Brandywine Realty Trust (NYSE:BDN) Q2 2022 Earnings Conference Call July 26, 2022 9:00 AM ET
Company Participants
Jerry Sweeney – President and CEO
George Johnstone – EVP of Operations
Dan Palazzo – VP and CAO
Tom Wirth – EVP and CFO
Conference Call Participants
Anthony Paolone – J.P. Morgan
Jamie Feldman – Bank of America
Michael Griffin – Citi
Brian Spahn – Evercore ISI
Omotayo Okusanya – Credit Suisse
Bill Crow – Raymond James
Operator
Welcome to the Brandywine Realty Trust Second Quarter 2022 Earnings Conference Call. My name is Hilda [ph] and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. [Operator Instructions]
I will now turn the call over Mr. Jerry Sweeney, President and CEO. Mr. Sweeney, you may begin.
Jerry Sweeney
Hilda, thank you very much. Good morning, everyone and thank you for participating in our Second Quarter 2022 Earnings Conference Call. On today’s call with me, as usual are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Vice President and Chief Accounting Officer; and Tom Wirth, our Executive Vice President and Chief Financial Officer.
Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities 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.
Well, since our last call, our economy has seen record inflation, continued global supply chain disruption and a dramatic increase in baseline interest rate. These conditions have credit significant cost increases and uncertainty in the equity and debt financing market at least in the near term.
Our portfolio stability evidence by our low forward rollover provides protection from operating expense increases on 81% of our lease, and that position us as best as possible for this changing environment.
Our operating and development plan remains strong and very much on target. While overall return-to-work has been slower than we would like. We are benefiting from a decided tenant focus on quality.
We continue to experience higher physical occupancy across our portfolio with the highest level of density being in our Pennsylvania suburbs and D.C. operations. Tenant interest in high quality work environments is accelerating. We see that every day in our tour levels, lease negotiations and deal execution.
In fact, 32% of the new deals in our operating portfolio pipeline, our tenants looking to upgrade from lower quality, less amenitized buildings. During the call this morning, Tom and I will review second quarter results, provide an update on our 2022 business plan and our guidance. After that Dan, George, Tom and I are available to answer any questions.
During the second quarter, we executed 686,000 square feet of leases, including 423,000 square feet of new leasing activity. We also posted rental rate mark-to-market at 18.4% on a GAAP basis, and 7.8% on a cash basis.
Our full year mark-to-market range remains at 16% to 18% on a GAAP basis, and 8% to 10% on a cash basis. Absorption for the quarter was positive and tenant retention was 70%.
Second quarter capital costs were in line with our business plan range, core occupancy and leasing targets were also within forecasted ranges, and we ended the quarter 92.1% lease and 89.6% occupied.
It’s further worth noting that our Philadelphia CBD University City, Pennsylvania suburbs and Austin portfolios which comprise 93% of our NOI are combined 93.8% leased and 91.9% occupied.
Our spec revenue target remains in the range of $34 million to $36 million, with $33.7 million or 96% of the midpoint achieved. This speculative revenue range represents approximately 1.8 million square feet, which 1.6 million has already been leased. So 89% done on that metric.
The portfolio is stable, and our forward rollover exposure through 2024, averages 7.2%, which ranks at six out of 17 office routes. Further our annual rollover through 2026 is below 10%, ranking a seven out of 17 office routes.
From an FFO standpoint, we posted first quarter results of $0.35 per share, which was $0.01 above consensus estimates. And then looking at our 2022 guidance, Tom will articulate in greater detail. But the bottom line is our original 2022 business plan projected interest expense between $70 million and $72 million.
We have met that assumption for the first half of the year. However, looking to the second half, due to the rapid increase in short term rates, our interest expense, including our share of joint ventures will increase by about $0.03 per share.
So while our operating plan remains fully on track, based on the rise in interest rates, we are narrowing and adjusting our FFO range from 137 to 145 per share to 136 to 140 per share. And as I mentioned, Tom will articulate more detail on that in a few moments.
Based on our 2022 leasing activity and development spend, we continue to project our debt-to-EBITDA range will be between 6.6 and 6.9 times. That leverage increased, the majority is transitional, coming through debt attribution particularly on the development side.
So to amplify that point, our core EBITDA range remains between 6.0 and 6.3 times by limiting our joint venture and active development redevelopment projects, as we mentioned in the last call, we believe this is a more accurate measure of how we manage our core stabilized portfolio.
Looking a bit ahead, despite the ongoing scepticism on forward office demand drivers, our leasing philosophy actually remains fairly encouraging. During the second quarter physical tour volume equaled first quarter levels, with overall volume up over 30% from our previous year.
Virtual tour volume was up 27% from the first quarter, And our total leasing pipeline is 4.8 million square feet, broken down between 1.4 million square feet on our operating portfolio, and 3.4 million square feet on our development project.
