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Edited Transcript of BDN earnings conference call or presentation 31-Jan-19 2:00pm GMT

Q4 2018 Brandywine Realty Trust Earnings Call

RADNOR Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Brandywine Realty Trust earnings conference call or presentation Thursday, January 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George D. Johnstone

Brandywine Realty Trust - EVP of Operations

* Gerard H. Sweeney

Brandywine Realty Trust - President, CEO & Trustee

* Thomas E. Wirth

Brandywine Realty Trust - Executive VP & CFO

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Conference Call Participants

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* Daniel Ismail

Green Street Advisors, LLC, Research Division - Analyst of Office

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* Jason Daniel Green

Evercore ISI Institutional Equities, Research Division - Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael Robert Lewis

SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the fourth quarter 2018 earnings call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, President and CEO, Mr. Jerry Sweeney. You may begin.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [2]

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Dimitri, thank you very much. Good morning, everyone, and thank you for participating in our fourth quarter 2018 earnings call. On today's call with me today are George Johnstone, Executive Vice President of Operations; Dan Palazzo, Vice President and Chief Accounting Officer; and Tom Wirth, our Executive VP and Chief Financial Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meanings of the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC.

We have taken a little bit more of a streamlined approach this quarter. So our comments this morning will summarize 2018 activity, but primarily focus on our 2019 plan. After an overview, Tom will provide a synopsis of our financial results, and then Tom, George, Dan and I will be available for any questions.

We closed the year strong. We exceeded our business plan metrics on cash and GAAP mark-to-market, capital ratios, tenant retention and achieved many of our other targets, including ending the year at 95.5% leased. We did come up a little short in our spec revenue, primarily due to slower occupancy of leased spaces, which also resulted in our being below our year-end occupancy target and our same-store growth rates. On a very positive note, however, Q4 leasing activity accelerated over Q3 by 17% and was up 3% over 2017 levels, building strong momentum for 2019. We also completed several previously announced transactions in Austin and Northern Virginia. The baseline effect of this swap reduced our DC revenue contribution to 8% and increased our revenue contribution from Austin to 18%. It also moved capital and revenue dollars to a market with strong positive mark-to-market and a 12% capital ratio from a market with negative mark-to-market and a 20% capital ratio.

We also continued the liquidation of our Allstate JV through selling Station Square in Silver Spring at $170 million -- $107 million value at a 6.5% cash cap rate. We also acquired Quarry Lake, a 121,000 square-foot building, for $39.5 million at about a 6% cash cap rate. That asset is a perfect complement to our Northwest Austin portfolio, provides excellent mark-to-market upside for us in a few years and reflects our objective to continue increasing our revenue contribution to -- from Austin to 25%.

As Tom will touch on -- none of the benefits of these Austin acquisitions will flow through to our 2019 same-store numbers. During the fourth quarter, we reinitiated and fully expended the remaining capacity on our share repurchase plan by purchasing 2.5 million shares for $32 million. The board also approved a new $150 million share repurchase plan, which we did use during January to purchase an additional 550,000 shares, bringing aggregate purchases to $39 million at an average price of $12.76 per share. We also redeemed $7 million of operating partnership units for cash. We do plan to continue to use this repurchase program opportunistically as part of our capital deployment programs.

We also announced a 5.6% dividend increase supported by improved portfolio performance and strong cash flow growth. On the development front, we closed the year with the delivery of our fully leased 500 North Gulph Road and Broadmoor Six in Austin and the sale of our Subaru Training Facility.

Turning to 2019. We are off to a great start. In our supple on Pages 10 and 11, we did provide some additional color on the greater Philadelphia and Austin markets. Suffice it to say, both markets remain strong, with good activity, building pipeline and leasing levels. We have also raised our spec revenue target by 1.6%, and our leasing pipeline stands today at 1.7 million square feet, including 436,000 square feet in advanced stages of negotiation. Austin continues to benefit from corporative traction and end market expansions, most notably Apple, Google, Oracle and Samsung as well as in emerging life science sector. Rental rates increased 6.5% in 2018, and Austin closed the year with 1.3 million square feet of absorption. Philadelphia also closed out 2018 on a very strong note, with rents up 4.4% and with over 1.1 million square feet of tenants new to the city over the last 2 years, clearly reflecting continued acceleration of Philadelphia as an emerging life science and transportation-centric employment hub. The city added almost 17,000 jobs during 2018, primarily driven by growth in financial services and the health care and life science fields.

