Q2 2024 Brandywine Realty Trust Earnings Call

Participants

Gerard Sweeney; President, Chief Executive Officer, Trustee; Brandywine Realty Trust

Thomas Wirth; Chief Financial Officer, Executive Vice President; Brandywine Realty Trust

George Johnstone; Executive Vice President – Operations; Brandywine Realty Trust

Anthony Paolone; Analyst; JPMorgan Chase & Co

Steve Sakwa; Analyst; Evercore ISI Institutional Equities

Michael Griffin; Analyst; Citigroup Inc.

Dylan Burzonski; Analyst; Green Street Advisors, LLC.

Omotayo Okusanya; Analyst; Deutsche Bank AG

Michael Lewis; Analyst; Truist Securities, Inc.

Presentation

Operator

Good day, and thank you for standing by. Welcome to Brandywine Realty Trust Second Quarter 2024 earnings call. (Operator Instructions) Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. Please go ahead.

Gerard Sweeney

G.G, thank you very much. Good morning, everyone, and thank you for participating in our second quarter 2024 earnings call. On today’s call with me are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Senior Vice President and Chief Accounting Officer; and Tom Wirth, our Executive Vice President and Chief Financial Officer.
Prior to beginning, certain information discussed during our call 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 assurances that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference to our press release as well as our most recent annual and quarterly reports that we filed with the SEC.
While first and foremost we hope that you and yours are doing well. Your summer is off to a great start and are looking forward to a successful and ever-improving second half of 2024. During our prepared comments, we’ll briefly review our results for the quarter and progress in our 2024 business plan. Tom will then briefly review second quarter financial results and frame at the key assumptions driving the balance of our ’24 guidance. After that, Dan George, Tom and I are available to answer any questions.
Well similar to last quarter’s call, we want to start off by addressing the key themes that guide our thinking every day. Our focus remains on three key areas: liquidity, development lease up and portfolio stability. First on liquidity. In our recent bond issuance cleared the decks on any bond maturities through November of 2027.
During the quarter, we fully redeemed our October 24 bonds. As such, we anticipate maintaining minimal balances on our line of credit over the next several years to ensure ample liquidity and believe that that liquidity will be further enhanced by our asset sales program and other deleveraging initiatives.
On our operating joint ventures, we have resolved two of our non-recourse mortgages. On our Cira square JV, we refinanced our existing mortgage that will mature this month with a new $160 million mortgage, which now expires in June of ’29. Each partner funded a pro rata share of the equity required to reduce the outstanding mortgage balance and put that project in a cash flow positive position.
On our MAP joint venture, a few items to highlight. We have reduced, restructured and extended the existing leasehold mortgage. The mortgage was reduced by $26 million and extended through March of 2029. In addition, the amended loan provides the lender receives a 95% participation in the operating results, reducing our economic interest to 5%.
The combined activity of deleveraging on Cira Square and the restructuring of the MAP joint venture reduced our debt attribution by $101 million. To facilitate that restructuring on MAP and to provide capital for the debt paydown of $26 million, Brandywine and the fee owner formed a joint venture to purchase 14 flex and industrial properties. This new entity is completely unencumbered and we are currently marketing that portfolio for sale and we anticipate they sell, be able to sell those properties over the next several quarters.
Second, on development lease up, the pipeline on all projects continues to build with the number of tours and issued proposals increasing during the second quarter versus the first quarter. We are in the advanced stages of lease negotiation with approximately 200,000 square feet of tenants with a strong pipeline building behind that.
The residential components continue to perform on a pro forma in terms of both absorption and rents. Each of these projects are top of market, attractive to a broad range of customers, and we remain confident of hitting our targets. We certainly recognize that both the earnings drag and balance sheet impact of carrying this non-revenue-producing capital and continue our aggressive marketing campaign on each project.
To the upside, upon stabilization, these projects will generate approximately $50 million of GAAP and $45 million of cash NOI or 15.5% increase to our existing income stream. So they do remain a key driver to our company, and we are critically focused on really having those projects reach their stabilization.
And on the stability, certainly our portfolio stability is always top of mind. The strong operating metrics we posted again this quarter reflect the underlying stability of the core portfolio. And while certainly our 80% occupied Austin portfolio still faces near-term challenges, fundamental growth dynamics in that market remain. In fact, activity levels in Austin have picked up, second consecutive quarter of positive absorption in that marketplace, and we plan to be a strong participant in that market’s recovery.
Philadelphia, which is one of the lowest vacancy rates among large cities in the country, continues to perform well, as evidenced by our 94% leasing level and occupancy levels 91%. Looking ahead, we have less than 6% annual rollover through 2026, one of the lowest in the office sector. Our 2024 revenue plan is running ahead of schedule. As such, we’ve increased our speculative revenue range by $1 million and also raised our annual retention range.
Our mark to market capital ratios and same-store numbers all continue to perform at relatively strong levels as they have done over the last several years. We fully recognize the liquidity and valuation challenges facing our sector, in fact in the entire commercial real estate space and continue to take steps necessary to win strong [share] performance on our business plan and achieving all of our growth objectives. With that background, the momentum from the first quarter continued into the second quarter and the year is off to a very solid start. All operating results are in line or above our 2024 business plan.
A few highlights. We posted second quarter FFO of $0.22 per share in line with consensus or speculative revenue range as I mentioned, of $24 million to $25 million has been increased to $25 million to $26 million, with $25.6 million already executed. Our ’24 bond maturity has been fully redeemed. Our combined leasing activity for the quarter totaled 500,000 square feet. During the quarter, we executed 164,000 square feet of leases, including 101,000 square feet of new leases within our wholly owned portfolio.
