Brandywine Realty Trust (BDN) Q3 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Brandywine Realty Trust Third Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to Jerry Sweeney, President and CEO. You may begin.

Michelle, thank you. Happy Friday morning, everyone, and thank you for participating in our third quarter 2022 earnings call. On today's call with me today are George Johnstone, our Executive Vice President of Operations; our Vice President and Chief Accounting Officer, Dan Palazzo; 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. So during today's call, Tom and I will review third quarter results, provide an update on our '22 business plan. And after that, Dan, Tom, George and I are available for any additional questions. Looking back at the quarter, certainly, record inflation, interest rate increases, capital market uncertainty, recessionary fears have significantly changed the operating and financing landscape. The stability of our operating portfolio, evidenced by low forward rollover, protection from operating expense increases on 81% of our leases well position us on the operating margin front, and we will certainly continue to focus on margin improvement as we enter the '23 budget cycle, and we are pleased that our '22 operating and development plans remain on target. The macro environment, however, certainly impacted our capital program. And while we will continue to select planning and approval efforts, future development starts are on hold unless they are fully pre-leased and until the existing pipeline posts more leasing traction. During the quarter, we also terminated several potential acquisitions and accelerated our refinancing and interest rate management programs that Tom and I will review during the course of our conversation. From an operating standpoint, we continue to experience higher physical occupancy, now 60% overall with a high of 70% to 75% in the Pennsylvania suburbs. Hybrid attendance, as you might expect, continues in all of our markets, Tuesday through Thursday being the most common in office days. On those high peak days, we're experiencing closer to 70% to 75% attendance from most tenants. Tenant interest in high-quality work environments remains the order of the day. We see that every day in our tour levels, lease negotiations and deal executions. In fact, 41%, which is up from 32% last quarter, of the new deals in our operating portfolio pipeline are from tenants looking to upgrade from lower quality, less amenitized buildings. During the third quarter, we executed 513,000 square feet of leases, including 300,000 square feet of new leases. We also posted rental rate mark-to-market of 16.5% on a GAAP basis and 6.9% on a cash basis. Our full year mark-to-market range remains 16% to 18% on a GAAP basis and 8% to 10% on a cash basis. Absorption for the quarter was 176,000 square feet. Tenant retention was 90%, and we ended the quarter slightly below 91% occupied and 91.8% leased. It's further worth noting that our Philadelphia CBD, University City, the Pennsylvania suburbs and Austin markets, which cover 93% of our portfolio NOI, were a combined 93.8% leased and 93% occupied. Our spec revenue range remains in the $34 million to $36 million range, with $35 million or 100% at the midpoint achieved. The speculative revenue range represents approximately 1.8 million square feet, of which 1.7 million or 94% is already executed. The portfolio is stable and our forward rollover exposure through 2024 averages 6.5%, which ranks us third out of 17 office REITs. Further, our annual rollover exposure through 2026 is 7.3%, also ranking us third out of 17 REITs, and we continue efforts to reach out into the maturity curve on a daily basis. We did post FFO of $0.36 per share, which was 2% -- above $0.02 above consensus estimates. We beat those estimates, primarily due to the combination of improved operating results, lower interest costs and a higher-than-anticipated gain on the 3151 Market Street formation. So while exceeding consensus estimates for the quarter, we're keeping our FFO range unchanged at $1.36 to $1.40 per share, primarily due to the unstable interest rate environment and the impact of any potential sales. Based on 2022 leasing activity and higher EBITDA, our third quarter net debt-to-EBITDA decreased to 7.2x on a combined basis. And based on our development activity, we are projecting to be at the upper end of our current range of 6.6 to 6.9 at the end of the year. Our core EBITDA metric of a range of 6 to 6.3 focuses on our operating portfolio by eliminating joint venture and active development and redevelopment projects. We continue to believe this is a more accurate measure of how we manage our core portfolio, and those metrics are noted on Page 31 of our sup. In looking at leasing activity, [indiscernible] remained encouraging during the third quarter. Our total leasing pipeline is 4.8 million square feet, broken down between 1.5 million square feet on the operating portfolio and 3.3 million on the development project. The 1.5 million square foot existing portfolio pipeline is up 430,000 square feet from last quarter, with approximately 208,000 square feet in advanced stages of lease negotiations. Also, as I mentioned, 41% of that new deal pipeline are prospects looking to move up the quality curve. The 3.3 million square foot leasing pipeline on our development projects increased over 300,000 square feet during the quarter. Deal conversion rate in the second quarter was 40%, up from 38% last quarter and in line with prepandemic levels from the fourth quarter of 2019. Another good sign is tenants continue to accelerate their decision time line. This past quarter, the median deal cycle time improved by an additional 4 days and is now equal to pre-pandemic levels. In looking at liquidity and dividends, we currently have $350 million availability under our $600 million line of credit. With our targeted development spend and absent any other financing sources, we anticipate having over $300 million of that line available at the end of 2022. Our $0.76 per share dividend is well covered with a 53% payout ratio. We know there is a focus on near-term maturities, so Tom and I will address them during our comments. We have a $350 million bond maturity in February of '23. We are confident we could refinance these bonds in the investment-grade market and continue to explore shorter dated maturity bond options in that investment-grade market. We are