Brandywine Realty Trust (BDN) 2022 Q2 法說會逐字稿

Welcome to the Brandywine Realty Trust Second Quarter 2022 Earnings Conference Call. My name is Hilda, and I will be your operator for today.

(Operator Instructions)

I will now turn the call over to Mr. Jerry Sweeney, President and CEO.

Mr. Sweeney, you may begin.

Hilda, thank you very much. Good morning, everyone, and thank you for participating in our second quarter 2022 earnings call. On today's call with me, as usual, are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our 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 laws. 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 our press release as well as our most recent annual and quarterly reports that we file with the SEC. Well, since our last call, our economy has seen record inflation continued global supply chain disruption and a dramatic increase in baseline interest rates.

These conditions have created significant cost increases and uncertainty in the equity and debt financing markets, at least in the near term. Our portfolio stability, evidenced by our low forward rollover provides protection from operating expenses -- expense increase on 81% of our leases and that positions us as best as possible for this changing environment. Our operating and development business plan remains strong and very much on target, while overall return to work has been slower than we would like, we are benefiting from a decided tenant focus on quality.

We continue to experience higher physical occupancy across our portfolio with the highest level of density being in our Pennsylvania suburbs and D.C. operations. Tenant interest in high-quality work environments is accelerating. We see that every day in our tour levels, lease negotiations and deal execution. In fact, 32% of the new deals in our operating portfolio pipeline are tenants looking to upgrade from lower quality, less amenitized buildings. During the call this morning, Tom and I will review second quarter results, provide an update on our 2022 business plan and our guidance. After that, Dan, George, Tom and I are available to answer any questions.

During the second quarter, we executed 686,000 square feet of leases including 423,000 square feet of new leasing activity. We also posted rental rate mark-to-market of 18.4% on a GAAP basis and 7.8% on a cash basis. Our full year mark-to-market range remains at 16% to 18% on a GAAP basis and 8% to 10% on a cash basis. Absorption for the quarter was positive and tenant retention was 70%.

Second quarter capital costs were in line with our business plan range. Core occupancy and leasing targets were also within forecasted ranges, and we ended the quarter 92.1% leased and 89.6% occupied. It's further worth noting that our Philadelphia CBD, University City, Pennsylvania suburbs and Austin portfolios, which comprised 93% of our NOI or a combined 93.8% leased and 91.9% occupied. Our spec revenue target remains in the range of $34 million to $36 million with $33.7 million or 96% at midpoint achieved. This speculative revenue range represents approximately 1.8 million square feet, of which $1.6 million has already been leased. So 89% done on that metric.

The portfolio is stable and our forward rollover exposure through 2024 averaged 7.2%, which ranks at 6 out of 17 office REITs. Further, our annual rollover through '26 is below 10%, ranking a 7 out of 17 office REITs. From an FFO standpoint, we posted first quarter results of $0.35 per share which was $0.01 above consensus estimates.

And looking at our 2022 guidance. Tom will articulate in greater detail, but the bottom line is our original 2022 business plan projected interest expense between $70 million and $72 million. We have met that assumption for the first half of the year. However, looking to the second half due to the rapid increase in short-term rates, our interest expense, including our share of joint ventures, will increase by about $0.03 per share. So while our operating plan remains fully on track based on the rise in interest rates, we are narrowing and adjusting our FFO range from $1.37 to $1.45 per share to $1.36 to $1.40 per share. And as I mentioned, Tom will articulate more detail on that in a few moments. Based on our 2022 leasing activity and development spend, we continue to project our debt-to-EBITDA range will be between 6.6 and 6.9x.

That leverage increase, the majority is transitional, coming through debt attribution, particularly on the development side. So to amplify that point, our core EBITDA range remains between 6.0 and 6.3x by eliminating our joint venture and active development and redevelopment projects. As we mentioned on the last call, we believe this is a more accurate measure of how we manage our core stabilized portfolio.

Looking a bit ahead, despite the ongoing skepticism on [four] office demand drivers, our leasing velocity actually remains fairly encouraging. During the second quarter, physical tour volume equaled first quarter levels with overall volume up over 30% from our previous year. Virtual tour volume was up 27% from the first quarter and our total leasing pipeline is 4.8 million square feet, broken down between 1.4 million square feet on our operating portfolio and 3.4 million square feet on our development project. The 1.4 million square feet leasing pipeline on the existing portfolio is up 100,000 square feet from last quarter with approximately 130,000 square feet in advanced stages of lease negotiations.