Based on our efforts during the first six months of the year, we have eliminated $163 million of debt attribution from our joint ventures which exceeds our $100 million target. And as noted on page 13, in our SIP, our business plan does anticipate having full availability on our $600 million line of credit at year-end ’24. Along those lines, our consolidated debt is 95% leased — I’m sorry, 95% fixed at a 6.2% rate.
Our quarterly rental rate mark to market was 10.8% on a GAAP basis and negative 0.4% on a cash basis. It’s worth noting this metric for the quarter was impacted by a larger lease renewal we did in Austin with a roll down in a rental rate, which we accepted in lieu of any tenant improvements. Our new leasing mark to market was a strong 28% and 15.5% on a GAAP and cash basis, respectively.
We ended the quarter at 87.3% occupied and 88.5% leased, sequentially down from last quarter, but right in line with our ’24 business plan projections. So the operating portfolio remains in solid shape. Our forward rollover exposure through ’25 has been further reduced to 5.8%, and as noted, through ’26 down to 5.7%. Also, we do not have any tenant lease expirations greater than 1% of revenue through 2026.
So we believe our asset quality, service delivery platform and submarket positioning remain a key competitive advantage. Similar to prior quarters, the quality curve thesis continues to gain strength as reflected in the overall pick up in leasing activity.
In addition, given some of the distress or competitive landlords are facing, we have in several submarkets seen our competitive set shrink and the quality operating and financial stability of our platform has continued to separate us from the pack, both in the minds of prospective customers, existing tenants and brokers.
Along those lines, we continue to see encouraging signs on leasing front, as evidenced by the following metrics. The increase in physical tour activity has been very positive. Second quarter physical tours exceeded first quarter by 22%, also exceeding our trailing fourth quarter average by over 11%. Also, tour activity remains above pre-pandemic levels by 27%.
On a wholly owned basis during the second quarter, 68%, 68% of all new leases were resolved this flight to quality. Tenant expansions, continued outweighed tenant contractions during the quarter, our executed renewal and expansion activity has enabled us to raise our annual retention range by 150 basis points from 57% to 59%, to 59% to 60%.
The total leasing pipeline continues in a strong position. The operating portfolio leasing pipeline is up 100,000 square feet from last quarter. It stands at 2.3 million square feet. This includes approximately 282,000 square feet in advanced stages of negotiations. Our development pipeline remains at the same levels as last quarter, and also 32% of our operating portfolio new deal pipeline are prospects looking to move up the quality curve.
Looking at EBITDA, our second quarter net debt to EBITDA remained at 7.9x, compared to the first quarter at the same level, as increase in investment in our development projects was offset by our JV recapitalizations. Our core EBITDA metric ended the quarter at 7x, slightly above our current targeted range.
Based on our operating results for the first half of the year, we have narrowed our 2024 FFO guidance from $0.90 to $0.97 per share to $0.91 to $0.96 per share. And also looking at the dividend based on our $0.6 per share dividend, our second quarter FFO and CAD, FAD payout ratios were covered at 68% and 97% respectively. And at the midpoint, our first six-month CAD payout ratio was better than our 2000 business plan projection.
Looking at sales activity, our business plan does contemplate us executing between $80 million and $100 million of sales. We had targeted those to occur in the fourth quarter. We have about $200 million of properties in the market for price discovery. Given the reaction to that activity thus far, we do anticipate posting actual results within our targeted range. And while we will also anticipate continuing to sell noncore land parcels, we did have several land agreements terminated during the quarter through the buyer’s inability to obtain financing.
And looking at our developments, the development pipeline remains strong. As of now, we have approximately 200,000 square feet in active lease negotiations, 900,000 square feet of proposals outstanding and 300,000 square feet of space undergoing test [fits]. Tour velocity continues to pick up and activity levels have continued to increase on our recently delivered project at one uptown.
Given the length of time to complete the space plans I noted last quarter, we still need to obtain permits, construct space. Our ’24 financial plan does not include any spec revenue coming from either [one-up and our] 3025 JFK. To accelerate revenue recognition, however, we are nearly finished building out two floors of spec suites, at one uptown and one for spec suites at 3025.
Looking at 3025, that property is fully delivered. On the commercial component, we’re currently 15% leased with an active pipeline and again, 100,000 square feet or so under active lease negotiations.
On the residential component, we continue to see steady traffic and leasing activity for that residential component, which we call Avira as 237,000 leases executed or just shy of 73% of the project that’s up significantly from last quarter’s call. About 151 of those leases have taken occupancy at pro forma rental rates.
We still project the rep. This residential component will be between 80% and 85% leased by year end ’24. We have begun pre-leasing for one Uptown’s of block A residential component called Solaris house and continued to see steady traffic. We have 22 leases executed. No lease have taken occupancy yet as the first move-ins are scheduled for later in August. And we remain we continue to project that project will be between 20% and 25% leased by year end ’24.
3151 market is scheduled for delivery in the fourth quarter of this year. We have a leasing pipeline of over 250,000 square feet on that with 110,000 square feet in lease negotiations. At Uptown ATX with office component, we have that in a joint venture, and our leasing pipeline there approximates 1.2 million square feet with the prospects range from 3,000 to 300,000 square feet. As I just said, we did complete four spec suites with the second floor underway, and things are moving on track there as well.
Our next phase of the B+labs in a 8th floor Cira Center is well underway, and we remain in the final stage of negotiating a lease with a single tenant for that entire floor. Tom will now provide an overview of our financial results.

