Brandywine Realty Trust (NYSE:BDN) Q2 2024 Earnings Conference Call July 24, 2024 9:00 AM ET
Company Participants
Jerry Sweeney - President and CEO
George Johnstone - EVP of Operations
Daniel Palazzo - Senior Vice President and Chief Accounting Officer
Tom Wirth - EVP and CFO
Conference Call Participants
Anthony Paolone - JPMorgan
Steve Sakwa - Evercore ISI
Michael Griffin - Citi
Dylan Burzinski - Green Street
Omotayo Okusanya - Deutsche Bank
Michael Lewis - Truist Securities
Gabby Horvath - KeyBanc
Operator
Good day and thank you for standing by. Welcome to Brandywine Realty Trust, Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] 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.
Jerry Sweeney
Gigi, thank you very much. Good morning, everyone, and thank you for participating in our second quarter 2024 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 the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC.
Well, first and foremost, we hope that you and yours are doing well. Your summer is off to a great start and are looking forward to a successful and ever improving second half of 2024. During our prepared comments, we'll briefly review our results for the quarter and progress on our 2024 business plan.
Tom will then briefly review second quarter financial results and frame out the key assumptions driving the balance of our '24 guidance. After that, Dan, George, Tom and I are available to answer any questions.
Well, similar to last quarter's call, we want to start off by addressing the key themes that guide our thinking every day. Our focus remains on three key areas, liquidity, development lease up and portfolio stability. First, on liquidity, our recent bond issuance cleared the decks on any bond maturities through November 2027.
During the quarter, we fully redeemed our October '24 bonds. As such, we anticipate maintaining minimal balances on our line of credit over the next several years to ensure ample liquidity, and believe that that liquidity will be further enhanced by our asset sales program and other deleveraging initiatives.
On our operating joint ventures, we have resolved two of our nonrecourse mortgages on our Cira Square JV. We refinanced our existing mortgage that was matured this month with a new $160 million mortgage, which now expires in June of '29. Each partner funded a pro rata share of the equity required to reduce the outstanding mortgage balance and put that project in a cash flow positive position.
On our MAP joint venture a few items to highlight. We have reduced, restructured and extended the existing leasehold mortgage. The mortgage was reduced by $26 million and extended through March of 2029. In addition, the amended loan provides the lender receives a 95% participation in the operating results, reducing our economic interest to 5%.
The combined activity of deleveraging on Cira Square and the restructuring of the MAP joint venture reduced our debt attribution by $101 million. To facilitate that restructuring on MAP and to provide capital for the debt paydown of $26 million, Brandywine and the fee owner formed a joint venture to purchase 14 flex and industrial properties.
This new entity is completely unencumbered and we are currently marking that portfolio for sale and we anticipate be able to sell those properties over the next several quarters. Second on development lease up the pipeline on all projects continues to build with the number of tours and issued proposals increasing during the second quarter versus the first quarter.
We are in the advanced stages of lease negotiation with approximately 200,000 square feet of tenants, with a strong pipeline building behind that. The residential components continue to perform on pro-forma in terms of both absorption and rents. Each of these projects are top of market, attractive to a broad range of customers and we remain confident of hitting our targets.
We certainly recognize that both the earnings drag and balance sheet impact of carrying this non-revenue producing capital and continue our aggressive marketing campaign on each project. To the upside, upon stabilization, these projects will generate approximately $50 million of GAAP and $45 million of cash NOI or a 15.5% increase to our existing income stream.
So they do remain a key driver to our company and we are crisply focused on having those projects reach their stabilization. And on the stability certainly, our portfolio stability is always top of mind. The strong operating metrics we posted again this quarter reflect the underlying stability of the core portfolio, and while certainly our 80% occupied Austin portfolio still faces near term challenges, fundamental growth dynamics in that market remain.
In fact, activity levels in Austin had picked up second consecutive quarter of positive absorption in that marketplace and we plan to be a strong participant in that market's recovery. Philadelphia, which is one of the lowest vacancy rates among large cities in the country, continues to perform well as evidenced by our 94% leasing level and occupancy level of 91%.
Looking ahead, we have less than 6% annual rollover through 2026, one of the lowest in the office sector. Our 2024 revenue plan is running ahead of schedule. As such, we have increased our speculative revenue range by $1 million and also raised our annual retention range.
Our mark to market capital ratios and same store numbers all continue to perform at relatively strong levels as they have done over the last several years. We fully recognize the liquidity and valuation challenges facing our sector, in fact the entire commercial real estate space, and continue to take steps necessary to a strong, sure performance on our business plan and achieving all of our growth objectives.
With that background, the momentum from the first quarter continued into the second quarter and the year is off to a very solid start. All operating results are in-line or above our 2024 business plan. A few highlights, we posted second quarter FFO of $0.22 per share, in-line with consensus.
Our speculative revenue range, as I mentioned, of $24 million to $25 million has been increased to $25 million to $26 million with $25.6 million already executed. Our '24 bond maturity has been fully redeemed. Our combined leasing activity for the quarter totaled 500,000 square feet.
