管理層發言
Thank you for standing by, and welcome to the Brandywine Realty Trust second quarter 2026 earnings call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press *1 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press *1 again. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Jerry Sweeney, President and CEO. Please go ahead, sir.
Jonathan, thank you very much. Good morning, everyone. Thank you for participating in our second quarter 2026 earnings call. On today's call with me are Daniel Palazzo, our Senior Vice President and Chief Accounting Officer, and Thomas E. Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed on the call today may constitute forward-looking statements within the meaning of the federal securities laws. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC. During our prepared comments today, Tom and I will briefly review second quarter results and frame the key assumptions driving our guidance for the second half of the year. After that, Daniel, Tom, and I are available to answer any questions. To start, from an operating, portfolio management, and liquidity standpoint, the second quarter produced results that exceeded or were in line with our business plan. This is highlighted by our spec revenue increasing by $1 million over the guidance midpoint. Also, due to better-than-expected tenant renewals and expansions, we increased our full-year range for tenant retention. All of our other full-year operating and financial metrics remain unchanged from our original 2026 business plan. Since our last call, significant progress has been made on our capital markets activity, including asset sales and our Q2 refinancing that we will review in a few moments. Quarterly highlights include achieving 99% of our spec revenue at the revised guidance midpoint. Our second quarter FFO was $0.13 per share, which was ahead of the management guidance we provided on our first quarter call and $0.01 below consensus. We are maintaining our $0.55 full-year midpoint and have narrowed our full-year FFO guidance range accordingly. Our balance sheet strengthening program is progressing very much on target, with approximately $208 million of asset sales now complete and the remaining assets under agreement and scheduled to close in the third quarter. We raised our sale guidance to $305 million, which is up $1 million from our business plan. For all sales, we have achieved pricing in line with our original guidance. Looking more closely at second quarter operations, solid operating metrics reinforced our strong market positioning and tenants continued to prefer high-quality space. Our wholly owned portfolio is 90.6% leased and 89.1% occupied. We had 88,000 square feet of positive net absorption during the quarter. Our year-end occupancy and lease percentage will improve throughout the year as we will have positive full-year net absorption for the first time in several years, which is additional evidence of the ever-improving market in which we are operating. Leasing activity for the quarter totaled 353,000 square feet, including 254,000 square feet in our wholly owned portfolio and 98,000 square feet in our joint ventures. Forward leasing commencing after quarter end totals 166,000 square feet with most taking occupancy this year. We have also achieved $18.3 million of spec revenue. That outperformance versus our original plan was primarily driven by Philadelphia CBD and our University City operations. Tenant retention for the quarter was 85%, resulting in us raising our full-year midpoint retention to 51% to 53%. This raise is due to unbudgeted renewals and expansions, again, in Philadelphia CBD and the Pennsylvania suburbs. Our capital ratio for the quarter was 12.9%, within our 2026 business plan range, and our year-to-date capital ratio remains below our 2026 range but will remain within the overall guidance that we have provided. Our GAAP mark-to-market was 1.5%. Cash mark-to-market declined during the quarter but we do anticipate improvement in results in the next two quarters and are maintaining our full-year guidance. Our same-store results were a positive 0.5% on a GAAP basis and 1.9% on a cash basis, both within our current guidance ranges. Tour volume in the second quarter remains on pace with the high volume we saw in the first quarter. We also continue to experience good tour conversion rates. For the trailing four quarters, 53% of our tours convert to a lease proposal and, from proposal, 41% converted to executed leases, which is above our historical average. A few additional comments regarding market dynamics. In Philadelphia, which includes our CBD and University City portfolios, we are now 95% occupied and 97% leased with only 7% rolling annually through 2028, and overall activity levels remain very strong. During the quarter, we continued our CBD outperformance trend for the entire first half of 2026 with 54% of all new leases signed in our CBD and University City submarkets being at a Brandywine property, significantly exceeding our market share. In addition to that, as noted on Page 4 of the SIP, we are monitoring conversion projects aggregating more than 5.1 million square feet, representing approximately 11% of Philadelphia's total office inventory. Our market position in Philadelphia will continue to improve as these conversion projects