also, however, actively pursuing several other more flexible financing options, including secured and unsecured property and portfolio financings through the bank and other traditional institutional financing sources. This $350 million bond in February is our only wholly-owned balance sheet maturity until our next bond matures in October of 2024. We do have 2 joint ventures with nonrecourse loans maturing in 2023. We are already underway with extension discussions and exploring other financing sources for those loans as well. The first is a $208 million loan in our Commerce Square joint venture. This is a very low levered financing with over an 11% debt yield on income in place. We're already in discussions with the existing lender for an extension as well as exploring other financing sources. The second maturity in the joint venture framework is in August of '23 and refinancing and discussion efforts are underway there as well. From a capital allocation standpoint, we continue to assess forward capital spend. In addition, we are marketing an additional $200 million of properties for sale as part of our ongoing price discovery process. In looking at our development opportunity set, as I mentioned earlier, other than fully leased build-to-suit opportunities, all future development starts are on hold, pending more leasing on the existing pipeline and certainly more clarity on the cost of debt capital and cap rates. We also terminated 2 potential acquisitions that we had underway since the quarter end. When you look at our development pipeline, our remaining total Brandywine net funding obligation on all of our wholly-owned and joint venture development projects is $115 million, which includes $11 million remaining to fund on our 3151 Market project and $17 million for remaining tenant improvement spend on our now 96% leased 405 Colorado. As you'll note on that page in the sup, our equity requirements on Schuylkill Yards West and Uptown ATX Block A are fully funded. We also announced as part of our press release, the commencement of our 155 King of Prussia Road project. This 145,000 square foot project is 100% leased to Arkema and will serve as their North American headquarters. We anticipate the project stabilizing in the fourth quarter of '24. We are already proceeding on a 60% loan-to-cost construction loan to help finance this project. And based on that, as of quarter end, we only have $18 million left to fund on this project, which again is included in the above $115 million total forward spend obligation. Our 250 King of Prussia Road project in Radnor is now over 53% leased, having signed 28,000 square feet of leases this quarter. The current pipeline totals 254,000 square feet. And again, our remaining $20 million spend on this project is included in the $115 million forward spend noted on that schedule. In looking at University City, our B.Labs project is doing extremely well and is leased to 15 different companies. A number of these companies are already expressing needs for additional space. So building on this success, we do plan to convert another floor totaling approximately 27,000 square feet to meet existing incubator demand. And in addition, as noted on previous calls, feasibility studies remain underway to add another 78,000 square feet of life science capable space through Floor 9 including space being vacated by an existing tenants. On looking at Schuylkill Yards, our 3025 JFK project, which is a life science residential tower remains on time and on budget for Q3 '23 delivery. We currently have an active pipeline, totaling just shy of 400,000 square feet, which is up 73,000 square feet from last quarter. The pipeline is expected to continue as construction progresses. In fact, now with the superstructure nearing completion, we have done over 100 hard hat tours for prospects and their representatives. As I noted earlier, our $56.8 million equity commitment is fully funded, our partners' equity investment is also fully funded, and the first funding of our construction loan has commenced. As you know from our supplemental package, in Schuylkill Yards, we can do about -- develop another 3 million square feet of additional life science space. And as another step in the execution of that plan, our 3151 Market project, which is a 441,000 square foot dedicated life science building is on schedule and on budget. That project will be completed in the second quarter of '24. On that project, we have a leasing pipeline of about 400,000 square feet, and we plan on obtaining a construction loan in the 50% loan-to-cost range early in '23 as funding of that construction loan is not required until the third quarter of next year. Construction is also on time and on budget at Block A, at our Uptown ATX development. In addition, as noted in our announcement, during the quarter, we did close on our construction loans totaling $207 million. On the office component, which is 348,000 square feet, our leasing pipeline is 1.5 million square feet. When we take a look at our development pipeline, the key phrase is with that forward pipeline is timing flexibility as evidenced by low land basis per FAR and product diversity. Of the 14.2 million square feet we can build, we can do about 3 million to 4 million square feet of total life science space and over 4,000 multifamily units. And our overlay approvals, particularly at Schuylkill Yards and Uptown ATX give us a degree of flexibility to further adjust that mix to meet market demand. As evidence of the low land basis per FAR, you will note in our statements that we did record an $8.7 million land gain on the land contribution to our joint venture. And looking at other capital components, while our '22 business plan did not and does not specify a dollar volume of property dispositions, we have been active on this front as well. As I mentioned, we have over $200 million of assets in the market for price discovery. We do anticipate continuing to sell select noncore land parcels during '23 as we did in '22. We do have approximately $110 million of assets under firm agreements of sale that we do expect to close prior to year-end. We also further expect that sales of select properties out of our existing joint ventures will occur over the next 4 quarters. And dollars generated from these activities will certainly be used to reduce leverage, fund our development pipeline and look for higher-yielding growth opportunities. Tom will now provide an overview of our financial results.