During the quarter we executed 164,000 square feet leases, including 101,000 square feet of new leases within our wholly-owned portfolio. Based on our efforts during the first six months of the year, we have eliminated $163 million of debt attribution from our joint ventures, which exceeds our $100 million target.
And as noted on page 13 in our SIP, our business plan does anticipate having full availability on our $600 million line of credit at year end '24. Along those lines, our consolidated debt is 95% leased, I’m sorry 95% fixed at a 6.2% rate. Our quarterly rental rate mark to market was 10.8% on a GAAP basis and negative 0.4% on a cash basis.
It's worth noting that this metric for the quarter was impacted by a larger lease renewal we did in Austin with a roll down in rental rate, which we accepted in lieu of any tenant improvements. Our new leasing mark to market was a strong 28% and 15.5% on a GAAP in cash basis, respectively.
We ended the quarter at 87.3% occupied and 88.5% leased, sequentially down from last quarter, but right in-line with our '24 business plan projections, so the operating portfolio remains in solid shape. Our forward rollover exposure through '25 has been further reduced to 5.8% and is noted through '26 down to 5.7%.
Also, we do not have any tenant lease expirations greater than 1% of revenue through 2026. So we believe our asset quality, service delivery platform and submarket positioning remain a key competitive advantage. Similar to prior quarters, the quality curve thesis continues to gain strength as reflected in the overall pickup in leasing activity.
In addition, given some of the stress our competitive landlords are facing, we have in several submarkets seen our competitive set shrink and the quality, operating and financial stability of our platform has continued to separate us from the pack, both in the minds of prospective customers, existing tenants and brokers.
Along those lines, we continue to see encouraging signs on the leasing front as evidenced by the following metrics. The increase in physical tour activity has been very positive. Second quarter physical tours exceeded first quarter by 22% and also exceeding our trailing fourth quarter average by over 11%, also, tour activity remains above pre-pandemic levels by 27%.
On a wholly owned basis during the second quarter, 68%, 68% of all new leases were a result of this flight to quality. Tenant expansions continue to outweigh tenant contractions during the quarter. Our executed renewal and expansion activity has enabled us to raise our annual retention range by 150 basis points from 57% to 59% to 59% to 60%.
The total leasing pipeline continues in a strong position. The operating portfolio leasing pipeline is up 100,000 square feet from last quarter and stands at 2.3 million square feet. This includes approximately 282,000 square feet in advanced stages of negotiations. Our development pipeline remains at the same levels as last quarter and also 32% of our operating portfolio new deal pipeline our prospects looking to move up the quality curve.
Looking at EBITDA, our second quarter net debt to EBITDA remained at 7.9 times. The increase compared to the first quarter at the same level as increased investment in our development projects was offset by our JV recapitalizations. Our core EBITDA metric ended the quarter at seven times, slightly above our current targeted range.
Based on our operating results, for the first half of the year, we have narrowed our 2024 FFO guidance from $0.90 to $0.97 per share and $0.91 to $0.96 per share. And also looking at the dividend based on our $0.60 per share dividend, our second quarter FFO and CAD payout ratios were covered at 68% and 97% respectively. And at the midpoint, our first six-month CAD payout ratio was better than our 2000 business plan projection.
Looking at sales activity, our business plan does contemplate us executing between $80 million and $100 million of sales. We had targeted those to occur in the fourth quarter. We have about $200 million of properties in the market for price discovery. Given the reaction to that activity thus far, we do anticipate posting actual results within our targeted range and while we also anticipate continue to sell noncore land parcels, we did have several land agreements terminated during the quarter due to the buyer's inability to obtain financing.
In looking at our developments, the development pipeline remains strong. As of now, we have approximately 200,000 square feet in active lease negotiations, 900,000 square feet proposals outstanding and 300,000 square feet space undergoing test fits.
Tour velocity continues to pick up and activity levels have continued to increase on our recently delivered project at One Uptown. Given the length of time to complete the space plans I noted last quarter, we still need to obtain permits, construct space. Our '24 financial plan does not include any spec revenue coming from either One Uptown or 3025 JFK.
To accelerate revenue recognition however, we are nearly finished building out two floors of spec suites at One Uptown and one floor of spec suites at 3025. Looking at 3025, that property is fully delivered. On the commercial component we're currently 15% leased, with an active pipeline and again 100,000 square feet or so under active lease negotiations.
On the residential component, we continue to see steady traffic and leasing activity for that residential component which we call Avira has 237,000 leases executed, or just shy of 73% of the project. That's up significantly from last quarter's call. 151 of those leases have taken occupancy at pro-forma rental rates.
We still project this residential component will be between 80% and 85% leased by year end '24. We have begun pre-leasing for One Uptown's block A residential component, called Solaris House, and continue to see steady traffic. We have 22 leases executed, no leases have taken occupancy yet as the first move ins are scheduled for later in August and we continue to project, that project will be between 20% and 25% lease by year end '24.
