Brandywine Realty Trust - Earnings Call - Q1 2017
April 20, 2017
Transcript
Speaker 0
Good morning. My name is Tabitha, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I'll now turn the call over to Gerry Sweeney, President and CEO. Sir, the floor is yours.
Speaker 1
Tabitha, thank you very much. Good morning, everyone, and thank you for participating in our first quarter earnings call. On today's call with me are Tom Worth, our Executive Vice President and Chief Financial Officer Dan Palazzo, Vice President and Chief Accounting Officer and we have George Johnstone, Executive VP of Operations, who's calling in from off-site, so he'll be available for Q and A later in our call. Prior to beginning our presentation, 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 filed with the SEC. So with that said, as we normally do, we'll start off with a summary of our key business plan performance and then Tom will review our financial results. So far, we're off to a solid start. During the first quarter, we made significant progress in our business plan objectives, meeting or exceeding many of our operational leasing and investment goals. We also are reaffirming most of our business plan targets and increasing the two other targets that we laid out in our business plan.
On the investment front, we have executed two thirds of our $200,000,000 disposition target with a strong pipeline of transactions under contract or in the market for sale. And as anticipated, our portfolio repositioning is accomplishing our goals of growing earnings, cash flow and strengthening our balance sheet. And these goals are best evidenced by our strong same store cash growth this quarter and by the increase in our full year cash mark to market range. Our mark to market for the quarter was 9.1% on a GAAP basis in excess of our targeted range. Our mark to market on a cash basis was lower than our range primarily due to several known DC renewals.
But based on forward activity, we expect full results to be within the new targeted range, which increased by 100 basis points from 8% to 10% to a new range of 9% to 11%. We ended the quarter at 93.2% occupied and 94% leased. Our speculative revenue plan is 90% complete on a revenue basis and 80% complete on a square footage basis, which compares favorably to our performance in 2016. Our tenant retention rate for the quarter was also below our annual target, but based on known activity, we are increasing our annual target from 68% retention to 71% for 2017. Our GAAP and cash same store numbers for the quarter were in excess of our business plan range at 2.4% GAAP and 9.4% cash.
Future quarterly activity will return us to our existing ranges for these metrics for 2017 full year. Our leasing capital for the quarter came in above our range primarily due to three long term deals in CBD Philadelphia. But again, on forward leasing activity, we're maintaining our 2017 targeted range of $2 to $2.5 per square foot per lease year. We expect we will be below our range in Q2, in line in Q3 and slightly above in Q4. But fundamentally based on our strong mark to market cash rent growth combined with longer lease terms and strong annual escalations that has resulted in a 16% increase in our same store net effective rent since 2015.
So very good operational throughput through our portfolio. From a balance sheet standpoint, we continue to benefit from our sales program as evidenced by improvements in our liquidity and leverage metrics. To wit, we've reduced our net debt to EBITDA from 6.6% at year end twenty sixteen to 6.3% at quarter end. We reduced our net debt to total assets from just north of 38% at year end down to 37.5% at quarter end. Our weighted average cost of debt year over year went from 4.7% down to 4.5%.
And we also ended the year with or ended quarter with a net cash balance of $235,000,000 and 0 drawn on our line of credit. As we disclosed in our press release and discussed on last quarter's call, we did utilize $100,000,000 of our cash reserves to redeem our entire 6.9% perpetual preferred shares at par. As noted again, this redemption did result in a one time non cash charge of $02 per share during the second quarter, We're so as a result revising our 2017 guidance from a range of $1.35 to $1.42 per share down to $1.33 to $1.4 per share solely to reflect that 2% non cash a $02 non cash charge. On the investment front, we're running ahead of pace in our $200,000,000 disposition target. We completed $133,000,000 of sales during the first quarter at a cap rate average cap rate below our targeted range.
We also made progress on recycling our land basis and JVs by exiting our apartment joint venture in Plymouth Meeting, Pennsylvania, where we netted $27,000,000 in cash along with achieving a $27,000,000 reduction in debt attribution posted a gain of $14,600,000 and internal rate of return just north of 18%. We do anticipate using this successful round tripping on some of our other residential JVs. Before getting into our specific business plan metrics, we wanted to provide just a little color on what we're seeing in our markets as a prelude to any questions that you may have. First of all, our pipeline of potential leasing transactions has increased to 1,800,000 square feet, which is up 100,000 square feet from the last quarter. We have also approximately 400,000 square feet of leases out for Signature.
Portfolio was solid with traffic levels in CBD Philadelphia up. Pennsylvania suburban properties were in line with previous quarter traffic levels and in Austin and Northern Virginia were down slightly quarter over quarter. Our portfolio occupancy continues to outperform market averages ranging from 500 basis points of outperformance in Austin to 1,000 basis points of outperformance in our Northern Virginia properties. Our leasing and property teams continue to do really exceptional work in servicing our customers and accelerating our lease up plans. We continue to see good absorption in our core market areas.
For example, absorption pace is up 20% year over year in the Pennsylvania suburbs. And in fact, in that market, vacancy rate is at the lowest level since 02/2001. Austin absorption was up slightly over Q4 levels and CBD Philadelphia continues to perform well with Q1 leasing levels of 460,000 square feet. I guess more importantly is looking at over the next several years, we're pleased to report that our forward lease expirations are now below 10% annually for each year between now and 2021. Those accelerated pre leasing efforts really solidify our operating platform and we believe position us for continued market outperformance.
