Earnings Call Transcript
Brandywine Realty Trust (BDN)
Earnings Call Transcript - BDN Q2 2023
Operator, Operator
Good day and thank you for standing by. Welcome to the Brandywine Realty Trust Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there’ll be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. Please go ahead.
Gerard Sweeney, President and CEO
Tania, thank you very much. Good morning, everyone, and thank you all for participating in our second quarter 2023 earnings call. On today’s call with me are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Senior Vice President and Chief Accounting Officer, and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of 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. During our prepared comments, Dan will review our second quarter results and progress on our 2023 business plan. Tom will then review second quarter financial results and frame out the key assumptions driving our 2023 guidance for the balance of the year. And after that, Dan, George, Tom and I are certainly available for any questions. So, moving to our prepared comments, the second quarter saw continued leasing momentum throughout our portfolio. During the quarter, we executed 568,000 square feet of leases, including 177,000 square feet of new leases within our wholly-owned portfolio. Our joint venture portfolio achieved a very strong 401,000 square feet of lease execution including 139,000 square feet of new leases. The combined activity totaled 969,000 square feet. And as we showed on Page one of our SIP, these are the highest combined leasing volumes for the past four quarters. The operating metrics were strong as well. For the second quarter, we posted rental rate mark-to-market of 17.6% on a GAAP basis and 5.8% on a GAAP basis. As we look at the balance of the year, our mark-to-market will vary by region with CBD Philadelphia at a 17% cash and 30% GAAP rental rate increase. The PA suburbs will be a 2% cash positive and 9% GAAP positive. Our mark-to-market in Austin, we anticipate a negative on both the cash and GAAP basis given the current market conditions. This quarter we did have 18,000 square feet of positive absorption, we currently stand at 89.4% occupied and 91.1% leased based on the 224,000 square feet we have in four lease commencements. More importantly, as we view our portfolio, our core markets at Philadelphia CBD, University City, the Pennsylvania suburbs and Austin, which comprise about 94% of our NOI, are 91.2% occupied and 92.7% leased. During the quarter, both our GAAP and cash same-store outperformed our business plan ranges. The second quarter capital costs were also in line with our business plan ranges, and tenant retention came in at 71%, above the top end of our full-year forecast, but we are maintaining our existing range based on forecasted activity between 49% to 51%. Spec revenue range remains $17 million to $19 million with $16.1 million or 89% at the midpoint already achieved. The speculative revenue range represents approximately 1.1 million square feet of which 787,000 square feet or 72% is already completed. Our operating platform is solid with a stable outlook, and we further reduced our forward rollover exposure through 2024 to an average of 6.6% and through '26 to an average annual rate of 7.3%. We are definitely seeing a pickup in activity, converging the lease execution remains frustratingly slow with overall velocity, a starting point to any leasing cycle continues to improve. Several key points we like to highlight for you. One, the quality curve thesis remains intact as our physical tour volume has been very encouraging. Second quarter physical tours exceeded the first quarter by 5%, exceeded our 2022 quarterly average by 47%, and also exceeded pre-pandemic levels by a significant margin. On a wholly-owned basis, during the second quarter, 118,000 square feet of our new leasing activity were 67% of those leases resulted from the flight to quality. We also saw tenant expansions continue to outweigh tenant contractions during the quarter. I think it's further evidence of the emerging market recovery, our total leasing portfolio is up 21% from last quarter and stands at 3.5 million square feet. That excludes the 1.3 million square feet we have on our joint venture pipeline, which is also up from last quarter by over 200,000 square feet. The wholly-owned pipeline is broken down between 1.3 million square feet in our wholly-owned operating portfolio and 2.2 million square feet on our development projects, which again, like the joint venture pipeline, is up over 200,000 square feet from last quarter. The 1.3 million square foot existing portfolio pipeline includes approximately 160,000 square feet in the advanced stage of lease negotiation. Additionally, in that pipeline, 31% of our operating portfolio new deals or our prospects are looking to move up the quality curve. As we noted on Page 01 of our supplemental package, we received notice during the quarter from the State of Texas that they terminated their lease at our Uptown ATX campus effective August 31st, 2023. The state currently occupies 100% of one of our buildings there with an anticipated lease expiration date of October 26. The state has relocated their employees into a state-owned building. We are still assessing if that notice was provided in accordance with the requirements of the lease. And while we continue to make that assessment as we determine we are entitled to additional rent or remedy, we have conservatively assumed that we will not receive any rent after August and then remove that income from our FFO range. The overall impact of the early termination will be over $14 million in terms of reduction in total forecast of rent over the remaining lease term, and that includes about $1.5 million in 2023 and $4.4 million in 2024. In addition, we will also need to write off approximately $370,000 in straight-lining rent over that 90-day period. To the extent it is ultimately determined that that lease was effectively terminated in accordance with our Uptown ATX Master Plan, we would plan on taking that building out of service, similar to what we did in the 905 building as it would not be available for any re-leasing activity consistent with our Master Plan development program. Turning to our EBITDA, our second quarter net debt-to-EBITDA increased to 7.6 times, which is up from 7.4 from the first quarter primarily due to increased development spend of about $75 million. However, as occupancy