I should note that as an example of building velocity out of last quarter's pipeline, we executed 430,000 square feet of leases while during the quarter, adding over 500,000 square feet of new prospects to the current pipeline. Also, 32% of our new deal pipeline are prospects looking to move up the quality curve, and we did experience this trend in terms of leases executed during the second quarter were 67% of the new leasing activity we executed were flight the quality tenant.

The leasing pipeline on our development projects is at 3.4 million square feet, and that did increase over 0.5 million square feet or 28% during the second quarter. Deal conversion rates in the second quarter was up to 38% from 33% the last quarter. And another good sign is that tenants continue to accelerate their decision time line. This past quarter, the median deal cycle time improved by an additional week and is now within 5 days of our pre-pandemic levels.

From a liquidity standpoint, even with our targeted development spend and absent any other financing or sales sources, we anticipate having $300 million availability under our line of credit. And along those lines, during the quarter, we did renew both our $600 million line of credit and our $250 million term loan on very similar terms to those that were previously existing. Our $0.76 per share annual dividend is well covered, is a very attractive yield on our current stock price, and is accompanied by 54% FFO payout ratio.

In looking at capital allocation, we made progress on several fronts. We continued during the quarter and will continue to sell noncore land parcels. During the last quarter, we sold our land parcel in the Riverfront District of D.C. generating a $3.4 million gain. We also sold some 9 core buildings and land in New Jersey, generating an incremental $800,000 gain.

In looking at our development opportunity set, our remaining Brandywine net funding obligation on all of our active development projects is just about $110 million. Our equity requirements on Schuylkill Yards West and Uptown ATX Block A is fully funded. We have $24 million to fund on our new store at 3151 Market. The balance of that remaining funding requirement really tied directly to leasing activity.

During the quarter, we did commence the redevelopment of $23.40 corner. That property is 85% leased under an 11-year lease, and we anticipate completing that project by the fourth quarter of '23. 405 Colorado made incremental progress during the quarter. We're now 91% leased based upon the 22,000 square feet of leases that we signed during the quarter. We have [25] leases out for final execution that will completely fill the building. So we're happy to deliver that project at our original anticipated yield.

The 250 King of Pressure Row, which is our first life science delivery in the Radnor submarket is now over 36% leased. Current pipeline totals 237,000 square feet, and we're making great progress if that building approaches its final delivery. In looking at our development of Schuylkill Yards and Uptown ATX, Schuylkill Yards West which is our life science office residential tower on time, on budget for Q3 '23 delivery. The project is that we'll continue to deliver a 7% blended yield. As I mentioned a moment ago, our entire equity commitment is fully funded.

Our partners' equity investment is also fully funded and the first funding of the construction loan recently commenced. You may recall, in Schuylkill Yards, we can develop about 3 million square feet of life science space. And as another step towards realizing that vision, we are excited to announce the start of our 3151 Market Street project, a 440,000 square foot dedicated life science building. The building has an estimated cost of $308 million, will deliver a yield of 7.5%, and we are targeting a second quarter 2024 completion.

Our leasing pipeline on that project right now is over 400,000 square feet. We have obtained an equity commitment from our existing institutional partner, Schuylkill Yards, and the 3151 structure is consistent with our existing Schuylkill Yards West project with Brandywine having a 55% ownership stake and our partner having a 45% ownership position.

Looking at Uptown AGX Block A, the first phase of our 66-acre development is underway. Construction there is also on time and on budget. And we certainly anticipate that, that project will continue to generate additional leasing activities as we go through the development pipeline. In fact, even this early in the process, our leasing pipeline stands at 1.6 million square feet. In addition to those ongoing developments, we have seen an increase in tenant interest in several of our build-to-suit projects, and we are exploring several opportunities in both the Pennsylvania and Austin regions. Two key points just to close out on our development discussion -- is our -- on our forward pipeline is our low land basis per FAR and our product diversity.

Of the 14.2 million square feet that we can build, only about 25% is office with the ability to do between 3 million to 4 million square feet of life science space and over 4,000 apartment units. Furthermore, the overlay approvals we have on both of those master planned communities gives us a degree of flexibility to further adjust that mix to meet market demand drivers.

So our key takeaways on the development pipeline is a very quantify forward funding basis, a low land basis, low carrying costs demand driver flexibility and product diversity. And in terms of generating additional liquidity, while 2022 business plan does not incorporate any additional disposition, we do anticipate being active on this front. We anticipate continuing to sell, select noncore land parcels. And even with the recent volatility in the debt markets, in particular, we believe that we have ongoing opportunities to harvest profits from the sale of several properties.

