Brandywine Realty Trust Q3 FY2021 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Brandywine Realty Trust Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host today Mr. Gerard Sweeney, President and CEO. Please go ahead, sir.

Olivia, thank you very much. Good morning, everyone, and thank you all for participating in our third quarter 2021 earnings call. On today's call with me 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 Law. Although we believe these 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. Well, first and foremost, we hope that you and yours continue to be safe, happy, healthy, and engaged. And I think looking at our business, despite reopening delays related to the Delta variant, the office market continues to improve; tour activity, lease negotiations, and deal executions remain on a positive trend line. Our portfolio occupancy has increased to approximately 35%. The predominance of tenants returning has now expanded beyond just small employers, as occupancy for tenants 50,000 square feet and below is now over 50%. During our prepared comments, we'll review our third quarter results, discuss progress on our business plan, and update you on our recent capital and development activity. Tom will then provide a financial overview, and afterward, Dan, George, Tom, and I will be available to answer any questions you may have. From a portfolio management standpoint, we remain focused on reducing forward rollover and providing a solid platform for growth. These efforts have been successful. We have reduced our forward rollover exposure through 2024 to an average of 6.8%, a slight improvement over last quarter. Our forecasted rollover exposure is now below 10% annually through 2026. Revenue and earnings growth remain a top priority. Key near-term earnings drivers for us are, as you all know, we have several key vacancies that, upon lease-up, will generate between $0.07 and $0.10 per share of growth. We are delighted to report that we have now leased about 46% of that targeted square footage and achieved about 45% of that forward revenue growth at an average mark-to-market of 12% cash and 19% GAAP, and that income will be substantially in place by the third quarter of 2022, which can create a good growth opportunity for us. Some notable components of that during the quarter, the last 38,000 square feet vacated by SHI in Austin has been leased and we've also signed a replacement lease for the 42,000 square feet tenant in Radnor, Pennsylvania. Lastly, we signed three new leases at Commerce Square, totaling just shy of 29,000 square feet. We see clear trend lines of tenants requiring higher quality space, which we believe positions our portfolio extremely well. From a financial standpoint for the third quarter, we posted FFO of $0.35 per share, which is 1% per share above consensus estimates, which Tom will walk you through. We've also made excellent progress on all the other components of our 2021 business plan. We anticipate about 100,000 square feet of positive absorption during the fourth quarter and we will achieve our year-end occupancy and lease percentage guidance ranges. To reinforce our leasing progress to date, we are increasing our speculative revenue target by $500,000 from our mid-point range of $20.5 million to $21 million, and we are over 99% complete on that revised target. It's important to note that the $21 million target that we're now circling is about 15% above the bottom end of our original range and it reflects ever-improving office market conditions. Looking at some other operating statistics, we posted great results for the quarter as well. Tenant retention was above our 2021 business plan range. Of the 59 new deals that we signed this year, the weighted average lease term is 7.8 years; 68% of those lease terms are longer than four years, and our medium lease term has remained fairly consistent with what we were able to achieve in 2018, 2019, and 2020. Third quarter capital cost came in below 8% of generated revenue, well within our business plan range. Cash mark-to-market was a positive 12% and our GAAP mark-to-market was a positive 16%. Our year-to-date mark-to-market results are above our full-year ranges. However, as we noted on last quarter's call, based on leases already executed and commencing in the fourth quarter with lower mark-to-market results, we will finish the year within our business plan ranges. We expect that every region will post positive mark-to-market results on both a cash and GAAP basis this year. Our third quarter GAAP same-store NOI was 2% and year-to-date results are within our '21 range. Our third quarter cash same-store NOI was 5.5% and above our 2021 range of 3% to 5%, but again, similar to our mark-to-market dynamic, tenants scheduled to take occupancy later this year will accelerate same-store growth and will enable us to achieve our 2021 business plan ranges. We are still forecasting a '21 year-end debt-to-EBITDA in the range of 6.3 times to 6.5 times. Regarding leasing velocity, we know that everyone is focused on recovery data points and we have several encouraging signs to report. The Philadelphia suburban market produced more than 350,000 square feet of leasing activity in the second quarter, a 42.7% increase quarter-over-quarter. The CBD market also posted 181,000 square feet of leasing activity, and Philadelphia generally is making a strong recovery from the pandemic compared to other major American cities. Our vacancy rate is lower than the national average and based upon a major brokerage report, Philadelphia is in the top 10 of all American cities for pandemic recovery as measured by recovery rates and employment, vaccination, and leasing activity. During the quarter, we had a total of over 1,500 virtual tours that inspected over 758,000 square feet, in line with second-quarter results. Physical tours were down slightly compared to the second quarter and we attribute this more to the summer months, as third quarter physical tours outpaced first quarter tours by over 13%. Our overall pipeline stands at 1.6 million square feet, which increased by about 600,000 square feet during the quarter, another good sign with more tenants entering the marketplace. While these recovery data points are encouraging, they also compare favorably to pre-pandemic leasing trends. So our pipeline today is 7% better than our third quarter '19 results. Deal conversion rate was on par with