Regarding our 2017 plan, we do expect the year end occupancy levels to continue to improve throughout the year up to a range between 9495%. We did reduce our speculative revenue target by $1,000,000 to reflect the continued acceleration of our building sales and to account frankly for a property currently under contract to a user where we had projected some speculative revenue in our 2017 plan. Same store numbers will range between 0% to two percent on a GAAP basis and a very strong 6% to 8% on a cash basis. As I noted, investment sales are moving very much according to our plan. We're maintaining at this point our 2016 disposition guidance of $200,000,000 of net sales with anticipated future sales of $67,000,000 targeted in the second and third quarter, in line with our pro form a cap rate of 8%.
We are confident of achieving this disposition target and we currently have about $100,000,000 of properties either under agreement or in the market for sale. One nuance to our disposition plan for 2017, our Concord sale occurred earlier than we anticipated and did generate a tenthirty one requirement. So we do anticipate making an approximately $35,000,000 acquisition during the summer months. Our focus is solely on value add and we have currently identified several potential redevelopment opportunities to meet this requirement. As Tom will outline, we will be repaying our $300,000,000 unsecured bonds due in May.
They have a carry of 5.7% rate with funding through a combination of cash on hand and our line of credit as the first step in overall debt management program. Just some quick notes on our development pipeline. Our nineteen nineteen market joint venture project with CalSTRS and Elkhart is doing great. The office and retail component remains 100% leased. The two fifteen car garage is already averaging 90% occupancy per day.
We will achieve a free and clear return north of 7% and the apartments are already 92% leased and 84% occupied. Interior renovations at nineteen hundred Market are substantially complete. We're still in the final phase of zoning approval for some exterior improvements, which we hope to wrap up later this year. And we are still projecting a low double digit free and clear return from that property. Construction is on schedule and on budget for our one one hundred and eleven thousand square foot 100% pre leased build to suit property in King Of Prussia, Pennsylvania.
We'll deliver that property during the second quarter. We did realize some final construction cost savings. So project costs were reduced by just shy of $2,000,000 which increases our previous 9.5 free and clear return to the mid-10s. The office portion of FMC is complete and 96% leased as we reported last quarter. We did commence operations this quarter on components of our residential project.
Our 3,000 square foot restaurant is scheduled to open in June. We are we still expect that the office component will stabilize in Q4 this year and the residential component be stabilized in Q1 twenty eighteen. On the residential component, we did open in January and we're still in the process of delivering finished units. Results thus far are very encouraging. The flexible stay component is doing very well.
The furnished residences are about 23% leased already and the market rentals are already 24% leased. So we're really gearing up for full delivery in the next forty five days. Given the executed leasing activity in the office component, the length of those lease terms have exceeded pro form a, but also came with a higher capital spend as well as finalizing the residential programming between the flexible stay furnished and unfurnished units and several upgrades. We did increase our cost level to $400,000,000 on FMC combined project, but we're also able based on known economics to increase our targeted free and clear return to 8.1% based upon known activity. Zoning ordinances have been introduced and the design planning work continues on our Schuylkill Yards project.
We have continued some planning efforts during the approval timeline, and we could potentially start our public space component in the third quarter. We also continue to advance planning and predevelopment on several of our development sites, including 405 Colorado and our Broadmoor master planning efforts in Austin, Texas, And we are still projecting a $50,000,000 development start that we expect to commence in the latter half of the year. I'll now turn it over to Tom for a review of our financial performance and some observational observations and then George will be available for Q and A.
Speaker 2
Tom? Thank you, Jerry. Our first quarter rental income attributable to common shareholders was $19,300,000 or $0.11 per diluted share and our FFO totaled $56,100,000 or $0.32 per diluted share. Some observations from the first quarter results, same store NOI rates for the first quarter were up 2.4% GAAP, 9.4% cash, both excluding net termination and other income items. We've now had twenty three consecutive quarters of GAAP increase to the GAAP metric and 19 for the cash metric.
Consistent with prior quarters, our G and A sequentially increased from $5,900,000 to $9,400,000 Our first quarter G and A was above forecast primarily due to some onetime professional fee items. FFO contribution from our unconsolidated joint ventures stood at $9,500,000 in line with forecast. Interest expense $21,400,000 which approximated our forecast and a $1,000,000 sequential increase primarily due to lower levels of capitalized interest. Our income and termination fees totaled 900,000.0 and $1,000,000 respectively and did approximate our forecast. And third party fee income and expense totaled 6,500,000.0 and $2,400,000 respectively.
Our fourth quarter CAD totaled $41,700,000 representing a 68% payout ratio, which includes $9,500,000 of revenue maintaining capital expenditures. We also incurred $6,300,000 of revenue creating revenue expenditures. Looking forward to the second quarter, we note the following: Sequential property level operating income GAAP operating income excluding term fees, third party and other income for the second quarter will range between 71,500,000.0 and $72,000,000 as compared to the second first quarter actual NOI of about $73,000,000 The second quarter NOI will include approximately $4,000,000 contribution from FMC, up from 2,800,000.0 in Q1, partially offset by first quarter disposition activity, which will have sequential dilution of $1,200,000 In addition, the new IBM lease at Broadmoor will have a lower sequential GAAP NOI as the purchase accounting FAS 141 income will burn off reducing us by $1,000,000 on a sequential basis from the first quarter. As outlined previously, while the same store NOI will benefit from the renewal of IBM, the GAAP NOI will actually decrease. G and A expense for the second quarter due to the timing of our first quarter expense recognition and previously noted professional fees, our second quarter G and A expense will decrease to approximately $6,500,000 and for the full year, we continue to approximate about $28,000,000 Other income for the second quarter will approximate $05,000,000 Our full year estimate of $3,000,000 remains intact.