As such, we are currently testing the investment market with several assets for sale. Obviously, volatility in the debt markets over the last 45 days has slowed that process, but we remain confident of being able to generate additional liquidity over the next several quarters. We also anticipate the sales of select properties out of some of our existing joint ventures over the next 4 quarters. Dollars generated from these activities will be used to fund our development pipeline, reduce leverage and redeploying the higher growth opportunity. Tom will now provide an overview of our financial results.

Thank you, Jerry. Our second quarter net income totaled $44.5 million (sic) [$4.5 million] or $0.03 per diluted share, and FFO totaled $60.5 million or $0.35 per diluted share and $0.01 of consensus estimates. In general observations regarding our second quarter results, our second quarter results were above consensus. We had some moving pieces and several variances to the first quarter guidance.

On G&A, it's $1.7 million below that forecast, primarily due to the timing of expenses, and we have not changed our range for the full year. Portfolio operating income totaled approximately $69.2 million and was slightly below our first quarter guidance of $70 million. Land gains were above forecast by $600,000 due to a higher gain on the sale of our New Jersey portfolio. Our second quarter fixed charge interest coverage ratios were 3.7 and 4.0, respectively and sequentially below the first quarter results but in line with forecasted results.

Our first quarter annualized net debt-to-EBITDA was 7.4 above the high end of our range, or we are not changing that range at this time. Looking at our guidance for the rest of '22, as Jerry mentioned, we narrowed our guidance ranges for both net income and FFO by $0.04 a share.

In addition to that narrowing our guidance, we also reduced the midpoint of the guidance by $0.03 per share. The reduction is due to higher interest expense based on -- we issued guidance, the interest rate curve forecasted at that time for the third and fourth quarter were 71 basis points and 92 basis points, respectively. Current curve is higher by approximately 175 basis points in the third quarter and 240 basis points in the fourth quarter.

To that, we have an anticipated floating rate debt averaging $500 million in the third quarter and $695 million in the fourth quarter which includes about $148 million of JV floating rate debt in the third quarter and $125 million in the fourth quarter. Our fourth quarter increase in floating rate debt is primarily due to the $250 million term loan, which is fixed through mid-October '22 and floating thereafter and partially offset by [mid place] at in our joint venture properties. We believe there will be opportunities to mitigate some of the floating rate interest through hedging and potentially asset sales that will lower our line of (inaudible).

Looking to the third quarter of '22, we have some following assumptions. Our portfolio operating income will approximate $71 million and will be above the second quarter as we anticipate net absorption to continue through the balance of the year. FFO contribution from our unconsolidated joint ventures will be $6.5 million for the third quarter. G&A will remain unchanged, roughly at $8 million. Total interest expense will increase to $19 million, primarily due to the anticipated higher rate and capitalized interest of approximately $2 million. Term fee and other income will approximate $2 million.

Net management fee and development income will be $3.5 million. And we do have a land gain sale and tax provision that will net around $1.5 million per level (inaudible).

Refinancing activity, as Jerry mentioned, we did recently refinance the $600 million of credit through June of 2026, and our $250 million term loan reviewed 2027 on very similar terms to the current facility.

Looking at our capital plan, fairly straightforward and totals $200 million. Our 2022 CAD payout ratio will continue to be 84% to 95% and likely be at the higher end of that range. The '22 range is above our historical run rate, primarily due to the higher capital costs associated with higher leasing activity in our wholly owned and joint venture portfolio. The uses for this remainder of the year is $74 million of development and redevelopment projects, $65 million of common dividends, $30 million of revenue maintained and $20 million of revenue create CapEx and $10 million of net equity contributions to our joint ventures.

Primary sources are $90 million of cash flow after interest, $81 million use for the line of credit and $29 million cash on hand. Based on the capital plan outlined of flow, our line of credit balance will approximate $300 million at the end of the year, leaving $300 million available. This needs to be adjusted in our SIP where we have $330 million. We'll be adjusting and reposting that dip this morning. We also priced our net debt-to-EBITDA range of 6.6x to 6.9x, but the main barrier will be timing and scope of our development activities.

With regards to liquidity, we have ample capacity through our line of credit. We do expect to invest an incremental $96 million in our active development projects after 2022. And our plan is to complete targeted asset sales later this year and into '23 to lower that line of credit balance. We anticipate our fixed charge ratio to be approximately 3.5x and our interest to be 3.8x, a slight decrease from the prior quarter, and our net debt to GAV will be between 40% and 41%. We believe these ratios are elevated due to our growing development and redevelopment pipeline, and we believe they are transitory. And once these developments are stabilized, they will decrease. To further highlight how the investment in future development is impacting our current leverage metrics.