get executed. In the Pennsylvania suburbs, we are 91% leased with the Radnor submarket being 93% leased. We continue to see solid levels of pipeline prospects for all of our existing vacancies. On the other hand, Austin, at 67% occupied, continues to lag the rest of the portfolio and creates a more than 400-basis-point drop in our overall company occupancy. Our Austin quarter-end occupancy was negatively impacted by 3.7% due to 405 Colorado, which was 100% leased being held for sale at the end of the quarter and subsequently closed. The operating portfolio leasing pipeline is up 13%, or 220,000 square feet, from the first quarter and remains a solid level just shy of 2 million square feet. This pipeline includes about 456,000 square feet of deals in advanced stages of negotiation. Turning to our balance sheet, we remain in solid shape from a liquidity standpoint. While we had a balance outstanding on our line of credit at quarter end, upon receipt of $192 million of sale proceeds, we paid off that balance. As such, there is no outstanding balance on our line of credit and we have $35 million of cash on hand. Our paramount objective is to use the vast majority of sale proceeds to reduce company leverage and to further improve credit metrics. As such, we intend to use our cash balances and sale proceeds to further reduce debt, including repurchasing bonds starting as early as this quarter, and to a much lesser extent, repurchasing shares. Regarding our planned share buyback program, until we make significant progress on achieving all of our leverage targets and credit metrics, we anticipate using only about 5% to 10% of our net proceeds to repurchase shares. Consistent with this approach and as noted previously, our multi-year plan is designed to return to investment grade metrics. As such, we plan to maintain minimal balances on our line of credit and continue improving all credit metrics. The execution of our sales program is an excellent catalyst to reduce overall leverage levels and further improve all credit metrics. As a point of note, almost 50% of our outstanding bonds have coupons north of 8.8%, providing an excellent refinancing opportunity over the next several years assuming capital markets remain constructive. Regarding other elements of our capital plan, during the quarter we repaid a construction loan on 25 JFK with a $90 million 7-year secured financing on the residential component of VERA and payments from our unsecured line of credit. This transaction unencumbered the office component of the property for inclusion in our unencumbered asset pool, bringing over $13 million of GAAP income onto our balance sheet. During the quarter, we also exercised our first six-month extension right under our existing credit facility, moving the maturity date to year-end 2026. As we complete our 2026 capital recycling program and other capital market activity, we will continue our productive work with our bank group to recast the facility during this extension period. With the asset sale activity and the financings, we project our year-end core net debt to EBITDA to be, as we outlined in the SIP, in a range of 8 to 8.4x. Looking at our two remaining development projects, 1 UPTOWN and 51, while we have minimal definitive results to report this quarter, activity levels have been quite significant. Our overall pipeline for these projects is up over 10% from our last quarter. More importantly, at 1 UPTOWN, we have three leases being finalized and five proposals advancing towards lease negotiations that total over 100,000 square feet. At 51, in addition to the pipeline continuing to build, we have a multi-floor client in advanced lease negotiations, and our overall pipeline remains around 46% office and 54% life science. We also had several other prospects and active discussions and several other key proposals outstanding. Additionally, in anticipation of the 2027 IBM expiration at Uptown ATX, we plan to commence redevelopment of at least one of the existing buildings. Since announcing this initiative, we have built a pipeline of over 1.1 million square feet with lease commencement dates ranging from 2027 to 2028. The market response has been exceptional. The first building consists of 157,000 square feet and we expect to deliver that renovated building in the fourth quarter of next year. We do expect rent levels to be 15% to 20% below rents required for new Uptown brand-new development, and we are targeting a cash yield north of 8%. Also, as prospective tenant requirements advance, we have planning underway to do similar renovations to several other buildings within the complex. Our Radnor Hotel development opened on schedule in May 2026. This 121-room hotel is situated adjacent to our 2.1 million square foot Radnor life science and office portfolio and Penn Medicine's campus. The hotel is already serving as an excellent amenity for the Brandywine tenant base, the eight universities and colleges within a five-mile radius, and the adjoining Penn Medicine complex. For the partial eight-month operating period from May when we opened the doors through December 2026, our pro forma projected total was 8,500 room nights sold at a target ADR in the low $300s. To date, with less than three months of operations, we have already booked over 8,400 hotel room nights, achieving