previous quarter results as well. Now, as you might expect and we reported last quarter, median deal cycle time continues to trail pre-pandemic levels by approximately 30 days. But on a very positive note, during the quarter, we executed 464,000 square feet of leases, including 347,000 square feet of new leasing activity. We also continue to see two favorable trends that positively impact our portfolio. First, quality product matters. Since the beginning of the pandemic, approximately 100,000 square feet of deals have moved up into Brandywine buildings versus lower quality competitors. Secondly, we have seen approximately 20 tenants expand their premises by approximately 122,000 square feet since the beginning of the pandemic. Regarding our liquidity and dividend coverages, as Tom will report, we have excellent liquidity and anticipate approximately $550 million available on our line of credit by the end of the year. We have no unsecured bond maturities until 2023, with a weighted average effective rate of 3.73%, and a fully unencumbered wholly-owned asset base. Our dividend remains extremely well covered with a 54% FFO and 81% CAD payout ratio. As we noted, our five-year dividend growth rate has been 5.3%, while our five-year CAD growth rate has been just shy of 8%, well in excess of our core peer averages. From a capital allocation standpoint, it was another quiet quarter, but we continue to make progress on many other fronts. As part of our land recycling program, we sold three non-core land parcels generating just shy of $11 million in proceeds and a $900,000 gain. During the quarter, our $50 million preferred equity investment in two office properties in Austin, Texas was redeemed. We recorded a $2.8 million incremental investment income during the quarter due to that early redemption. That $50 million preferred equity generated just shy of a 21% internal rate of return during the whole period. Taking a quick look at our development opportunity set, 250 King of Prussia Road, which we noted in our supplemental package, is a 169,000 square foot project under renovation in the Radnor sub-market. That was started in the second quarter and will be wrapped up by the second quarter of 2022. The project will accommodate heavy life science as well as offices. Our cost increased quarter-over-quarter due to some additional MEP work to facilitate broader life science penetration, as well as us adding an additional generator for power redundancy. Those two items impacted our targeted yields by reducing about 20 basis points. The project, as we noted before, is the first delivery in our Radnor Life Science Center, which will consist of more than 300,000 square feet of life science space in one of the region's best-performing sub-markets. Our current pipeline for 250 King of Prussia Road totals more than 200,000 square feet, including 51,000 square feet in lease negotiations. Looking at Schuylkill Yards, our Schuylkill Yards West project is on time and on budget for a Q3 2023 delivery. That project will deliver a 7% blended yield. It consists of 326 apartment units, 200,000 square feet of commercial and life science space, and 9,000 square feet of street-level retail. We have an active pipeline continuing to build on that project, and our $56.8 million equity commitment is fully funded. Our partner's equity investment is currently being made and the construction loan that we closed recently will not have its first funding until the first quarter of 2022. Looking at 405 Colorado in Austin, Texas, this project is now complete. During the quarter, we increased our lease percentage from 24% to 44%. We have a growing and active pipeline now that that building has been fully delivered. We did slide our stabilization date a couple of quarters to reflect the timing of these new lease signings, as well as the timing of our targeted pipeline. The 522 space garage opened during the summer and is currently just shy of about 12% occupied, and we have signed 102 monthly contracts since we opened the garage. 3000 Market Street in University City, Philadelphia, is a 91,000 square feet life science renovation as part of our Schuylkill Yards neighborhood. Base building construction is complete. The building is fully leased for 12 years at a development yield of 9.6%. The redevelopment increased the building size from 64,000 to 91,000 square feet by converting below-grade space into labs. This property was placed into service on October 1st. Cira Labs, which we announced a couple of quarters ago, where we partnered with PA Biotech Center to create a 50,000 square foot, 239-seat life science incubator within the Cira Center project, will be completed later in the fourth quarter and will open January 1, 2022. Since the announcement, we have had great leasing success and now stand just shy of 50%, about 49% leased with 118 of that 239 seats leased, and a pipeline with 17 additional proposals aggregating more seats than we have available capacity. We are very excited about delivering that project on a substantially pre-leased basis. Looking at some future development at Schuylkill Yards and Broadmoor, we can develop about 3 million square feet of life science space. We've already delivered 3000 Market, The Bulletin Building, 3151 Market, which is our 424,000 net rentable square feet life science building, is fully designed, ready to go, and with a strong leasing pipeline that remains our goal to start that project in early '22, assuming market conditions permit and the pipeline continues to build. At Broadmoor Block A, which consists of 363,000 square feet of office and 341 apartments at a total cost of $321 million, will be starting later in the fourth quarter. We are finalizing documentation, including construction financing with our partner. The first phase of Block F, which is 272 apartment units, will be starting in the same venture format in Q1 of '22, and on the office leasing component, our leasing pipeline right now is slightly over 500,000 square feet with about an additional 1.5 million square feet of inquiries. As we outlined last quarter, we would normally provide '22 guidance for earnings and our business plan and FFO during the third quarter cycle. However, consistent with what we did last year, and based on the continued uncertain business climate, we will announce our '22 guidance on our fourth quarter earnings call. Tom will now provide an overview of our financial results.