As outlined in our development page, we currently have $397 million invested in development projects that are providing none or minimal 2022 earnings. That $397 million investment has a 1.4x increase to our leverage at the end of the quarter. We anticipate those projects generating $57 million of cash NOI over time and are confident on reaching those dated investment deals. Once these active projects are stabilized, we forecast that, that leverage will go back down into the low 6 range.

As mentioned above, we plan to partially offset the current development leverage with some targeted sales in '22 and '23. While the above development activity takes place, we included an additional metric of core net debt to EBITDA, which was 6.6x at the end of the quarter, which excludes our joint ventures and active fully owned development side. I'll turn the call back over to Jerry.

Great, Tom. Thank you very much. So just to wrap up, key takeaways are, we're very mindful of the tone on the office market and the impact of return to work and hybrid work schedules, and we're working on that battle every day. I do think we are seeing some very encouraging signs that evidence this real flight to quality. And I think the real bias on a lot of large and small employers are making sure that they provide the right physical platform to execute their business plan. And our portfolio is in solid shape. We have excellent visibility for forward growth. As I mentioned earlier, our average rollover is very low through 2020, actually through 2026 with strong mark-to-market, very manageable and demonstratable capital spend and accelerating leasing velocity. Our 4 growth drivers remain increasing NOI out of our existing portfolio and executing our development pipeline. So as usual, we'll end where we start in that we really do all of you and your families are doing well and having a chance to enjoy the summer.

And with that, we are delighted to open up the floor for questions. As we always do, we ask that in interest of time you limit yourself to 1 question and a follow-up. Hilda?

(Operator Instructions)

And we have a question from Anthony Paolone from JPMorgan.

My first question is -- relates to, Jerry, you mentioned 32%, I think, in the pipeline looking for I guess, improved space or highway monetized space. Can you talk a bit more about specifically what they're looking for and maybe perhaps the type of space they're coming out of and whether they're keeping the same footprint and shrinking? What exactly is changing there?

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

Yes, Tony, be glad to. I mean we're seeing the predominance of that light to quality coming more from the inventory. So in Downtown Philadelphia kind of taking the jump from B inventory up to trophy. But even in the suburbs, we're starting to see tenants taking advantage of space opportunities that we have in Radnor, Conshohocken, even Plymouth Meeting coming at some of the second-tier submarkets in the suburb. I think it's the not only the management of the buildings, but it's the building systems, the elevator systems, HVAC systems, technology within the building. The overall, I think, the majority of those tenants are probably dialing back the space a little bit, but nothing, I would say, significant -- maybe 5% to 10% reduction in footprint.

The typical build-outs, our second quarter kind of spatial analysis on pretty much the same. We had been trending kind of 65% workstation, 35% offices. During the second quarter, we kind of saw that trend to 60-40, so not a dramatic shift between workstation but a little bit more space planning focused on pathways and turning radius and things along those lines. But again, nothing of significance to the general footprint.

Yes, I think just to add on to that, Tony. Certainly, quality of landlord location of building are key. And also, a demonstrated track record of capital reinvestment in the project. I mean some of the highlighted items in addition to what George mentioned, with the real team focused on HVAC, vertical transportation systems are really a very crisper focus on more interior day lighting, which typically comes from higher ceilings, more glass, some level of indoor outdoor component.

We're certainly seeing that in our new development projects. We're a full-service amenity program. It's very attractive to both office, life science and residential tenants. Structured parking is becoming a key issue now the ability to have covered parking so I think all of those things are more prevalent in portfolios like ours are key parts of every one of our development projects. I think that -- those items as well as, I think, the reputations or respect landlords have, our key decision points to tend to make their fond determination.

Got it. And then just for Tom, you laid out the pieces of the floating rate debt and the cost impact to guidance. But just thinking bigger picture, like where do you think, you should be over time in terms of the amount of your debt floating and also thinking about it as we start to look into next year because I think you have some bonds coming due earlier in the year as well.

Yes. So Tony, on the floating rate debt, I do think that we will look at, at least on the term loan as a good example. I think that is something we will look to fix whether it be now or in the future, as we take a look at the curve, which has been moving pretty volatile. But we do -- I do think we should be above the 90% on our loan -- on a fixed rate debt, and we'll get back up that level, which is where we historically have been. I think the combination of the -- on the wholly owned portfolio.

On the JV portfolio, I do think we will continue to float as we do development, as we have some of these joint ventures. So that one will probably stay in the same range that it's in now, but we have mitigated a little bit of that with some past and hedging that we've already put in play. I think on the bond, Tony, we will probably look to refinance those. I'm not sure if we're going to refinance them with 10-year bonds, but we're monitoring the market, and we'll probably look to refinance those with public bonds early next year.