and NOI increase during the balance of 2023, we anticipate this ratio will decrease to our business plan range, with asset sales taking place in the second half of the year and our prior year's $100 million reduction in JV debt attribution also occurring by the end of the fourth quarter. As we did note in the SIP, this ratio has been higher due to development spend and debt attribution from joint ventures based on our development pipeline investment. At quarter end, we have $338 million of capital invested in $93 million of JV debt generating no meaningful NOI at this point. If we remove that investment from our 7.6 metric, our leverage would be 6.4 times, well within our core portfolio range. On the liquidity front, we also made solid progress on both our joint venture debt maturities in development financings during the quarter. In June, our Commerce Square joint venture closed on a five-year $220 million secured financing with a 7.875% coupon, which replaced a $204 million mortgage loan. Given the state of the financing market, the rate was higher than we initially anticipated earlier in the year, but that loan has some flexibility and is open for pre-payment after June of 2025, and it does provide additional proceeds to fund current and future leasing costs. In connection with that refinancing, we did make a $50 million contribution to the venture to both fund closing costs, redeem a portion of our preferred equity partner's equity interest, and pay down all accrued but unpaid partner preferred dividends to put back the joint venture on very solid financial footing. Subsequent to quarter end, our MAP joint venture is finalizing a short-term extension on our $180 million loan from the current lender that will take that maturity through October 1st of 2023. That extension will provide additional time to work on a recapitalization strategy with both that leasehold lender and the fee owner of the properties. We are also in advanced discussions on a construction loan on our 155 King of Prussia Road project, and we anticipate that loan will close in August. On our other operating joint ventures, we do have $70 million of overall investment with $620 million of non-recourse mortgages maturing next year before any extension options are exercised. Of that $620 million, $112 million is attributable to Brandywine, as our ownership stake ranges between 15% and 20%. We're working very closely with all of our partners and our lenders on loan extensions and refinancing efforts and expect to report additional progress on these non-recourse financings in the coming quarters. Currently, our consolidated debt is 93% fixed at 5.03%, and we have no consolidated debt maturities until the October 2024 bond, a $350 million bond. We also have no balance available at the end of the quarter on the $600 million unsecured line of credit, and we have approximately $32 million of unrestricted cash on our balance sheet. As we noted on Page 13 of our SIP, based on our projected development spend, our business plan, after fully funding remaining development spend and all TI and leasing costs, we project, and Tom will amplify that, we will have full availability on that $600 million line of credit by year-end 2023. For the quarter, at our guidance midpoint, our $0.19 per share dividend represented a per-quarter dividend and an FFO payout ratio of 66% and an 84% cap tier ratio. So, another great quarter controlling capital spend. As such, we noted in the SIP, we're changing our CAD range to 90% to 100%, down from 95% to 105%, and we anticipate our coverage to beat the low end of the newer range. I have to discuss a few moments; our business plan projects $100 million to $125 million of sales that will generate additional liquidity as well as some gain. Certainly, as our business plan progresses, the Board will closely monitor capital market conditions both company and market overall liquidity, sale activity progress, and our dividend payout levels as we assess the dividend going forward. Looking at our development pipeline, our wholly-owned development pipeline aggregates $302 million of costs, and it's 30% life science and 70% office. These wholly-owned developments are 83% leased with remaining funding requirements of $51 million, which is built into our capital plan. The majority of that spend is for tenant improvements and leasing commissioning costs that will only be spent attending to our lease executions. Our joint venture development has a Brandywine share of $512 million; at full cost, this pipeline is 32% residential, 38% life science, and 30% office. As we noted in the SIP, higher interest costs than originally contemplated will impact our total cost, and based on the current SOFR curve, we currently estimate the cost increase due to higher rates will approximate $23 million. Based on the preferred structure of those joint venture developments, it is anticipated that Brandywine will likely be required to fund those additional costs, and we noted such increases on the development page in the SIP. Further, as I stated last quarter, we're saving the obvious given the volatility in the capital market other than fully leased build-to-suit opportunities, future development is on hold pending more leasing on our existing pipeline and more clarity on the cost of both debt capital and cap rates. Looking ahead, given the mixed-use nature of our Master Plan communities, primarily at Schuylkill Yards and Uptown ATX, as we identified on Page 14 of the SIP, our expected forward product pipeline mix is 27% life science, 42% residential, 22% office, and 9% support retail entertainment and hospitality. Also, as identified back on Page 06 of the SIP, our objective is to grow our Life Science platform to over 23% of our square footage based on land we currently own or control and approvals currently implied. Just a quick review of specific projects on Page 07. 2340 Dulles Corner is 92% pre-leased with $23 million of remaining funding. 