3151 market, it is scheduled for delivery in the fourth quarter of this year. We have a leasing pipeline of over 350,000 square feet on that with 110,000 square feet in lease negotiations. At Uptown ATX the office component, we have that in a joint venture, and our leasing pipeline there approximates 1.2 million square feet with prospects range from 3000 to 300,000 square feet.
As I just said, we did complete a floor of spec suites with the second floor underway and things are moving on track there as well. Our next phase of B.Lab on the eighth floor of Cira Center is well underway, and we remain in the final stage of negotiating a lease with a single tenant for that entire floor.
Tom will now provide an overview of our financial results.
Tom Wirth
Thank you Jerry, and good morning. Our second quarter net income totals $29.9 million or $0.17 per share and second quarter FFO total $38 million or $0.22 per diluted share. Our second quarter net income results were impacted by a $53.8 million or $0.31 per diluted share one time non cash income gain from the restructuring of our MAP joint venture.
Our FFO results met consensus and we have some general observations regarding our second quarter, highlighting a couple variances compared to our first quarter guidance. Interest expense was $2.2 million below our reforecast, primarily due to higher capitalized interest and lower projected borrowings on our unsecured line of credit.
G&A totaled $8.9 million, 600,000 below or above our reforecast, primarily due to compensation expense. This quarterly variance continues to be a timing variance, and we still anticipate the full year number to be consistent with our guidance. Our first quarter debt service and interest coverage ratios were 2.2 and net debt to GAV was 45.2%, both in-line with projections.
Our first quarter annualized core net debt to EBITDA was 7.0 and is 210 of a turn above our range, and our annualized combined net debt to EBITDA was 7.9, just above the high end of our range of 7.5 to 7.8. Regarding portfolio and joint venture changes, we have made no changes to our wholly owned core portfolio in this quarter.
Financing activity as Jerry highlighted, we completed a $400 million bond offering that closed on April 12, and with this closing, we've eliminated a near term maturity risk with no unsecured bonds maturing until November 2027. Our wholly owned debt is now 94%, just under 95% fixed, with a weighted average maturity of 4.2 years.
Regarding our 2024 joint venture maturities, as Jerry mentioned, we have made progress with our partners and lenders on the 2024 maturities. We refinanced our loan with Cira Square and setting that maturity date till 2029. We recapitalized the MAP joint venture by acquiring our partner's interest, reducing the existing loan by $24.5 million, and then executing a new loan through 2029.
These transactions continue our goal of reducing our investment exposure to our operating joint ventures and just as importantly, also reducing the net debt attributed to these ventures by well over $100 million in this quarter. In addition, in connection with the MAP recapitalization, we formed a 50-50 partnership with the current ground owner and acquired the leasehold interest in 14 property portfolio located in Richmond, Virginia totaling approximately 642,000 square feet or $44 per square foot.
That is over 99% occupied. Portfolio is primarily flexed in industrial properties with a weighted average lease term of 7.5 years. The portfolio is 44% occupied by S&P 500 biotechnology company. We intend to market this portfolio for sale and based on the profile of the portfolio assets, we expect to sell the assets within the next couple of quarters.
The joint venture portfolio is unencumbered. Looking more closely at our third quarter 2024, we have the following general assumptions. Our portfolio operating income will total approximately $75 million and roughly $1 million above our second quarter operating income number.
FFO contribution from our unconsolidated joint ventures will total negative $2 million, which again approximates our second quarter results. Our G&A for the third quarter will be up sequentially, that will be flat, sorry at $9 million. Our interest expense will approximate $33 million with capitalized interest of $3.5 million.
Termination in other income will approximate $7.5 million in the third quarter. The sequential increase is due to anticipated transactional income that we forecasted in our full year guidance, which was $11 million. Net management, leasing and development fees will be $3 million for the quarter. We don't expect any land or tax provision to be material.
Interested investment income will total $300,000 or $1 million too sequentially below the second quarter. The second quarter had excess cash from the timing of the April bond offering, the bond tender and the final June bond redemption. Our share count will approximate $176 million shares and for our capital plan?
Capital plan is fairly straightforward, $180 million, our CAD range remains at $90 million to $95 million. Uses for this remainder of the year is $55 million for development and redevelopment projects, $52 million for common dividends, $28 million of revenue maintained capital, $20 million of revenue create capital and $25 million of equity contributions to our joint ventures.
The primary sources are $77 million of cash flow after interest payments, $90 million of land sales and $17 million of construction loan proceeds related to 155 King of Prussia Road. Based on the capital planned outlined above and cash on hand, we should have $4 million of cash on hand and our line undrawn at the end of the year. We also project to have a net debt to EBITDA ratio ranging between 7.5 and 7.8 and our debt to GAV will approximately 45%.
Our additional metric of core net debt to EBITDA is still ranging between 6.5 and 6.8 and excludes primarily just our joint ventures as all of our active development projects will be complete. We believe this core leverage metric better reflects the leverage of our core portfolio and eliminates our more highly levered joint ventures and our unstabilized development and redevelopment projects.