Our next question comes from Jamie Feldman from Bank of America.

Can you talk more about the development and redevelopment start? Just kind of what gives you conviction here? I know that you've got pretty good leasing in the redevelopment, but just kind of what gives you conviction on starting projects here in terms of the leasing outlook and maybe even more importantly, the cost outlook? And what have you done in these projects to kind of hedge against inflation rate?

Yes. Great question, Jamie. A couple of things. On the First, on the cost side, I think as we've talked on previous calls, we don't start anything unless we're fully locked and loaded on the cost. So for example, Jamie, on 3151 we have executed a guaranteed maximum price contract with the general contractor we know very well. We're close to 89% bought out at the sub-trade level. We do build in contingencies both within the [GC] contract as well as at the owner level to make sure that we can account for any kind of last-minute change that take place. But we're very focused on running all of our projects, including kind of the prospective development pipeline all the way through the entire design development process.

And as part of that, we're pricing 2 to 3x before we kind of put pencils down. So even in that number that Tom outlined, that close to $400 million number on the development investment. Some of that money is basically for design development work on projects that are next in the queue to make sure that we're fully locked down the cost equation.

In terms of the -- and have to add any additional color here on that point. On the conviction for the starts, I think they really come from a couple of different vantage points. One, we know the markets very well. We have great recon and visibility to what we think that both the current and perspective pipeline is.

So in the case of our redevelopment at 2340, that obviously was conditioned upon getting that 85% lease done. We'll complete that over the next couple of quarters, deliver that building and that will create a good capital event opportunity for us with that building. And certainly having that building, which had been previously vacant now 85% leased, which is the 2 top floors to lease. Things puts us -- we think that puts us in a very good position to generate either a great NOI stream over the next 11 years or a great capital event sometime in '23.

In terms of 3151, the combined pipeline we have for both Schuylkill Yards West and and the 3151 start, it's very strong. It's very diverse in terms of size of tenant type of sponsorship be that institutional public company, established company. When we take a look at where -- when we think the timing requirements these prospects are, they're very keen on delivery time line, which us starting the project gives us the ability to meet.

The other thing, as you may take -- as you know, we've taken to account is taking a look at the forward supply pipeline. And certainly, one of the opportunities we have here at Schuylkill Yards is to be able to kind of preempt maybe some future development starts by competitors by starting our project given the existing pipeline. So we kind of assess all those risk factors as we go through the equation to actually make the historic project.

Uptown ATX, but certainly, there's always a lot of construction in Austin, Texas in every product type. But I think from our perspective, knowing the full range of development capacity we have at up 10 ATX. Starting that office residential component of Block A, we have already got over 1 million plus square feet of prospects in (inaudible) for the 350,000 square feet of office components are. So right now, we're frankly evaluating, do we break the building down for single floor tenants or hold off for a larger-scale tenant which tends to take a little bit more time to go through the gestation evaluation process. So hopefully, that answers your question.

Yes. And then just -- it sounds like you're considering some additional asset sales. How should we think about the potential impact on earnings for the back half of the year or maybe even into '23, do you think you would -- can you mitigate the dilution? Or do you think that's actually downside to numbers?

Our hope is we go into all these things is to minimize the dilution. We do think we have a couple of assets that were at marketing for price discovery other a fairly low cap rate sales a couple may go to users. We may have other joint ventures we can sell out of. So the game plan there, Tony, is to kind of sequence those sales into manage the solution as much as we can, but then also balance that against optimal pricing as well as liquidity generation.

The next question comes from Michael Griffin from Citi.

It's Michael Bilerman here with Michael Griffin. Jerry, I wanted just to sort of step back and just think about sort of the enterprise as a whole. And you talked a little bit about the sort of lease rollover and how that's more or less than peers. And you've talked a little bit about the development adding accretion. But when you look at the right-hand side of your balance sheet, you have not only the exposure on the floating rate side, which you've addressed in this year's guidance, but you have $1.8 billion gross of debt rolling over the next 2.5 years, of which your share is $1.1 billion, right?

You got $1.1 billion in the JVs and you got $700 million of the 2 bonds that come due on early next year and 1 in '24. And when you look at that, right, 55% of your debt book and you are more highly leveraged than your peers. 44% on a net effective basis, it would appear as though everybody was issuing debt the last few years to refinance upcoming maturities and you guys sort of sat still.