The 1.4 million square feet leasing pipeline on the existing portfolio is up 100,000 square feet from last quarter with approximately 130,000 square feet in advanced stages of lease negotiation.
I should note that as an example of building velocity, out of last quarters pipeline, we executed 430,000 square feet of leases, while during the quarter adding over 500,000 square feet of new prospects to the current pipeline.
Also, 32% of our new deal pipeline, our prospects looking to move up the quality curve. And we did experience this trend in terms of leases executed during the second quarter where 67% of the new leasing activity we executed replace the quality of tenant.
The leasing pipeline on our development projects is a 3.4 million square feet and that did increase over half a million square feet or 28% during the second quarter. Deal conversion rates in the second quarter was up to 38% from 33%, the last quarter.
And another good sign is that tenants continue to accelerate their decision timeline. This past quarter, the median deal cycle time improved by an additional week, and is now within five days of our pre pandemic levels.
From a liquidity standpoint, even with our targeted development spend and absent any other financing or sales sources, we anticipate having $300 million availability under our line of credit. And along those lines during the quarter we did renew both our $600 million line of credit and our $250 million term loan on very similar terms to those that were previously existing.
Our $0.76 per share annual dividend is well covered, is a very attractive yield in our current stock price is accompanied by 54% FFO payout ratio. In looking at capital allocation, we made progress on several fronts.
We continue during the quarter and will continue to sell non-core land parcels. During the last quarter we sold our land parcel in the riverfront district of D.C. generating a $3.4 million gain. We also sold some nine core buildings and lands in New Jersey, generating an incremental $800,000 gain.
In looking at our development opportunity set, our remaining Brandywine net funding obligation on all of our active development projects is just about $110 million. Our equity requirements on Schuylkill Yards West, and Uptown ATX. Block A is fully funded.
We have $24 million to fund on our new store to 3151 Market. The balance of that remaining funding requirements really tied directly to leasing activity. During the quarter, we did commence the redevelopment 2340 Dulles Corner. That property is 85% leased under an 11 year lease, and we anticipated completing that project by the fourth quarter of 2023.
405 Colorado made incremental progress during the quarter. We’re now 91% leased based upon the 22,000 square feet of leases that we signed during the quarter. We have two fund [ph] leases out for final execution that will completely fill the building. So we’re happy to deliver that project at our original anticipated yield.
250 King of Prussia Road, which is our first life science delivery in the Radnor sub market, is now over 36% leased. Current pipeline totals 237,000 square feet and we’re making great progress in that building approaches final delivery.
In looking at our development of Schuylkill Yards and Uptown ATX, Schuylkill Yards West, which is our life science office residential tower on time, on budget for Q3, 2023 delivery. The project will continue to be delivered 7% blended yield.
As I mentioned a moment ago, our entire equity commitment is fully funded. Our partners, equity investment is also fully funded. And the first funding of the construction loan recently commenced.
You may recall, and Schuylkill Yards, we can develop that 3 million square feet of life science space. And it’s another step towards realizing that vision. We are excited to announce the start of our 3151 Market Street project, a 440,000 square foot dedicated life science building. The building has an estimated cost of $308 million, will deliver a yield of 7.5%. And we are targeting a second quarter 2024 completion.
Our leasing pipeline on that project right now is over 400,000 square feet. We have obtained an equity commitment from our existing institutional partners, Schuylkill Yards and the 3151 structure is consistent with our existing Schuylkill Yards West project, with Brandywine having a 55% ownership stake, and our partner having a 45% ownership position.
Looking at Uptown ATX Block A, the first phase of our 66 acre development is underway. Construction there is also on time and on budget. And we certainly anticipate that that project will continue to generate additional leasing activity as we go through the development pipeline. In fact, even this early in the process, our leasing pipeline stands at 1.6 million square feet.
In addition to those ongoing developments, we have seen an increase in tenant interest in several of our build-to-suit projects. And we are exploring several opportunities in both the Pennsylvania and Austin region.
Two key points just to close out our development discussion is our on our forward pipeline is our low land bases per SAR and our product diversity. Of the 14.2 million square feet that we can build, only about 25% is office with the ability to do between three to 4 million square feet of lifestyle space and over 4000 apartment units.
Furthermore, the overlay approvals we have on both of those Master Plan communities gives us a degree of flexibility to further adjust that mix to meet market demand drivers. So our key takeaways on the development pipeline is a very quantifiable for funding basis at low land bases, low carrying costs, demand driver flexibility and product diversity.
And in terms of generating additional liquidity, while 2022 business plan does not incorporate any additional disposition. We do anticipate being active on these fronts. We anticipate continuing to sell select non-core land parcels. And even with the recent volatility in the debt markets in particular, we believe that we have ongoing opportunities to harvest profits from the sale of several properties.
As such, we are currently testing the investment market with several assets for sale. Obviously, volatility in the debt markets over the last 45 days has slowed that process. But we remain confident of being able to generate additional liquidity over the next several quarters.