Story continues

Thomas Wirth

Thank you, Jerry, and good morning. Our second quarter net income totaled $29.9 million, or $0.17 per share, and second quarter FFO totaled $38 million, or $0.22 per diluted share. Our second quarter net income results were impacted by a $53.8 million or $0.31 per diluted share, one-time, noncash income gain from the restructuring of our MAP joint venture.
Our FFO results met consensus, and we have some general observations regarding our second quarter, highlighting a couple of variances compared to our first quarter guidance. Interest expense was $2.2 million below our reforecast, primarily due to higher capitalized interest and lower projected borrowings on our unsecured line of credit.
G&A totaled $8.9 million, a $600,000 below or above our reforecast, primarily due to compensation expense. This quarterly variance continues to be a timing variance and we still anticipate the full year number to be consistent with our guidance. Our first quarter debt service and interest coverage ratios were 2.2 and net debt to GAV was 45.2, both in line with projections. Our first quarter annualized core net debt to EBITDA was 7.0% and it is two-tenths of a turn above our range, and our annualized combined net debt to EBITDA was 7.9x, just above the high end of our range of 7.5x to 7.8x.
Regarding portfolio and joint venture changes, we have made no changes to our wholly-owned core portfolio in this quarter. Financing activity, as Jerry highlighted, we completed at $400 million bond offering that closed on April 12, and with this closing, we have eliminated a near-term maturity risk with no unsecured bonds maturing until November 2027. Our wholly-owned debt is now 94 — , just under 95% fixed with a weighted average maturity of 4.2 years.
Regarding our 2024 joint venture maturities, as Jerry mentioned, we have made progress with our partners and lenders on the 2024 maturities. We’ve refinanced our loan with Cira Square and setting that maturity date of 2029. We recapitalized the MAP joint venture by acquiring our partner’s interest, producing the existing loan by $24.5 million and then executing, though a new loan through 2029.
These transactions continue our goal of reducing our investment exposure to our operating joint ventures and just as importantly, also reducing the net debt attributed to these ventures, high well over $100 million in this quarter. In addition, in connection with the MAP recapitalization, we formed a 50-50 partnership with the current ground owner and acquired the leasehold interest in 14 property portfolios located in Richmond, Virginia, totaling approximately 642,000 square feet for $44 per square foot, that is over 99% occupied.
Portfolio is primary flex and industrial properties with a weighted average lease term of 7.5 years. Portfolio is 44% occupied by S&P 500 biotechnology company. We intend to market this portfolio for sale and based on the profile of the portfolio assets, we expect to sell the assets within the next couple of quarters. The joint venture portfolio is unencumbered.
Looking more closely at our third quarter 2024, we have the following general assumptions. Our portfolio operating income will total approximately $75 million and roughly $1 million above our second quarter operating income number. FFO contribution from our unconsolidated joint ventures with total was negative $2 million, which again approximates our second quarter results.
Our G&A for the third quarter will be up sequentially or will be flat, sorry, at $9 million. Our interest expense will approximate $33 million with capitalized interest of $3.5 million. Termination and other income will approximate$ 7.5 million in third quarter. The sequential increase is due to anticipated transactional income that we forecasted in our full year guidance, which was $11 million.
Net management leasing and development fees will be $3 million for the quarter. We don’t expect any land or tax provision to be material. Interest and investment income will total $300,000 or $1 million to sequentially below the second quarter. The second quarter had excess cash from the timing of the April bond offering that’s the bond tender and the final June bond redemption.
Our share count will approximate 176 million shares. And for our capital plan, our capital plan is fairly straightforward, $180 million. Our CAD range remains at 90% to 95%. Used [it for this] remainder of the year is $55 million for development and redevelopment projects, $52 million for common dividends, $28 million of revenue-maintained capital, $20 million of revenue create capital and $25 million of equity contributions to our joint ventures.
The primary sources are $77 million of cash flow after interest payments, $90 million of land sales and $17 million of construction loan proceeds related to 155 King of Prussia Road. Based on the capital plan outlined above and cash on hand, we should have $4 million of cash on hand and our line undrawn at the end of the year.
We also project to have a net debt to EBITDA ratio ranging between 7.5x and 7.8x and our debt to GAV will approximately 45%. Our additional metric of core net debt EBITDA is still ranging between 6.5 and 6.8, and excludes primarily just our joint ventures as all of our active development projects will be complete. We believe this core leverage metric better reflects the leverage of our core portfolio and eliminates our more highly levered joint ventures and our unstabilized development and redevelopment projects.
During 2025, our core net debt to EBITDA should begin to equal our consolidated net debt to EBITDA as our fully owned development projects reach stabilization, and we continue to reduce our exposure to the current joint ventures. We anticipate our fixed charge and interest coverage ratios will approximately be 2.2, which is equal to the second quarter.
I will now turn the call back over to Jerry.