almost 99% of our 2026 occupancy projections while maintaining our ADR target. So these initial results are very encouraging. We will be fully opening our two food-and-beverage offerings by Labor Day and we expect to stabilize the project in mid-2027. As we have noted previously, once this project is stabilized, we will aggressively seek alternative capital structures for this operation. Looking at capital markets, as we have already highlighted, we have exceeded our initial 2026 business plan target of $280 million to $300 million of sales. We expect to close all $305 million of sales by the end of the third quarter. We do have several other properties in the market for sale as you look at our disposition pipeline moving into 2027. In general, the response from the market on assets listed for sale was very strong. There was considerable interest with a typical marketing process producing seven to ten qualified bids. All buyer types were engaged, including institutional investment managers, private REITs, and significant interest from private capital and family offices. Looking at further elements of our capital plan, we plan to recapitalize both 1 UPTOWN and Solaris, our residential project at Uptown ATX, during the second half of 2026. We anticipate a full sale on Solaris and a pari-passu joint venture on 1 UPTOWN. These initiatives will recover significant capital, lower debt attribution, and increase liquidity. So with that overview, Tom will now review our financial results for the second quarter and the outlook for the balance of the year. Tom?
Thank you, Jerry, and good morning. Our second quarter net loss was $31 million, or $0.18 per share. Our second quarter FFO totaled $23.6 million, or $0.13 per diluted share, and was above our first quarter guidance and $0.01 below consensus estimates. General observations for the second quarter: FFO contribution from our joint ventures was $0.3 million, or $1 million above our forecast due to termination fee income and improving leasing. G&A expense was below our forecast by $0.2 million, primarily due to timing. Other income and termination fees were $2.2 million, or $3.3 million below our forecast, due to lower termination fee income. Net third-party fees of $1.8 million were $1.3 million above forecast due to higher third-party leasing fees. Property-level NOI, interest expense, and other forecast-to-quarter results were generally in line. Looking at our debt metrics, second quarter debt service and interest coverage ratios were 1.7x, both equal to our first quarter results. Our second quarter annualized combined and core net debt-to-EBITDA were 9.0x and 8.1x, respectively. Since most of our sales and debt reduction will occur during the third quarter, our leverage metrics are similar to the first quarter. During the second half of the year, we expect these leverage levels to decrease. Portfolio composition: during the second quarter, we removed four properties from our core portfolio that are being held for sale, totaling approximately 775,000 square feet and they are roughly 91.5% occupied. To confirm, properties classified as held for sale are removed from our quarter-end operating statistics. Based on the assets sold and the assets held for sale, the impact to our portfolio statistics will be immaterial. During the second quarter, we added 250 King of Prussia Road, a 168,000 square foot life science property located in the Radnor submarket, to the core portfolio as the property stabilized in June. From a liquidity and financing standpoint, we continue to maintain solid liquidity with $35 million current cash on hand and no outstanding balance on our unsecured line of credit after taking into account the announced July sales activity. Related to sales activity, we adjusted our business plan for an increase to the wholly owned disposition activity. As Jerry touched on, we have increased our sales target to $305 million with $208 million already closed and two properties expected to close during the third quarter. The majority of these proceeds will be used to reduce debt and continue our path back to investment grade. With respect to our planned buyback activity on the unsecured notes, we will be focused on notes with higher coupons as that will have more of an immediate impact to improve our coverage ratios. Since these bonds trade at a premium, we will incur one-time debt extinguishment costs. However, we have not included these in our estimates of current FFO guidance. We also intend to use a portion of these sales proceeds, as Jerry mentioned, to opportunistically buy back some shares. From a financings activity perspective, the $178 million consolidated construction loan that was scheduled to mature in July 2026 was repaid in June. We funded the repayment with a secured loan on the residential portion of the property totaling $90 million and our unsecured line of credit to unencumber the property. The $90 million 7-year secured financing was swapped to a fixed all-in rate of 5.8%. Regarding the credit facility, our unsecured line of credit had an initial maturity date of June 2026 with six-month extensions through June 2027. While we complete our sales and debt reduction program, we continue to work with our bank group and anticipate completing a longer-term amendment during the initial six-month extension