Termination fees, expect $05,000,000 in the second quarter and our full year estimate remains at $3,000,000 Interest expense and preferred dividends. Second quarter interest expense will decrease to approximately $21,000,000 primarily due to the anticipated payoff of our bonds that mature on May 1, totaling $300,000,000 at a rate of 5.7%, partially offset by lower capitalized interest. Our second quarter preferred dividend, for the partial quarter up to the redemption date will total $300,000 FFO contribution from our unconsolidated joint ventures should approximate the first quarter at about $9,500,000 and in fact our joint ventures will contribute about $37,000,000 for the entire year. Third party fee income should approximate $25,000,000 for the income and $8,500,000 for the related expense, no changes. As we look at our business plan assumptions, net sales of $200,000,000 to date we have sold 133,000,000 or 68%.
We do not have we're not changing that target. The unsecured bonds will be paid off at maturity. Bank term loan, we anticipated in the last quarter of doing a bank term loan between 150,000,000 and $200,000,000 to partially fund that bond maturity. We've assumed a 3.25% rate. However, as we assess our other liability management alternatives, which could include the twenty eighteen bonds, we've delayed the execution of the term loan to either late second quarter or early third quarter.
The preferred shares, as discussed, have been redeemed at par. The redemption did generate a onetime noncash charge of $02 primarily it's all related to unamortized original issue discount original issuance costs that are being written off. And that charge, as we've discussed in the past, was not included in guidance and then for caused us to have a $02 revision. Land sales, we do have some land sales under contract, though we have to program no FFO gains or losses as a result in our guidance. We continue to have an estimated 178.3 weighted average shares for dilution purposes.
Looking at capital, we continue to project 17 capital coverage between seventy one percent and sixty four percent, reflecting around $35,000,000 of revenue maintaining CapEx at the midpoint. Primarily cash uses and sources for the balance of the year will total $650,000,000 The primary uses will be $125,000,000 for development and redevelopment projects, dollars 86,000,000 of aggregate dividends, dollars 31,000,000 of revenue creating CapEx, the $300,000,000 bond payoff,
Speaker 3
the $100,000,000
Speaker 2
redemption of the preferred and $4,000,000 of mortgage amortization. The sources to fund that are $125,000,000 of cash flow after interest payments, dollars 64,000,000 of speculative net sales, a $250,000,000 term loan, use of our cash of about $200,000,000 and $11,000,000 residual land sales, primarily Garza. Based on the capital plan and the two fifty million dollars term loan being executed sometime during 2016, we anticipate having a cash balance that approximates $35,000,000 at year end. Redemption of the preferred will cause our debt to EBITDA ratio to increase from the 6.3 times, which Jerry noted earlier, will increase by 0.3 to the second quarter. However, the removal of the preferred dividend will also improve our fixed charge ratio by 0.2 times, put us over three.
We also project that our year end debt to EBITDA ratio remains in the mid-six area. In addition to our debt to GAV will remain approximately 40% by the end of the year. We continue to be mindful of the current interest rate environment and we are considering a number of refinancing options that may include potentially addressing the $20.18 $325,000,000 bond maturity at 4.95%. I'll now turn the call back over to Jerry.
Speaker 1
Thank you, Tom. So to wrap up, 2017 is off to a great start for us. We really do believe that this year represents a continuation of our growing operating cash flow, improving our CAD payout ratios, growing NAV and really positioning the company with a very solid operating platform for future growth. Just one other closing comment. I would like to remind everyone that we will be hosting an Investor Day on May 8 with a series of presentations by management that will start at 10:00 in the morning and that will occur at the in our FMC Tower at Sierra Center South.
So with that, we'd be delighted to open up the floor for any questions. As we always do, we ask that in the interest of time, you limit yourself to one question and a follow-up. Tabitha?
Speaker 0
Your first question comes from the line of Michael Lewis with SunTrust.
Speaker 2
Jerry, I think you mentioned Northern Virginia a bit soft. It looks like the DC Metro occupancy came in a bit, but the NOI was up and I think the rents look like they were up. Since the election and everything, I mean, what's changing there? And are you seeing improvement in that market? Do you think over the next year that's kind of a drag on your same store NOI?
Or is it getting better and catching up?
Speaker 1
Michael, objective is to get that portfolio back to above 90% leased by the end of the year. That's clearly our more challenging market. Since the election, I think the psychology in the market has turned certainly more positive with the expectation that there'll be more government contracting opportunities, more of an emphasis on homeland security, cybersecurity. So certainly as our team is speaking to our tenant base and prospects, there seems to be a more positive bias to the feedback we're getting. We really haven't, however, seen that translate to any significant increase in quantitative data in terms of either absorption or leasing activity levels.
But certainly psychology is a good starting point. From our perspective, we're just hoping we're not going to see a Trump bump slump where things start to revert back to the mean where they were before. But certainly, we're very mindful of the work we need to get done in Northern Virginia. We have built into our capital plan, renovating several of our existing projects along the toll road to reposition them to generate higher levels of return on invested equity, very similar to what we did on our Dulles Corner project a few years ago that has been a wonderful success for us. So it's very much an aggressive marketing stance we're taking down there.
Again, the psychology has been positive, and we're tracking a number of different situations that hopefully will translate to better than business plan improvements for us.
Speaker 2
Thank you. So my second question is you sold some land in Austin and Richmond and it looks like there's some more coming. Has there been any change in your view of land based on where we are in the cycle and likelihood of starting new developments? Or I guess a Part B to that question, as you look at your land, is there more of a focus on Schuylkill Yards and the Austin land as kind of the source of kind of development going forward and maybe you trim some of the rest?