250 King of Prussia Road remains 53% leased with $20 million of remaining funding. That 53% leased did not change quarter-over-quarter, but we do have a strong pipeline of about 200,000 square feet of deals in that pipeline of which 100% of that pipeline is life science. Based upon that pipeline, we did slide the stabilization date of that project by one quarter. In addition, when you take a look at our overall pipeline development activity, that pipeline of our development project is up 10% quarter-over-quarter, and as I mentioned earlier, stands at 2.2 million square feet. Lease execution, even with the pipeline building, has been slow in coming, and we have a number of leases in various stages of negotiation and are working hard to get them across the finish line. Given the mixed dynamic, we did slide the stabilization date on 3025 JFK by one quarter, and given the market conditions and pipeline activity in Austin, did slide the one Uptown office component by two quarters in their stabilization date. On 3025, to touch on that, we have a current active pipeline that's up slightly from last quarter for the life science and office component. We've done an amazing number of tours through the project, and that tour activity continues to deliver. The first block of residential units is underway this quarter with a good level of activity since our marketing launch several weeks ago. Our 3151 life science project is under construction, Schuylkill is up to the fifth level. We have a leasing pipeline there of almost 400,000 square feet and all systems are go in terms of the number of core net tours we're doing as well. Turning to Austin, our Uptown ATX Block A construction, from a construction standpoint, is on time and on budget. On the office component, our leasing pipeline is at a standard 721,000 square feet which is up 180,000 square feet from last quarter. That pipeline includes a mix of prospects ranging from as low as 5,000 square feet to as large as 200,000 square feet. As that curtain wall and the building is going up and the lobby finishes are being completed, we're seeing an uptick in activity there as well. Our next space of B.Labs at the nine-floor Cira Center is well underway. This conversion to gradual lab space is now 66% leased. The full conversion will be completed in the first quarter of next year, with total costs, which we built into our capital plan at $20 million, and we expect a return on cost there of 11%. Just a quick look at the sales market. There is no question that the sales market has been impacted by a challenging rate environment, a pullback by lenders on commercial real estate financing, particularly office, and negative macro overtones on the office sector itself. In spite of this, based on our pre-marketing efforts, we are still maintaining our $100 million to $125 million sale target, as we originally noted when we announced our 2023 business plan, and we did anticipate those sales occurring in the second half of the year. We do have about $200 million of properties in the market for sale now. Those properties are in our mid D.C. and Pennsylvania suburban markets. We also have several joint venture properties on the market at the same time as well. This quarter, we did gain certainty on the sale of an asset in Austin and expect that $53 million sale to close in the next several weeks. We have several other properties moving through contract negotiation, a couple of which may assess some level of short-term seller financing. In general, we continue to see a good list of bidders, the primary challenge being getting acquisition financing at both the cost and the loan to value range that makes sense for the buyer, but we continue to work with our buyers and their potential lenders to come up with a good solution. We do plan to continue to sell non-core land parcels during the balance of the year. And on the joint venture front, as I alluded to, really about 20% of our total debt is coming from our JVs through debt attribution. We do plan to recapitalize several of these JVs during the second half of 2023 with a goal to reduce our attributed debt from our operating JVs to 24% or approximately $100 million by the end of the year. That will certainly be additive to improving our EBITDA multiple. Dollars generated from those activities will be used to fund our remaining development pipeline commitments and obviously reduce leverage and improve the Company's liquidity. With those comments, I'll now turn it over to Tom to provide an overview of our financial results.
Thomas Wirth, CFO
Thank you, Jerry, and good morning. Our first quarter net loss totaled $12.9 million or $0.08 per share, and FFO totaled $49.6 million or $0.29 per diluted share and $0.02 above consensus estimate. Some general observations regarding our second quarter results being above consensus, we have several moving pieces and several variances compared to our first call guidance. Our management and leasing development fees totaled $3.7 million or $1.3 million above our first quarter projections primarily due to higher third-party lease commission income. Our portfolio of operating income totaled $75 million, $1 million below our $76 million forecast due to some leasing commencing slightly behind budget. FFO contribution from our joint ventures totaled $4.5 million and was $1.3 million above our forecast primarily due to lower interest expense from the delay in completing the Commerce Square mortgage to June of 2023. Termination and other income totaled $1.4 million and was $900,000 above our first quarter forecast. We anticipate the second quarter result will be a good run rate going forward. We also forecasted one land sale to generate a $600,000 gain and that's been delayed until the third quarter. Our second quarter debt service and interest coverage ratios were 2.9 and 2.8 respectively, slightly better than our forecast, and net debt to JV was 41.7%. Our second quarter annualized core net debt to EBITDA was 6.5 times and within our 2023 range, and our annual combined net debt to EBITDA was 7.6, three-tenths over our guidance. However, we anticipate the metric to improve with higher EBITDA and the forecast of asset sales. Regarding the portfolio, as highlighted last quarter, 405 Colorado is now included in our core portfolio for the second quarter. As Jerry outlined, we continue to make some progress on our financing front. In June, our joint venture refinanced the Commerce Square property with a five-year first mortgage at a rate of 7.75%. The mortgage totaled $220 million and replaced the previous $204 million mortgage maturity, providing $60 million of good news capital for existing and forecasted leasing activity. While the rate is above our forecasted rate, the CMBS market was open which allowed us to complete this refinancing despite the recent bank failures. While we were successful in completing the Commerce Square financing, we continue to see challenges in the financing market for office properties. Traditional banks are allocating little