We also anticipate the sales of select properties out of some of our existing joint ventures over the next four quarters. Dollars generated from these activities will be used to fund our development pipeline, reduce leverage and redeploying the higher growth opportunities.
Tom will now provide an overview of our financial results.
Tom Wirth
Thank you, Jerry. Our second quarter net income totaled $44.5 million or $0.03 per diluted share, and FFO totaled $60.5 million or $0.35 per diluted share and $0.01 of consensus estimates.
General observations regarding our second quarter results. Our second quarter results were above consensus. We had some moving pieces and several variances to the first quarter guidance.
On G&A, $1.7 million below that forecast, primarily due to the timing of expenses and we have not changed our range for the full year. Portfolio operating income totaled approximately $69.2 and was slightly below our first quarter guidance of $70 million.
Land gains were above forecast by 600,000 due to a higher gain on the sale of our New Jersey portfolio. Our second quarter fixed charge, interest coverage ratios were 3.7 and 4.0 respectively, and sequentially below the first quarter results, but in line with forecasted results.
Our first quarter annualized net debt-to-EBITDA was 7.4, above the high end of our range, however, we are not changing that range at this time. As looking at our guidance for the rest of 2022, as Jerry mentioned, we narrowed our guidance ranges for both net income and FFO by $0.04 a share.
In addition to that narrowing our guidance, we also reduced the midpoint of the guidance by $0.03 per share. The reduction is due to higher interest expense based on we issued guidance, the interest rate per forecast at that time for the third and fourth quarter were 71 basis points and 92 basis points respectively. Current curve is higher by approximately 175 basis points in the third quarter, and 240 basis points in the fourth quarter.
Through that we have an anticipated floating rate debt averaging $500 million in the third quarter, and $695 million in the fourth quarter, which includes about $148 million of JV floating rate debt in the third quarter, and $125 million in the fourth quarter.
Our fourth quarter increase in floating rate debt is primarily due to the $250 million term loan, which is fixed through mid October 22 and floating thereafter, and partially offset by the [Indiscernible] cap in our joint venture properties.
We believe there will be opportunities to mitigate some of the floating rate interest through hedging and potentially asset sales that will lower our line of credit balance. Looking to the third quarter of 2022, we have some following assumptions.
Our portfolio operating income were approximate $71 million and will be above the second quarter as we anticipate net absorption to continue to the balance of the year. FFO contribution from my own consolidate joint ventures will be $6.5 million for the third quarter.
G&A will remain unchanged roughly at $8 million. Total interest expense will increase to $19 million, primarily due to the anticipated higher rate and capitalized interest were approximately $2 million.
Term fee and other income were approximate $2 million. Net management fee and development income will be $3.5 million. And we do have a land gain sale and tax provision that will net around $1.5 million over the land [ph].
Refinancing activity as Jerry mentioned, we did recently refinanced the $600 million line of credit through June 2026, and our $250 million term loan for June 2027, on very similar terms towards the current facility.
Looking at our capital plan, fairly straightforward until those $200 million, our 2022 CAD payout ratio will continue to be 84% to 95% and likely be at the higher end of that range. The 22 range is above our historical run rate, primarily due to higher capital costs associated with higher leasing activity and our wholly-owned and joint venture portfolio.
Uses for this remainder of the year is $74 million of development and redevelopment project, $65 million of common dividends, $30 million of revenue maintain and $20 million of revenue create CapEx and $10 million of net equity contributions to our joint ventures.
Primary sources are $90 million of cash flow after interest, $81 million use of the line of credit and $29 million cash on hand. Based on the capital plan outline above, our line of credit balance will approximate $300 million at the end of the year leaving $300 available.
This needs to be adjusted in our SIP where we have $330 million we’ll be adjusting and reposting that debt this morning. We also project that our net debt to EBITDA range of 66 to 69, but the main variable be timing and scope of our development activities.
With regards to liquidity, we have ample capacity through our line of credit. We do expect to invest in incremental $96 million and our active development projects after 2022. And our plan is to complete targeted asset sales later this year and into 2023 to lower that line of credit balance.
We anticipate our fixed charge ratio to be approximately 3.5 and our interest would be 3.8, a slight decrease from the prior quarter and our net debt to GAV will be between 40% and 41%.
We believe these ratios are elevated due to our growing development and redevelopment pipeline and we believe they are transitory and once these developments are stabilized, they will decrease.
To further highlight how the investment and future development is impacting our current leverage metrics. As outlined in our development page, we currently have $397 million invested in development projects that are providing none or minimal 2022 earnings.
That $397 million investment has a 1.4 times increase or leverage at the end of the quarter. We anticipate those projects generating $57 million of cash NOI over time and are confident on reaching those data to estimate yield.
Once these active projects are stabilized, we forecast that leverage will go back down into the low six range. As mentioned above, we plan to partially offset the current development leverage with some targeted sales in 2022 and 2023.