Looking at our plan. Our spec revenue plan is 77% completed and other than the increase in spec revenue, all of our other operating metrics remain the same as we announced in October. Overall, our pipeline of deals is stronger and levels of activity have increased across the board, including in Radnor, where our pipeline is almost 300,000 square feet versus the targeted 2019 absorption level of about 126,000 square feet. Another item of particular note is the high level of activity that we're seeing at our 1676 International Drive project in Tysons Corner. As previously announced, we're investing $24 million to completely reimagine the entire building, including lobby, amenities, restrooms, mechanical systems and a lot of the outdoor space reconfiguration as well as improving access to the building from this -- from the road network. All of that work will be substantially completed by the vacation of the existing tenant at the end of the third quarter. That will leave us with about 200,000 square feet to lease, and our current pipeline of deals already stands at well over 600,000 square feet. So we really are delighted with how well that renovation plan has been received and are very confident of creating another successful value-add story.

We continue to make excellent progress in our development pipeline. As was included in the press release, we are closing in on a prelease of our 405 Colorado project in downtown Austin, a 114,200,000 square-foot office building over at 520 car-parking deck. More importantly, we have an extremely strong pipeline of deals, aggregating almost 400,000 square feet. So given that pipeline and the depth of it and our confidence in its execution, we're planning to start this project in the next 45 days.

Our development and leasing activities at Schuylkill Yards, Garza, Four Points and Radnor are all progressing well. We are completing the design development process on each project and giving pre-leasing achievement, could be in a position to start 1 or 2 of those project by year-end 2019. Just given at size -- a quick update on Schuylkill Yards. We did update the disclosure in the supple on Page 15. Design and pricing work continues at an excellent price. We have seen a real upsurge in activity through our marketing campaign, and our pipeline today currently stands at over 1.5 million square feet, including several hundred thousand square feet of life science uses. Equity sourcing discussions on Schuylkill Yards also remain extremely encouraging. To refresh everyone's memory, Schuylkill Yards is in a federal-qualified opportunity zone, which has generated significant interest from a variety of capital sources looking for both excellent real estate investments with federal capital gain deferral advantages. The goal for Schuylkill Yards is to have the projects in a position to start over the next 4 quarters, of course, assuming favorable market and financing conditions. On Broadmoor, we're designing a 350,000 square-foot office and retail site as well as a residential site that can do 300-plus units. We plan to, again, subject to real estate and capital market conditions, be in a position to start either one of those or both over the next 4 or 5 quarters. From an investment standpoint, we do not have any sales or acquisitions built into our 2019 plan. We are, however, exploring the sale of some assets to harvest profit, generate additional liquidity and really accelerate our return on invested capital and cash flow growth trajectory.

As we did in 2018, we would expect that any deployment of this type to be earnings neutral to positive and would accelerate bottom line cash flow growth.

So to wrap up, the 2019 business plan is in excellent shape. We're confident of meeting all of our goals. We remain very encouraged by the depth of our leasing pipeline on both our existing inventory and our growing development pipeline.

Tom will now provide an overview of our financial results. Tom?

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Thomas E. Wirth, Brandywine Realty Trust - Executive VP & CFO [3]

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Thank you, Jerry. Our fourth quarter net income totaled $121.8 million or $0.68 per diluted share, and our FFO totaled $64.3 million or $0.36 per diluted share. Some general observations about 2018 results. Our balance sheet metrics continue to improve as our fourth quarter fixed charge and interest coverage ratios were 3.5 and 3.8 respectively, a 10% improvement on both metrics as compared to the fourth quarter of 2017. Our fourth quarter net debt-to-EBITDA improved to 6.0, our repurchase of 3.1 million shares had no material impact on our fourth quarter earnings, since the shares were purchased later in the quarter. While our year-end occupancy and speculative revenue were below target, the variance is primarily due to timing of tenants taking occupancy of some tenants that we anticipate remaining in holdover through 2018. That allowed us to achieve our 95.5% portfolio leasing, which represents the midpoint of our range.

Looking at 2019 guidance for the first quarter and year, property-level income will total approximately $83 million and will be incrementally $3.5 million higher than our fourth quarter number. The increase is primarily due to Austin's acquisition totaling about $7.5 million, partially offset by the JV of our properties at Northern Virginia and the balance coming from the completion of our 500 North Gulph Road and Four Points developments. Our FFO contribution from unconsolidated joint ventures were totaled $3.5 million, and is $2.5 million below our fourth quarter number, primarily due to lower interest in the NoVa joint venture as compared to the Austin joint venture, the sale of Station Square asset and the noncash increase to ground rent due to the new accounting standard. G&A for the first quarter will increase from $5.6 million to $9.5 million. The incremental increase is primarily due to the timing of deferred compensation expense. Recognition and consistent with prior years, our new capitalization policy will also increase G&A. Our annual G&A should still continue to come in between $30 million and $31 million.