Thank you, Gerard. Our third quarter net income totaled $900,000, or $0.01 per diluted share, and our FFO totaled $61.1 million, or $0.35 per diluted share, which was $0.01 above consensus estimates. Some general observations about the third quarter: While our results were above consensus, there were a number of moving pieces and several variances to our second quarter guidance. Portfolio operating income at $68.5 million was in line with our guidance from the second quarter. Interest and investment income totaled $4.5 million and was $2.5 million above our $2 million guidance number. As Jerry mentioned, this variance was due to the early termination of a $50 million preferred equity investment, which resulted in the acceleration of some fees totaling about $1.5 million and some make-whole interest on the investment income side of about $1.3 million. That all was recorded in the third quarter. We forecasted $2.3 million in land gains and tax provision, which was $1.4 million below our actual results. Two land sales were delayed, and we believe they will both close in the fourth quarter. As a result of those two, that nets to a $0.01 increase, so the reason we're above consensus. Interest expense of $15.2 million was below our second quarter forecast by $800,000, primarily due to higher than anticipated capitalized interest on 405 Colorado. Termination and other income totaled $1.8 million and was $400,000 above second quarter forecast, primarily due to the timing of some anticipated transactions. G&A was $7.1 million, $400,000 below our $7.5 million second-quarter guidance, primarily due to lower employee costs. Our third-quarter fixed charge and interest coverage ratios were 4.3 and 4.1, respectively, both metrics improved from the second quarter due to the higher investment income. Our third-quarter annualized net debt to EBITDA decreased to 6.5 and is currently at the high end of our 6.3 to 6.5 guidance. This metric also benefits from the increased investment income. On additional reporting, as we look at cash collections, they were over 99%, continuing to be very strong. We did have some net operating write-offs of tenants totaling about $700,000, which lowered our portfolio operating income for the quarter. As for portfolio changes, 3000 Market, based on Brandywine completing our base building obligations, will be added to our core portfolio during the fourth quarter as it's 100% leased life science to Spark Therapeutics. Looking at fourth-quarter guidance for 2021, we anticipate the fourth quarter results to improve compared to the third quarter and have some of the following assumptions: Portfolio operating income will total $70 million and will be sequentially higher than the third quarter. That’s due to the approximately 212,000 square feet that will be moving in during the quarter at a positive mark-to-market and will commence, along with 3000 Market. FFO contribution from unconsolidated joint ventures will total about $6.1 million for the fourth quarter, relatively flat compared to the third quarter. G&A will total roughly $7.1 million, again, sequentially flat to the third quarter. Interest expense will be approximately $15.5 million, with around $2 million of capitalized interest. Termination fees and other income should total about $2.5 million. Net management fees will be about $3 million, and interest and investment income of about $400,000. We anticipate land sales and tax provision to be about $1.3 million, mainly based on the slides from land sales that didn't occur in the third quarter, generating about $6 million in net cash proceeds. Regarding other business plan assumptions, there will be no property acquisitions. We noted one JV sale in our all-state portfolio, which should generate about $12 million of net cash proceeds, no anticipated ATM or share buyback activity, no financing or refinancing activity in the quarter, and our share count will be about 73.5 million diluted shares. On the financing front, as previously mentioned, we closed on our construction loan at Schuylkill Yards, representing a 65% estimated loan to cost. Initial interest rate will be about 3.75%. Based on our current capital plan, we will start drawing on that during the fourth quarter of 2022. We plan to restructure and extend our current loan encumbering our joint venture at 4040 Wilson, lowering our borrowing costs by about 100 basis points, generating minimal initial proceeds, but allowing for increased borrowings to complete the leasing of the vacant office space. While we have no other financing or refinancing activity in our plan, we continue to monitor the debt markets ahead of our 2023 secured bond maturity. Looking at our capital plan, our second quarter CAD was 65% of our common dividend, and year-to-date coverage is within our range. Our fourth quarter 2021 capital plan is straightforward at $140 million, including $70 million of development and redevelopment activity, $33 million of common dividends, $15 million of revenue maintenance, and $15 million of revenue creation capital expenditures and contributions to our joint ventures totaling about $5 million. The primary sources will be cash flow from interest payments - after interest payments of $38 million, $22 million use of the line of credit, $42 million cash on hand, and other land sales totaling about $18 million. Based on our capital plan, we will have about $558 million available on our line of credit. The increase in our projected line of credit is partially due to the build-out of our incubator at Cira Center, and we project the net debt to EBITDA to fall within the 6.3 to 6.5 range, with a significant variable being the timing and scope of capital development payments that could reduce cash. Our net debt to GAV will be 39% to 40%. In addition, we anticipate our fixed charge ratios to approximate 3.6% on interest coverage and will approximate 3.9% for fixed charge, which represents a sequential decrease, again, primarily due to some investment income received in the third quarter. I'll now turn the call back over to Gerard.