While the above development activity takes place, we included an additional metric of core net debt-to-EBITDA, which was 66 at the end of the quarter, which excludes our joint ventures, and active fully owned development.
I’ll turn the call back over to Jerry.
Jerry Sweeney
Great, Tom. thank you very much. So just to wrap up key takeaways or, look, we’re very mindful of the tone on the office market and the impact of return to work in hybrid work schedules. And we’re working on that battle every day.
I do think we are seeing some very encouraging signs that evidence that’s reflect the quality. And I think the real bias and a lot of large and small employers are making sure that they provide the right physical platform to execute their business plan.
And our portfolio is in solid shape. We have excellent visibility for forward growth. As I mentioned earlier, our average rollover is very low through 2024, actually through 2026. With strong mark-to-market, very manageable and demonstratable capital spend and accelerating leasing velocity.
Our forward growth drivers remain, increasing NOI out of our existing portfolio and executing our development pipeline. So as usual, we’ll land where we start, in that we really do wish all of you and your families are doing well and having a chance to enjoy the summer.
And with that we’re delighted to open up the floor for questions. As we always do, we ask that you limit yourself to one question and a follow up. Thank you very much.
Question-and-Answer Session
Operator
Thank you. We will now begin the question and answer session. [Operator Instructions] And we have a question from Anthony Paolone from J.P. Morgan. Please go ahead.
Anthony Paolone
Thanks. Good morning. My first question is relates to Jerry. You mentioned 32% I think in the pipeline looking for, I guess improved space or highly magnetized space. Can you talk a bit more about specifically what they’re looking for? And maybe perhaps the type of space they’re coming out of and whether they’re keeping the same footprint shrinking? What exactly is changing there?
Jerry Sweeney
Yes. George, do want to pick up on that?
George Johnstone
Yes. Tony, be glad to. I mean, we’re seeing the predominance of that, like the quality coming more from the inventory in downtown Philadelphia kind of taking the jump from B [ph] inventory up the trophy. But even in the suburbs, we’re starting to see tenant taking advantage of space opportunities that we have in Radnor, Conshohocken, even Plymouth Meeting coming out of some of the second year sub markets in the suburb. I think it’s not only the management of the buildings, but it’s the building systems, the elevator systems, HVAC systems. Technology within building. The overall, I think the majority of those tenants are probably dialing back space a little bit, but nothing that I would say, significant, maybe 5% to 10% reduction in footprint. The typical build outs, our second quarter kind of spatial analysis on — pretty much the same. We had been trending kind of 65% workstations, 35% offices. During the second quarter we kind of saw that trend to 60/40. So not a dramatic shift between workstation and office. But a little bit more space planning focused on pathways and turning radius and things along those lines, but again, not nothing of significance to the general footprint.
Jerry Sweeney
Yes. I think just to add on to that, Tony. Certainly, volume of landlord, location of building are key and also it demonstrated track record of capital reinvestment in the project. I mean, some of the highlighted items in addition, which George mentioned with the real keen focused on HVAC, vertical transportation systems are really a very crisper focus on more interior day-lighting, which typically comes from higher ceilings, more glass, some level of indoor, outdoor component. We’re certainly seeing that in our new development projects where full service amenity program is very attractive to both office, life science and residential tenant.
Structured parking is becoming a key issue now. But the builder have covered parking. So, I think all those things are more prevalent in portfolios like ours are key parts of every one of our development projects. I think that — those items as well as I think the recommendations of respective landlords have are key decision points that can make their final termination.
Anthony Paolone
Got it. Thanks for all that. And then just for Tom. You laid out the pieces of the floating rate debt and the cost impact to guidance. But just thinking bigger picture, like where do you think you should be over time in terms of the amount of your debt floating? And also thinking about it as we start to look into next year, so I think you have some bonds coming to where we are in the year as well?
Tom Wirth
Yes. So on the floating rate debt base, I do think that we will look at least on the term loan is a good example. I think that is something we will look at, whether it’d be now or in the future, as we take a look at the curve, which has been moving pretty volatile. But we do — I do think we should be above 90% on a fixed rate debt. And we’ll get back up into that level, which is where we historically have been. I think, the combination of the — on the wholly-owned portfolio. On the JV portfolio, I do think we will continue to float as we do development in this way — as we have some of these joint ventures. So that one will probably stay in the same range that it’s in now. But we have mitigated a little bit of that with some staff and hedging that we’ve already put in place. I think on the bond, Tony, we will probably look to refinance those. I’m not sure if we’re going to refinance them with 10 year bonds, but we’re monitoring the market and we’ll probably look to refinance those with public bonds early next year.
Anthony Paolone
Okay. Thanks for the color.
Jerry Sweeney
Thanks Tony.
Operator
Thank you. Our next question comes from Jamie Feldman from Bank of America. Please go ahead.