Thank you, Gerard. Our third quarter net income totaled $13.3 million or $0.08 per diluted share, and FFO totaled $61.8 million or $0.36 per diluted share, $0.02 above consensus estimates. Some general observations regarding the third quarter. Our third quarter results were above consensus, and we had several variances to our second quarter guidance of those numbers. Interest expense was $1.2 million lower than the forecast, primarily due to the timing of capital spend and interest rates being slightly below our forecast. We have not changed our full year guidance. Portfolio operating income totaled approximately $72 million and was above our second quarter guidance of $71 million. Land gains were above our forecasted $1.5 million due to a higher gain on the formation of our 3151 Market Street joint venture. Our third quarter debt service and interest coverage ratios were 3.7 and 3.9, respectively, which were similar to the second quarter results in line with forecast. Our third quarter net debt to EBITDA was 7.2 and slightly above our high end of 6.6 to 6.9 guidance range. As Jerry mentioned, our 2022 guidance remained unchanged. While our results were ahead of consensus, we do remain cautious about interest rates and expect a sequential increased interest expense totaling approximately $4.5 million in the fourth quarter. I believe there will be opportunities to mitigate some of our floating rate interest exposure through hedging and asset sales that will lower our floating rate line of credit balance. Looking to the fourth quarter of 2022, we have the following general assumptions: Property level operating income will approximate $72.5 million and will be incrementally higher than the third quarter as we anticipate a slight net absorption increase during the fourth quarter. Total interest expense will increase to $22.5 million, primarily due to the anticipated higher interest rates and capitalized interest will approximate $2 million. Our contribution of FFO from our unconsolidated joint ventures will total $5.5 million, and our G&A for the fourth quarter will be $8 million. Our term fee and other income we expect to approximate $3.5 million for the fourth quarter. Net management fees for the quarter will be $3 million and net gain on -- and tax provision will total $700,000. Refinancing and liquidity activity, as we forecast our future financing needs, we are assessing our options to increase liquidity. With regards to our bonds, the $350 million bonds maturing in February of '23, we believe that we can refinance them in the current market with a shorter-dated bonds. However, as Jerry mentioned, we are assessing several options that in combination will allow us to repay the 2023 bond and lower the outstanding balance on our line of credit. Those include looking at secured financings, and unsecured financing in the form of a term loan and again, potential asset sales, both this quarter and in the future. We anticipate raising between $550 million to $650 million in proceeds within the next 90 days that will be used to pay off the February bonds and reduce our outstanding balance on our floating rate line of credit. Our fourth [ quarter ] capital plan is very straightforward and totals $110 million. Our CAD payout ratio remains at 84% to 95%, and that will likely be at the higher end of our range. The 2022 CAD range is above our historical run rate, primarily due to the higher capital costs associated with the higher leasing activity in our wholly owned and JV portfolios. We expect to spend about $45 million in development and redevelopment, $33 million in dividends and $10 million in revenue creating and revenue maintained each and $12 million in net equity contributions from our joint ventures. Based on the capital plan outlined above, our line of credit balance will approximate $299 million at the end of the year, leaving approximately $311 million of line availability. We also expect that our net debt-to-EBITDA ratio will be at the top end of our 6.6 to 6.9 guidance range, with the main areas being the timing and scope of our development spend. With regards to liquidity, we have ample capacity for our line of credit. We do expect to invest an incremental $115 million on our active development projects from today forward and targeted asset sales to fund those will lower that -- we'll pay for that balance as well as lower our line of credit. We anticipate our debt service coverage ratios will approximate 3.5, our interest coverage ratio is 3.8 and our net debt to EBITDA will be 40% to 41%. We believe that our net debt-to-EBITDA is at an elevated ratio, primarily due to our development and redevelopment pipeline. We believe those are transitory and once these developments are stabilized, our leverage will decrease. To further highlight how investment of the future development is impacting our current leverage, as outlined on our development page, we currently have $428 million invested in development projects that provide little to no 2022 earnings. That $428 million investment represents a 1.2x increase to our leverage as of quarter end. We anticipate those projects generating an incremental $64 million of cash NOI over time, and we are confident in achieving the stated investment yields. Once these active projects are stabilized, we forecast that our leverage will decrease back into the low 6x range. As mentioned above, we plan to partially offset the current development range with some targeted asset sales in '22 and '23. Until those developments stabilize, we have included an additional metric of core net debt to EBITDA at 6.5 at the end of the quarter, which excludes our joint ventures and our active development projects. I will now turn the call back over to Jerry.