Gerard Sweeney

Great. Thanks, Tom. So the key takeaways are, the portfolio remains in very solid shape. Average rollover exposure, as I mentioned, is one of the lowest in the sector, demonstrated ability to manage our capital spend and a stable and accelerating leasing velocity, including a proposal to conversion rate that continues to improve over our pre-pandemic levels.
So we remain very focused on executing a business plan that continues to improve liquidity, keeps our operating portfolio on a solid footing with obviously a very clear and daily focus on leasing up our development projects to generate that forward earnings growth. As usual, when we started, we wish you and your families are doing well. And with that, we’re delighted to open up the floor for questions. We do ask that in the interest of time you limit yourself to one question and a follow-up.

Question and Answer Session

Operator

(Operator Instructions) Anthony Paolone, JPMorgan.

Anthony Paolone

Thanks. Good morning. Just, Jerry, maybe want to go back to the leasing pipeline for the three commercial projects under development. If I go back like a couple of quarters, looked like 3025 had about 700,000 square feet, 3150 wanted, he has talked about 400,000 square feet ATX, he had a couple of hundred thousand square feet. It sounds like you still have a pipeline, but the conversion to lease has been on the switch side. I mean, maybe can you talk a bit about if anything’s really changed in terms of the prospective tenant behavior or just your confidence level on getting some of these things over the finish line, might be?

Gerard Sweeney

Yes, Tony, good morning, and great question. Thank you. Look, I mean, the pipeline has been pretty strong on these properties all the way through which I think reflect that there some market positioning, the quality of what we’re delivering. Some of the buildings, you know whether 3025, the 9th floor wasn’t done until late last year, One Uptown, we actually had some significant infrastructure improvements being done off-site with limited access to the property, but they’re both in excellent shape now. 3151 is on track for a full delivery by the end of this year.
So the projects present themselves very well. The traffic in terms of tour activity remains very strong. The flight to quality thesis seems like it’s, as I mentioned in our operating portfolio, seems to have a level of continued validity. It’s just taking tenants long to make up their minds. I mean, we do have several larger leases under active lease negotiations. So we’ve moved from proposal to lease negotiations. I do think the pipeline for 3025, Tony, and 3151 has remained fairly stable in terms of square footage, moving tenants and prospects in and out.
I think the real pleasant surprises within the last couple of quarters, we’ve seen a dramatic uptick in One Uptown. With that building being delivered now, there’s a real increase in the number of showings, the number of proposals are being issued and the overall level of activity. In that market, we are seeing a return of a couple of larger tenants. Clearly, we’re still — in a market that is over 20% vacancy, we’re still competing against other product and sub-lease space, but we’re very pleased with the pickup in activity at One Uptown over the last couple of quarters.
We still have work to do. And we’re focused on that with active engagement by top management and our leasing team and all these tours and lease negotiations.
I think on the residential front, I know you didn’t address that specifically, but we continue to make very solid progress at 3025 with good uptick in activity quarter over quarter. And when Solaris House really effectively rolls out with the first occupancies later this month, we think we’ve got a good building pipeline there as well.

Anthony Paolone

Okay. Thanks for that. And then just follow up. You talked about the limited rollover in the next few years in the portfolio. And just given your historical level of leasing, it would seem like that. It sets up pretty well to absorb some vacancies. So just wondering if what we should think of, if there are any impediments to that being the case, whether it’s lower retention or anything you’re thinking about there that could stand in the way?

Gerard Sweeney

I think we feel like the portfolio should be in — the operating portfolio should be in a very solid shape going forward. We clearly spiked out a couple of higher vacancy projects in the supplemental information package, and we continue to make progress on each of those projects. Austin remains in the operating portfolio with over 80% leased, which is well below our historical run rate.
Again, I guess we’re looking at the level of tour activity increase in our properties quarter over quarter. The market’s finally had two consecutive quarters of positive absorption and increase in leasing activity. That market sees beginning some additional green shoots. But the other thing we can take a look at the portfolios, is no tenant with an expiration is greater than 1% of revenues. But George, maybe you can add some color on that?

George Johnstone

Yeah, I mean, staying on the theme of expirations, our largest expiration in 2025 is a 50,000 square foot tenant in Radnor, which we have a lease issued to them. And look to announce its execution in the third quarter. And then as Jerry said, I mean, really the opportunity is with the Austin portfolio and its 20% vacancy level. The current operating pipeline breaks down kind of 60% between of Philadelphia in the Pennsylvania suburbs and 40% in Austin.
So we’ve had a number of move outs over the last kind of five to seven quarters. We think, the end is close to being over for some of those rollouts. And now it’s a matter of converting that new deal pipeline to occupancy.

Anthony Paolone

Okay. Thank you.

Gerard Sweeney

Thank you.

