Brandywine Realty Trust (BDN) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Brandywine Realty Trust First Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I now like to hand the conference over to your host today, Jerry 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: Had record inflation, increasing construction and labor costs and unprovoked 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, positioned 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 has remained between 16% and 18% on a GAAP basis and 8% to 10% on a cash basis.

As outlined in our 2020 (sic) [2022] 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 relet with scheduled second through fourth quarter 2022 occupancies. And the mark-to-market on those backfill 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 the free rent on Blank Rome's renewal occur in 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 Philadelphia 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% of 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 development and 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 combined. The core EBITDA range of 6.0x to 6.3x focuses on our core portfolio by eliminating our joint venture and 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 '22 outpaced the fourth quarter of '21 by 30%. We had a total of almost 1,800 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 foot 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 2 weeks and is now within 2 weeks of the pre-pandemic levels.

In looking at liquidity and dividend coverages, we have excellent liquidity. Even with our targeted development spend and absent other financing or redeployment sources, we anticipate having $350 million available in 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 a first quarter pad 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 noncore land parcels. During January, we sold 1 parcel for $1.4 million, generating a $900,000 gain. And subsequent to the quarter end, we sold our land parcel on the Riverfront district of D.C. 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 foot property located adjacent to our Cira South and Schuylkill Yards projects in University City.

You may recall, we acquired this, 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 decided 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 foot and a mid-5% cash cap rate range and north of 7% GAAP cap rate range.

Our 2 partners, each owning a 40% stake, are a 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 evaluate 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 renew-let market or a conversion to 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 bringing in 2 high-quality partners for 80% ownership stake also minimize our direct investment and effectively make this a leverage-neutral transaction.

In looking at our other development opportunity set. 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 lease is 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 of these occupancies, we have shifted the stabilization to the first quarter of '23.

In the Pennsylvania suburbs, our 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 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 foot 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 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 to our 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 at Schuylkill Yards in 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 of the construction loan occurring in the second quarter of '22.

Our Life Science push does continue with Schuylkill Yards. As we've noted before, we can develop between 3 million 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 foot dedicated life science building. Building's 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 for 348,000 square feet of 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's 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, and 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. 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 basis at Uptown is about $5 an 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 at Schuylkill Yards, as you know, is via options. So there's very few -- very little carry costs on those land holdings. And we have a take-down based on the milestone schedule with significant extension options. So both of these facts provide us with significant flexibility to develop per 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 SIP. Of the 14.2 million square feet we can build, only about 25% of is dedicated to office, with the ability to do between 3 million and 4 million square feet of life science space. And incorporate in that square footage pipeline is the ability to do about 4,000 apartment units. So further 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 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 to continue to sell select noncore 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, redeploy to higher-growth opportunities.

So Tom will now provide an overview of our financial results.

Thank you, Jerry. 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 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 1 land sale. We anticipate the second land sale to occur in the second quarter. Termination and other income totaled $6.5 million and was $3 million above our fourth quarter forecast primarily 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 7.0x and slightly above our -- slightly above the high end of our 6.6% to 6.9% -- 6x (sic) [6.6 to 6.9x] 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 6.9x.

For 2022, our full year same-store portfolio increased by 2 properties, which were The Bulletin Building and 426 West Lancaster.

Regarding '22 guidance, as Jerry 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 $70.5 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 approximately $1.9 million.

While we believe we have forecasted interest rates throughout the balance of '22, we have some incremental exposure in the second half of the year if 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, 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 costs associated with the higher leasing activity for this year in 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; our cash on hand of $39 million; and $33 million of land sales, of which, 2 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 6.6x and 6.9x, with the main variables being the timing and scope of our development activities. And our net debt to GAV of 39% to 40% range. In addition, we anticipate our fixed charge ratio of approximately 3.8x and our interest coverage will approximate 3.7x, which represents slight decreases from the prior quarter.

While we believe these 3 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 overall leverage to decrease. Therefore, we have included an additional metric of core net debt to EBITDA, which was 6.2x 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 levered joint ventures and our unstabilized development and redevelopment projects.

I'll now turn the call back over to Jerry.

Thank you, Tom. So I guess, the key takeaways are the office market continues to show increasing traction. Our physical occupancies continue to increase, there is variability between markets. But the operating portfolio is in solid shape, with excellent visibility to both stability but also, for growth, given the rollover metrics we talked about earlier. Given what we're seeing at the pipeline level with prospects, tenants are clearly requiring higher-quality space, and we believe that new development in our trophy stock has and will continue to benefit from that trend.

So we'll end where we started, and that we wish all of you and your families are doing well.