or no money to new originations for new office loans except for certain situations such as fully leased build-to-suit properties and good relationships with the banks. We think some lenders will be flexible and provide shorter-term loan extensions on performing portfolios with good sponsorship. Regarding our joint venture debt, we are working with our partners on the 2024 maturities to possibly extend the current maturities with existing lenders. We're also considering some asset sales within those portfolios to lower leverage, and we have commenced marketing efforts with new lenders on a couple of the joint venture properties. We anticipate executing a short-term extension on our $100 million first mortgage on a MAP portfolio as we know we are 50% partners in the joint venture, which has lease-full positions in the portfolio assets, and we are working with the lender to recapitalize that loan, along with discussions with the joint venture lender as well as the ground owner. Regarding 2023 guidance, we have narrowed our guidance by $0.04, maintaining a midpoint of 116, and the range is mainly attributable to the variability of our asset sales program both in terms of volume and timing, as well as our projected land sales and related gain. Our 2023 business plan includes the following assumptions: $100 million to $125 million of second half sales with dilution not being significant; no new property acquisitions; no anticipated ATM or share buyback activity; and the share count is estimated to be 174 million diluted shares. Looking more closely at the third quarter of 2023, we view the following general assumptions. Property level operating income will total $77 million and be $2 million ahead of the second quarter, primarily due to increased occupancy at 405 Colorado, 250 King of Prussia Road, and the balance of the portfolio. Our FFO contribution from our unconsolidated joint ventures will total $1.5 million for the third quarter. The sequential decrease is primarily due to higher interest rate expense, primarily from the Commerce Square refinancing, and then higher interest rates on our MAP JV as a favorable spot matures on August 1st, and a slightly negative impact from the commencing of our residential operations. Our G&A expense will decrease from our second quarter to $8 million due to reduced restricted share compensation. Our interest expense, including deferred financing costs, will approximate $26 million and capitalized interest will approximate $3 million. Termination fees and other income will total $1.5 million for the quarter; net management and leasing development fees will be $3.4 million as we continue to forecast higher third-party lease commission income. Land gain in sales and tax provision will net to a $1 million gain representing two forecasted land sales. As we look at our capital plan and as Jerry mentioned, we experienced better forecasted CAD payout ratio of 84% primarily due to leasing capital costs seen below our business plan range. Since our first half CAD payout rate was better than forecasted, we have adjusted our annual 2023 CAD range from 95% to 105% to 90% to 100%. Our capital plan for the second half of the year is very straightforward and totals $220 million. More importantly, we continue to prioritize liquidity and still project no borrowings on the $600 million unsecured line of credit at the end of 2023. Uses for the balance of 2023 are comprised of $90 million of development and redevelopment projects, $66 million of common dividends, $10 million of revenue-maintain capital, $10 million of revenue-create capital, and $24 million equity contributions to our joint ventures. Primary sources are $105 million of cash flow after interest payments, a $10 million projection on a construction loan for 155 King of Prussia Road, and a $15 million increase in cash which will result from the $120 million of land and other property sales. Based on this capital plan outlined above, we project having full line availability at the end of the year. We also project that our net debt to EBITDA will fall at the upper end of our range of 7.0 to 7.3, and then the minimal projected income by year-end on the development projects. Our debt to GAV will be in the 40 to 42 range, and our core net debt EBITDA range of 6.2 to 6.5 by the end of the year, which excludes our joint ventures and our active development projects. We continue to believe this core leverage metric reflects the leverage of our core portfolio and eliminates more highly leveraged joint ventures and our unstabilized development and redevelopment projects. We believe these ratios are elevated due to our growing development pipeline and believe that once these developments are stabilized, our leverage will decrease back towards the core leverage ratio. We anticipate our debt service and interest coverage ratios to approximately 2.7, which represents a sequential decrease in our coverage ratios due to our projected development spend and higher interest rates. I’ll now turn the call back over to Jerry.
Gerard Sweeney, President and CEO
Thanks, Tom. So just the key takeaways would be the portfolio is in solid shape. We do recognize there remains some negative overtones on office and the future of office. But we are seeing an increasing build-up in our pipeline as well as tour activity; major challenges getting decisions made but the clear dynamic of the flight to quality I think we're benefiting from throughout our portfolio. We've also taken a number of steps over the last number of quarters to ensure that our annual average square foot rollover exposure through '26 is only 7.3% with strong mark-to-markets manageable capital spend, and hopefully a continued acceleration of our leasing velocity. We have covered all of our wholly-owned near-term liquidity. We've worked our business plan predicated upon ensuring ample liquidity by keeping our line of credit at zero. We are actively pursuing a range of financing activities to ensure that liquidity position and our leverage metrics continue to improve. Our business plan is based upon improving liquidity and keeps our operating portfolio on a very solid footing with a good forward leasing pipeline to continue executing over the next couple of quarters. So as usual, and where we started, we really do wish you and all your families well. And with that, we're delighted to open up the floor to questions. Tanya, we do ask that in the interest of time you limit yourself to one question and a follow-up.