Great, Tom. Thank you very much. So the key takeaways as we wrap up our prepared comments: the portfolio and operations are in excellent shape. We've made some really good progress on both building the pipeline and beginning the process of significantly filling some of those larger vacancies. That will be a great growth driver for the next couple of years. The leasing pipeline continues to increase as tenants return to the workplace. That pace is not as fast as any of us would like, but we are seeing a lot of green shoots in terms of more tenancies coming into the market. Along those lines, we expect to see a compression of decision timelines later in the year and into early '22, and we are anticipating a continuation of positive mark-to-markets driven by improving market conditions, as well as the necessity of having higher rents based on escalating construction prices. Safety, health, and amenity programs, both in design and execution, remain a top priority for all prospects, large and small, and based on that, we really believe that new development and our trophy inventory stock will remain in a very positive position. We are focused on our two forward growth drivers: delivering additional products within Schuylkill Yards and leasing up what we have under development. We are delighted to be moving forward on the first phase of Broadmoor later this year and into the first quarter of '22. The success we've had at 3000 Market, The Bulletin Building, and the results we just reported on Cira Labs, as well as a focus on starting 3151 early next year, will have over 1 million square feet of life science space operating or under construction, which builds a base of revenue diversification that we've talked about. We certainly are focused on continuing to grow cash flow, and our attractive CAD growth over the last five years has really resulted in a well-covered and attractive dividend poised to grow as we increase earnings. Lastly, on financing and capital availability, private equity remains readily available at very effective pricing, as well as a very competitive and advantageously priced debt market. Strong operating and development platforms like Brandywine have significant traction for project-level investments, as evidenced by what we've demonstrated thus far at Broadmoor and Schuylkill Yards. We believe there is readily executable attractive financing available for development at very attractive third-party equity cost of capital. As usual, we'll end where we started, which is that we wish you and all of your families well. And with that, we now open the floor for questions. Please limit yourself to one question and a follow-up.

And our first question is coming from the line of Jamie Feldman with Bank of America. Your line is open.

Thank you and good morning. So I think you had mentioned that the leasing pipeline is now 1.6 million square feet, up 600,000 square feet quarter-over-quarter. Can you just talk about the big moves in there and what the incremental 600,000 consists of, along with a little more color about how this breaks down by development and market?