Speaker 1
Yes. Look, I think when we go through our land inventory, have a page in the book on it. The our primary focus right now is we think our land at about 3.5% or 3.7% of our asset base is in the range where we want it to be. We do think though that there are a number of parcels of profit that we have on the market for sale that either are no longer part of our core market growth strategy or primarily better suited towards alternative uses, but don't have the scale or the location to warrant us doing a transaction like we did with Toll Brothers in Plymouth Meeting. So we clearly are looking at a number of the parcels of ground in Pennsylvania, New Jersey, Virginia as potential fodder for generating capital for the company.
When we do look at land, think we think we've got a very good forward land development pipeline opportunity in Philadelphia. So we're not really looking to acquire much more land in Philadelphia that we don't already control. And in Austin, we do think that the site we have downtown and more importantly, we think the tremendous growth opportunity long term that Broadmoor will create gives us sufficient land basis there to really grow our portfolio significantly.
Speaker 2
Thanks. I look forward to seeing you in a few weeks.
Speaker 1
Thank you. So do we.
Speaker 0
Your next question comes from the line of Jamie Feldman with Bank of America.
Speaker 4
Great. Thank you. Good morning.
Speaker 1
Hi, Jamie.
Speaker 4
You talk more about some of the space that went vacant during the quarter, exact locations and just lease prospects to backfill and what's in your guidance versus maybe expectations to get it backfilled in 2018?
Speaker 1
Yes, I think when we took a look at why we had negative absorption during the quarter, it really came from several couple several tenants. One in the Pennsylvania suburbs, we had about a 50,000 downsize of operations, which we knew was coming, it was clearly part of our plan. And then had a similar situation in a couple of our buildings downtown and one of our remaining assets over in New Jersey. So what we really saw, Jamie, was what we knew was going to happen as part of our overall business plan. So no real surprises there.
One of the floors that we received back at downtown, we've already got some very active prospects for that now. So anticipate leasing it up by the end of the year. But as we take a look at our forward pipeline, we certainly think that the occupancy levels, the absorption pace we've targeted are very achievable.
Speaker 4
Okay. And then can you talk longer term about your plans for the residential and hotel space at FMC?
Speaker 1
Yes. I think the intermediate focus for us is just complete it and get it leased up and starting to generate the revenue that we are that we're anticipating. And as I touched on, I think we're very happy with how that's being received in the marketplace. I think longer term, just as we looked at with the Plymouth Meeting joint venture, we'll certainly start to evaluate some of these other residential JVs. There may be a more near term optimal price point for us on some of those projects than our typical core office holdings.
When we developed FMC, we set it up to be a potential condo interest. So as we reach stabilization, we'll certainly take a look at that. As we will, frankly, with some of our other mixed use projects to see if the continued cap rate compression that we continue to see on the residential side creates a near term value point than we might have otherwise been thinking.
Speaker 4
Okay. But do you think long term you'll want to keep a stake just to help to control the asset as long as you're on the office
Speaker 5
I or not
Speaker 1
think it's too early to call, Jamie. I think we really want to do right now with FMC is just get it locked away and meet all of our targets. We certainly are open to a number of different capital structures, not just on that project, but on any of our projects. And I don't want to prejudge that we're going to be completely out or partially in or at this point. But I think you should understand that we have a very open mind to what the ultimate structure or our residual position would be based upon where we see we create the most value for our company.
Speaker 4
Okay. Thank you.
Speaker 1
You're welcome.
Speaker 0
Your next question comes from the line of Emmanuel Korchman with Citi.
Speaker 6
Hey, guys. Good morning. If we look at your lease expiration schedules, especially what's left in 2017, it looks like those rates are significantly below your portfolio average. Is that just a matter of mix? And does that drive sort of the, I guess, outsized rent rollover expectations for 'seventeen?
And then on that same front, if we look at 'eighteen, do those rents being closer to average imply that rent rollovers might be a little bit softer?
Speaker 1
Well, I know one of the big upticks that we're seeing anticipate for 2017, as Tom touched on, is the solid mark to market we're getting on IBM. George, maybe you can pick up the second part of Manny's question.
Speaker 7
Sure. Yes, I think the balance of 2017, which there isn't a whole lot left, only a handful of deals above 15,000 square feet, but a number of those are in fact expiring at advantageous rates for us. And that's kind of why we've got the embedded mark to market ranges that we do. I think when we look at 2018, we've got a couple of higher rents in DC that market still hasn't fully recovered. So I do think you'll continue to see some cash roll downs into 2018.
But I think for the balance of the portfolio, I think we've seen rent growth levels where that trend is will be positive for 2018.
Speaker 6
Great. And then a question for Tom. Tom, as you think about guidance or maybe your presentation of guidance, with something like speculative revenue, the fact that that now came down quarter over quarter because sales were executed, does that am I thinking about it correctly in that that didn't imply the sales or that the mix of the assets you were going to sell has changed? So if we look forward from here, if you sell the additional, call it, 70,000,000 that you have in guidance, does that mean the speculative revenue could come down again? Or does your speculative revenue number now foresee the sales that you're going to make?
Speaker 2
Manny, no, we could it is a speculative number based on a number of transactions that are that we have out in the market. So we won't move that speculative revenue target. So we feel something is sold or under contract and we feel good about the sale. So the speculative revenue target could adjust again if we sell certain assets that had activity planned for the back half of the year.
Speaker 1
Yes. I think, Matti, just to jump in the I mean, one
Speaker 8
of the
Speaker 1
primary drivers of the change quarter from the last time we spoke to this quarter call was that we did place a property under agreement to a user. That property has some vacancy that we really did anticipate generating some spec revenue for us kind of mid Q3 through Q4. So that was the primary driver behind the change in the spec revenue target this year. That's a fairly unique situation. We're really marketing the property for sale.
