space will backfill in the third quarter.

Okay. And sorry, just one last follow-up. So the Austin move out, are they going to another part of town or are these tenants that are just vacating and doing something different?

Yes, the one went to another part of town, downsized on their vacate and ended up going to a lesser rental rate property. And then the other one had already been on a kind of a hybrid of both work from home and sub leasing some of their space and then just opted not to renew something worth for utilizing it.

Thank you. And our next question comes from the line of Michael Lewis with Truist Securities. Your line is open. Please go ahead.

Great, thank you. I wanted to ask when physical occupancy kind of becomes concerning because I think we sort of discounted it leasing is still happening, and you've talked a lot about that on this call, and the company is still had returned to work dates that were out there in the future. Now it's late April and so maybe talk a little bit about where that physical occupancy is in Austin in Philadelphia. And as we get further along in the calendar here and a lot, lot of employees don't seem to be going back to, does that become concerning as lease, leases roll over the next several quarters?

Yes, hey, Michael, it's Jerry. George and I can tag team this. I mean, look, I mean, our occupancy levels across the portfolio right now are a little bit north of 45% and that range is from 60% in the Pennsylvania suburbs, about 65% down in Met DC, Philadelphia CBD is kicking around 40% to 45%. I think that the economy that we're seeing is that, and we've talked about this on previous calls, is the larger companies like [indiscernible] the companies that occupy a large massive square footage have been fairly slow to return to physical workplaces. So in Philadelphia, for example, one of our major tenants in building downtown there, they are starting to return not until May. We have a financial service firm out in the Pennsylvania suburbs is starting to migrate back in now. We're 80% of physical occupancy in Tysons Virginia given all the defense contracts, so. Tenants less than 50,000 feet, they're back either full boat or pretty close to full boat. We are seeing many employers implementing hybrid work programs but requiring a minimum number of days downtown. I guess, I know it's hard to read the tea leaves. But I guess our team, given the daily conversations we have with tenants, I guess we're, we're increasingly more optimistic on how companies are valuing the physical platform as a way to prevent a lot of employee turnover, dissatisfaction, build the culture, all those things that kind of are out there in the, in the vernacular. But the, the level of hybrid work is a lot higher than we, than we thought it would be. We thought there, actually the number, if you look at it inversely, the number of tenants are going fully remote is much, much lower than we thought it would be even three or four quarters ago. And we know a very, very few situations where tenants are moving to a hoteling concept even when they're in a hybrid model. So preserving the individual workstations, individual work office, that certainly seems to be more of the standard than the exception. But I let George on if anymore comments.

Yes, I think the other thing playing into it, Michael, is mass transportation. So I mean I know here in Philadelphia lifted, just lifted their mask requirements on, on buses and trains. And so I think that the combination of spring and hopefully warmer weather fully returning. I think you'll start to see more and more people past pick up on that. And I think as Gary mentioned, a number of the larger companies with high employee basis has kind of signals May is kind of, they're bringing, bringing more people back and expecting more people back.

Great, thanks. And my second question. I'm just following up on some of the things you said about Austin. We see the supply forecast for Austin and so I'm just curious about how you feel about the competitive position of Broadmoor versus other possibilities. The domain obviously is close as companies come to Austin and choose to build new maybe talk a little about the advantages and disadvantages of the location you have there or maybe, it's maybe you just think it's a case of enough demand for everybody. How do you kind of thinking about that?

Well, look, we know, Austin, we have some great demand drivers. But we also know that it has, has always had an ongoing, a fair amount of supply coming online. I think as we assess this started at Uptown certainly to go a hard look at the market is where we thought the demand drivers were. Look, we think we're in a very, very competitive position against the Domain and other, other sites up in that part of town. We do know that the train station will be an important differentiator. We think that the ability for tenants to be part of a master-planned mixed community that will have a wide range of office, retail, hospitality, et cetera creates a very attractive platform for them. But we certainly, Michael, going to all of these decisions knowing that the competitive marketplace is always acute. We know we compete against some very high quality companies. They design and build good product as well. We do everything we can to kind of create that point of differentiation in terms of efficiency, a floor plates, lines of the buildings, et cetera, but whether it's in Austin, Texas or University City, Philadelphia wherever we undertake a development we always recognize that the competitive marketplace is always there and we always trying to think about how we can outperform that our competitors. I don't know if that answers your question or was general but certainly happy to amplify.