Jamie Feldman
Great. Thanks and good morning. Can you talk more about the development and redevelopment start? Just kind of what gives you conviction here? I know that you’ve got pretty good leasing in the redevelopment. But just kind of what gives you conviction on starting projects here, in terms of the leasing outlook, and maybe even more importantly, the cost outlook? And what have you done in these projects to kind of hedge against inflation risk?
Jerry Sweeney
Yes. A great question, Jamie. A couple of things. First on the cost side. I think as we’ve talked on previous calls, we don’t start anything unless we’re fully locked and loaded on the cost. So for example, Jamie, on 3151, we’ve executed a guaranteed maximum price contract with a general contractor that we know very well. We’re close to 89% bought out at the sub trade level. We do build in contingencies both within the GC contract as well as at the owner level to make sure that we can account for any kind of last minute change that take place. But we’re very focused on running all of our projects, including kind of the perspective development pipeline, all the way through the entire design development process. And as part of that, we’re pricing two to three times before we kind of put pencils down.
So even in that number that Tom has outline that close to $4 million number on the development investment, some of that money is basically for design development work on projects that are next in the queue, to make sure that we’re fully locked down the cost equation. In terms of the — I haven’t had any additional color to on that point. On the conviction for the starts, I think they really come from a couple of different vantage points. One, we know the markets very well. We have great recon and visibility to what we think that both the current and prospective pipeline is. So, in the case of our redevelopment at 2340, that obviously was conditioned upon getting the 85% leased, done. We’ll complete that over the next couple of quarters. Deliver that building and that will create a good capital event opportunity for us with that building.
And certainly having that building which had been previously vacant, now 85% lease, which is the two top floors to lease, things puts us that — we think that puts in a very good position to generate that either great NOI stream over the next 11 years or great capital event sometime in 2023. In terms of 3151, the combined pipeline we have for both Schuylkill Yards West and the 3151 start, its very strong, it’s very diverse in terms of size and type of sponsorship be that institutional, public company established company, so we take a look at where we — when we think these timing requirements these prospects are, they’re very keen on delivery timeline, which us — starting the project gives us the ability to meet. The other things you may take into — as we’ve take in account is, taking a look at the forward supply pipeline. And certainly one of the opportunities we have here to Schuylkill Yards is to be able to kind of preempt maybe some future development starts by competitors by starting our project given the existing pipeline.
So we kind of assess all those risk factors as we go through the equation to actually make the decision to start that project. Uptown ATX, but certainly, as always — there’s always a lot of construction in Austin, Texas, in every product type. But I think from our perspective, knowing the full range of development capacity, we have it Uptown ATX shorting that office residential component of Block A. We’ve already got over a million plus square feet of prospects in tow, for the 350,000 square feet of office components. So right now we’re frankly evaluating, do we break the building down for single floor tenants or hold off for a larger scale tenant, which tends to take a little bit more time to go through the gestation, evaluation process. So hopefully that answers your question?
Jamie Feldman
Yes. Thank you very much. And then just — it sounds like you’re considering some additional asset sales. How should we think about the potential impact on earnings for the back half of the year? Maybe even to 2023? You think it would — can you mitigate the dilution? Or do you think that’s actually downside to numbers?
Jerry Sweeney
Our hope is we going to all these things is to minimize the dilution. We do think we have a couple of assets that we’re marketing for price discovery, either a fairly low cap rate sales. A couple may go to users. We may have other joint ventures began sell out of. So the game plan there, Tony is the kind of sequence those sales into management solution as much as we can, but then also bounce that, again, optimal pricing as well as liquidity generation.
Jamie Feldman
Okay, all right. Thank you.
Jerry Sweeney
Thank you.
Operator
Thank you. The next question comes from Michael Griffin from Citi. Please go ahead.
Unidentified Analyst
Hey, it’s Michael Bellman [ph] here with Michael Griffin. Jerry, I wanted just to sort of step back and just think about sort of the enterprise as a whole. And you talked a little bit about sort of lease rollover and how that’s more or less than peers. And you’ve talked a little bit about the development adding accretion. But when you look at the right hand side of your balance sheet, you have not only the exposure on the flooding rate side, which you’ve addressed in this year’s guidance, but you have $1.8 billion gross of get rolling over the next two and a half years, of which your share is 1.1 billion, right? You got 1.1 billion in the JVs and you got $700 million of the two bonds that come due one early next year and one in 2024. And when you look at that, right, 55% of your debt book, and you are more highly leveraged than your peers. 44% on a net effective basis, it would appear as though, everybody was issuing debt the last few years to refinance upcoming maturities, and you guys sort of sat still. And I’m just trying to better understand sort of respond litigation on the balance sheet side, because it would appear, this could have a significant impact on earnings as you refinance. And I know you’re going to get development accretion, but it will largely be offset by the dilution from refinancing on top of the dilution from potential asset sales. So how should investors think about the risk that this is posed to the enterprise today?