During 2025, our core net debt to EBITDA should begin to equal our consolidated net debt EBITDA as our fully owned development projects reach stabilization and we continue to reduce our exposure to the current joint ventures. We anticipate our fixed charge and interest coverage ratios will approximately be 2.2, which is equal to the second quarter.
I will now turn the call back over to Jerry.
Jerry Sweeney
Great. Thanks Tom. So the key takeaways are the portfolio remains in very solid shape. Average rollover exposure, as I mentioned, is one of the lowest in the sector. Demonstrated ability to manage our capital spend and a stable and accelerating leasing velocity, including a proposal to conversion rate that continues to improve over our pre pandemic levels.
So, we remain very focused on executing a business plan that continues to improve liquidity keeps our operating portfolio on a solid footing with obviously a very clear, and I daily focus on leasing up our development projects to generate that forward earnings growth. As usual end where we started, we wish you and your families are doing well and with that we're delighted, Gigi, to open up the floor for questions.
We do ask that in the interest of time, you limit yourself to one question and a follow up.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Anthony Paolone from JP Morgan.
Anthony Paolone
Thanks. Good morning. Just, Jerry, maybe want to go back to the leasing pipeline for the three commercial projects under development. If I go back like a couple quarters, it looked like three 3025 had about 700,000 square feet. 3151 I think you guys talked about 400,000 square feet in ATX had a couple hundred thousand square feet.
It sounds like you still have the pipeline, but the conversion to lease has been on the slow side. I mean, maybe can you talk a bit about if anything's really changed in terms of the prospective tenant behavior or just your confidence level on getting some of these things over the finish line? Might be.
Jerry Sweeney
Yes. Tony, good morning and great question. Thank you. Yes, look, I mean, the pipeline has been pretty strong on these properties all the way through, which I think reflect the, their submarket positioning, the quality of what we're delivering.
You know, some of the buildings, for 3025, the amenity floor wasn't done until late last year. One Uptown, we actually had some significant infrastructure improvements being done off site that limited access to the property.
But they're both, they're both in excellent shape now. And 3151 is on track for a full delivery by the end of this year. So, the projects present themselves very well. Traffic in terms of tour activity remains very strong.
The flight to quality thesis seems like it's, as I mentioned in our operating portfolio, seems to have a level of continued validity. It's just taking tenants long to make up their minds. I mean, we do have several larger leases under active lease negotiations. So, we've moved from proposal to lease negotiations.
I do think the pipeline for 3025 Tony and 3151 has remained fairly stable in terms of square footage, moving tenants and prospects in and out. I think the real pleasant surprise is in the last couple quarters, we've seen a dramatic uptick in One Uptown with that building being delivered now there's a real increase in the number of showings, the number of proposals are being issued, and the overall level of activity in that market we are seeing a return of a couple of larger tenants.
Clearly, we're still in a market that is over 20% vacancy. We're still competing against other product and sublease space. But we're very pleased with the pickup in activity at One Uptown over the last couple of quarters. We still have work to do and we're focused on that with active engagement by top management and our leasing team, and all these tours and lease negotiations.
I think on the residential front, I know you addressed that specifically, but we continue to think to make very solid progress at 3025 with good uptick in activity quarter-over-quarter. And when Solaris House really effectively rolls out the first occupancies later this month, we think we'll get a good building pipeline there as well.
Anthony Paolone
Okay, thanks for that. And then just follow up. You talked about the limited rollover in the next few years in the portfolio. And just given your historical level of leasing, it would seem like that sets up pretty well to absorb some vacancies.
So just wondering if what we should think of if there are any impediments to that being the case, whether it's lower retention or anything you're thinking about there that could stand in the way?
Jerry Sweeney
I think we feel like the portfolio should be in, the operating portfolio should be in a very solid shape going forward. We clearly spiked out a couple of higher vacancy projects in the supplemental information package, and we continue to make progress on each of those projects.
You know, Austin remains in the operating portfolio 80% lease, which is well below our historical run rate. Again, I guess we're looking at the level of tour activity that's increased in our properties quarter-over-quarter. The markets finally had two consecutive quarters of positive absorption and increase in leasing activity.
That market seems to be getting some additional green shoots. But the other thing we take a look at the portfolio is, is no tenant is no tenant with an expiration is greater than 1% of revenues. But, George, maybe you can add some color.
George Johnstone
Yes, I mean, staying on the theme of expiration, our largest expiration in 2025 is a 50,000 square foot tenant in Radnor, which we have a lease issued to them and look to announce its execution in the third quarter. And then, as Jerry said, I mean, really, the opportunity is with the Austin portfolio and its 20% vacancy level.
The current operating pipeline breaks down kind of 60% between Philadelphia and the Pennsylvania suburbs, and 40% in Austin. So we've had a number of move outs over the last kind of five to seven quarters. We think the end is close to being over for some of those rollouts. And now it's a matter of converting that new deal pipeline to occupancy.
Anthony Paolone
Okay, thank you.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Steve Sakwa from Evercore ISI.