We just were approached by a company that has a specific use for that building. It's a very good trade for the organization. So from our perspective, we decided that it's probably better for us both for 2017 and long term to sell that property even though it came at a slight downtick to our spec load revenue target.
Speaker 6
Okay. Thanks guys.
Speaker 1
Thank you.
Speaker 0
Your next question comes from the line of John Guinee with Stifel.
Speaker 4
Thank you. If these questions have already been answered, let me know. First, status on Northrop Grumman, dollars 35 full service round, I think about 284,000 square feet in Northern Virginia. It looks like about a 2018 lease expiration. Second, I think you've got maybe a big lease expiration for Verizon in three Logan, I might be wrong on that.
Three, a lot of press recently about property tax increases in the commercial buildings in Center City, Philadelphia? And then lastly, how do we look at your land basis at Schuylkill Yards?
Speaker 1
John, how are you this morning? Good, good. A couple of questions I'll just run through. Northrop Grumman, they've exercised an extension to the last one under their lease to go out through the fourth quarter of twenty eighteen. I think they continue to assess their various options and we maintain a very active dialogue with them.
They're occupying the space, so we'll see where it goes. But what was originally a kind of year end 2017 expiration has now rolled forward another nine months. So we'll see how that works out. Verizon is and we've known for a while is moving out of about 100,000 square feet in our 3 Logan project. Again, was a known move out for the last several years as they weren't really occupying much of that space.
The reality is that we have some very strong prospects for that and anticipate that we'll have when we do lease that space up, we'll have a very good mark to market on that. The real estate tax assessment issue in Philadelphia, the city came out with some revised assessments. We're working our way through all those numbers. Philadelphia has not reassessed in a number of years. And from a macro standpoint, real estate tax in Philadelphia really are below the regional average by a significant amount.
So this reassessment, think, starts the path for Philadelphia to kind of reassess their commercial property base. As we're looking through the numbers, we think that will wind up costing us about 1,200,000.0 or $1,300,000 as we look forward to 2018 when those assessments go in place, assuming that there's no appeal. So we're certainly like every other landlord looking through the numbers we received in to determine whether there's an appeal there. And on Schuylkill Yards, I think the transaction we structured with the landowner provides a rolling option for us to take down land. And I think a price we've indicated about $35 per FAR foot that holds flat for a number of years and escalates at a couple of percentage points a year.
Hope that answers your questions.
Speaker 4
Great. Wonderful. Thank you.
Speaker 1
You're welcome.
Speaker 0
Your next question comes from the line of Greg Millman with KeyBanc Capital Markets.
Speaker 9
Hey, guys. Greg. Jerry, I think last call, you had said you really didn't want to go above $200,000,000 of dispositions. But just given you guys have, what, about $100,000,000 in the market and you're talking more about maybe monetizing some resi positions, I mean, could we see that number move higher through the year?
Speaker 1
Look, I think we are still maintaining our guidance on the $200,000,000 The nuance to that is, as I outlined, is that with the $10.31 requirement, we do anticipate that if we wind up executing on that, that we would wind up still being a $200,000,000 net seller. So what we have done for the year plus we have in the market puts us above the $200,000,000 mark. But frankly, some of those things are in the market may not we may have the pricing that we want or may not get the terms and conditions that we desire. But we're so we're still, Craig, I think, bottom line holding into that number on a net basis. We think that the combination of whatever the $10.31 exchange property is and the incremental sales as Tom's worked through will be neutral to FFO for this year.
But look, certainly, think it's incumbent upon anybody, any landlord to always be responsive to what the market is telling them from a pricing standpoint. So we do have a very active dialogue across the board and across all of our regions on what property pricing we can get. As we assess that today, we're comfortable with where our guidance number is. Certainly, we would not want to preclude our harvesting some additional money later this year if the right situation presents itself. We haven't seen visibility on that definitively yet.
But certainly, I think as we've done in the last several years, we always maintain an open mind to harvesting some great value of some of our real estate.
Speaker 9
Is it fair to say if you guys are more opportunistic, it'd be lower cap rate stuff relative to sort of the eight caps you've been guiding us toward?
Speaker 1
Well, look, success in the first quarter, we're well inside the 8% cap rate range. Now that's due to some of the properties we're selling, but the cap rates that we sold are ranged between 5.57%. So we that's one of the reasons why we put so much in the market, so we can be selective as to where the best price points are compared to how we value those properties. So we expect to continue that over the next couple of quarters.
Speaker 9
That's helpful. And then just on the Marine peers, when do you expect the $9,000,000 payment to come through? Once that tenant either leave or terminate?
Speaker 1
Yes. That's going to be outstanding until that tenant expires, think, Dan, 2020. 2020. 2020 rather, yes. Thank you.
Speaker 9
How much was there I know you guys lumped it in last quarter with the parking at Sierra. How much of that NOI for the full year was marine versus just parking revenue?
Speaker 6
I'm wondering
Speaker 9
what I'd say, what's the cap rate on the $21,000,000
Speaker 8
for that one?
Speaker 1
It's pretty low. It's in the 4% range when we take a look at everything all in. It's really a future development site. We sold it to a very high quality development company moving in from outside of the city who plans on doing some residential Waterfront development. So I think for us, we made it it was a great transaction that moved development site that's been on our books for a while.
We were generating some income from that based upon the marine and the parking and the restaurant operations. But certainly, they're more equipped to make that project successful for the Marine Center.
Speaker 6
Great. Thanks guys.
Speaker 1
You're welcome.
Speaker 0
Your next question comes from the line of Rich Anderson of CJS Securities.