Operator, Operator
Gentlemen, please limit yourself to one question and a follow-up. One moment while we compile the Q&A roster. Our first question will come from Steve Sakwa with Evercore ISI. Your line is open.
Steve Sakwa, Analyst
Thanks. Good morning, Jerry and Tom.
Gerard Sweeney, President and CEO
Good morning.
Steve Sakwa, Analyst
I was wondering if you could provide more details on the leasing pipeline. The numbers seem quite high compared to the development pipeline, yet nothing has been finalized. I am curious about what factors are influencing the decision-making of CEOs and CFOs. Is it the ongoing uncertainty about a potential recession? Is it related to interest rates? What ultimately prompts these individuals to make a decision?
Gerard Sweeney, President and CEO
Yes, it's a great question. It’s Jerry. I think a couple things, and George, certainly feel free to chime in. But I think when we look at the development pipeline in particular, those buildings are reaching kind of the latter stage of their physical construction. So lobbies are now done, amenity floors are being completed. It shows a really high quality building. So I think we've always seen in all of our development projects over the years, Steve, an acceleration of pipeline as the building nears completion. So that was a trend line we would expect to see. And I think we're frankly pretty happy, even given the slowness of the Austin and Texas market, with the size of the pipeline build we have there just in the last quarter. We are working every moment of every day to figure out the algorithm of how we get people to execute leases. The major thing that we are seeing is that there is general concern about macroeconomic conditions in tripling these larger size leases. These companies are committing a huge amount of their own capital to move into new office and life science space. The negative overtones and the lack of clarity on where the economy is going is certainly playing into that theme. I've had a number of direct conversations with some of the C-suite executives, some of our key prospects, and they walked away incredibly excited about the quality of the project we're presenting to them. When they go back to their own offices, it's hard to pencil through the cost of relocation; I think that's giving them a little bit of a pause. So we have not heard anything relative to any of our specific projects that's holding anything back; in fact, quite the contrary. I think we have, generally after a tour, a very high level of enthusiasm by the prospect. It tends to be more as they work through their own financial situation what they view is the appropriate time to pull the trigger and sign a long-term lease, tending to be the bigger gating issue. But the pipeline itself continues to grow, with very good diversity within that pipeline itself between large and small users. We're very happy with what we're seeing here in Philadelphia, in terms of the mix between office and life science prospects. All that being said, our focus remains on getting some lease executions done. We have a number of prospects in space planning, and we have a number of prospects we're working through letters of intent on a couple of lease negotiations. But we've remained very anxious to report to all of you some definitive lease signings. We know the prices will lease up, even with the increased costs, we kept the return on cost metrics the same because we're meeting very little resistance on our rental pricing. But we know we have some work to deliver there, Steve.
Steve Sakwa, Analyst
Great, thanks. And I guess on the follow-up, you touched on this State of Texas lease, and I guess just to maybe paraphrase, it sounds like you're not really questioning their ability to cancel the lease, but maybe did they provide proper notification? When may the lease actually terminate? Is there something you're questioning about the ability to cancel or is it more about when it would get canceled?
Gerard Sweeney, President and CEO
Well, I want to be careful in my commentary. But the lease we executed with the State of Texas contained a standard provision in all State of Texas leases with all — when I say all to the extent we can determine all State of Texas leases. Essentially we see a number of other government agency leases, well that gives the sovereign the State or the Federal government the right to cancel the lease to the extent that appropriations are withdrawn to support that agency. In addition to that, there are certain other requirements in the lease about backfilling the space with other state agencies and complying with some other notice requirements as well as providing evidence of non-appropriation. So at this point, I want to say whether they have the right to cancel or if they do when that would be effective. I think given the lateness of this notice, we're still tracking down both from a business, political and legal front what the most appropriate steps for us to take are. This lease termination could have significant implications in the State of Texas since, as I mentioned, most if not all the state leases have these provisions in them. To the extent we've been able to terminate, it's never been exercised before. So we have a lot of work to go through before we determine if the notice we received was valid or not. But in the interest of full disclosure, as soon as we received that and we thought it was appropriate to disclose that to our shareholders immediately, we have taken those revenue projections of the rents we would receive under that lease out of our revenue projections and FFO for the balance of 2023. So, there is work to do there as well, and certainly we are collaborating with the various agencies to try and come to the right answer.
Steve Sakwa, Analyst
Great. Thank you. That's it.
Operator, Operator
One moment for the next question. And our next question will come from Camille Bonnel of Bank of America. Your line is open.
Camille Bonnel, Analyst
Good morning. Can you talk to the retention dynamics during the quarter? I noticed you held your guidance on this. So just trying to understand if any particular tenant or lease contributed to this or are you seeing stickier behavior but keeping guidance in case of situations like ATX?