Operator

Steve Sakwa, Evercore ISI.

Steve Sakwa

Thanks. Good morning. Maybe to follow up on Tony’s question, Jerry, just as you think about the pipeline, can you help maybe frame out what percentage of the tenants are deals that your square footage that you’re talking to are kind of new-to-market tenants, where they need to make a decision or need to pick the space versus maybe that are expiration driven? Is there a real difference in the discussions you’re having on the new side versus kind of the lease expiration driven discussions?

Gerard Sweeney

Steve, please tell me, operating portfolio and the development portfolio or just the development?

Steve Sakwa

Sorry, I was really focused on the developments, Jerry.

Gerard Sweeney

Okay. No, I look, I think, you know a number of the prospects that we’re talking about are in, let’s say, Schuylkill Yards, are tenants who are existing in the market that needs significant expansion. So there is some urgency on their time line to accommodate that. We have a couple of tenants who are new to the market. And I’m always trying to figure out, if they’re new to market means there is more of an urgent time line or there’s more deliberative steps they need to go through.
But our experience has been that folks that we’re talking to seem to have some urgency in making a decision. We are talking to a few, I’ll call them institutional type of tenants, which have a pressing need, but they tend to move slower. So we’re staying very much in touch with them. And look, I think one of the things that we track is you know, how many — what proposals we have outstanding and how much square footage we have gone through space planning. That’s really where it starts to get very serious.
And we’ve seen some delays on the programmatic side where prospects are still trying to figure out how much space they need? What they’re — are people back three days a week, four days a week? Should they have larger common areas, smaller common areas? So the space planning process today is more protracted than it was pre pandemic. I think that’s part of the delaying mechanism here.
Again at One Uptown, again, a number of tenants are — most of the prospects are in market tenants. You have pending maturities, so they do have significant pressure to make decisions in the near term.

Steve Sakwa

Okay. And maybe just to follow up on the Schuylkill Yards between the two different buildings because one’s really geared to traditional office and obviously 3150 is a life science.
Just maybe on the Life Science front, what are you seeing kind of from both institutions and maybe traditional life science? Obviously, the funding environment has gotten better. We haven’t seen as much public market IPO activity, but VC funding has gotten better. So just what are the discussions like for 3151 with that building delivering kind of later this year?

Gerard Sweeney

Yes, I think the discussions there are very constructive. Again, we have a major prospect who are in negotiations with, and that is a high growth potential tenant. And then a few of the institutions who are also prospects for 3151, again, have pressing needs and are tracking through this space planning deliberative process that they’re going through. I think overall, we take a look at — as lab users in the market. At the beginning of the year, there was about1 million square feet of prospects floating through the various life science submarkets in the region. That’s now down to about 800,000.
Now, some leases have been executed, but we are very encouraged with what we’re hearing on the capital raising front because we believe that that will generate some additional activity in the near term. Our B+lab incubator and graduate space programs continue to perform well. So we’re seeing a very healthy pipeline out there.
And of course, their growth aspirations are really driven primarily by their ability to raise capital. So with more capital certainly come back into that market, we’re hoping that we’ll get some near-term growth opportunities coming at it, B+labs incubator and B+labs graduate level spaces.

Steve Sakwa

Great. That’s it for me.

Gerard Sweeney

Thank you, Steve.

Operator

Michael Griffin, Citi.

Michael Griffin

Great, thanks. Jerry, I think in your prepared remarks, you mentioned the tour activity is notably above where we were relative to pre-COVID. So I guess can you kind of give us some insight? I mean, is that greater demand for space that those stores are indicating? Or is it really dependent out in the market looking for a better deal? Any help? Any color there would be helpful.

Gerard Sweeney

Yeah. I think it’s a combination of a couple of factors. And George and I can tag in this. I think one of the things that we’re seeing and we’re seeing it statistically in the pipeline is we’re picking up a lot of additional activity because of the flight to quality, companies wanted to bring tenants back to high quality space.
We’re certainly seeing, as I alluded in the comments, I mean, the competitive set shrinking a bit. So I think part of the pipeline activity, Michael, is not, I wouldn’t necessarily categorize it as net new demand. I would indicate it is more shifting demand from lower to higher quality space. And I think we’re very well positioned to take advantage of that. I think even in the comments we’re looking over 60% of our lease executions during the quarter, where tenants moving up the quality gap. I anticipate that accelerating near term.
Just take a look at the detail of our pipeline. We are hearing from more and more prospects that they are concerned about the financial stability of their landlord. They’re concerned about the financial structuring of the building there are in, brokers who tend to be a fairly forward thinking and aggressive in terms of make sure they get deals done, are very focused on getting paid. So we’re seeing a number of RFPs come out requiring some type of credit support for the brokerage commission looking to get some additional underwriting support for [KI dollars] being available.
We’re in a great position on all those fronts. So when you combine that financial flexibility and the quality of our portfolio, and frankly, I think the quality of our on-site property management and leasing teams, we’re presenting a much different, much safer, a much higher quality presentation than a lot of our competitive setting, and that really is predominantly in Philadelphia, CBD University City, the Pennsylvania suburbs. I’m starting to see some of that in the other submarkets as well.
So I wouldn’t say, George, maybe you have a perspective on that. It’s a tremendous increase in net new demand as opposed to a shifting within the marketplace.