Tom Wirth
Hey, Mike, it is Tom. Just the start off, I think on the on the maturities, we do have two bonds coming due 350. And we’re going to look at how the markets play out. The rates have gone up significantly, spreads have not moved, in fact, they’ve gone out further. So, we are going to have to monitor where that is, those bonds are coming off just below 4%. And we’re probably looking at financing somewhere in the 5% area, depending where the market is, and what tenor within those bonds at. But I assume we will refinance both of those bonds with new public debt. And at current levels, there will be some dilution, you’re right. On the other things that are maturing, for example, like a Commerce Square, which is, is $200 million. That one is well under level, and we have — we’ve already been out in the market looking at debt for that. And we feel we can refinance that at not too dissimilar number at the same level or actually put in some good news capital.
And a couple of the other ones, like a Cira Square, where we deliberately put some short term debt on it based on where the markets were when we bought that property. And we feel very confident with the IRS and there that we can refinance that property as well. There’s some others that are there, I don’t want to go into each one of them, certainly do that another point, like a 1919 is an internal loan that partners have made, that can easily be extended. So — and then hopefully, Michael, we are going to do some asset sales. Our line of credit, as you know, in the past has been minimal, it actually having cash on the balance sheet. So, and we haven’t done sales in a bit of time. So, I think that something we will look to do to bring that line balance down. Now that is extended.
And to the extent we didn’t do some financing in the prior years. But we did look at those financings, we were watching the bond market. Hindsight, maybe we should have done something earlier. But we were looking at all — a lot of make holes that had to be made on those bonds, and people were paying a lot of money to do that. And then at that time, we didn’t think it was worth spending all the extra cash to prepay bonds and thought that was something that we could mitigate that and look at doing them in 2022. Unfortunately, the markets have gone out quite a bit. And you can look back and say maybe we should have done some of those bonds earlier. But I think we can still refinance them. And we will look to minimize the dilution for those as well, just by being very proactive.
Unidentified Analyst
We just seeing that from a balance sheet management perspective, how do you leave yourself exposed with 55% of your total company get rolling two and a half years, at a time when interest rates were at their all time lows. Like I understand all the things on an operating basis, and you’re excited about the developments. But if you’re going to give it all back from interest, and take the risk on debt, I just don’t know when do earnings ever come out. And it just feels like every year, there’s just something else coming about that takes numbers down. And I just — I’m trying to understand why the company put itself in this position to have their backs against the wall with such a dramatic amount of debt coming due at extraordinary low rates?
George Johnstone
For some of that debt going into 2024, we do have 24 months. I don’t know that I would say we got our back against the wall. If you go back to the beginning of the year, Michael, we looked at where those interest rates were. They ran up dramatically. And I’m not going to forecast where interest rates are going. But we do have 24 knots to refinance them. Our coverage ratios are in great shape. So we’re going to be able to bring them in. Where those rates are? We’ll find out. But they did move a lot quicker than we thought. But I don’t think I would characterize it as our backs up against the wall with some of these facilities and what we’re going to be able to finance.
Unidentified Analyst
I think more so from the fact that you just talked about how you’re line was more drawn than you’d like it to be most companies run at zero balance on their line and use it during the quarter. You obviously, your equities constraints, you can issue equity, you’re talking a little bit more land sales, but all you’ve done this year is take on more capital commitments and raise leverage rather than the other side. So, I guess it is what it is and I guess as we progress into 2023 and 2024, we’ll have to better understand, as you refinance $1.1 billion of your pro rata share debt that’s under 4%. How much of an impact that will take away from all the good leasing and development project leasing that’s coming about. So thank you.
Operator
Thank you. The next question. I’m sorry. We will take the next question that comes from Brian Spahn from Evercore ISI. Please go ahead.
Brian Spahn
Hey, thank you. Jerry, you’ve talked about physical occupancies. And I think you mentioned the highest utilization levels in Philadelphia suburbs and D.C. But as you talk to tenants, what are your expectations for utilization levels into the back half of the year? Do you think this number is kind of topped off given hybrid work adoption?
Jerry Sweeney
Now, George and I step in. I think we can teach. It’s interesting. We actually — the more conversations we have directly with tenants, the more encouraging than you seems to be in terms of them bringing people back three or four days a week. We really haven’t as we thought on previous calls, that had anyone focused on a hotelling concept. There’s clearly a desire for more efficient space layouts, which George kind of framed that out. We see some of the space planning working. We’re continuing to see kind of an incremental uptick in people coming back into the offices. Actually, one of the slowest marks we have and people coming back to the office really is down in Austin, Texas, where that, a high concentration of tech companies. And they tend to be slower than the financial service and the professional service companies in terms of bringing people back into the office.
Certainly the health care related companies are going back. So we actually — it’s something that we liked often, some of the other senior folks here. And there seems to be this general bias against anywhere accelerating, bringing people back to the office. I do think it’ll be somewhere in that three to four days a week for the most part. And I think to some degree that will be a function of labor market condition, specific industry exposure. Even within companies, we’re seeing different ground rules for different functional areas. So those functions that are in very high demand, like IT [ph], we’re certainly seeing more flexibility, more tenants to have their right people, IT folks work remotely. George, any other color on that.