And I'm just trying to better understand sort of risk mitigation on the balance sheet side because it would appear this could have a significant impact on earnings as you refinance, and I know you're going to get development accretion but it will largely be offset by the dilution from refinancing on top of the dilution from potential asset sales. So how should investors think about the risk that this is posed to the enterprise today.

Michael, it's Tom. Just to start off. I think on the maturities, we do have 2 bonds coming through [350] . We're going to look at how the markets play out. The rates have gone up significantly. Spreads have not moved. In fact, they've gone after others. So we are going to have to monitor where that is. Those bonds are coming off just below 4% and we're probably looking at financing somewhere in the 5% area, depending on where the market is and what tenant we do those bonds at. But I assume we will refinance both of those bonds with new public debt. And at current levels, there will be some dilution, you're right. On the other things that are maturing, for example, like Commerce Square, which is $200 million, that one is well under levered. And we have -- we've already been out in the market looking at debt for that, and we feel we can refinance that at a not too dissimilar number at the same level.

We're actually put in some good news capital and a couple of the other ones like at Cira Square, we deliberately put some short-term debt on it based on where the markets were when we bought that property and we feel very confident with the IRS in there that we can refinance that property as well.

There are some others that are there. I don't want to go into each one of them. I can certainly do that another point like in 1919 is internal loan partners have made that can easily be extended. So -- and then hopefully, Michael, we are going to do some asset sales. Our line of credit, as you know, in the past, has been minimal to actually having cash on the balance sheet. So -- and we haven't done sales in a bit of time. So I think that that's something we will look to do to bring that line balance down on average as it is extended. And to the extent we didn't do some financing in the prior years, but we did look at those financings, we were watching the bond market. Hindsight, maybe we should have done something earlier, but we were looking at a lot of make holes that had to be made on those bonds and people were paying a lot of money to do that.

And then at that time, we didn't think it was -- we're spending all the extra cede prepaid bonds and thought it was something that we could mitigate that and look it doing them in 2022. Unfortunately, the markets have gone out quite a bit. And you can look back and say, maybe we should have done some of on earlier. But I think we can still refinance them, and we will look to minimize the dilution from those as well despite being very proactive on time..

Would just seem that from a balance sheet management perspective, how would you leave yourselves exposed with 55% of your total company debt rolling in 2.5 years at a time when interest rates were at their all-time lows. Like I understand all the things on an operating basis, and you're excited about the developments, but if you're going to give it all back, from interest and take the risk on debt. I just don't know when do earnings ever come out. And it just feels like every year, there's just something else coming about that takes numbers down. And I just -- I'm trying to understand why the company put itself in this position to have their backs against the wall with such dramatic amount of debt coming due at extraordinarily low rates.

For some of that debt going into '24, we do have 24 months. I don't know that I would say we got our back against the wall. If you go back to the beginning of the year, Michael, we looked at where those interest rates were they ran up dramatically. And I'm not going to forecast where interest rates are going. But we do have 24 announces to refinance them. Our coverage ratios are in great shape, so we're going to be able to be where those rates are, we'll find out. But they did move a lot quicker than we thought, but I don't think I would characterize it as our back up against the wall with some of these facilities and what we're going to be able to (inaudible).

I think it more so from the fact that you just talked about how you're lying with more drawn than you'd like it to be. Most companies run a 0 balance on their line and use it during the quarter. You obviously are equity constrained, you can issue equity, you're talking a little bit more land sales, but all you've done this year is take on more capital commitments and raise leverage rather than the other side. So I guess it is what it is. And I guess as we progress into 2023 and '24, we'll have to better understand as you refinance $1.1 billion of your pro rata share of debt that's under 4%. How much of an impact that will take away from all the good leasing and development project you're saying that's coming about.

The next question -- I'm sorry. We will take the next question that comes from [Brian Stan] from Evercore ISI.

Jerry, you talked about physical occupancies. And I think you mentioned the highest utilization levels in Philadelphia suburbs D.C. as you talk to tenants, what are your expectations for utilization levels into the back half of the year? Do you think those numbers kind of topped off given hybrid work adoption?

George and I'll tag team it. No, I think we can -- it's interesting. We actually -- the more conversations we have directly with tenants, the more encouraging the news seems to be in terms of them bringing people back 3 or 4 days a week. We really haven't, as we've talked on previous calls, had any one focused on a hoteling concept. There's clearly a desire for more efficient space layouts, which George kind of framed at how we see some of the space planning working. We're continuing to see kind of an incremental uptick in people coming back into the offices. Actually, one of the slowest markets we have in people coming back the office really is the down in Austin, Texas, where that -- a high concentration of tech companies.