period. Looking at the recapitalizations, as our joint ventures continue to lease up and cash flows improve, we anticipate recapitalizing the final two preferred equity development projects into pari-passu common equity joint venture structures during the second half of the year, with our ownership decreasing to a minority stake or an outright sale. We extended two existing loans on our ATX projects. While we still anticipate closing those transactions in the second half of the year, we felt extending the loans will allow us time to run the recapitalization process without concerns about the maturities. The recapitalization of both these projects will generate cash proceeds between $40 million and $50 million that will be used to further reduce our wholly owned leverage and will be slightly accretive to earnings and improve leverage. We continue to feel incrementally more positive about executing our land sales program this year but we have not included any land proceeds, gains, or losses in our results. Our forecast of results focusing on the third quarter guidance: property-level operating income will approximate $69.5 million, which will be $3 million below the second quarter. The incremental decrease is primarily due to the assets that are held for sale that did close in July and that will generate a $5 million reduction in NOI for the third quarter versus the second quarter. The lower NOI is partially offset by the full-quarter impact of the Radnor Hotel, which commenced operations in May and will generate a $1.2 million quarter-over-quarter increase. We also have the stabilization of 250 King of Prussia Road, which stabilized in June and will have that full-quarter effect in the third quarter as well. FFO contribution from our joint ventures will be breakeven for the third quarter. G&A expense for the third quarter totals $7.5 million. The sequential decrease is consistent with prior quarters and is primarily due to the timing of deferred compensation expense recognition. Our full-year G&A range is maintained at $36 million to $37 million. Total interest expense including deferred financing costs will approximate $40 million, which includes $0.4 million of capitalized interest. We have lowered our full-year interest expense range by $6.5 million at the midpoint to account for the anticipated lower debt balances. As previously mentioned, in connection with potentially buying back our unsecured bonds, we may incur one-time extinguishment charges that are not currently included in our guidance. Termination fee and other income will total $2.8 million. Net third-party fees will approximate $1.5 million. Interest income of $0.5 million. Our fully diluted share count will be 180 million. For clarity, the above forecasted results on our core FFO range will be $0.13 to $0.15 for the current third quarter. Turning to our capital plan, the second half of the year remains active with a total of $250 million of activity. Our second quarter CAD payout ratio was 103%; however, payout will remain within our business plan range for the balance of the year at 70% to 90% as we expect incremental improvement in the payout ratio as FFO improves into the balance of the year. Looking at the larger uses, we have $40 million of development spend, $28 million of common dividends, $17 million of revenue-maintaining capital, $25 million of revenue-creating capital, and $10 million of equity contributions to our joint ventures. The sources are $55 million of cash flow from operations after interest and asset sales totaling $290 million. Based on the capital plan, we anticipate having a small balance outstanding on our unsecured line of credit, and we anticipate our net debt to EBITDA to still be in the range of 8.4x to 8.8x, and our fixed charge ratio will be between 1.8 and 2.0. Implicit in these ratios is the execution of our asset sales program and the recapitalization of the ATX developments. Until revenue comes online from our remaining development projects, particularly 3150 Market, our leverage ratios will remain elevated. However, our asset sales recycling program is generating proceeds that will lower debt levels and improve our leverage metrics for both bonds and the credit facility. The benefit of this will be reported in future quarters as we continue on this program. I will now turn the call back over to Jerry.
Great. Thank you, Tom. As we wrap up and look ahead, market conditions continue to firm. We are seeing a monthly increase to the overall pipeline across the board in all of our core markets. Our leasing teams are doing a great job in terms of making sure we capture more than our market share of lease deals across our portfolio. As we have outlined, 2026 is going to show earnings growth and lower leverage over 2025, and we certainly expect further improvement in growth in 2026. As Tom touched on, as we continue to stabilize and recapitalize these projects, we do believe they will be generating significant incremental NOI in 2026, 2027, and 2028. So the groundwork has been laid and we will continue building on the momentum that our teams have created to drive long-term value. So with that, Jonathan, we are delighted to open up the floor for questions. As we always do, we ask that, in the interest of time and courtesy, you limit yourself to one question and one follow-up.