George Johnstone

Yeah, Michael, I would agree. I think it’s more rotational. And I think building ownership and sponsorship is really one of the key drivers of what prospects we are looking for.

Michael Griffin

That’s great. I appreciate the color. That’s helpful. And then just circling back on the development pipeline, obviously I think the projects are substantially completed. But you know, if the leasing is not there, could we see stabilization dates [placed] out or the expectations are realized, the expenses and stop capitalizing these things four or five quarters after completion?

Gerard Sweeney

I’m sorry. Tom, go ahead.

Thomas Wirth

Yeah, Michael. On the capitalization, just so our methodology — and I believe it’s pretty standard is that once we hit our substantial completion date — and this is on the commercial side, we basically have a 12-month window where we continue to capitalize costs on the vacant space. And that capitalized costs will be OpEx as well as interest.
Once the property hits that one-year window, regardless of where it is on a stabilization basis, which we put at kind of a 90%- 95% range, we will still at the end of the one-year window from substantial completion, it becomes operational and therefore, interest in OpEx that may have been capitalized while it was vacant will shift to being part of operations.

George Johnstone

I think Michael, from a business standpoint, I think when you take a look at what our projected stabilization dates are, and that’s really being driven off of what the activity and discussions we’re having with the existing pipeline of tenant. So to the extent, for example, that a tenant would accelerate their, then move-in decision that might accelerate one of those dates or if they would delay it by a quarter or two, that might impact that as well. But the key focus you have right now to get some of these leases and proposals executed. So we have certainty that income dream coming in in ’25 and ’26.

Michael Griffin

Great. That’s it for me. Thanks for the time,

Gerard Sweeney

Thank you, Michael.

Operator

Dylan Burzinski, Green Street.

Dylan Burzonski

Hey, guys. Thanks for taking the questions. I guess just going back to sort of the decision on [NAV side] venture and continuing to own those assets. I guess can you guys just kind of talk about the reasoning behind that as opposed to sort of just walking away from those assets?

Gerard Sweeney

Sure. Happy to. I look, I guess, this is a while back. This has been a fairly successful investment for us, as evidenced by the fact that we recognize the $50 million plus non-cash income. So it has been a very fairly profitable transaction for us over the years. And I think, Dylan, recall this was a structured transaction where the fee and the lease hold were separated. So it was a fairly complicated transaction.
So as we were contemplating what the best path for us was, we felt that there are debt reduction and restructuring provided a couple of different pathways. One was we obtained a five year period to reposition those assets, and as part of that plan, embark on a programmatic liquidation effort of assets over that five-year period of time.
An important driver in that was creating a mechanism to ensure that both the lease hold and the fee ownership interests were aligned. So there was some embedded liquidity that was created by this restructuring that gave us the ability to kind of move assets out the door. It also provided a solid revenue stream for Brandywine from a management leasing, construction management standpoint that would yield some upside potential for us while eliminating really the debt attribution.
I mean one of our key issues in this restructuring was to reduce a significant amount of debt attribution, which is one of the trade-offs that was made with the lender and providing them a cash flow participation. So it was really an effort to ensure that existing relations were preserved. There was no downside to Brandywine to doing this. It created a profit opportunity going forward.
And I think the structure we wound up with whereby we were able to achieve the $26 million in debt pay down with the fee owner. So it’s kind of like Brandywine’s the leasehold owner, the fee owner work together to generate $26 million to pay down the mortgage, I think created a great one ways.
Tom touched on those assets, are 99% leased, a strong weighted average lease term of over 7.5 years, investment base, double-digit Cap rate on the acquisition we think creates a positive spread recovery for us in the near term on that debt paydown.
So I think all those pieces played into in terms of maintaining that relationship and ensuring there’s no downside to Brandywine, creating a future profit opportunity, both through the program liquidation plan, the revenue stream from the property and leasing services as well as the profitability that may come out of at this new joint venture that’s sitting there unencumbered, and those assets were in the market for sale today.

Dylan Burzonski

Appreciate that color. And then maybe one last one for me on the $200 million that you guys are currently marketing. I know you guys have sort of been in the marketing process for a couple of hundred million of assets over the last 12 to 18 months. Just curious sort of how those discussions have changed over that time period and what they’re not sort of bidding tents are more for holiday versus last year’s same amount? Just curious how things are progress on that front.

Gerard Sweeney

Yeah. I think we’ve seen a slight uptick in buyer interest. And I think that’s been primarily driven by a couple of things. One, I think the lending environment, which is still challenging, is getting marginally better, particularly for smaller size deals. So I think, you know, with the CMBS market that the debt funds, they’re providing a regulated/unregulated source of capital that I think continues to improve quarter over quarter.
We’re seeing some of the life companies get back into the marketplace. So I think the financing market is marginally better. I think there’s also that’s one factor. The Another factor is, you know, a number of office investors are suggesting that a bottom has been hit in terms of valuation and they’re seeing the operating metrics across the sector, not deteriorated as much as they were in previous quarters. So there seems to be a little bit more interest in trying to lock away good deals today.
We are also seeing — as a third phase, a number of users who are looking to acquire assets, given that their cost of capital could be lower than their landlords, and they were able to effectively buy properties and reduce their ongoing occupancy costs. So I think lending environment getting marginally better.
The psychology beginning to shift towards the market bottom. And think just the relative cost of capital that we’re seeing between some of our larger prospects, larger users looking to buy assets versus enter into leases. Hopefully, that’s helpful.