George Johnstone
Yes. I think, the one thing we’re seeing and part of it is probably also influenced by the summer. But Tuesday, Wednesday, Thursday, right now is kind of the high occupancy days with lower amounts Monday and Fridays as one would imagine and in fact, but even those companies that have rolled out voluntary return to work, we’re starting to see increased term work environment they have, sometimes they do just want to get back to collaborate. So, I think we kind of keep moving the goalposts a little bit, but I do think end of summer we’ll really be kind of the neck. What happens after Labor Day and I do think it just requires a couple of CEOs to kind of just put the gauntlet down and say, hey, it’s time to come back. And I think you’ll start to see each industry sector kind of follow the lead.
Brian Spahn
Okay. Thanks. And just on the incubator. Jerry, can you remind us that. There were a couple of floors that did plan to expand there. And is that still on track? And I guess, what are you seeing — what are you hearing from these tenants? And then, how are you monitoring the health of these tenants and their appetite to expand just given the pullback and funding that we’ve seen?
Jerry Sweeney
Yes. We’re monitoring them daily, and they all seem to be doing pretty well. So — but certainly, we’re mindful the fact that with the index of the public — the public company index down 27% of the venture capital pull back that there’s a certainly higher risk to some of these tenants. We’re seeing — it’s a near term expansion requirements by some of those tenants. As you know, B.Labs this 50,000 square feet. We’ve got 12 companies in there were 98% leased. And we do anticipate based on feedback from those tenants somewhere between 180,000 to 150,000 square feet of future demand drivers there over the next 12 to 24 months. So — but certainly, is the point you raised is a fair one is the top of mind for us as well, which is — with some of this, some of this pull back and kind of more negative macro economic overtones, we’re very closely tracking how these tenants are doing. How their trials are going. How their capital base is going, their burn rate. And that’s really where our partnership with the biotech has been helpful as well. They know the science, they know these companies. So we can assess them from through the window that we know, real estate, they can help us assess the future viability and growth expectations to these tenants from a scientific and talent standpoint. So it’s been a very effective partnership on that front.
We — the last piece of your question. We do plan on expanding the incubator. We — contrary to some of the negative times, we’re actually trying to work with trying to move some office tenants into other buildings where their leases don’t expire until the mid part of 2023. So to some degree, our timing of delivering that additional square footage is really a function of how we can relocate those tenants. We do have some work taking place on one of the floors within Cira to facilitate some known tenants who would expect that to take place over the next several quarters.
Brian Spahn
All right. Thank you very much.
Jerry Sweeney
Thank you.
Operator
Thank you. The next question comes from Omotayo Okusanya from Credit Suisse. Please go ahead.
Omotayo Okusanya
Oh, yes. Good morning, everyone. Could you just talk a little bit about built-to-suit you mentioned that you may actually start something on that front. A little bit about where that demand is coming for built-to-suit, and specifically interested in maybe if it’s coming from the lab, biotech side? And also just how big their opportunity could be in the near term and how that would potentially be funded?
Jerry Sweeney
Certainly. So happy to answer that. The built-to-suit I alluded to, are primarily in some of our production assets. So they’re kind of in the 100,000 to 150,000 square foot range. They would be potentially full building users on 10 to 15 year leases, that development is really an elected decision. So I think as we look at the landscape today, certainly having those smaller buildings lots away from the full tenancy standpoint would be attractive. One key prospect we’re talking to is a life science company who is looking for a significant expansion opportunity. And the other was a larger regional relocation and consolidation of some existing older space. But we’re looking to kind of create a bit of a newer corporate image. And to do that in a newer building that has all the amenities that it’d be top of mind for these tenants now.
Omotayo Okusanya
Great. Thank you.
Jerry Sweeney
Those projects from a capital standpoint are kind of in the $75 million plus range, we can deliver those within typically, four quarters could be four or five quarters, depending upon the complexity fit out. So the delivery cycle between the investment of the money and the recovery of the NOI is much less protracted than we’re seeing on these larger scale development.
Omotayo Okusanya
Got you. Thanks.
Jerry Sweeney
Thank you.
Operator
Thank you. The next question comes from Bill Crow from Raymond James. Please go ahead.
Bill Crow
Good morning. Thanks, Jerry, can you just highlight the pipeline for life science buildings in Philly and what the risk is that we may see some overbuilding given some of the challenges you do see find in smaller companies financing?
Jerry Sweeney
Yes, sure, Bill. As we’re looking at the pipeline, we have there a number of properties that are currently under development. There have been several that had been announced. And we’re not sure that some of the ones have been announced will actually get the financing or the tendencies to actually get the project started. So right now there’s probably four or five core competitive projects between University City, Science Centre down to build out a Navy Yard, which tends to be lower rise, lower rise projects that tend to be more manufacturing versus lab space. And then, there’s a number of other properties that are kind of between Navy Yards and near in Pennsylvania suburb, and CBD Philadelphia are either being talked about, Bill, is Life Science conversion, ending, getting a tenancy in place, or starting the design development process.