And they seem to be slower than the financial service and the professional service companies in terms of bringing people back into the office. Certainly, the health care-related companies have been back. So we actually -- it's something (inaudible) Some of the other senior folks here. And there seems to be this general bias to continue accelerating bringing people back to the office. I do think it will be somewhere in that 3 to 4 days a week for the most part.

And I think to some degree, that will be a function of labor market conditions, specific industry exposure, even within companies, we are seeing different ground rules for different functional areas. So those functions are in very high demand like IT. We're certainly seeing more flexibility for and it's to have their IT folks work remotely. But George, any other color on that?

Yes. I think the one thing we're seeing and part of it is probably also influenced by the summer. But Tuesday, Wednesday, Thursday, right now is kind of the high occupancy phase with lower amounts, Monday and Friday as one would imagine and expect. But even those companies that have rolled out voluntary return to work, we're starting to see increase (inaudible) term work environment they have times they do just want to get back to collaborate. So I think we kind of keep moving the goalpost a little bit, but I do think end of summer will really be kind of the next -- what happens after Labor Day. And I do think it just requires a couple of CEOs to kind of just put the gauntlet down and say, hey, it's time to come back.

And I think you'll start to see each industry sector kind of follow the lead. Okay. And just on the incubator, Jerry, can you remind us. I think there were a couple of floors that you plan to expand there and -- is that still on track? And I guess, what are you seeing -- what are you hearing from these tenants? And how are you monitoring the health of these tenants and their appetite to expand just given the pullback in funding that we've seen?

Yes. We're monitoring them daily, and they also be doing pretty well. So -- but certainly, we're mindful of the fact that with the index, the public company index down 27% and some of the venture capital pull back that there's a certainly higher risk to some of these tenants. We're seeing some near-term expansion requirements by some of those tenants. As you know, the B.lab is 50,000 square feet, we're -- we've got 12 companies in there, we're 98% leased. And we do anticipate, based upon feedback from those tenants somewhere between 80,000 to 150,000 square feet of future demand drivers there over the next 12 to 24 months.

So -- but certainly, the point you raised is a fair one that's the top of mind for us as well, which is with some of this pullback in kind of more negative macroeconomic overcomes we're very closely tracking how these tenants are doing, how their trials are going, how their capital base is going to burn rate. And that's really where our partnership with CFD and Biotech has been helpful as well. They know the science. They know these companies. So we can assess them from a -- through the window that we know real estate, they can help us assess the future viability and growth expectations of these tenants from a scientific and talent standpoint. So it's been a very effective partnership on that front.

The last piece of your question, we do plan on expanding the incubator. We contrary to some of the negative (inaudible) we are actually trying to work with, trying to move some office tenants into other buildings where their leases don't expire until the mid part of '23. So to some degree, our timing of delivering that additional square footage is going to be a function of how we can relocate those tenants. We do have some work taking place on one of the floors within Cira to facilitate some known tenants. I would expect that to take place over the next several quarters.

The next question comes from Omotayo Okusanya from Credit Suisse.

Could you just talk a little bit about build-to-suit. You mentioned that you may actually start something on that front? A little bit about where that demand is coming, for build-to-suit specifically interested in maybe if it's coming from the lab biotech side? And also just how big that opportunity could be in the near term and how that would potentially be funded?

Happy to answer that. The build-to-suit as I alluded to, are primarily in some of our production assets. So they're kind of in the 100,000 to 150,000 square foot range. They are -- would be potentially full building users on 10- to 15-year leases. That development is really an elective decision. So I think as we look at the landscape today, certainly having those smaller buildings locked away from the full tenancy standpoint would be attractive.

One key prospect we're talking to is a life science company who is looking for a significant expansion opportunity. And the other was a larger regional relocation and consolidation of some existing older space. They're looking to kind of create a newer corporate image and to do that in a newer building that has all the amenities that will be top of mind for all key tenants. These projects from a capital standpoint are kind of in the $75 million plus range. We can deliver those within Typically, 4 quarters, could be 4 or 5 quarters, depending upon the complexity that it out. So the delivery cycle between the investment of the money and the recovery of the NOI is much less protracted than we're seeing on these larger-scale developments.

The next question comes from Bill Crow from Raymond James.

Jerry, can you just highlight the pipeline for life science buildings in Philly and what the risk is that we may see some overbuilding given some of the challenges in [BC] funding smaller company financing?

Yes. Sure, Bill. As we're looking at the pipeline we have. There are a number of properties that are currently under development. There have been several that have been announced. And the -- we're not sure that some of the ones that've been announced will actually get the financing or the tendencies to actually get the project started.