Tom, thank you. Well, to kind of wrap up our prepared comments, the portfolio remains in solid shape. We know that there are concerns about the future demand drivers. I think what we're seeing right now in our leasing pipeline is continued new additions by tenants looking for an upgrade of their inventory. At this point in the cycle, they are prepared to pay for that upgrade. So we're still posting very good operating metrics. And looking forward, as we move into more uncertain times, I mean, certainly, our average annual rollover exposure through '24 of only 6.5% with the strong mark-to-markets predictable and manageable capital spend and accelerating leasing velocity, we think, puts us in very good shape. So as usual, we'll end where we started and that we really do wish you and all your families well, and we're delighted to open up the floor for questions, Michelle. We do ask in the interest of time, you limit yourself to 1 question and a follow-up.

[Operator Instructions] Our first question comes from Brian Spahn with Evercore.

So you talked a bit about the leasing demand pipelines. But maybe could you just provide some more color on the demand you're seeing specifically for the spec development projects in Schuylkill Yards and Uptown ATX for both life science and traditional office. And I guess how much activity in particular are you seeing from large potential users of these spaces?

Brian, I'll move south to north. I think when we take a look at our pipeline -- and George, certainly, feel free to chime in. We have our pipeline for Uptown, that's still very early in the development cycle, is very, very good. We have several close-to-full building users who are evaluating the project and discussions with them continue. Of course, given their size, they tend to be fairly complicated. So we're in active dialogue with them and their representatives. Then we have a whole range of additional tenants who range honestly from a couple of floors to single-floor users. Given the demand we're seeing right now, Brian, we've not yet started to entertain users smaller than 1 floor. We're keeping a shadow pipeline on that. But I think we want to see where some of the larger tenants, larger tenant prospects land to figure out where we have the availability and what floors in the building. So I think we're very happy with the level of activity we're seeing there. And the same thing for the North at Schuylkill Yards. I mean we have the superstructure, 3025 will top out at the end of November. The window wall system is up through 6 of the 8 levels on the life science side, and then we leapfrogged up to the residential tower. We are having daily tours with prospects, their brokers. So the pipeline there is very good. We have there a number of multiple floor users, ranging up to 70,000 to 80,000 square feet. And then we're also looking at a number of smaller users, be they less than a floor that are in the queue as well. Same thing on 3151, a little bit early. We're just really coming out of the groundbreaking on that. But the users there, again, range from single floor, i.e. 35,000 square foot users up to a couple of hundred thousand square feet. The range is from established life science companies, companies growing out of the incubators in the region into more graduate level space as well as a good pipeline of institutional demand coming from the health care and academic systems.