Speaker 5
Thanks. Good morning. So could we talk about the GAAP and cash same store NOI differential hasn't always been leaning to the cash side as substantially it is today. I'm just curious what the shelf life of that sort of spread is. Looking back several quarters, it was kind of the reverse.
And so is this kind of a 2017 event where you have such a big cash number and more moderate GAAP number? And should we expect that to kind of become more in line with one another starting in 2018 or some point down the road?
Speaker 2
Rich, this is Tom. I'll answer that. This year there was because of the IBM, which we've talked about in the past and the burn off of the acquisition GAAP NOI from the $141,000,000 is a big dichotomy this year and that particular transaction being such a large part of our spec revenue this year caused it to be larger than it would have been otherwise. I think though, do looking at 2018, we continue to see our straight line rent and those GAAP adjustments coming down. And so I think at least through 2018, you're going to see the same thing occur when we look out to 2018 is that we will see our cash NOI outpacing our GAAP in terms of growth.
So we'll see that going forward as a trend.
Speaker 5
Okay. I now recall the IBM thing. Thank you. And then second question, just looking back at the kind of the transcript from last quarter, I noticed you made the comment that 85% of your disposition target of $200,000,000 then and now was either sold or under contract. I think that was kind of the terminology used.
And now you've completed 66%. I'm just curious, does that 85% then and 66% now, does that sort of suggest, even though you kind of went down the path of saying you got faster with Concord, is
Speaker 1
it maybe moving a little slower
Speaker 5
than you anticipated three months ago?
Speaker 2
Hi, Rich, this is Tom again. I think when we looked at the disposition target, we had that under contract. But I think when we talked about our guidance and what we thought we would execute, we thought we would have 75% done by June 30. So some of the transactions may be closed sooner than we thought. But I think our overall goal was to get 75% of that $200,000,000 by June 30.
And I don't think we feel that that is any different than where we are today. Some of them closed maybe a quarter or two or a month or two earlier than we thought. But I think we always anticipated having 75% done by midyear.
Speaker 5
Okay. And if just quickly dividend policy, you quote your cat on a percentage number nowadays. I mean, it suggests that maybe you got some ideas about future dividend growth. Is that a fair statement?
Speaker 2
Well, that one, Rich, there were some changes made. I haven't really tracked our other companies, but we were changing that as a result of some guidance that came out from the SEC that is telling us that we should be talking in terms of a coverage ratio rather than a per share ratio. So that's the only reason it changed. There's nothing to be read into it on a change in policy for our dividend.
Speaker 5
Okay. Fair enough. Thanks.
Speaker 10
Thanks, Rich.
Speaker 0
Your next question comes from the line of Jed Ragan of Green Street Advisors.
Speaker 8
Guys. Good morning, Jed.
Speaker 6
Can you I just wonder if you can give
Speaker 8
us a sense of kind of the rent growth you're seeing across your markets at this point?
Speaker 1
Sure. George and I will tag team that up. I'll take the kind of the first part of it. Look, I think what we're seeing in the Pennsylvania suburbs is there was a lot of good activity and a high level of leasing velocity. So we've been able to move rents up into the 4% to 5% range.
Year over year in the CBD area, rents have moved up to 5% to 7% depending upon the inventory class. We're still seeing rents fairly flat as we talked about in DC. And down in Austin, they continue to have very strong upward pressure on rents. And I'm just looking through my notes right now. So when you take a look at the average asking rents in Austin, they've kind of up 11% year over year across the board.
Then when you take a look at the Class A rents in Austin, that's they're up just shy of 13% year over year. So I think we're still in that point where we're being able to push rents fairly nicely throughout the bulk of our portfolio. Certainly in every market, keeping an eye on where we think deliveries are coming in. And that's one of the reasons why we're really accelerating a lot of our forward lease role as well, which is why I highlighted the fact that one of the things that we really think will hold the company in great stead over the next few years is that we've got our annual rollover now down to 10% or below between now and 2020. But I think we're really very much focused on seizing the moment, so to speak, on this window where rents are still pushing up and pushing up nicely in all of our markets and making sure that we're well positioned to the event that we wind up moving into any period in the next few years where things start to slow down a little
Speaker 8
bit. That's helpful.
Speaker 3
Jed, I was
Speaker 7
going to say, I'm sorry. In terms of mark to market, I think we're continuing to see double digit increases in GAAP mark to markets in Pennsylvania CBD and in Austin. And we're seeing kind of low to mid single digit GAAP rent growth now come out of DC.
Speaker 8
Okay. That's helpful. And I guess related to that, the mark to cash mark to market rent guidance for 2017, you bumped up a little bit even though the first quarter number was pretty modest. Was that a function of, again, just kind of the mix of assets you're selling changing? Or is that just rent growth kind of ticked up faster than expected?
George?
Speaker 7
Yes. It's really more based on the deals we've executed that's allowed us to push the range. More of that was based on actual forward commencing deals that we've executed. But I think given the fact that we do continue to see nice rent growth coming out of Downtown Philadelphia and in Radnor, the clarity of the pipeline and the deals we've executed but not yet commenced allowed us to move the range.
Speaker 8
Okay. Thanks. And then just generally on Philly, looks like job growth has been pretty healthy here recently. I'm just wondering if you can talk about kind of the main drivers behind that. Is that I mean, are state and local tax incentives or sort of policy positions changing or maybe which sectors of the economy feel healthier than others?