Dylan Burzonski

No, that was extremely helpful. So I appreciate that detail.

Gerard Sweeney

Thank you.

Operator

Omotayo Okusanya, Deutsche Bank.

Omotayo Okusanya

Hey, good morning. Just wanted to follow up on the MAP JV question. Again, with all the restructuring doesn’t seem like it’s having a huge impact on your 2024 guidance numbers. Well hoping you can give us a sense of kind of on a going forward basis, how would you kind of quantify what the potential kind of upside is from a numbers perspective from this restructuring?

Thomas Wirth

Yes, I’d said, — I’m Tom. Yeah, the effect on our earnings was not that significant for two reasons. One is yeah, we’re the portfolio withstanding at the time as well as with the full debt in place. We were not recognizing a large amount of FFO. So the fact that we have now lowered that percentage of the FFO, but then lowered the debt, it’s kind of put us in the same place. So the effect of having less FFO as a percentage of the JV, but it was kind of at a breakeven spot as it was.
So our hope is now that we have restructured, we’re going to be putting — we’re going to have more cash flow with a lower loan balance that we will be able to then put some of that free cash flow back into the property. So for ’24, it was a diminimus change to our FFO results from the joint venture.

Omotayo Okusanya

But on a going forward basis, is there a way one can quantify what like how it can help ’25 and beyond?

Thomas Wirth

The way it can help ’25 and beyond is if we do start doing leasing and get some of the assets stabilize. We will see the FFO increase. I think you also, as Jerry mentioned, we are going to be doing the leasing, construction development and management of the properties. And so we think ’25, it could give us some uplift if we start to see the leasing occur.
Again, we’ll be managing and leasing the projects and that should help our third-party revenue stream. Again, not much this year since we just completed the restructuring. We have to get back into the market with some of these properties. And we think that it could be an uplift in ’25, but I’m not ready to say how much that may be, but I do expect some margin will improvement as we get into ’25.

Omotayo Okusanya

That’s helpful. And then with the dividend outlook again that the cash payout ratios are tighter again this quarter. I think you really kind of lay out the plans in terms of sources and uses of capital going forward.
But again, how does one kind of think about the dividend just kind of given A CAD kind of — some of your sources next year or this coming year include asset sales and [celebrate] very tough transactions market. And just on a net basis, the dividend could be an attractive source of capital. But I’m just kind of curious how management is thinking about that going forward.

Gerard Sweeney

Yeah. This is Jerry. We look at that every quarter. And I think when the question was up in these quarterly calls, we always provide the same answer, which is it’s something that we’re keeping a close eye on, and the components there really are what the forward capital spending for the company is. And I think that’s one of the reasons we’ve track so carefully the capital ratios in all on all of our leasing. Our development pipeline, as indicated in this in the supplemental package, our remaining funding there is less than $6 million. So it’s pretty much all fully funded.
We do, as we were talking about on the call, have a, I think, a very good pipeline of pending lease executions in the development pipeline that will provide some income certainly over the next several years, and it provides good growth platform for us. The portfolio’s stability we think is one of the best in the office sector in terms of rollover, our lower capital ratios, positive mark to market, and we feel that provides a very solid foundational point for the organization.
So we feel we’re evaluating each of those factors. If I put to the Board and the management team in a very good place to have clarity as to what we think our forward capital spend will be. And while the CAD ratio was higher this quarter, year to date, we’re actually below our targeted range. So we’re actually performing better, again, in terms of maintaining CAD ration.
But we never lose sight of the fact that every dollar is precious. Every dollar has a relative cost to it. So we certainly want to balance our business plan and execution with maintaining a good payout to our shareholders and recognize the value that they have invested in the company as well.

Omotayo Okusanya

Okay. Thank you.

Gerard Sweeney

Thank you.

Operator

Michael Lewis, Truist Securities.

Michael Lewis

Thank you. Back to the MAP JV, the decision to put in the $26 million to pay down debt and take these 14 properties, can we assume that you’re going to sell these — you expect to sell these and get at least your $26 million back on the sales. And then the decision to keep the 5%, I think if the assets were all like Cira, CBD assets and it would be clear to me. You mentioned there’s no downside. I just wonder, what’s the upside for the effort here for keeping the interest?

Gerard Sweeney

Yeah. Michael. The answer to your first question is yes, most assuredly. And the answer to the second question is that the 5% interest again was really part of our reduction of debt attribution. We do believe that given the programmatic liquidation plan have we are putting in place for this portfolio, will generate upside for the company. In the meantime, as Tom alluded, we think there’s going to be a positive return for us on the property services we provide.
So I think it was really those two factors that weighed into the decision to go to the 5%. And certainly the lender and the owner want to make sure that Brandywine had some level of notional commitment to this portfolio by maintaining a share of the ownership split.