(Operator Instructions) So with that, we're ready to open up for Q&A, Michelle.

(Operator Instructions) Our first question comes from the line of Steve Sakwa with Evercore ISI.

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 used 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, $25. 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, certainly happy to do it. Happy to walk through that and explain the rationale in more detail. Look, we thought it was a preemptive opportunity to really both controllable loan 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 that is in that range that you mentioned from an office standpoint.

Remember, this is a significant infrastructure that's 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 be somewhere, if you take a look at kind of 2030 dollars 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 as part of our GSA renovation. So it breaks 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 great multiple near-term profit opportunity by doing a lease renewal or by preserving a fairly significant size inventory of readily convertible space in a AAA location, certainly given what else we would expect to see happen between 2022 and 2030 in University City.

So it was certainly something that wasn't necessarily part of our business plan, but when it became available and we were able to identify really 2 incredibly high-quality equity sources to help us finance the acquisition. We kept our ownership stake at 20%. Having financed 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 tradeoff near term. And then we certainly think as the market for life science continues to evolve here in University City, this becomes a major potential receiver site in the event that the GSA would elect to move out.

Our next question comes from the line of Jamie Feldman with Bank of America.

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

No. Jamie, this is Tom. No, there are no rent bumps in the lease, so it is a flat -- traditional flat GSA lease. However, for purposes of GAAP, we do mark the lease to market. So we do pick up an adjustment for that into our GAAP revenue -- our GAAP NOI calculation.

Okay. And then I guess shifting gears. You talked about tour levels and negotiations up 31% quarter-over-quarter. I think you said there's 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's 2.8 million square feet of interest.

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

Yes. I mean, on the development, that still includes 405 Colorado, kind of 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 12,000, and then we've got some advanced dialogue 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 have had continued dialogue.

And a pretty healthy exchange, if I might jump in for a second, George, with -- Just on exchanging proposals back and forth. We responded to a number of RFPs, Jamie, which is usually good -- a good sign, and certainly, when you're re-responding to kind of a shorter list. So I think we feel pretty good about where we stand with Schuylkill Yards West.

And in Uptown, I mean, there are a number of investors that have been back and forth between Austin in the last couple of months. That just announced, and we really haven't started to build that significant a pipeline. We're really responding to a lot of inquiries and kind of early marketing activities on the Block A Uptown ATX, Jamie.

Okay. Yes, I guess as a follow-on, I mean, we were just down in Austin ourselves, and it seems like kind of the 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 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 2 kind of 30,000 square foot 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 in kind of converting tour to proposal to lease.

Conversely, in the Pennsylvania suburbs, activity remains steady and we're seeing great levels of activity really in all of the submarkets. Radnor, Conshohocken, Plymouth Meeting, King of Prussia. During the quarter, we signed a 23,000 square foot 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 backfilled 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 outs, 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 hybrid of work from home and subleasing some of their space and then just opted not to renew since they weren't fully utilizing it.

And our next question comes from the line of Michael Lewis with Truist Securities.

Great. 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 companies still had return 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 and Philadelphia. And as we get further along in the calendar here and a lot of employees don't seem to be going back, does that become concerning as leases roll over the next several quarters?

Michael, 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 ranges from 60% in the Pennsylvania suburbs, about 65% down in Met DC, Philadelphia CBD is kicking around 40% to 45%.

And I think that the dichotomy that we're seeing is that, and we've talked about this on previous calls, is the larger companies, when I say large companies, the companies that occupy a large amount of square footage, have been fairly slow to return to physical workplaces. So in Philadelphia, for example, one of our major tenants in the building downtown, they're starting to return not until May. We have a financial service firm out in the Pennsylvania suburbs is just 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 square 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. And 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 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 vernacular.

But the level of hybrid work is a lot higher than we thought it would be. We thought they -- actually the number -- if you look at it inversely, the number of tenants who are going fully remote is much, much lower than we thought it would be even 3 or 4 quarters ago. And we know 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 offices, that certainly seems to be more of the standard than the exception.

But I don't know, George, if you have any more color.

Yes, I think the other thing playing into it, Michael, is mass transportation. So I mean, I know here in Philadelphia, SEPTA just lifted their mask requirements 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 kind of pick up on that. And I think as Jerry mentioned, a number of the larger companies with high employee bases have kind of signaled May as kind of their bringing more people back and expecting more people back.

Great. 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 bit about the advantages and disadvantages of the location you have there. Or maybe you just think it's a case of enough demand for everybody. How do you kind of think about that?

Well, look, we know Austin had some great demand drivers, but we also know that it has always had an ongoing -- a fair amount of supply coming online. I think as we assessed, this started at Uptown, certainly took a hard look at the market as where we felt the demand drivers were.