分析師問答
Certainly. Thank you. And our first question for today comes from the line of Steve Sakwa from Evercore ISI. Your question, please.
Yes. Thanks. Good morning, Jerry and Tom. Could you maybe just provide a little bit more color on 3150 Market? I think you said you had multiple users looking at the building. Maybe just talk about the nature of the tenancy, life science versus traditional office? And have you seen any meaningful improvement on the life sciences front as capital markets activity on that front has gotten better over the last six to nine months?
Yes, certainly, Steve. How are you this morning? At 3150 Market we actually have a multi-floor client in an advanced stage of lease negotiations right now, so we think that is moving very positively. We think that will also generate some additional momentum. As I mentioned, the portfolio's pipeline is up about 10% from last quarter. I know pipeline is not the same as getting a deal done, but it is a harbinger of good things to come. We are happy that tour velocity remains very active and a lot of ongoing discussions and proposals are advancing. In terms of the life science market, we are seeing a bit of a rebound. In fact, we were fortunate enough here at Sierra Center to host an event the other day with the Governor of the Commonwealth of Pennsylvania, Josh Shapiro, and a number of other state officials to announce that the Commonwealth included $125 million in the budget for InnovatePA, which is geared toward providing attractive financing to help life science companies grow. We think that will accelerate the growth rate and the capital structures of a number of life science companies that are being curated both at incubators and other institutions in the city, and certainly start to create a little more momentum for those incubator-level tenants to move to graduate spaces. We are talking to a couple tenants in our graduate-level space taking more space than at 51. So the trend line of acceleration is not occurring at the pace any of us would like, but the trend line is positive, seems durable, and we are certainly looking forward to getting a couple of leases across the finish line on this building.
Okay. Thanks. And then just as a follow-up, I think you said that Solaris and 1 UPTOWN were basically JV or asset sales in the back half of the year. Maybe just talk about the demand for Austin assets in general, particularly on the apartment side, given that market's been oversupplied? And what kind of demand did you see when you went to sell 405 Colorado?
Yeah. Well, in terms of 405 Colorado, we saw great activity. Stepping back, if you look at the activities taking place in Austin, our primary focus, as I have talked about on prior calls, is to take real advantage of long-term value we have at Uptown. As noted in the SIPA, we achieved some excellent zoning changes in the last year that moved our FAR up and increased height limits, so a big focus of our talent and capital base is going to be directed to harvesting the value we can create at 1 UPTOWN. Based on that, with our sale program focused on reducing leverage, we took a look at many properties in our portfolio. 405 came up as a property that was obviously very high quality and fully leased. We thought it was a good time to optimize some value there. We saw a very active bid list from a number of very high-quality institutions and we closed that transaction a few weeks ago. The pricing of that project north of $700 per square foot came right in line with our assumed guidance. Even with the supply pipeline—5 million square feet of current vacancy including space coming online and projected absorption levels between 500,000 square feet—the leasing profile and the weighted-average lease term we had on 405 were very attractive to many investors. So we were very pleased to get that across the table. It helps us focus back on 1 UPTOWN and Uptown ATX in general, and it generated a lot of great liquidity for us. Looking at Solaris, we had great success in absorbing space at Solaris and we have been testing the waters with a number of investors. We think there is a high probability we get a very good cap-rate transaction on that project done within the next 60 to 90 days. The in-migration and job growth in Austin are still very good, so even though there has been some temporary overbuilding of apartments, the absorption pace has been pretty significant throughout the city of Austin.
Thank you. And our next question comes from the line of Seth Bergey from Citi. Your question, please.