Speaker 1
Jay, look, we and we certainly plan on doing spending more time on this showing some data on our Investor Day because we know that's a key question in the minds of a number of investors. The we're seeing generally good growth across all the sectors. The anchors to Philadelphia clearly have been the Eds, the Meds, they continue to grow at a nice pace, particularly a couple of larger institutions in the city of Philadelphia, Egyptian Healthcare Systems on a big acquisition in growth mode. But more importantly, I think we're seeing a good mix of companies locating into Philadelphia from the surrounding region, primarily driven by this demographic shift towards urban town centers, integrated lifestyles, access to mass transportation. So we track very carefully and we'll be able to show some statistics on this at our Investor Day of the percentage of absorption and leasing activities coming in from outside the city.
City is also hopefully getting focused on tax strategies that will generate more of an open door for business relocate downtown. They've launched a couple of programs that provide some incentives, including some wage tax credits. The company is moving into town. And I think a lot of the green shoots are there. We've seen a number of companies set up bases of operation in the city even though they maintain large employment bases throughout the region.
The most recent example that's been in the news is Vanguard, which is a major employer in the Philadelphia region, has really opened up their first kind of incubator space in the city of Philadelphia. And we think that that trend line or that reflects what we've seen as a trend line from a lot of other companies. And we certainly think that trend line will continue. More to come on that at our Investor Day, but I think when you take a look at year over year job growth numbers, Philly has actually posted some pretty good numbers. We have a lot of ground to make up.
We understand that compared to some of the other 25 largest cities in the country. But we think that there's a lot of demographic and corporate drivers at play that are bringing more businesses long term into the city of Philadelphia.
Speaker 8
Okay. That's helpful. Appreciate the color. Maybe just last one if I can. Have you guys seen any changes, noticeable changes so far this year in terms of the cap rate environment or investor demand?
Speaker 1
None. It's and I'm not sure it's because of the volatility of the treasury market or what's happening in Washington. But I think we've been very pleased with the level of traction we're getting on the sales of some of our properties. As I think we've talked on previous calls, the bidding pool is not as deep deep as it once was, but there's still active buyers out there. And we're still seeing very active CMBS bank debt market, still a flood of private equity sitting on the sidelines looking for decent rates of return.
So we've really not seen any material movement in cap rates anywhere. Your
Speaker 0
next question comes from the line of Nick Jermaine with JMP Group.
Speaker 10
I know it's not a big dollar amount, Jerry, but the capital deployment that you've got targeted for the back half of the year. I mean, is there any sort of market mix that you're looking at or asset type? Maybe just kind of provide some perspective of what you're kind of considering as a value add investment?
Speaker 1
Yes. Look, think we're looking at we're really focused on trying to find another project that kind of fits what we've been able to do on in nineteen hundred Market Street. We're able to buy it for a very good price per square foot, utilize our marketing and development teams to kind of turn around and generate a nice rate of return for us. Right now, the primary focus of the properties we've identified are really kind of in the greater Philadelphia area. So that level, that $35,000,000 deployment will probably be in the Philadelphia region.
But to the broader question, Mitch, when we look at our land pipeline going forward, we do have a $50,000,000 development start in our projections for later this year. Our expectation given kind of the pace of discussions we're having with tenants, we do expect that that investment will most likely be in Austin, Texas. We haven't we've got a few other prospects we're kind of dealing with in the other regions. But for right now, the strongest demand that we're seeing from larger users who would occupy a building that size is really coming from Austin.
Speaker 10
And I know there's obviously a bunch of development underway and in the pipeline there. The likelihood is you won't do anything until you get that leasing commitment, correct?
Speaker 1
That is correct.
Speaker 10
Great. And just one more for me, Tom. I know there's a couple of ins and outs and changes on capital plan for some of the debt coming due. So term loan got pushed, but the term loan and cash to pay down this year's maturity. And then next year, is that just going to be a refi?
How should I think about just the two big tranches of debt coming due?
Speaker 2
Mitch, the way we were looking at the this year's maturity was going to be the two, meaning the preferred and the 'seventeen maturity was going to be a combination of cash and a bank term loan. The second part of that is 'eighteen. We were thinking that would be a refinance in 'eighteen. So that's kind of how that's how our model and how we're projecting things to you right now. But with the 10 moving the way it has of late since the last announcement of the Fed rate hike, we've been more focused on maybe doing some liability management that may include the 2018 bond.
So it wouldn't be something we're certainly considering that at this point. So I would say right now it's just going to be refinance 2017 with the cash and the term loan and we'll worry about 2018 next year, but that may accelerate.
Speaker 10
Helpful. Thank you.
Speaker 1
Thank you, Mitch.
Speaker 0
Your next question comes from the line of Rob Samal with Evercore ISI.
Speaker 2
Hey, guys. Good morning. Just kind
Speaker 6
of following up on an earlier question. I know you have the $50,000,000 start later this year. But you've kept your development start guidance unchanged for the last couple of quarters. So I know you've commented in the past that there could be additional activities. I guess could you talk broadly about what you're seeing on the ground?
Is there any upside to that number?
Speaker 1
Rob, there could be. But if we felt strong enough about it right now, we'd be more definitive in our forecast. We have a number of discussions underway with tenants who are looking to upgrade their physical plant and move into new buildings. From our perspective, it's really a function of does the timing and do the numbers work for us on that. So as I just mentioned a few moments ago, I mean, we're further advanced in our discussions for development start in Austin.
There are a couple of other opportunities that we're pursuing in the Pennsylvania, Philadelphia regions that we'll see how they plan out. But certainly to the extent that we could do more and the terms make sense for us and there was a heavy level of pre leasing Or even from the standpoint in a broader sense, we are now beginning to see more tenants who are looking for buildings, but looking that they would own the building. So we would be a fee developer. So very much along the lines of what we were able to accomplish with Subaru in building their North American headquarters where we're a we made a return on the land. We're developed and we get a development fee.