Steve Sakwa
Thanks. Good morning. Maybe to follow up on Tony's question, Jerry, just as you think about the pipeline, can you help maybe frame out what percentage of the tenants or deals that square footage that you're talking to are kind of new to market tenants, where they need to make a decision or need to pick space, versus maybe that are exploration driven?
And is there a real difference in the discussions you're having on the new side versus kind of the lease exploration driven discussions?
Jerry Sweeney
Steve. So on the operating portfolio and the development portfolio, or just the developments?
Steve Sakwa
Sorry, I was really focused on the developments, Jerry.
Jerry Sweeney
Okay, look, I think, a number of the, a number of the prospects that we're talking about are in, let's say, Schuylkill yards are tenants who are existing in the market, but need significant expansion. So, there is some urgency on their timeline to accommodate that.
We have a couple of tenants who are new to the market, and I'm always trying to figure out if new to the market means there's more of an urgent timeline or there's more deliberative steps they need to go through. But our experience has been the folks that we're talking to seem to have some urgency to making a decision.
We are talking to a few, I'll call them institutional type of tenants, which have a pressing need, but they tend to move slower. So we're staying very much in touch with them. And look, I think one of the things that we track is what proposals we have outstanding and how much square footage we have going through space planning.
That's really where it starts to get very serious. And we've seen some delays on the programmatic side, where prospects are still trying to figure out how much space they need. Are people back three days a week, four days a week? Should they have larger common areas? Smaller common areas.
So, the space planning process today is more protracted than it was pre pandemic. And I think that's part of the delaying mechanism here. Again, at One Uptown, again, a number of tenants are, most of the prospects are in market tenants who have pending maturities. So they do have significant pressure to make decisions in the near term.
Steve Sakwa
Okay. And maybe just to follow up on the, on the Schuylkill yards between the two different buildings, because, one's really geared to traditional office and obviously, 3151 is life science, just maybe on the life science front, what are you seeing kind of from both institutions and maybe traditional life science?
Obviously, the funding environment has gotten better. We haven't seen as much public market IPO activity, but VC funding has gotten better. So just what are the discussions like for 3151 with that building delivering kind of later this year?
Jerry Sweeney
Yes, I think the discussions there are very constructive. Again, we have a major prospect who we're in negotiations with, and that is a high growth potential tenant. And then a few of the institutions who are also prospects for 3151, again have pressing needs and are tracking through the space planning deliberative process that they're going through.
I think overall, we take a look at lab users in the market. At the beginning of the year, there was about a million square feet of prospects, floating through the various life science submarkets in the region. That's now down to about 800,000.
Now, some leases have been executed, but we are very encouraged with what we're hearing on the capital raising front, because we believe that that will generate some additional activity in the near term. Our B.Labs, incubator and graduate space programs continue to perform well.
So we're seeing a very healthy pipeline of there. And of course, their growth aspirations are really driven primarily by their ability to raise capital. So with more capital starting to come back into that market, we're hoping that we'll get some near term growth opportunities coming out of B Lab's incubator and B Lab's graduate level spaces.
Steve Sakwa
Great. That's it for me. Thanks.
Jerry Sweeney
Thank you, Steve.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Michael Griffin from Citi.
Michael Griffin
Great. Thanks. Jerry, I think in your prepared remarks, you mentioned the tour activity is notably above where we were relative to pre Covid. So, I guess, can you kind of give some insight? I mean, is that greater demand for space that those stores are indicating, or is it really just tenants out in the market looking for a better deal? Any color there would be helpful.
Jerry Sweeney
Yes, I think it's a combination of a couple of factors, and George and I can tag this. I think one of the things that we're seeing, and we're seeing it statistically in the pipeline, is we're picking up a lot of additional activity because of the flight to quality. Companies want to bring tenants back to high quality space.
We're certainly seeing, as I alluded in the comments, I mean, the competitive set, shrinking a bit. So, I think part of the pipeline activity, Michael, is not, I wouldn't necessarily categorize as net new demand. I would indicate it as more shifting demand from lower to higher quality space. And I think we're very well positioned to take advantage of that.
I think even in the comments, we're talking over 60% of our lease executions during the quarter were tenants moving up the quality of I anticipate that accelerating near term. Just take a look at the detail of our pipeline.
We are hearing from more and more prospects that they are concerned about the financial stability of their landlord. They're concerned about the financial structuring of the building they're in. Brokers who tend to be fairly forward thinking and aggressive in terms of making sure they get deals done are very focused on getting paid.
So we're seeing a number of [indiscernible] come out requiring some type of credit support for the brokerage commission, looking to get some additional underwriting support for TI dollars being available. We're in a great position on all those fronts. So when you combine that financial flexibility and the quality of our portfolio and then frankly I think the quality of our on-site property management and leasing teams, we're presenting a much different, much safer, much higher quality presentation than a lot of our competitive settings.
And that really is predominantly in Philadelphia, CBD, University City, the Pennsylvania suburbs. And we're starting to see some of that in the other submarkets we're in as well. So I wouldn't say, George, maybe you have a perspective on it. It's a tremendous increase in net new demand as opposed to a shifting within the marketplace.