Got it. And you touched on additional asset sales as well. Could you maybe just talk about what you're seeing in the transaction market today in terms of bid-ask spreads and I guess to the extent you can't complete additional dispositions, what are the funding plans for development? And how would you say that impacts your thinking around the dividend?

Yes. Well, I think in terms of the funding plan around future development, I think we framed out or tried to frame out fairly clearly that the forward committed development spend we have, what we have underway is $115 million. So we have plenty of capacity with our plans in place to fully fund that out. As I mentioned, we're also given the uncertainty in the interest rate and cap rate climate right now, putting a number of projects on hold until we get more clarity on where those markets and those pricing levels will be, but more importantly, where the source and uses play out. So hopefully, that answers the second part of your question. In terms of the asset sales, it's not a lot of trades have occurred because you're really seeing that there's still a bit of a disconnect between by -- between seller expectations and buyer aspiration, so to speak. And the buyers are tending to do their pricing models and their equity return models based upon where they see debt is. And the debt markets, frankly, have been a little more volatile, of late, as we all know. So that's creating some confusion in terms of what the appropriate price levels are. I think, in general, for the assets, we do have in the market, we're very pleased with the number of confidentiality agreements that folks have signed to get access to the information as well as the number of tours. So there's a high level of interest out there in terms of potential buyers. We are seeing target pricing levels of somewhere 10% to 15% below originally targeted levels of a couple of quarters ago. And that's, I think, one of the reasons why you're not seeing a lot of things trade. But I think the level of activity that we're seeing and the quality of the buying pool is good. I just think the pricing metrics are a bit unclear right now based on where the debt pricing levels are.

Our next question comes from Michael Griffin with Citi.

Maybe following up on that disposition question. Do you have a sense of the targeted buyer pools for these proposed dispos? And is there one capital partner that might be more attractive kind of relative to others in terms of these transactions?

Yes, Michael. I mean, look, they range from there -- in our bidding pool right now, there are a number of foreign investors who are looking. And it runs the full gamut down to Tier 2 institutional investors, syndicators who have money. It really depends. And we have assets that are in the marketplace that range from basically $20 million in value up to about $80 million in value. So it's a fairly wide range of asset size that are out there. And as I mentioned in my answer to your earlier question, I think we've been pleasantly surprised with the number of people who are coming through the properties for tours. Certainly, the investment brokers we've hired to represent us on a number of these trades, they're spending as much time kind of locking down debt commitments as they are walking equity investors through because I think the question that comes up after the lobby looks great, is like what's the debt cost going to be on the project. So we're spending a lot of time outreaching to a wide range of lending sources to make sure that we understand where debt pricing level should be. So we're in a good position to respond to pricing offers when they come in. I mean what we have under agreement, we'll be executing those at a sub-6% cap rate. And we feel pretty good about them getting across the finish line, as I mentioned, by the end of the year. And then the remaining [ properties ] we have in the market quite candidly range from assets that we deem to be noncore that we're kind of testing the market at that higher rollover stage of a project life cycle to ones that are more stable.

And then just maybe on the upcoming debt maturities and refinancing prospects. Do you have a sense of the potential term in rate for these? And Jerry, I think you talked about it being more shorter-term debt. Is there any possibility of maybe terming it out for longer?

Tom, do you want to take that?

I think the debt we're targeting and the refinancings we're targeting are kind of in the 5-year range for most of it. Some of it may be a little shorter term than that. But I think we're kind of looking at 5 years at this point. Again, with the bond deal being a potential, we're also looking at things that even if they are 5-year instruments that we could get out of them or refinance them earlier than keeping them outstanding for 5 years. So trying to look at some options that will -- that can go out that 5-year window, but potentially if things improve, allow us to repay them earlier.

Our next question comes from William Crow with Raymond James.