George Johnstone, Executive Vice President of Operations
Yes, Camille, good morning. This is George. I'll handle that one. We had a very strong quarter in terms of the second quarter at 71%. We do have two pending move-outs still to come. One is a 55,000 square foot tenant in our Plymouth Meeting portfolio during the third quarter, and then another is a 69,000 square foot tenant in Radnor who will vacate in the fourth quarter. So those two known forward move-outs are really the reason why we've maintained the full-year retention guidance.
Camille Bonnel, Analyst
Helpful. And my follow-up on a different topic, as you've been to the market a few times this year to execute on different financing as part of your liquidity enhancement program, and you're now looking to execute on a construction loan at 155 King of Prussia. I know these assets are 100% pre-leased, but do you get a sense from your discussions with the lenders? Is there still appetite to issue construction loans at the targeted 60% LTV, or is there something under discussion?
Thomas Wirth, CFO
Hi Camille, it's Tom. I think the approval will depend on the tenant and their lease. For this specific build-to-suit project, I believe there is interest from lenders. They might seek a bit more credit enhancement through recourse, but it shouldn't be significant. Sponsorship is important, and we've received interest for the loan. We expect to close with one of our well-established banking relationships. We approached banks that we are familiar with, so I believe the market is receptive to a solid tenant with favorable lease terms and strong sponsorship.
Camille Bonnel, Analyst
Thank you.
Gerard Sweeney, President and CEO
Thank you.
Thomas Wirth, CFO
Thank you.
Operator, Operator
One moment for our next question. And our next question will come from Michael Griffin of Citi. Your line is open.
Michael Griffin, Analyst
Great, thanks. I had a question on the commerce for JV. I'm curious if the refinancing was contingent on you contributing more equity? If so, do you see more upside in owning more of this property longer term? Anything you got there that would be great.
Gerard Sweeney, President and CEO
Yes, good morning. I hope you’re doing well. Tom and I can address this. We were pleased to finalize the financing despite the challenges in the market. It was a substantial loan with strong debt yield coverage, which under typical circumstances would have been an easy decision, but we were lucky that the CMBS market was accessible. We anticipate that this market will continue to be available, serving as a potential source for future financing. When evaluating commerce, it's essential to consider the trend line. It's a valuable asset with considerable potential for NOI growth. Over the past few quarters, we have seen excellent leasing activity with notably positive mark-to-market rents and effective management of capital costs. We believe there's a strong pipeline developing with leases currently in progress. Additionally, the neighborhood is improving, becoming more of an infill area with new residential and commercial developments, along with excellent onsite parking and a solid retail base. Given the significant increase in our debt service costs and the preferred structure we established years ago, which has been costly for us due to the growing accrual, we are optimistic about the upward trajectory of that property. Considering the expense of the new debt and the preferred equity, along with our liquidity situation, we are in a position to pay down some of that accrual, redeem part of the preferred equity, and enhance our overall stake to optimize value moving forward.
Michael Griffin, Analyst
Thanks. Then my next one, just on the development pipeline, I think you've talked about pushing out some of the stabilization dates from last quarter. When do you have to start seeing leasing on some of these properties? Are you confident to hit those targeted stabilized yields?
Gerard Sweeney, President and CEO
Yes, I think in the next couple of quarters. And I think, Michael, as we went through the assessment of what to do with those stabilization dates, we kind of went through the line item by line item in the pipeline and kind of rolled out what we thought we could actually deliver. So we think in the next couple of quarters, we need to be posting some leasing activity to meet those stabilization dates.
Michael Griffin, Analyst
Great. That's it for me. Thanks.
Gerard Sweeney, President and CEO
Thank you.
Operator, Operator
One moment for our next question. And our next question will come from Michael Lewis of Truist Securities. Your line is open.
Michael Lewis, Analyst
Thank you. Jerry and Tom, you both gave a lot of color on the commerce square refi and some of the work that you have left to do on other JV refinancing. Maybe there's not much more to say on this, but I think it's interesting how office refis are getting done these days. So I'm curious if you could share a little more about the inner workings of why an 8% stake, how you settled on that, how you settled on the asset value, maybe share the value that this priced at that 8% interest, just kind of color on how these deals get done and how they were? And maybe commerce square as an example?
Gerard Sweeney, President and CEO
Yes, thank you for the question, Michael. Let me start by discussing our other joint ventures. Tom and I can also cover commerce. We have partners in all of these ventures. Commerce is distinct because we are majority partners, which allows us to control the asset as it is an unconsolidated joint venture. In our other joint ventures, we typically own between 15% to 20%. Firstly, we have strong partners. Secondly, we maintain excellent relationships with these partners as we collaborate closely on the recapitalization strategies for each venture. All loans associated with these ventures are completely non-recourse, although there are varying levels of investment from both Brandywine and our partners. In all joint ventures, the operating performance has generally exceeded the respective market benchmarks. This has helped us maintain strong credibility regarding both operational and capital investment with our lenders. Their focus is on understanding the challenges of refinancing. As Tom mentioned, we expect to be able to manage through the current situation until liquidity and capital markets improve, which will involve collaborative discussions with our partners and lenders. Regarding the MAP joint ventures, we partner with Sculptor and own the leasehold, while a third party owns the fee. We are currently discussing the recapitalization strategy with the fee owner, leasehold lender, and our partner. The structure of these operating joint ventures differs from that of commerce because they are all common equity ventures, whereas commerce has a preferred structure which influences how we approach maximizing value in that venture. Tom, would you like to add anything?