George Johnstone
Yes Michael, I would agree. I think it's more rotational and I think building ownership and sponsorship is really one of the key drivers of, of what prospects are looking for.
Michael Griffin
I appreciate it. That's helpful. And then just circling back on the development pipeline, obviously I think these projects are substantially completed. But if the leasing is not there, could we see stabilization dates book out or the expectation to realize expenses and stop capitalizing these things, four or five quarters after completion?
Jerry Sweeney
I'm sorry, Tom, go ahead.
Tom Wirth
Hey Michael, on the capitalization, just so our methodology, just, and I believe it's pretty standard, is that we, once we hit our substantial completion date, and this is on the commercial side, we basically have a twelve-month window where we continue to capitalized costs on the vacant space. And that capitalized cost will be OpEx as well as interest.
Once the property hits that one year window, regardless of where it is on a stabilization basis, which we put in kind of the 90%-95% range, we will still at the end of the one year window from substantial completion, it becomes operational. And therefore, interest in OpEx that may have been capitalized while it was vacant will shift to being part of operations.
Jerry Sweeney
And I think, Michael, from a business standpoint, I think when you take a look at what our projected stabilization dates are and that's really being driven off of what the activity and discussions we're having with the existing pipeline of tenants.
So to the extent, for example, that a tenant would accelerate their move in decision, that might accelerate one of those dates, or if they would delay it by a quarter or two, that might impact that as well. But the key focus we have right now is to get some of these leases and proposals executed. So we have certainty that income stream coming in in '25 and '26.
Michael Griffin
Great. That's it for me. Thanks for the time.
Jerry Sweeney
Thank you, Michael.
Operator
Thank you. Our next question comes from the line of Dylan Burzinski from Green Street.
Dylan Burzinski
Hi, guys. Thanks for taking the question. I guess just going back to sort of the decision on the MAP venture and continuing to own those assets, I guess can you guys just kind of talk about the reasoning behind that as opposed to sort of just walking away from those assets?
George Johnstone
Sure. Happy to. Look I guess, as a way of background, this has been a fairly successful investment for us, as evidenced by the fact that we recognize the $50 million plus non cash income. So it's been a very fairly profitable transaction for us over the years. And I think they'll recall this was a structured transaction where the fee and the leasehold were separated.
So it was a fairly complicated transaction. So as we were contemplating what the best path for us was, we felt that the debt reduction and restructuring provided a couple different pathways. One was we obtained a five-year period to reposition those assets, and as part of that plan, embark on a programmatic liquidation effort of assets over that five-year period of time.
An important driver in that was creating a mechanism to ensure that both the leasehold and the fee ownership interests were aligned. So there was some embedded liquidity that was created by this restructuring that gave us the ability to kind of move assets out the door. It also provided a solid revenue stream for Brandywine from a management leasing, construction management standpoint, that would yield some upside potential for us while eliminating, really, the debt attribution.
I mean, one of our key issues in this restructuring was to reduce a significant amount of debt attribution, which is one of the tradeoffs that was made with the lender in providing them the cash flow participation. So, it was really an effort to ensure that existing relationships were preserved. There was no downside to Brandywine to doing this.
It created a profit opportunity going forward. And I think the structure we wound up with whereby we were able to achieve the $26 million debt payment pay down, with the fee owner. Say Brandywine is a leasehold owner, the fee owner worked together to generate $26 million to pay down the mortgage I think created a great runway as Tom touched on those assets are 99% leased, a strong weighted average lease term of over seven and a half years.
The investment base double digit cap rate on the acquisition, we think creates a positive spread recovery for us in the near term on that debt paydown. So I think all those pieces played into in terms of, maintaining the relationship, ensuring there's no, there's no downside to Brandywine creating a future profit opportunity, both through the program liquidation plan, the revenue stream from the, from the property and leasing services, as well as the profitability that may come out of this new joint venture that's sitting there unencumbered and those assets are entering the market for sale today.
Dylan Burzinski
Appreciate that color. And then maybe one last one for me on the $200 million of assets that you guys are currently marketing. I know you guys have sort of been in the marketing process for a couple hundred million dollars of assets over the last 12 to 18 months.
Just curious sort of how those discussions have changed over that time period and whether or not sort of bidding tents are more full today versus last year, same amount, just curious how things have progressed on that front.
Tom Wirth
Yes, I think we've seen a slight uptick in buyer interest, and I think that's been primarily driven by a couple of things. One, I think the lending environment, which is still challenging, is getting marginally better, particularly for smaller size deals.
So, I think with the CMBS market, the debt funds, they're providing a regulated and unregulated source of capital that I think continues to improve quarter-over-quarter. We're seeing some life companies get back into the marketplace. So, I think the financing market is marginally better.
I think there's also, that's one factor, another factor is a number of office investors are sensing that a bottom has been hit in terms of valuation. And they're saying the operating metrics across the sector not deteriorate as much as they were in previous quarters. So there seems to be a little bit more interest in trying to lock away good deals today.