So I think we're seeing more and more tenants who are now for a variety of reasons looking to own their facilities versus just enter into a long term lease with us. So we're clearly open to both. But for right now, I think we are holding our guidance at the $50,000,000 And certainly, as events progress, we'll make sure everybody's fully aware of what we're thinking.
Speaker 2
Great. Thanks, Jerry.
Speaker 1
You're welcome.
Speaker 0
We have a follow-up from the line of John Guinee with Stifel.
Speaker 4
Great. Thank you.
Speaker 2
A quick
Speaker 4
follow-up. What I think we're seeing throughout the country regarding space leasing is that tenants will pay the freight for quality space. They'll pay the freight for A space. But what they want is a turnkey TI package and essentially the landlord financing the move for A space. And then B and C space tends to really be lagging, and that's tough to backfill that.
So the end result is that the rental rate growth is often driven by the TI package for the A space. Does that make sense to you guys? Can you sort of debate that or tell us if we have that correct or incorrect?
Speaker 1
No. I think that's a good thesis, John. Mean, I think we're saying that for the most part, costs continue to move up. Certainly, we're able to realize through some DE processes, some savings as we did on one of our properties this quarter. But yes, I think tenant expectations are they want to move into higher quality space that is very efficient.
So they can their average occupancy cost per employee is very competitive because of the efficiencies of the building, both from a column design, ceiling height, HVAC systems, etcetera, but also with all new building systems in place are going forward. Operating expenses will have some downward pressure compared to some stay put options. And I think from whether it's driven by the brokerage community or by the tenants themselves, there's clearly upward pressure happening on some on the TI packages. And that 's one of the reasons why we, a couple of years ago, really moved towards really looking to longer term leases, trying to get 2% to 3% annual rent bumps so that we can maintain a capital ratio on all of our deals somewhere between new deals between around 15% on the renewal deals closer to 10%. So that the economics work for us both from a point of sale standpoint, but just as importantly in terms of the NOI growth versus what our investment base is.
But we're clearly seeing that trend line where most tenants want something that's brand new and shiny and efficient and use that pricing discussion as a framework to evaluate stay put options. Fortunately, lot of the properties we sold were kind of in that B and C category. So I think we're pretty well positioned to both attract tenants to our new product, but also retain them on fairly competitive terms in our existing higher end product.
Speaker 4
Great. Thank you very much.
Speaker 1
You're welcome.
Speaker 0
Your next question comes from the line of Bill Crow with Raymond James.
Speaker 3
Morning, Jerry. Good morning. We're seeing a number of markets that the trend of companies relocated into their urban markets from the suburbs. And I'm just curious how much of the success of Philly CBD might ultimately mean that bigger challenge for your suburban markets?
Speaker 1
Well, Mark, we always want markets to grow. That's all else. I think we've seen though, Bill, is a lot of internal growth within our markets. And it's a matter of where those firms are deploying that growth. For example, we signed a large lease with a tenant in one of our properties downtown last year that was over 200,000 square foot add to their occupancy levels in the city of Philadelphia.
They did vacate some space in the suburbs, but their net growth was pretty dramatic. We've seen that with a number of other tenants as well. So look, certainly, as we assess the markets that we're in, we recognize that markets change as tenant drivers change. So one of the key drivers of our sale program quite candidly over the few years, particularly in New Jersey, Delaware, Pennsylvania, Maryland and Northern Virginia markets has really been focused on, okay, where do we think that long term tenant demand drivers have shifted? And then what's our what's the quality of our inventory base in those submarkets?
And we've fortunately been pretty successful in getting out of a lot of those. So our direct exposure to I think that trend line you've outlined is pretty minimal. We're not I think we're cognizant enough to recognize that if there's a net reduction in overall demand that that could have a downward pricing effect on some of the more commodity level markets. But fortunately, think we're pretty well insulated from that. But what we've seen is some of these tenants that moved downtown into Philadelphia, in particular, they've continued to maintain pretty big bases of operations.
So they're trying to basically accommodate some of their employees who want to be downtown for a period of time and kind of set up flexible workstations for them.
Speaker 3
That's helpful. Jerry, a follow-up question. You are the expert of the Philly market. And I'm just wondering what your gut's telling you as you look at Downtown Philly and the development activity that is going on. How close are we to crossing that line from really healthy to overbuilt?
Speaker 1
I think on the office side, we're still in a position of being very healthy. Mean, we have some there's a couple of renovated buildings coming online in the couple of 100,000 square foot range. There's a building coming online in University City. But I think given the demand drivers we're seeing and certainly the prospect list of deals that we're seeing, I think we remain in pretty good shape. So our expectation is we read the tea leaves is to make sure that we, number one, keep in the hunt for every potential prospect two, every tenant that we have anchored down for the next few years.
So we're kind of hedging our bets on both scenarios. Look, I think there's been a lot of residential construction in Downtown Philadelphia, which is one of the reasons why we're so pleased that our '19 19 price is doing so well and that we're seeing such great early support for FMC. But I do think when we take a look at the different product segments, looking down the road a year or so, there's probably going to be more of a softening on the residential side versus office. But we track all those pretty carefully and we make sure we try and stay in front of it.
Speaker 3
Great. See you in a couple of weeks. Thanks. Thank you.
Speaker 0
And at this time, I'll turn the call back over to Mr. Sweeney for closing remarks.
Speaker 1
Great. Look, thanks everyone for participating in today's call. Again, I want to remind everybody that we love to see everyone in Philadelphia on May starting around 10:00. Tom's team is available to handle any logistics you may have in getting into town, but we're looking forward to a really good presentation and showcasing our inventory and our management team throughout the company. So thank you very much.
Speaker 0
Thank you. That concludes today's conference call. You may now disconnect.