Look, we think we're in a very, very competitive position against The Domain and 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 portends to be part of a master plan 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, go into all 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 of 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 try and think about how we can outperform our competitors.

So I don't know if that answers your question or was too general, but certainly happy to amplify for you.

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

And our next question comes from the line of Manny Korchman with Citi.

It's Michael. Look at that, Manny and I are talking at the same time. We're here together. 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, you take the second. On the renewal, yes, the lease does not contain a renewal right. So it has -- there's no governor in place, there's no arbitration. It's -- basically, the owner of the property has the right to set what they think the rental rate should be, and the existing tenant has the right to take that or negotiate from that point. So there's no governor in terms of a certain percentage of fair market value or a required term.

And that was actually negotiated early on when we did that initial transaction with the GSA, Michael. So that was part of the original transaction, that there were a number of gives and takes as part of that original lease, one of which was obviously the flat rental rate that GSA prefers. And the quid pro quo for that was that there was no fixed renewal right that they had for either any duration or any rental rate.

Yes, Michael, on the loan, it's a -- we put in place right now a floating rate 2-year loan. At the closing, it was a tough time for the lending market, so we put in an interim loan. And between now and the end of the 2 years, we feel we'll secure a fixed rate loan for the balance of the lease and then go from there.

If memory serves, a few years ago, back in 2016, you sold this at a 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 it's still in the 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 6 years that would have increased the yield. And if anything, your probably operating expenses have since moved up.

Well, the operating expense are a complete passthrough, so you don't really -- that's really [the structure of the] triple-net lease. So yes, really -- it's been a flat lease. So we sold around 5% and we bought around 5%.

Yes, because you would just go back in '16, you sold at the mid-5s. So now -- so effectively, you're saying you sold it at 5%, but your price went up by 10%, right? Like, your price went up by 10% relative to when you sold, Jerry. So arguably, the yield can't be the same in a flat lease. The math just doesn't work.

Well, I mean, the lease -- the cash yield is a low 5s cash yield. So it's maybe a little different than the 5.5%, it may have been a little above 5.5%. But it is north of a 5% cash yield.

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

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 it as well. But no, the rental NOI is basically the same.

And I recognize -- just from a leverage perspective, I recognize there's a development parcel that was unleveraged, 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. While it's modest, it is going in the opposite direction of where you want it to go on a see-through basis.

Yes, Mike. From a leverage standpoint, it ranges anywhere from being neutral to plus 0.1x, depending on how -- what quarter we're in and what our NOI leverage is. But it is a slight uptick. But as you said, it is modest.

Okay. And at what point do you start negotiating with the IRS in terms of 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. I'm not sure what you mean by an issue. But look, we're -- we'll be in touch with the GSA. They move at their own pace. There's still a number of years left on the lease, I mean, 8 years left. So we have continued to manage the property since we renovated it. So our management team and in contacts will remain in place. And we certainly have a very good relationship and an open door policy with the GSA on this project. So we look forward to an active, productive series of conversations over the next several years.

And I think also, relative to the leverage question. I think as Tom touched on and I did as well in my comments, look, we certainly do recognize that we want to keep downward pressure on leverage. And that's, I think, one of the reasons why I've continued to spin out these noncore land sales.

I also think that there's a number of opportunities for us, for the balance of 2022, to both harvest profit for both deleveraging and making money through selling some assets out of some of our existing joint ventures and actually out of some of our -- out of our operating portfolio as well. So as we took a look at the transitional leverage here, whether it's flat or 0.1x, 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 that you're going to get out of this from marking the lease to market and the cheap debt and the high leverage, given the fact that it was a development side, the accretion that we're going to get from doing this -- the GAAP accretion will be outweighed by the additional sales you'll do later this year. So is that the proper way to think about it?

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

And our next question comes from the line of Bill Crow with Raymond James.

Jerry, it seems like the pledges for tax reform are gone or have little chance of taking effect. I'm curious whether the failure to change the SALT tax deduction might accelerate the shift we've already seen of workers out of markets like Philadelphia and 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 question is, and 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 -- and who knows where that will actually go? But I think there will continue to be migration to 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 and the business tax side in the next couple of budget years, to kind of recognize that the 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, Bill, at our overall operating portfolio, that's certainly a key component of that.

You saw us do a little bit of that a few years ago with 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 place.

The other thing to note, I do want to amplify, when we're talking about 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. So not core office products, which gives us the ability to -- while we're generating revenue from kind of the Mid-Atlantic region, it will be coming from different product types, and that gives you 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 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.