Sure Jamie, good morning. This is George, I’ll be happy to answer. So, as we always report pipeline on these calls, it's exclusive of any of our development projects. So it really is just core portfolio, and the composition of that 1.6 million square feet is 1.2 million square feet of new deals and about 400,000 square feet of renewals. It’s fairly evenly spread amongst the regions: about 400,000 square feet in Austin, 300,000 square feet in D.C., just north of 500,000 square feet in the Pennsylvania suburbs, and about 400,000 square feet in CBD. As for the roll forward, we had reported a pipeline last quarter; we subtract from that the deals executed during the quarter and then add to that the deals that have come into the pipeline. We’re seeing a good mix of activity, both renewals; tenants willing to make some decisions and entertaining proposals. We're extremely pleased with the level we achieved in the third quarter, along with the pipeline we see moving forward to build towards 2022.

So regarding the incremental 600,000 square feet, how would you characterize that? Are these tenants that were hesitant to make decisions but are now actively looking for space or what's changed so much?

I think it's tenants that are looking to make decisions because they know their return to work horizon is a little more defined now as the first year approaches. There is a flight to quality, as Jerry mentioned in his comments, and we had a couple of larger renewals that have 2023 and beyond expirations which are looking to include some sort of blend and extend in the pipeline.

Yes Jamie, Jerry here. I think just to add on to George's comments, I think with the economy starting to reopen and more of a defined path of return to the workplace, we're generally seeing a much more active dialogue from both the brokerage community, tenant representatives, as well as prospects. For a couple of quarters, we weren’t sure what the pace of that would be, but since Labor Day, we've seen a nice uptick in activity across the board. We are pleased to see that it’s not just one sub-market leading. We’re still seeing good activity in the Pennsylvania suburbs, particularly Radnor, the King of Prussia, and Conshohocken corridors. CBD activity, which was slow to recover, has picked up nicely in the last couple of months. The pipeline we built within our Northern Virginia and Maryland portfolios is increasing at a nice pace too. So there is a recognition of returning to the workplace; tenants are focusing on identifying their preferred locations.

Okay. I guess, from your unique vantage point given your sizable suburban and CBD portfolio in Philly, are you observing any noticeable trends with regard to hybrid work? Are some tenants migrating from downtown to the suburbs or vice versa, or not really?

Not really, Jamie. That's what a lot of pundits thought four or five quarters ago. We stay in close touch with all of our tenants through our property management and leasing teams. Rarely is there even a discussion about shifting from one to the other. George, would you like to add anything?

Yes, we've seen a handful of downtown tenants take a small footprint in the suburbs. They’re not giving back any square footage in the city but are adopting a touchdown space in the suburbs to accommodate workforce commuting patterns. However, these cases are more transient and not trendsetting across a broader base. Our capacity allows us to offer tenants a footprint that accommodates their workforce, providing an amenity that suits their needs.

You're seeing more traction with that flex office concept?

We're seeing a little bit of that, yes. Individuals who may not want to drive in on a particular day due to other commitments are taking advantage of our suburban location.

Lastly, while I have both of my questions here, how long are those leases, whether it's the touchdown suburban or even these flex leases?

Well, the touchdown is an amenity that we provide, so that's not a lease situation. The couple of smaller deals we’ve seen are typically three to four years where they entertain a small footprint.

And our next question is coming from the line of Manny Korchman with Citi. Your line is open.

Jerry, I wanted to talk about the redemption of the preferred investment you made. It certainly showed a good IRR on that capital invested, but you do lose that income going forward. Are you looking for more preferred deals or what will you use that $50 million for now?

Manny, it’s a great question. We are always looking for ways to identify advantageous short-term investment opportunities. To respond to your question, yes, we continue to look at several opportunities, although we don’t have anything prepared for announcement at this point. When we entered that transaction, we understood its potential for being very short-term, which is why we structured some exit fee arrangements into the deal. The impact on our overall returns will be slight, it's less than 2%, especially as we look into 2022, assuming we don’t explore new avenues. But we do expect to find other deployable opportunities for that $50 million, whether in another type of preferred investment with a high-quality partner needing bridge financing or redeploying it back into our very active development pipeline or renovations that yield good returns on incremental capital.

I want to turn back to your closing remarks. It sounds like your approach to bringing in institutional capital may have changed a little bit unless I’m reading too much into it? Are you now seeking to go out on more of a per-building or per-project basis and offer particular projects to institutional partners given there’s so much capital available out there, or do you think you’ll still approach larger deals encompassing broader projects?