Michael Lewis

And then you talked a lot about the leasing pipeline and the tour volume. I think during the quarter in the second quarter, we executed 164,000 square feet of leases. That seemed low to me. Was that lower than you expected? Is that number not a concern? I just wonder if it speaks to converting the pipeline and are you seeing something that’s shifting the leasing environment. Or I realize, there’s a danger in reading into one quarter, but just curious your thoughts on that.

Gerard Sweeney

Look, I think the — and George can add much more color. But I guess as I looked at it, we can never release enough space. So as George will tell, I’m always disappointed whenever the numbers come in, but we have a great team work and across the company. But as I looked at it for, you know, new leasing activity, we’re actually up quarter over quarter. The range was really the spread in the range was when it was on the renewables. And we had a couple of large renewals last quarter versus this quarter.
But we do track, Michael, like our conversions and our conversions from proposal to lease is actually running right in line with our ’23 and is up from our ’22 and pre-pandemic business plan. So I think we’ve really stayed very focused every day on getting leases done.
And again, I was tongue in cheek. I’m never happy with the level. We always want more leasing done. So we always want to move that conversion rate up, but we also want to do that and make money while we’re doing the leasing. So we have been very focused on maintaining our capital ratios, growing our net effective rents, doing the best we can to get, you know, 2.5% to 3% rent bumps.
So we recognize that there’s some properties like a few down in Austin, where we’re really purely a price taker. And part of our decision is to cover some costs and create longer-term value. In a number of other properties, I think we hold pretty firm to what the rent levels we require, what our capital spend commitment needs to be because there we feel we’re in a much better position to drive near term effective rent growth.

George Johnstone

Yeah, and Michael, this is George. I mean, one of the lumpiness in that number quarter over quarter oftentimes is the renewals. And we’ve done such a good job in getting out in front of ’25 and ’26. We’ve put a lot of those to bed. So the opportunity set on some of the ’25 and ’25, ’25 and ’26 renewals is shrinking. But again, I think a lot of times we looked at it in the context of what was new leasing for the second quarter at 100,000 square feet that was comparable to the first quarter on the wholly-owned portfolio.
So — and the other factor really is kind of offset. And I think, you know, while the pipeline continues to build, the decision making than a little bit slower there. There’s a lot of options for tenants in that market. So we just continue to work that pipeline ultimately looking and [working].

Michael Lewis

Thank you.

Gerard Sweeney

Thank you, Michael.

Operator

Upal Rana, KeyBanc Capital.

Hi, this is [Gabby Horsa] on for Upal. Could you provide any update on the properties you’d identified prior to help reduced vacancy in the portfolio?

Gerard Sweeney

I’m sorry. You cut out a little bit. You were referencing the progress we’re making on our higher vacancy properties?

Yes, that’s correct.

Gerard Sweeney

Okay. Great. Sorry. It just didn’t come through clear. Look, I think in terms of — and I’m referencing page 4, Gabby in our in our spare SIP. I mean, we have you know, River Place and Delaware. We are advancing our thought process on residential conversions there. And I think we’re going through the design development, the engineering and the political approval process to ensure that pathway on those properties is viable.
Plymouth Meeting. We were looking to market that property for sale, and we hope to have some good progress on that. The building in Connacher Hocking, which is one-on-ne West Elm, that lobby renovation is close to completion. So that’s been completely repositioned. So we’re anticipating a pickup in leasing activity there.
Cira Center really is the expansion of our life science space. Can we expect George to deliver?

George Johnstone

Yeah, we’ve got a whole tenant user for just shy of 30,000 square feet. They’ve got a lease in hand of that one. That lease will actually take Cira Center off of that lift. And then the last three, two of which are in Austin and then [401], Plymouth road, we’re actively leasing those. We’re seeing good volumes of tour and pipeline. And just really, again, need to — can convert some of those opportunities into executed leases. But I think as Jerry started, the top of the lift is certainly more impactful to that overall vacancy level and everything’s still tracking as noted on the page.

Great. Thank you. And then as a follow up, do you anticipate any impact from the mandate in Philadelphia for government employees to return to the office full time?

Gerard Sweeney

We actually — they have returned as of mid-July. The mayor has required all city employees come back to work. We think that’s a very positive messaging. I think the mayor is fully on board and focused on rejuvenating Center City and sending a great message to the private business community. And I think we’ve seen some other businesses based on her leadership move employees back to the office on a more regular basis.
So we view that as a very, very positive announcement for not just Philadelphia, but also for the region as well. So I think the impact has been very positive in terms of perception, in terms of increasing street traffic, in terms of moving towards a more safe, clean and green environment in the Center City area. So nothing but kudos to our mayor for leadership on making that very strong decision.

Great. That’s all from me. Thank you for your time.

Gerard Sweeney

Thank you.

Operator

Thank you. And I am not showing any further questions at this time. I’d like to turn the call back over to Jerry for any closing remarks.

Gerard Sweeney

Hey, G.G, thank you for your help today. And to all of you, thank you for participating in our second quarter earnings call, and we look forward to updating you on our ’24 business plan progress up in the fall. Our best wishes to you and your families for an enjoyable balance of the summer. Thank you very much.

Operator

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