We are also seeing as a third piece a number of users who are looking to acquire assets, given that their cost of capital could be lower than their landlords and they're able to effectively buy properties and reduce their ongoing occupancy costs.
So I think lending environment getting marginally better. The psychology beginning to shift towards the market bottom. And I think just the relative cost of capital that we're seeing between some of our larger prospects, larger, larger users looking to buy assets versus enter into leases. Hopefully that's helpful.
Dylan Burzinski
No, that was extremely helpful. So I appreciate that detail.
Tom Wirth
Thank you.
Operator
Thank you. Our next question comes to the line of Omotayo Okusanya from Deutsche Bank.
Omotayo Okusanya
Hi, good morning. Just wanted to follow up on the MAP JV question again with all the restructuring, doesn't seem like it's having a huge impact on your 2024 guidance numbers, but hoping you can give us a sense of kind of on a going forward basis, how one can kind of quantify what the potential kind of upside is from a numbers perspective from this restructuring?
George Johnstone
Yes. The effect on our earnings was not that significant for two reasons. One is where the portfolio was standing at the time as well as with the full, the full debt in place. We were not recognizing a large amount of FFO.
So the fact that we have now lowered that percentage of the FFO but then lowered the debt has kind of put us in the same place. So the effect of having less SFO as a percentage of the, of the JV. But it was kind of at a break even spot as it was.
So our hope is, now that we have restructured, we're going to be putting, we're going to have more cash flow with a lower loan balance that with the, we will be able to then put some, that free cash flow back into the property.
So for '24, it was a, it was a de minimis change to our, to our FFO results from the, from the joint ventures.
Omotayo Okusanya
But on a going forward basis, is there one can quantify what, how it could help '25 and beyond?
George Johnstone
The way it could help '25 and beyond is if we do start doing leasing and get some of the assets stabilized, we will see the FFO increase. I think you also, as Jerry mentioned, we are going to be doing the leasing, construction, development and management of the properties. And so we think '25, it could give us some uplift if we start to see the leasing occur again, we'll be managing and leasing the projects and, and that should help our third party revenue stream.
Again, not much this year since we just completed the restructuring. We have to get back into the market with some of these properties, and we think that could be an uplift in '25, but I'm not ready to say how much that may be, but I do expect some marginal improvement as we get into '25.
Omotayo Okusanya
That's helpful. And then with the dividend outlook again, the CAD payout ratio got tighter again this quarter. I think you kind of lay out the plans in terms of sources and uses of capital going forward. But how does one kind of think about the dividend just kind of given CAD TITA.
Some of your sources next year or this coming year include asset sales and you still have a very tough transactions market and on a net basis the dividend could be an attractive source of capital. But I'm just kind of curious how management is thinking about that going forward.
Tom Wirth
Yes, I'd say, Jerry, we look at that every quarter and I think when the question comes up in these quarterly calls, we always provide the same answer, which is it's something that we keep a close eye on. And the components there really are what the forward capital spend for the company is.
And I think that's one of the reasons we track so carefully the capital ratios on all of our leasing, our development pipeline as indicated in the supplemental factors, our remaining funding there is less than $6 million. So it's pretty much all fully funded. We do, as we were talking about on the call, have I think a very good pipeline of pending lease executions in the development pipeline that will provide some income, certainly over the next several years and provide good growth platform for us.
The portfolio stability we think is one of the best in the office sector, in terms of rollover, our lower capital ratios, our positive mark to markets and we feel that provides a very solid foundational point for the organization.
So we feel evaluating each of those factors puts the board and the management team in a very good place to have clarity as to what we think our forward capital spend will be. And while the CAD ratio was higher this quarter year to date, we're actually below our targeted range. So we're actually performing better against our planned CAD ratio.
But we never lose sight of the fact that every dollar is precious, every dollar has a relative cost to it. So we certainly want to balance our business plan execution with maintaining a good payout to our shareholders and recognize the value they have invested in the company as well.
Omotayo Okusanya
Thank you.
Tom Wirth
Thank you.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Michael Lewis from Truist Securities.
Michael Lewis
Great, thank you. Back to the MAP JV, the decision to put in the $26 million to pay down debt and take these 14 properties, can we assume that you're going to sell these, you expect to sell these and get, at least your $26 million back on the sales and then the decision to keep the 5%, I think if the assets were all like Philly CBD assets, it would be clearer to me.
You mentioned there's no downside. I just wonder what's the upside for the effort here for keeping the interest?
Jerry Sweeney
Hey, Michael, the answer to your first question is yes, most assuredly. And the answer to the second question is that, the 5% interest, again, was really part of our reduction of debt attribution.
We do believe that given the programmatic liquidation plan we are putting in place for this portfolio will generate upside for the company. In the meantime, as Tom alluded, we think there's going to be a positive return for us on the property services we provide. So I think it was really those two factors that weighed into the decision to go to the 5%.
And certainly the lender and the fee owner wanted to make sure that Brandywine had some level of notional commitment to this portfolio by maintaining a share of the ownership stake.