I don't think there has been any change in our strategy. I apologize if my tone suggested otherwise. We are always trying to balance taking advantage of good market development opportunities while determining the right financing platform. We're mindful of managing our discount to NAV while recognizing that our Brandywine equity cost of capital is higher, given current public market pricing. In the private marketplace, we can effectively price third-party equity well below our WACC while still preserving significant upside potential for our shareholders. That framework has been successful for financing larger-scale projects, and we will maintain the same process and objectives as in the prior quarter.

One last question for either George or Tom: Could you detail the impairments or write-offs on the collection side you mentioned? Tom, I think you stated it was $700,000; could you provide more context on what types of tenants were involved and any geographic details?

Certainly. It was a combination of a couple of tenants in the retail sector and one tenant in Austin. However, it wasn’t a broader trend; just a couple of non-office users along with one office user.

It appears your collection dipped on the office side, not necessarily for others. So was it that the office user constituted a larger part?

Yes. The office user was indeed a bigger portion that contributed to the decline in portfolio operating income by a few basis points.

Our next question is coming from the line of Steve Sakwa with Evercore ISI. Your line is now open.

Thanks. Good morning. I wanted to piggyback off of Jamie's question. You signed a lot of leases this quarter, and I'm curious, Jerry, if you could discuss space planning and how these companies are designing their new spaces and what the densities of that new space look like or what they’re planning versus the spaces they were formerly utilizing?

Good morning, Steve. I will tell you, there is no discernible trend line that I can quantify for you. It seems to be quite anecdotal and company-specific. However, we are seeing tenants expand their business and physical footprint as they bring on more employees. There are observations of more space per employee, larger workstations with a higher percentage of fixed wall offices, whether partitioned or demising walls, smaller conference centers, and wider circulation areas. Importantly, we're not observing a trend towards hot desking or shared workstations particularly, which is crucial. With very few exceptions, we are not seeing that among our tenants, even those pursuing a hybrid work schedule. However, there are inquiries from tenants looking to eliminate personal workspaces for each employee.

No, you touched on most observations, Jerry. The bottom line takeaway is that it hasn’t really changed, apart from perhaps a few smaller gathering areas and wider turning radiuses within the space.

I believe many tenants are taking a wait-and-see approach, especially larger companies considering their return-to-work timelines and configurations. Our talented internal space planning team communicates with all of our current tenants and new prospects consistently. The trend lines they observe align with our previous points.

As a follow-up, you mentioned a good demand you're observing at Broadmoor. The pipeline was about 500,000 square feet with another 1.5 million of inquiries. Without naming any names, could you describe the types of tenants involved? Are they primarily tenants already in the Austin market, or are these potential relocations?

The majority consists of tenants with some footprint in Austin looking for significant expansion, primarily technology companies. However, we're also seeing interest from over 20 financial services companies and over 22 life science firms. The marketplace may be slower than desired, but there's a resurgence of major prospects seeking higher-quality new development space. By launching that first phase at Broadmoor with our partner, we can position ourselves well for these larger prospects.

Our next question is coming from the line of Craig Mailman with KeyBanc Capital. Your line is open.

Jerry, could we revisit the $0.07 to $0.10 per share growth you mentioned? Given what’s in the leasing pipeline and prospects, when do you anticipate the other 60% to be finalized?

George and I can tag team this question. I believe a key variable is the delivery pace in our 1676 Northern Virginia property. With our Austin piece and the PA suburban piece signed off, we have strong leasing prospects for a couple of holes within the Logan’s in Philadelphia. The major variable really is how quickly we can accelerate the absorption in 1676. We have a robust pipeline, and the market is competitive. We are aggressive in pricing and concession packages. Our schedule for key vacancies is determined by lease-ups at properties like Commerce Square, which is our second-largest exposure.

Exactly, as you observed, 1676 accounts for roughly 40% of that $0.07 to $0.10 growth target. Commerce Square potentially allows us to fill in medium-sized tenants across each floor, and we've observed some positive leasing activity there.

I observe that the mark-to-market rates you’re receiving are good, and capital costs are low. Therefore, net effective rents seem okay right now. What’s been the tenant feedback regarding rents at Schuylkill and Broadmoor? Are they surprised given the lack of available listings?

We feel confident, frankly. At 250 in Radnor, we are targeting rent rates that we are navigating well in some of our current lease negotiations. The proposals we are pursuing at Schuylkill Yards and Broadmoor have not encountered much resistance regarding our pro forma rental rates. The market recognizes that the construction costs for new high-quality buildings are substantial and have been escalating. The tone from prospects indicates that we have not ignored the rental rates we’re asking. We believe we’re well positioned against our competitors in these markets.