No, that's helpful. And we'll talk again soon in any case. Thank you.

Thank you.

Thank you. And our next question comes from the line of Manny Korchman with Citi. Your line is open. Please go ahead.

It's Michael. So looking at, Manny and I are talking at the same time, we're here to get. I'll ask one and then Manny will follow-up. But just going back to Cira Square. Can you just go over, I know you put a loan on the asset. I assume that was a new loan. Can you just go over sort of the loan terms, duration, extension options, rate. And then just talk about the renewal process. I know you said there was no renewal option, but I didn't know what the language was in the lease when they can start that process, is it just a market rate renewal or is there an arbitrator? I just want to understand that process a little bit more, so that we really understand sort of the dynamics going on.

Sure, I'll take the first part, tom will state second. Yes, the lease does not contain a renewal right. So it has been -- there is no governor in place, there is no arbitration, it's basically the owner of the property has the right to set what they think the rental rates should be and the existing tenant has a right to take that or negotiate from that point. So there is no, there is no governor in terms of a certain percentage of fair market value or every acquire term and that was actually negotiated early on when we did that initial transaction with, with the GSA, Michael. So that was part of the original transaction that there were a number of give and takes as part of that original lease, one of which was obviously the flat rental rate this GSA refers and the quid pro quo for that was that there was no, no fixed renewal rights that they had for either any duration or any rental rate.

Yes, Michael, on the loan, it is a -- we put in place right now a floating rate two-year loan. At the closing it was, it was a tough time for the lending markets, so we put in an interim loan and between now and the end of the two years, we feel will secure up a fixed-rate loan for the balance of the, of the lease, and then go from there.

Memory serves you, a few years ago back in 2016, you sold to sort of 5.5 cap, that's what you disclosed at that point. So, I was surprised to hear, even though the price had gone up relative to where you sold it that is still in a 5.5 because I remember that this lease was a pretty flat lease overall. So I didn't think there was much bumps over the last six years that would have increased the yield and if anything you're probably operating expenses have moved out.

Well, the operating expenses are complete, pass through. So really if that's really triple net lease. So, really, it's been a flat lease. So we sold around 5 and we bought around 5.

Yes, could you just go back in 2016 you sold at a mid-fives. So now, so effectively, you're saying you sold out of 5, but you've if went up by 10%. Right. Like your price went up by 10% relative to what you sold, Jerry so arguably the yield can be the same in the flat lease, math just doesn't work.

Well, I mean, the lease, I mean the capital, the cash yield is a, is a low-fives cash yield. So it's maybe a little different than the 5.5, 5.5 maybe a little above 5.5, but it is north of a 5 cash yield.

Right. But it's lower than where you sold, it's a flat lease, right, just time, value of money would tell you, right?

Correct. Correct. There is no -- the NOI should be essentially flat. We have a flat lease. We do get recoveries on expenses so that plays into, into it as well. But now that the rental NOI is basically the same.

And I recognize, just from a leverage perspective, I recognize of development parcel that was on leverage and that was your equity, but effectively you're by putting 70% leverage on this asset from a GAV perspective, net-net leverage is going up, modest, it is going in the opposite direction of where you want it to go.

Yes, Mike,

On a see-through basis.

Yes, my from a leverage standpoint, it ranges anywhere from being neutral to plus one-tenth of a turn depending on how, what quarter we're in and what are NOI leverage is but it is slight uptick, but as you said, it is modest.

Okay. And when, at what point do you start negotiating with the IRS in terms of a renewal? I know the GSA does things a little bit differently than other tenants and I just didn't know if this is going to create some sort of issue down the road.