So right now, there's probably 4 or 5 core competitive projects between University City Science Center down to Philadelphia Navy Yard, which tends to be lower-rise projects. They tend to be more manufacturing versus lab space. And then there's a number of other properties that are kind of between the Navy Yard, the near in Pennsylvania suburb and CBD build after this are either being talked about this life science conversion pending -- getting a tenancy in place or starting the design development process.

So look, we're very mindful of the fact that life science business seems to have more clarity to the demand drivers than traditional office. So a number of office developers or holders of land that was deemed to be office are looking at life science opportunities. As we kind of assess our risk we do think that Schuylkill Yards given our location next to train station adjacent to the major institutions next to the 2 interstate highways.

Our location tends to be top tier. And based upon the feedback we've gotten from some of the prospects that we are talking to today. We know that, that locational drivers very important. In addition to that, when we took a look at a design level on a project like 3151, we'll be introducing some technical components of that building in terms of riser HVAC capacity, vibration, dynamic, blazing, oversight elevators with higher speed, things the Philadelphia market really hasn't seen before. And we think that those design elements and the efficiency of the footprint in addition to the locational advantage will put us in a very good position to attract more than our fair share, kind of fill these buildings.

I appreciate that comment. If I could just add on a question on the return to office rate. I used the Castle systems data and you may disagree with the data itself, but it shows going up at 38%, and it showed fine 38.1% on December 1, which would imply no real improvement. I'm wondering, a, do you disagree with the data; or b, maybe you could tell us what's going on with parking revenue and maybe how far below what it is from 2019?

Yes. Sure, Bill. This is George. I'd be happy to. Yes, I mean, look, the capital report, it's hit or miss kind of market to market. I mean we monitor our own Turnstyle data. Fourth quarter '21, we were about 25%, and we're currently at about 40% right now. So we are kind of at that capital number. But we actually were a little bit lower than their number. So we have seen some improvement.

Parking is a good segue because we are seeing those people that are coming in, the predominant are using the garages that we have in both Commerce Square over at Logan Square, where and a couple of other ancillary garages within the city. I mean our garage occupancies are about 92%, and we're just about all the way back to kind of pre-pandemic parking revenue numbers.

And we have a question from Michael Griffin from Citi.

Thanks for taking the follow-up and excited to be on the call. Just curious, on the 2340 Dulles development, why does that make sense to own as opposed to exiting the greater D.C. market entirely and focusing on Austin or filing?

Yes. No, look, I think that's the question. I alluded to that, I thought in my -- in 1 of my answers, where, look, the building for us was -- had a major tenant move out. If that began for a period of time, we were successful in attracting a major thing was actually the largest lease done in Northern Virginia this year. And the game plan is to essentially complete that renovation with the high probability of creating a capital event there. I think as you may know from looking at the company, we have sold a significant portion of our DC portfolio over the years, and it's now down to a fairly small percentage of our revenue stream.

I think with the 2340, we're definitely saying that, that is an opportunity to harvest some significant liquidity on building it for all intents and purposes you need to look at it as almost as a land play right now because it's really it's actually generating negative net NOI for us through the carrying cost or selling that building would actually generate a significant liquidity event for the company. And to even go back to kind of the debt refinancing question, that gives us the ability to generate a fairly significant amount of money with no earnings dilution and at a cost of capital that layers very well into a refinancing program that we've had over the next several years.

And we think we frankly have a couple of those opportunities within the company, where we have companies -- properties that are frankly, like for sale, they could be in joint ventures or wholly owned that we can generate fairly low -- fairly high proceeds of a fairly low cap ratio. The buildings are generating fairly low returns to us right now and they are good value-add acquisitions for other companies that can actually layer into the financing strategy that we're going to lay out over the next 12 to 24 months.

I appreciate the color on that. And then I also noted that the sublease space in your portfolio picked up slightly sequentially to 3.3%. Kind of how should we expect this to be trending sort of going forward? And sort of what led to the slight increase quarter-over-quarter?

Yes. I mean this is George. I'll take that one. I mean, I think it's probably going to continue in that low single digit, obviously, sublease space requires a little bit of term to it to really attract somebody. I think we've got a number of tenancies to with desire to sublet their space. But again.

I think given the term and the like, just have not been successful to date. So -- but again, I think based on our historic run rate, I still think it's low single-digit proposition for us.

And at this moment, we show no further questions. I would like to hand the call over to Mr. Sweeney for final remarks.

Great, Hilda. Thank you very much, and thank you all for participating on the call. We look forward to making continued progress in our business plan and updating you on that at our third quarter conference call. Enjoy the rest of the summer. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.