Thomas Wirth, CFO
Michael, on that, I guess on the financing itself, we looked at the amount of debt we wanted to put on. In fact, we could have added a bit more of good news capital to that loan. And as Jerry pointed out, we wanted to make sure we were mindful of where the debt service coverage would go, and our partner was as well being in a preferred equity structure. In terms of the contribution that we made to the venture, it was broken down into a couple of pieces. So I know that you'd put in some implied rates of per square foot and cap rate. For us, it was a bit lower than that; we did repay, as Jerry mentioned in his comments, some of the accrued preferred dividends that we had in the project. There are components to both a current and approved. Our contribution not only increased our stake to 48% but also paid off some accrued returns. The metrics are a bit lower than the ones you would have if you just take the $50 million and put it across the 8%. It's more like mid-200s per foot and then a cap rate a little above 7%. So not quite at the numbers that you look at by just taking the $50 million and putting it across the 8%.
Michael Lewis, Analyst
Okay, helpful. That's helpful. And then my second question, the same-store of high growth looks like it was driven mostly by lower expenses, particularly real estate taxes. Was there anything one-time in there or any color on what drove that?
George Johnstone, Executive Vice President of Operations
Yes, Michael, good morning. It's George. We did have a significant reduction in real estate taxes in our Austin, Texas portfolio. The Travis County appraisal district had come through and had lowered appraised values. Given the triple net nature of those leases, at our current 86% occupancy in Austin, a lot of that also lowered tenant reimbursements as we approved the reimbursement back to tenants. So that was really kind of a one-time event for real estate taxes.
Michael Lewis, Analyst
Okay, great. Thank you.
Gerard Sweeney, President and CEO
Thank you, Michael.
Operator, Operator
One moment for our next question. And our next question will come from Bill Crow of Raymond James. Your line is open.
Bill Crow, Analyst
Hey, good morning. Jerry life science space has been in the spotlight a little bit here lately. And I was wondering what your take is on the actual physical return occupancy levels you're seeing and the overall demand level for life science space?
Gerard Sweeney, President and CEO
Hi Bill, the occupancy levels in lab and research spaces are significantly higher than those in traditional office environments since that work requires being onsite. This has led many life science companies we work with to fully return to the workplace, creating equity among employees. We expect this trend to continue, with more companies increasing their return to three or four days a week. However, on the life science front, demand is currently slower compared to last year. We have several companies engaged in FDA trials and others seeking additional financing, and we're observing activity in the marketplace. Overall, the pipeline is improving, although macroeconomic conditions are affecting decision-making timelines. The life science pipeline continues to grow, especially at the university level, and we're seeing promising activity in our Radnor portfolio as well. The credit profiles of our tenants vary widely, from AAA-rated companies to emerging growth firms, so we are thoroughly assessing their financial health. We're collaborating with our B Labs partners and the PA Biotech Council, leveraging a scientific advisory board for insights on scientific validity and FDA approval chances, alongside our typical financial assessments. Despite lower demand, it has decreased substantially for planned starts. Our competition in University City is mainly three or four buildings, which were experiencing higher demand several quarters ago. The supply side has tightened considerably, and I believe our location and the quality of our buildings will keep us well-positioned as demand drivers develop into lease agreements.
Bill Crow, Analyst
Thanks. And one quick follow-up. How much did the tax assessor and the appraiser in Austin lower the values by?
Thomas Wirth, CFO
Bill, I'm going to have to follow up with you. I don't have that information with me.
Bill Crow, Analyst
Okay. Just curious average number. Thanks. That’s it from me.
Thomas Wirth, CFO
Thanks, Bill.
Operator, Operator
One moment for the next question. And our next question will come from Dylan Burzinski of Green Street. Your line is open, Dylan.
Dylan Burzinski, Analyst
Hi, guys. Good morning, and thanks for taking the question. Just curious about expectations for net effective rent in the back half of the year and heading into 2024. Is this a scenario where we could start to see some relief in growing in the net effective rent side of things?
George Johnstone, Executive Vice President of Operations
Yes, Dylan, good morning. It's George again. I'll be happy to take that one. Yes, I mean, we're seeing that effective rent growth. The fact that we're being able to control capital the way we are, asking rental rates have not come under much scrutiny or pressure. Strong positive net effective rent growth is being seen across both city and suburbs here in Pennsylvania. I think, in Austin right now, I think just given a 16% vacancy, we are competing a little bit more aggressively there. We're probably flat to maybe slightly negative on net effective in Austin, in the suburban pockets that we have in the operating portfolio.