Michael Lewis
Okay. And then you talked a lot about the leasing pipeline and the TOR volume. I think during the quarter and the second quarter, you executed 164,000 square feet of leases. That seemed low to me. Was that lower than you expected?
Is that number not a concern? I just wonder if it speaks to converting the pipeline and are you seeing something that's shifting the leasing environment or I realize there's a danger in reading into one quarter, but just curious your thoughts on that?
Jerry Sweeney
Yes, look, I think me and George can add much more color, but look, I guess as I look at, we can never lease enough space. So as George will tell, I'm always disappointed whenever the numbers come in, but we have great team working across the company. But as I looked at it for new leasing activity, we're actually up quarter-over-quarter.
The range was really, the spread in the range really was on the renewals. We had a couple large renewals last quarter versus this quarter. But we do track Michael, like our conversions and our conversions from proposal to leases is actually running right in-line with our '23 and is up from our '22 and pre pandemic business plans.
So, I think we really stayed very focused every day on getting leases done. And again, I was tongue in cheek. I'm never happy with the level. We always want more leasing done, so we always want to move that conversion rate up, but we also want to do that and make money while we're doing the leasing too.
So we have been very focused on maintaining our capital ratios, growing our net effective rents, doing the best we can to get 2.5% to 3% rent bumps. So we recognize that there's some properties, like a few down in Austin, where we're really purely a price taker. And part of our decision is to cover sunk costs and create longer term value.
But a number of other properties, I think we hold pretty firm to what the rent levels we require, what our capital spend commitment needs to be, because there we feel we're in a much better position to drive near term effective rent growth.
George Johnstone
Yes. And Michael, this is George. I mean, one of the lumpiness in that number quarter-over-quarter, oftentimes is the renewals. And, we've done such a good job in getting out in front of '25 and '26, we put a lot of those to bed. So the opportunity set on some of the '25 and '26 renewals is shrinking.
So again, I think a lot of times we look at it in the context of what was new leasing for the second quarter at 100,000 square feet, that was comparable to the first quarter on the wholly owned portfolio.
And the other factor really is kind of Austin. I think while the pipeline continues to build, the decision making has been a little bit slower there. There's a lot of options for tenants in that market. So we just continue to work that pipeline, ultimately looking to convert.
Michael Lewis
Thank you.
Operator
Thank you. Our next question comes from the line of Upal Rana from KeyBanc Capital Markets.
Gabby Horvath
Hi, this is Gabby Horvath on for Upal. Could you provide any update on the properties you had identified prior to help reduce vacancy in the portfolio?
Jerry Sweeney
I'm sorry, you cut out a little bit. Were you referencing the progress we're making on our higher vacancy properties?
Gabby Horvath
Yes, that's correct.
Jerry Sweeney
Oh, okay, great. Sorry. It just didn't come through clearly. Look, I think in terms of and I'm referencing page four, Gabby, in our SIP, I mean, we have, River Place and Delaware. We are advancing our thought process on residential conversions there.
And I think we're going through the design, development, the engineering and the political approval process to ensure that that pathway on those properties is viable. Plymouth meeting, we're looking to market that property for sale and we hope to have some good progress on that.
The building in Conshohocken, which is 101 West Elm, that lobby renovation is close to completion. So that's been completely repositioned. So we're anticipating a pickup and leasing activity there.
Cira Center really is the expansion of our life science space. And we expect George to deliver.
George Johnstone
Yes, we've got a full tenant user for just shy of 30,000 square feet. They've got a lease in hand. So that that lease will actually take Cira Center off of this list. And then the last three, two of which are in Austin and then 401 Plymouth Road.
We're actively leasing those we're seeing good volumes of TOR and pipeline and just really, again, need to convert some of those opportunities into executed leases. But I think as Jerry started, the top of the list is certainly more impactful to that overall vacancy level. And, everything, everything's still tracking as noted on the page.
Gabby Horvath
Great. Thank you. And then as a follow up, do you anticipate any impact from the mandate in Philadelphia for government employees to return to the office full time?
Jerry Sweeney
We actually, they have returned as of mid-July, the mayor has required all city employees to come back to work. We think that's a very positive messaging. I think the mayor is fully on board and focused on rejuvenating center city and sending a great message to the private business community.
I think we've seen some other businesses, based on her leadership, move tenants, move employees back to the office on a more regular basis. So we view that as a very, very positive announcement for not just Philadelphia, but also for the region as well.
So I think the impact has been very positive in terms of perception, in terms of increasing street traffic, in terms of moving towards a more safe, clean, and green environment in the center city area. So nothing but kudos to our mayor for her leadership on making that very strong decision.
Gabby Horvath
Great. That's all from me. Thank you for your time.
Jerry Sweeney
Thank you.
Operator
Thank you. And I am not showing any further questions at this time. I'd like to turn the call back over to Jerry for any closing remarks.
Jerry Sweeney
Yes. Gigi, thank you for your help today. And to all of you, thank you for participating in our second quarter earnings call. And we look forward to updating you on our '24 business plan progress in the fall. Our best wishes to you and your families for an enjoyable balance of the summer. Thank you very much.
Operator
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.