That’s helpful. Lastly, as we look at Block A, which you expect to start, how are you addressing supply chain issues given ongoing constraints?

To refresh your memory, prior to starting any project, we've worked through the pricing process and negotiated a comprehensive G&P, relying on subcontractor bids. We do early release packages to secure ourselves in the delivery cycles that fit our critical path for projects like Broadmoor and Schuylkill Yards West. For current projects, we are confident in our supply chain situation.

Our next question is coming from the line of Michael Lewis with Truist. Your line is open.

Thank you. A couple of points: You touched on cash flow growth and limited capital expenditures. I noticed low TIs and leasing commissions on the leasing you accomplished this quarter. Was there a dedicated effort to conduct more direct deals without brokers or was that just a coincidence this quarter?

There hasn't been a change in strategy. Monthly results can be episodic. Our focus remains to work closely with our tenants and maximize the value they derive from our partnerships. We respect brokerage's role and the value they add but will take direct leases where it’s advantageous to both parties that we’ve established long-term relationships with.

Understood. And for the second question, I’ll leave it open-ended: When I converse with investors about the leasing recovery, we discuss the strong market, but there’s concern that occupancy has been dropping. Similarly, while your mark-to-market looks solid, the fear is that market rents could be falling. Looking ahead, do you see the narrative for office stability, given potential work-from-home concerns? Can we stabilize occupancy and IC, or will we remain under pressure?

Michael, it's a great question. The state of short and long-term office conditions is paramount for us. We’re actually quite pleased with our position. Four to six quarters ago, discussions mainly revolved around dire predictions of collapsing rents and reduced interest among tenants. We're actually observing the opposite trend: unifying efforts encourage employees to work together in physical spaces, and available sub-lease space is dwindling in many markets. We haven't seen declines in expected net effective rents, even in competitive areas like Northern Virginia. Rest assured, we have actively reduced future rollover exposure to below 7% through 2024, positioning our platform for growth while allowing us to improve occupancy levels. We plan to return to mid-90% occupancies and deal with any frictional vacancies accordingly.

Our next question is coming from the line of Anthony Paolone with JPMorgan. Your line is open.

Thank you. My first question follows up on occupancy — specifically with regard to 2020. You have one large lease rolling, which is bigger than expected, and half of it has been backfilled. We can see the anticipated commencements presented in the supplemental, along with your pipeline information. I am just trying to gauge what we're not seeing: it seems occupancy should actually rise in 2022?

Indeed, we believe it will rise. Keep in mind that the vacancy at 1676 represents 134 basis points of occupancy. Therefore, filling that hole significantly moves the needle. Forward leases are also in place for tenants leaving and moving into new spaces. We’ve represented this in our supplemental documentation to reflect expirations that have been offset by new leased properties. The example you mentioned, with Baker giving back four floors, is illustrative: we’ve already secured leases for two of those and proposals out are in motion for leasing the remaining spaces.

Regarding the cap rates across various segments, could you provide some insights on suburban, CBD, Austin, Philly, and your primary segments?

I am not sure there's been any significant perceptible change since prior quarters. For Austin offices, we've observed cap rates around 5% or above, while multifamily cap rates drop below 4%. For D.C., cap rates fall in the 7% range depending on lease lengths. In Philadelphia suburbs, trades reflect well below 7%. There's been minimal trade downtown lately, with expected cap rates around 6% to 7%. With institutional capital interest increasing, I believe we can anticipate downward pressure on office cap rates in the medium term.

Jerry mentions resiliency of rents across the region. What are your thoughts on how that’s affecting property taxes and assessments in the near term, and are there differences between Philly and Austin?

We haven’t seen significant pressure on tax assessments yet, but it could emerge as municipalities try to balance budget gaps. Both Philadelphia and Austin maintain leases that place pressure on overall occupancy costs. Still, we haven't yet encountered issues at this stage, but we are closely monitoring assessments given recent reverse appeals related to school boards competing for funds.

I see no further questions at this time. I would now like to turn the call back over to Mr. Sweeney for any closing remarks.

Great, Olivia. Thank you for your assistance today and thank you all for joining us for our third quarter 2021 earnings call. Stay safe and well, and we look forward to updating you on our Q4 results after the 1st of the year. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.