Thanks. It is Nick Joseph here with Seth. Just hoping to get some more commentary on the thought process behind the split between the debt repayments and the stock buybacks. Obviously, there is accretion from the buyback side, but I recognize the desire to return to investment-grade metrics. So just wondering how you came up with that 5% to 10% of proceeds for the buybacks?
Hey Nick, Tom and I will tag in here. Again, the paramount objective is to move to investment grade and improve all of our credit metrics. The opportunity we have is that we have about $900 million of outstanding bonds that have coupons in the high eights. Being able to minimize those interest payments by buying back a lot of bonds is a real accelerant to improving all of our credit metrics. When we take a look at share buybacks, it is really deemed to be an adjunct to maintain earnings neutrality through the impact of our sales program. Right now we are targeting somewhere between 5% and 10% of overall proceeds. I did mention that we have some other projects in the market for sale—Tom alluded to some of the land-sale activity we are pursuing—so we are on a clear path to generate surplus liquidity and use that liquidity to improve our overall balance sheet metrics, with a portion allocated to buybacks given where the stock is trading. Trading a range of assets at roughly $300 million this year at our targeted cap rate in the high sevens to low eights versus where the stock is trading suggests the stock is currently undervalued. That being said, major focus is to improve all the credit metrics. Tom, do you have anything else to add?
Yeah, I would just add to that. At those levels of buyback—if in fact we do them and it all depends on where markets are—we think that doing buybacks at the single-digit level does not materially impact our leverage levels relative to where we need to get. Every dollar matters, but a small level of buybacks in that single-digit area can be consistent with delevering while keeping earnings neutral, especially when we're focusing on bonds that are north of 8.5% coupons. Yield to maturity on those might be in the mid-sixes, but buying back high-coupon debt will help improve coverage ratios relatively quickly. We have not included any one-time extinguishment charges in our current FFO guidance.
And this is Seth here just as a follow-up. Can you just provide some color on what the demand is for the IBM space that they are going to vacate and you have plans to renovate and what kind of preleasing would you look for to start on 09/2024 and 09/2026?
Good morning. Certainly. As I mentioned, the pipeline since we announced this initiative has been very encouraging. Part of that is the value in our Uptown development: the train station coming online early next year achieves the goal of becoming a mass-transit-served mixed-use development in Austin. Cap Metro projects it to be the second busiest station on that line, so that has been a real draw. The ability to deliver these buildings at a pricing discount to new construction cost—with floor-to-ceiling glass, completely renovated HVAC and mechanical systems, and a first-quality presentation—has been attractive to everyone. The overall submarket, even when you factor in sublease space, is less than 8% vacant. We felt there was a real window of opportunity. The first building we plan to start is about 157,000 square feet. We are hoping to get some leases done as we move through that construction process, but moving forward on other buildings will be a function of getting leases signed. We think we have some good discussions underway that will validate that thesis. The game plan is to deliver high-quality renovated office space within a mixed-use community that hits the price point many tenants are looking for, and given the amenity base and transit accessibility, we think that is a strong prescription for success.
Thank you. And our next question comes from the line of Upal Dhananjay Rana from KeyBanc. Your question, please.
Great. Thank you. Jerry, just on the 405 Colorado Tower disposition, what was the cap rate on that? And then also, once $300 million of dispositions are completed this year, where would you stand on doing further dispositions from here? Just trying to get a sense of how much more is left to do.
Yeah. From our perspective, we are looking to do more asset sales. We have a number of assets in the market for sale. We have not put a revised target in place for 2026 and we have not put any guidance for 2027, but as we take a look at each asset within our portfolio we are analyzing each asset's relative growth profile and what level of investment is required to bring those properties to stabilization and deliver growth to the company. We would expect sales of a couple hundred million dollars over the next four to six quarters as we move forward with this balance-sheet-enhancing program.
And on 405 Colorado, we did file and the cap rate was around 8%—maybe a little slightly above that. Cash cap would be a little lower, but that's basically the cap rate we achieved on that asset.
Okay, great. That was helpful. And then, just on occupancy: it improved 80 basis points to 89.1% and the lease percentage also increased. You mentioned this year will be your first positive net absorption year in a while. I am just trying to get a sense of timing on occupancy in the back half. You have got 166,000 square feet still to commence, and you sold several assets that were fully leased. So can you give thoughts on occupancy and why your guidance still suggests further improvement in the back half?