Yes, that will be not renew by an issue, but look, we'll be touch with the GSA, they move at their own pace are still a number of years left on the lease, I mean eight years left. So, we have continued to manage the properties since we renovated it. So, our management team and any time tax will remain in place and we certainly have a very good relationship and an open door policy with the GSA on this project, so look forward to, to an active productive series of conversations over the next several years. I think also relative to the leverage question, I think as Tom touched on and I did as well in my comments, but we certainly do recognize that we want to keep downward pressure on leverage and that's I think one of the reasons why we continue to spin out these non-core land sales. I also think that there is a number of opportunities for us, for the balance of 2022 to both harvest profit for both deleveraging and taking money through selling some assets out of some of our existing joint ventures and actually have some of our operating portfolio as well. So as we took a look at the transitional leverage here whether it's flatter or tend to -- we certainly believe we'll have the capacity to kind of bring that leverage back down as we deploy or as we sell some additional assets.

Right. So the GAAP accretion, you're going to get out of us from marketing the lease to market and the cheap debt in the high leverage, and given the fact it was the development side, the accretion that you're going to get from doing this, the GAAP accretion will be outweighed by the additional sales you'll do later this year, so that the proper way to think about it.

Well, again, I think, you take a lot at what we, will be selling properties or is what is there, but certainly we have other redeployment options as well, both in terms of either reducing leverage, you're paying on of debt or putting into our development pipeline. But certainly we look at all if all of those different leverage as part of what we're doing from a leverage and earnings standpoint.

Thank you. And our next question comes from the line of Bill Crow with Raymond James. Your line is open. Please go ahead.

Good morning, thanks for the time. Jerry, it seems like the pledge for tax reform are gone, we have little chance of taking effect curious whether the failure to change in SALT tax deduction might accelerate the shift we've already seen as workers out of market sites like towards Austin, that was my first question. My follow-up is simply that you've been the biggest cheerleader for Philadelphia for 20 years, which is terrific, but my questions is prompted by the Cira Square announcement. How much exposure to downtown Philly is simply too much exposure?

Yes, on the SALT question, look, I think certainly to the extent that federal tax policy, who knows where that will actually go, but I think there will continue to be migration is some of these lower tax states or lower tax jurisdictions. So, I think certainly Austin is benefiting from that shift out of California. Certainly even within Philadelphia, they're talking about potentially some tax reductions to both on the wage, tax the business, tax side in the next couple of budget years to kind of recognize that tax burden is in fact a contributor to where location decisions land. So I think we're actually encouraged by the heightened awareness within Philadelphia public policy circles on the level of, the increased level of burden of having companies operate in downtown Philadelphia. The in terms of the overall contracts, I think you'll see us look to lighten our investment base in Philadelphia over the next couple of years both in CBD Philadelphia, as well as the inner ring suburbs, so certainly as we take a look at our overall operating portfolio that's certainly a key component of that you saw us do a little bit of that few years ago with the, the joint venture with the sovereign wealth fund at Commerce Square. We reduced our investment stake there and I think you'll see a couple of other things happen in the next several quarters where we'll be looking to liquidate some other positions in the region to keep that balance in right. The other thing to note, I do want to amplify when we're talking at the development pipeline that development forward development pipeline has a high level of diversity to it. So when we take a look at Schuylkill Yards most of that development bill will be Life Science or residential some non-core office products, which gives us the ability to while we're generating revenue from out of the Mid-Atlantic region, it will be coming from different product types, like it's a whole range of different financing and exit options as well. So as we're looking at kind of our capital landscape over the next couple of years, certainly, you'll start to see us reduce our overall exposure to office product in the Philadelphia region.

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Jerry Sweeney for any further remarks.

Great, Michelle. Thank you very much and thank you all for participating in the first quarter conference call. Again, we hope everyone stays well and healthy and engaged and we look forward to having a conversation on our next quarter, next quarter conference call. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.