Great. A couple of bigger picture questions here, Jerry. I think if you went back 5 years ago, the narrative was that Philly was a kind of crown jewel in the Mid-Atlantic and willing and ready to accept a lot of New Yorkers that might move out in that market that was being a challenge. And I think if you just look forward to today, there's been a perception change maybe and maybe that's kind of what I'm asking about is, are your tenants -- have they had a perception change of the Philly market, the safety of the downtown CBD area? Anything like that, that might be a drag on future demand?

Excellent question. I mean, look, I think Philadelphia really has benefited in the last half dozen plus years of bringing a lot of new in-migration into the city and into the [ coast ] and suburbs as well. And I think that we've continued to see a number of companies move into the Philadelphia market. That slowed, of course, during the pandemic, but we also were able to pick up a couple of new tenants in our portfolio that were actually new to the region during the pandemic [indiscernible] Center City, Philadelphia. The tone of a lot of these major cities has certainly changed, where Philadelphia is making amazing progress on an economic growth trajectory. I think there is some concern about the safe and clean components that you're seeing [ repleting ] in a lot of other cities. I think there's a lot of attention being focused on that. It's certainly a bit of a concern by some tenants. But I think the general perception, Bill, is viewed as transitory. I think there's a lot of efforts underway both in the public and the private sector to provide for -- to provide methods to allay those concerns. We're in close communication here with the regional rail authority and what they're doing, certainly working with the business improvement districts in the city of Philadelphia to ensure that issues like that are, in fact, transitory and will be readily addressed. But it's certainly a topic that comes up in all candor with some discussions as people are looking at Philadelphia from the outside. And I think the -- when we get them through the door and we walk them through the vitality of the parts of the city where we're doing business, certainly, a great green shoot is the potential continued growth of the cell and gene therapy business in Philadelphia, and that's an academically anchored program. Roche Pharmaceuticals, Bill, as you may recall, they announced they're building a -- it will be a $600 million manufacturing research lab directly across from our IRS post office building, and that will house a whole range of employees from all over the world. So that type of investment activity we think portends, well, particularly for University City, but I think we readily acknowledge in all of our tenant business discussions that these major cities, including Philadelphia, have transition issues they need to work their way through. I don't know if that answers your question or not, but...

Yes. No, that's helpful. I mean, if we don't move there, it's beneficial to hear your thoughts. The second question, and that's kind of be smart to ask here, but twice during your prepared remarks, you talked about the positive attribute of having very few lease rollovers over the next couple of years. And I absolutely agree with you. But my question is, of course, that's the exact opposite from industrial, where a shorter lease duration is a premium these days. Has there ever been a time in the last 15 years where you would switch a few short-term lease expirations for a lot of maturities. It just feels like we have not enjoyed that period of time, with healthy mark-to-market rents. I mean just -- it feels like we've been trapped in a no-growth environment since the financial -- since the great recession. Is that unfair?

Yes, Bill, I apologize. You keep cutting in and out. So just as a point of -- are you asking, is there a time at which we think we'll be looking at shorter lease maturities to provide more intermediate-term upside in the rental NOI?

Yes. Sorry about the reception here. The question is, has there been a time over the last 15 years when it's actually been a good thing to have near-term maturities? It just -- it feels like we've never hit that time where the mark-to-market was attractive enough that you would want a lot of near-term maturities.

Well, I think as a general rule, it's been -- we haven't really seen that. But I do think from a submarket standpoint, there have been moments of pure sunshine. So for example, when I take a look at our Radnor portfolio or our University City portfolio here, certainly doing bridge term leases has turned out to be very successful for us. We'll be able to move up run rate significantly. We have not seen that in our Washington, D.C., Northern Virginia, Maryland market. We had moments of that in Austin, Texas. A number of years ago where we were doing 3-year leases that had some good [audio gap] built into them. So it's really -- for us, as we look at it, Bill, it's really a submarket dynamic that we really try and think through. So we'll take a look at what our forward rollover is by submarket, take a look at the existing occupancy levels and then modulate our marketing plan based on that. One of the challenging governors we've had quite candidly in the last half dozen years has been the escalation in construction pricing because that really tends to be -- the capital recovery mechanism sometimes tends to overwhelm the desire of the shorter-term leases to get that next bump. So -- but again, there have been moments of that. We do, as we've talked on previous -- we do a lot of spec suites where we build out smaller tenancies that we do leasing in the 3- to 5-year range, get higher-than-normal rents to provide the tenant that flexibility. And our track record has been that we actually get those tenants either renew or we get another tenant to move in as is condition. So I think for us, it's been very much a tactical versus strategic objective. I do like the lease structures we've migrated to. About 81% of our leases provide a pure inflation hedge for us. Our average annual escalations are in the high 2s to low 3s. So it provides kind of annual rental rate increases. And then we do take a look at our average lease terms, which we focus on every year as part of our business plan.