Yes. As we indicated, we expect positive absorption for the full year. We outlined in the original business plan that absorption would dip in the third quarter and then pick up strongly in the fourth quarter. We are holding our year-end occupancy and lease targets. Generally, we are very encouraged with the number of tenants coming back into the marketplace. The bias towards quality buildings, quality operators, and efficient operations remains intact and we think our on-the-ground leasing and property management teams are doing a very good job capturing activity relative to our market share. That is one of the reasons our pipeline continues to build. We are not going to rest until we get occupancy well above 90%. Our Pennsylvania-based assets—CBD Philadelphia, University City, and some suburban submarkets—are doing really well. We have a challenge in Austin and we have programs in place to address that over the next several quarters. We hope to pick up absorption there as well to minimize the drag on our overall occupancy and leasing stats in future quarters.
Thank you. And our next question comes from the line of Dylan Burzinski from Green Street. Your question, please.
Hi guys. Most of my questions have been answered. But as you think about any sort of remaining asset sales, are those likely to be more stabilized core-type assets or more assets with some current vacancy or vacancy as we look out over the next few years? Can you talk about how you think about the portfolio today?
Great question. It is going to be a mix. We take a disciplined look at every asset and perform net present value calculations to test where we think values are. For us, it is about the point at which each asset is at its optimal value given current market conditions. Even what we sold this year included a significantly under-leased property because the amount of capital required to bring that project to stabilization and the projected absorption timeline delivered a very low return on invested capital; selling it today exceeded that net present value. We are going through this exercise across the entire company. We consider weighted-average lease term, market dynamics, and asset quality. You should expect a mix of asset sales going forward. As Tom alluded to, we are also reviewing land inventory and have a number of parcels going through the sale process. Again, the major objective is to generate liquidity to improve the balance sheet and deliver growth going forward.
And would you say that for assets you've brought to market, comparing capital markets bids versus your internal assessment, is the market closer to your internal view for stabilized core assets? As buyers return, is there stronger appetite for value-add assets versus the core product?
We actually debate that internally. The market is still largely core capital looking for stability, weighted-average lease term, asset quality, and submarket positioning. But we are also seeing a return of value-add capital willing to take vacancy risk, especially given the limited new office supply and increasing conversion activity—like in Philadelphia where conversion represents a meaningful percentage of inventory. Some value-add buyers are more aggressive than they were a year or two ago and the debt markets being more fluid amplifies their execution. So it is a good time for us to identify which assets will deliver the best growth and to use market feedback from different investor types to inform which assets we sell and at what price points are acceptable.
Thank you. And our next question comes from the line of Anthony Paolone from JPMorgan. Your question, please.
Yes. Two quick ones. One is on the IBM buildings: what do you think your all-in spend will need to be to get those repositioned and backfilled?
Yeah. For the first building, which is what we have fully priced out, we expect the all-in cost to be somewhere in the $60 million range. That includes related infrastructure work, TI costs, and all base-building improvements.
Okay. And would that be a similar number for the other buildings if you moved them in the same direction?
Yeah, Tony, I think so. I hesitate to give a definitive answer because we are still pricing through that, but that is a good order-of-magnitude estimate. The key issue for us is not only the cost number but where rents will be relative to new development rents and our targeted returns being north of 8%, so that drives the cost equation as well.
Got it. And then just a second one: with the JV recap, you mentioned ownership stake going down. What order of magnitude do you think your ending ownership stake will be?
Our ideal structure from a liquidity harvesting and balance-sheet improvement standpoint is likely to result in us holding between 10% and 20%, with a bias more toward 10%. For the residential project in Austin, the current thought is to sell that and capture pricing.
Thank you.
Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to Jerry Sweeney for any further remarks.
Jonathan, thank you, and just to thank all of you for participating in our second quarter earnings call. We look forward to updating you on our business plan progress in October for our third quarter call. In the meantime, have a wonderful summer. Thank you very much.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.