So look, we’re very mindful of the fact that life science seems to have more clarity to the demand drivers than traditional office, to a number of office developers or holders of land that was deemed to be office are looking at life science opportunities. As we kind of assess our risk. We do think that too, we are escaping our location next to the train station adjacent to the major institutions. Next to the — do interstate highways. Our location tends to be top tier. And based upon the feedback we’ve gotten from the prospects that we are talking to today, we know that that locational drivers are very important. In addition to that, when we took a look at a design level on a project like 3151, we’ll be introducing some technical components that building in terms of riser [ph], HVAC capacity, vibration, dynamic glazing, oversized elevators with higher speed, things that fill up your market really hadn’t seen before. And we think that those design elements and the efficiency, the footprint, in addition to the locational advantage, will put us in a very good position to attract more than our fair share and build these buildings.
Bill Crow
Appreciate that comment. If I can just add on a question on the return to office rate. I use the castle systems data and you may disagree with the data itself, but it shows build up yet, 38% and it showed Philadelphia at 38.1% on December 1, which would imply no real improvement. I’m going to a disagree with the data or be maybe you could tell us what’s going on with parking revenue. And maybe how far below with what it is from 2019?
George Johnstone
Yes, sure, Bill. This is George. I’d be happy. Look, the capital [ph] report, it hit or miss kind of market-to-market. I mean, we monitor our own terms file data. Fourth quarter 2021, we were about 25%. And we’re currently at about 40% right now. So we are kind of at that capital number. But we actually were a little bit lower than their number. So we have seen some improvement. Parking is a good segue, because we are seeing, those people that are coming in the predominant — some are using the garages that we have in both Commerce Square over at Logan Square, and a couple of other ancillary garages within the city. I mean, our garage occupancies are about 92% and we’re just about all the way back to kind of pre pandemic parking revenue numbers.
Bill Crow
Great. Thanks. Thanks for the time.
Operator
Thank you. And we have a question from Michael Griffin from Citi. Please go ahead.
Michael Griffin
Hey. Thanks for taking the follow up and excited to be on the call. Just curious on the 2340 Dulles redevelopment, what does that make sense to own as opposed to exiting the greater D.C. market entirely and focusing on Austin or Philly?
Jerry Sweeney
Yes. No, look, I think that’s the question I alluded to that. I thought in my in one of my answers were — look, the building for us was had a major tenant move out, it’s that big and for a period of time. We were successful in attracting a — our major tenant was actually the largest lease done in Northern Virginia this year. And the game plan is to essentially complete that renovation with the high probability of trading and capital event there. I think as you may know from looking at the company, we have sold a significant portion of our DC portfolio over the years, and it’s now down to a fairly small percentage of our revenue stream. I think within 2340, we’re definitely saying that is an opportunity to harvest some significant liquidity on a building that it for all intents and purposes, you need to look as almost as the land play right now is really not — it’s actually generating negative net NOI for us [Indiscernible] selling that building would actually generate a significant liquidity event for the company. And to even go back to kind of the debt refinancing question, that gives us the ability to generate a fairly significant amount of money with no earnings dilution, and the cost of capital that layers very well into a refinancing program that we laid over the next several years. And we think we frankly, have a couple of those opportunities within the company, where we have companies, the properties that are frankly ripe for sale, they could be in joint ventures or wholly owned, that we can generate fairly low, fairly high proceeds off a fairly low cap rates or the buildings are generating fairly low returns to us right now. And they’re good value add acquisitions for other companies that can actually layer in to the financing strategy that we’re going to lay out over the next 12 to 24 months.
Michael Griffin
Got you. I appreciate the color on that. And then I also noted that some sublease space in your portfolio picked up slightly sequentially 3.3%. Kind of how should we expect this to be trending sort of going forward? And sort of what led to the slight increase quarter over quarter?
George Johnstone
Yes. I mean, this is George, I’ll take that one. I mean, I think it’s probably going to continue in that low single digit, obviously, sublease space, requires a little bit of term to it to really attract somebody. I think, we’ve got a number of tenancies to, you know, with desire to sublet their space. But again, I think, given the term and the like, just have not been successful to date. So, but again, I think based on our historic run rate, I still think it’s low single digit proposition for us.
Michael Griffin
Okay. That’s it for me. Thanks for the time.
Jerry Sweeney
Thank you.
Operator
Thank you. And at this moment, we show no further questions. I would like to have the call over to Mr. Sweeney for final remarks.
Jerry Sweeney
Great. Thank you very much. And thank you all for participating on the call. We look forward to making continued progress in our business plan, updating you on that at our third quarter conference call. Enjoy the rest of the summer. Thank you.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect. Speakers please stand by for debrief.
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