Our next question comes from Daniel Ismail with Green Street Advisors.

Maybe going back to an earlier response, Jerry, I believe you mentioned on the dispositions, those being a sub-6 cap. Are those stabilized? Or is there some leasing to do there?

One is fairly stabilized, and the other is a residential project.

Got it. And for clarity, I believe earlier this year, you guys have placed a 1900 market on the disposition block? Is it safe to assume that, that is not included in that $110 million?

It is not, Danny. That is correct. That -- we still have that in the market. You may recall, we launched that right before Memorial Day. And with the summer coming in and more importantly, the volatility at that point, we moved the bid day back. We are still talking to a couple of, I think, high-quality buyers there. But again, that amplifies what I was talking about earlier in terms of the need to kind of lock away debt financing. So I think we're following the approach of putting a number of different types of product in the marketplace to kind of get a sense of where we think pricing will settle in and then kind of using the data we're getting back from that and then really comparing that to what we think the internal value for us from a net present value standpoint is holding that asset versus trading it out. And that's -- I think the discipline will maintain as we look out over the next several quarters as we kind of see where the market clearing prices will be on some of these asset sales.

Got it. And then just last one for me. The -- I'm just curious, you mentioned terminating a few acquisitions this quarter as well as announcing the build-to-suit developments. How are you guys viewing those opportunities in light of the share price, which is on our numbers now over 10% flat cap rates and potential share repurchases.

Yes. Look, certainly, share repurchases are on the table for us. I think we want to make sure that we fully focus on locking away all the liquidity, all the liquidity and addressing the near-term maturities and certainly trying to get some additional asset sales across the table. We fully recognize the value of that, and that's certainly part of our deployment toolkit as they say once we achieve some of the near-term maturity refinancing objectives I spoke about earlier. Okay. No. If that is the -- I want to make sure that answered your question.

Our next question comes from Steve Sakwa with Evercore ISI.

Jerry and Tom, I just wanted to circle back on some of the debt stuff. And I understand it's a little fluid in terms of whether you're going to go 5 or 10 years. Right now, the curve is obviously inverted. So 10-year treasury is obviously below the 5-year. But how are you guys thinking about spreads? I guess I'm just trying to get a better handle on where you think all-in fixed rate debt cost would be today? And then secondly, is there anything you can tell us about the $250 million term loan that expired in October?

Well, I guess -- Steve, I'll answer a couple of those. So I think if you look at where the investment-grade market is for bonds, for example, as where rates are, it is -- there is an inverted yield curve, and I think as we take a look at bonds, either 5-, 7- or 10-year bonds, the pricing is not very different. It's high. And I would say that it would be high pricing for us. I'd say you're talking a number in the 7% range on investment-grade bonds maybe today and that's considering bonds are open. And -- but all of the -- our credit spread comes down a little bit to offset the change in the rates. But that's kind of a flat curve right now and the flat quotes we're getting when we take a look at bonds, there's not much of a difference between 5 and 10s and 7s in terms of net yield. So I think that's part of your second -- your first question. The second one, I think, if you're talking about the $250 million term loan, the term loan was extended as part of the line of credit. The swap -- if you're asking about the swap, we did have a swap that was on that term loan through October. And at this point, that term loan is now going to float. We have not put the swap on it at this point. We are looking at whether we want to do a long-term swap with where we see the yield curve at the back end, especially to put a fixed rate on that, but we have not done that at this point.

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

Great. Well, Michelle, thank you very much for help today. Thank you all for participating in our call. Wish you a great holiday season, and we look forward to updating you on our fourth quarter results and '23 business plan after the first of the year. Have a great day.

This concludes the program. You may now disconnect.