Gerard Sweeney, President and CEO
Thank you, Dylan. One of the trends we're observing, which may be echoed by our office peers, is that as tenants return to the office more frequently, they are seeking higher quality workspaces. While the net absorption in some markets may not be robust, leasing activity remains quite strong. Tenants are willing to pay more for better buildings due to their enhanced efficiency. They might be downsizing in terms of square footage, but the quality of the environment they provide for their employees offers significant improvements over their previous spaces. This quarter, a noteworthy statistic is that over 60 percent of our new leasing activity comes from tenants opting for higher quality spaces, and we have achieved solid growth in mark-to-market and net effective rents. We monitor this statistic closely, as it indicates future trends in effective rents. As long as tenants are inclined to pay higher rents for superior buildings, we anticipate continued growth in net effective rents. However, as George mentioned about Austin, there is still sublease space available that we are competing with, especially in high-quality buildings. If those subleases offer discounts, it may exert some downward pressure on us, which is why our business plan incorporates a negative mark-to-market assumption for our planned leasing activities in Austin for the remainder of the year.
Dylan Burzinski, Analyst
I appreciate your comments on how the lending environment remains challenging for office. I'm curious, in your discussions with lenders, is there a certain debt yield that they're targeting?
Thomas Wirth, CFO
Dylan, this is Tom. I think that we've been seeing debt yields that are in the low double-digits. It'll depend on the property and the tenancy. But they are in the low double-digits in terms of debt yields that they are looking to target.
Dylan Burzinski, Analyst
Great. Thanks all.
Gerard Sweeney, President and CEO
Thank you.
Thomas Wirth, CFO
Thank you.
Operator, Operator
One moment for our next question. And our last question will come from Anthony Paolone of JPMorgan. Your line is open.
Anthony Paolone, Analyst
Thank you. One follow-up on the life science leasing pipeline, I think you mentioned 400,000 square feet for 3151. And it's almost the size of the whole building. So that seems positive. But just what's the alternative universe for the folks looking at that project? Like, just trying to understand how much share you all might need to get that project built up? Also, I guess, relevant for the space of 3025 as well?
Gerard Sweeney, President and CEO
Yes, good morning, Tony. The competitive set in University City is primarily three other buildings, two others of which are under construction. We think each building is fairly good in quality, and their delivery times are different. Some degree will that be in the next or not in the mix with a prospect today will really be based upon their delivery timeframe. In addition to University City, whether we compete with those buildings, sometimes some of these tenants should look in different sub-markets, whether it be the Navy Yard or out in the Pennsylvania suburbs strictly Radnor. The universe is much smaller than it was, as I mentioned in a previous comment, four to six quarters ago. I think the upside to the downside of the lending activity is that not a lot of pressure is getting financed. Additionally, given the increasing costs, the yield requirements are higher as well. So that the lower supply coming online and the increased cost to build these buildings, not just from a hard cost but also from a soft cost standpoint, are pushing rent levels up fairly significantly in order to have their numbers pencil. We think that trend line will be in place through the stabilization dates of both 3025 and 3151. Even within that competitive space, we think the proximity of Schuylkill Yards to the regional rail network, to 30th Street Train Station proximity, easy walk to the CBD and all the amenities there does position us very strongly against the competitive set. That being said, as I mentioned earlier, we know we need to get some of this leasing prospects across the finish line. That's our core focus.
Anthony Paolone, Analyst
Okay. Thank you for that. And then, I guess just a follow-up, one relates to the dividend. You talked about the focus on our liquidity, but also a little bit of improvement in the pay-out. I’m just wondering, is there a point in time where the board just takes a finer look at the dividend and you all reassess just how to think about the calculus around the dividend right now?
Gerard Sweeney, President and CEO
Sure. Look, a fair question. But the board takes a hard look at this every quarter. Some of the factors that come into play on that are obviously our own portfolio performance, how our capital plan is progressing, what our core leasing pipeline looks like in terms of NOI accretion. Then we spend a fair amount of time really talking about macro conditions, as well as Brandywine's overall liquidity needs. We'll have that same discussion in September as we start to contemplate the third quarter dividend distribution. Look, our capital plan, as Tom outlined and referenced in the SIP, is doing much better than our original forecast. We've done a good job of navigating some challenging waters in the financing markets to meet our financing objectives. That being said, we still have work to do. That work needs to be done against the backdrop of the very challenging capital market environment. So variable right now is the pace of sales activity, the pricing in which some of those sales take place, and how some of these joint venture loan negotiations go. By September, we'll be able to provide some additional clarity on those points, and then we'll sit down and make a decision on what we think the third quarter and any core dividends may be. The fact that we didn't cover our dividend today based upon a revised forecast is a positive, but we got to keep in mind that that's a Brandywine-specific situation versus us dealing with a very challenging macro market condition.
Anthony Paolone, Analyst
Okay. Thank you.
Gerard Sweeney, President and CEO
Thank you.
Operator, Operator
I would now like to turn the call back to Jerry for closing remarks.
Gerard Sweeney, President and CEO
Tanya, thank you very much. Everyone, thank you for participating in our second-quarter earnings call. We look forward to keeping you updated on our next third-quarter earnings call in the fall. Enjoy the rest of the summer. Thank you again for your engagement.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.