Interest expense will increase to $20.5 million, with fixed-rate interest being 98.6%. Capitalized interest should approximate about $0.5 million, and full year interest should approximate $84 million to $85 million. Term and other income will total $1 million for the quarter. Net management leasing and development fees will be $3 million for the quarter and will approximate $13 million for the year. Land and tax provisions will net to a positive $2.5 million, and we did lose about $900,000 of income related to the Subaru National Training Center. On the share repurchase, our recent activity will lower our weighted average share count to just 178.5 million, and the numbers don't reflect any additional buyback, but we remain opportunistic. On the financing side, term loan C, we closed that in December with a recast of our term loan to a new 5-year loan with no changes in the maturity date. The recaps to the loan allowed us to lower the interest -- the effective interest rate by 55 basis points. Our Northern Virginia joint venture financing, we anticipate closing that financing during the first quarter of 2019 and receiving approximately $30 million of net proceeds.

Regarding the change in accounting standard, we issued initial guidance, we highlighted a 4.6 or $0.03 charge representing a reduction in the amount of internal leasing cost we had capitalized and an increase in our ground rent expense due to a new and straight line in guidelines. We also know that we had not yet concluded on a accounting treatment of a ground lease at one of our joint ventures. Since that date, we had determined that the ground lease expense will increase about $3.3 million, representing a noncash increase to ground rent expense and negatively impacting the income from our joint ventures. Based on our current capital plan for 2019 includes $165 million of development, $55 million of revenue maintaining, $40 million of revenue creating spend and approximately $18 million for the acquisition of the Radnor land. Our line of credit balance will be about $220 million at year-end. We project that our net debt-to-EBITDA ratio between 6.1 and 6.3 and will maintain a variable being scoped to the development -- and that will vary based on the scope of the development activities during the year. In addition, our net debt to JV will remain in the low 40 range -- 40% range. We continue to anticipate our fixed charge ratio to be around 3.4 and our interest coverage improving to 3.6 by year-end '19.

I will now turn it back over to Jerry.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [4]

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Tom, thanks. With that, we're delighted to open up the floor for any questions. [Operator Instructions] Dimitri?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Manny Korchman with Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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I'm wondering, maybe we could start with 1735 Market. You guys did not buy the asset, but I'm sure you considered it given your market share in Philadelphia. Maybe can you just share thoughts as to why you did not acquire that asset? And then also how the value at that asset translates to sort of the value for your Philly assets?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [3]

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Yes, Manny, I could barely hear you, but I don't relate to 1735. We -- when we looked at that project, I think it's fairly stable with not a lot of vacancy. So from our perspective, we thought and as events yesterday proved out, the building would trade at a very low cap rate and a very strong price per square foot. So we didn't view that we could add a lot of value to that as part of our marketing platform and that if someone else owned that, given the stability of that really being a core asset, it really did not present a competitive downside to us. We do think it's a direct look through to our properties from a pricing standpoint. But I do think Equity Commonwealth and their whole team did a great job of creating core value as they took that property through its lease-up phase, and as our interest in buying that building was much more higher several years ago when there was a lot of leasing to do, they did a great job of stabilizing it. I think -- I'm real happy to see some out-of-town high quality, thoughtful investment money moving into the city and setting a high watermark for an asset on a price-per-pound basis as well as a very low cap rate. I think that validates our investment thesis. Our investment basis is, as you all know, in the CBD is about $220 a square foot gross, so we think this is a great benchmark for us. We think that the price that it's being bought at will create a momentum for additional rent acceleration, particularly given the fact that there's very few large blocks of space available in the market, and the trophy market continues to tighten. So it is a good pricing benchmark for the balance of our portfolio. We think it moved from a value add to a core acquisition with the great leasing work that Equity Commonwealth did. And from our perspective, we're pretty happy with the pricing benchmark it's setting in the market and congratulate Equity Commonwealth for a great trade and welcome the new buyers to the city of Philadelphia.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [4]

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I hope you guys can hear me better now.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [5]

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We can, yes.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [6]

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A question for you on the ground rent. Just so that we can be clear, the ground rent adjustment you made impacts the lease accounting standard and it doesn't change the amount of ground rent, is that correct? Or are there 2 adjustments we need to make?

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Thomas E. Wirth, Brandywine Realty Trust - Executive VP & CFO [7]

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No. There -- it's a straight -- it's a noncash straight-line ground rent adjustment. So the cash we are going to be paying will continue to be the same. It's just the length and calculation of that ground rent will change.

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Operator [8]

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And our next question comes from Jamie Feldman with Bank of America Merrill Lynch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [9]

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Tom, I just want to make sure it's clear. Can you talk more about the spec revenue miss for the fourth quarter and the year? And just give more detail on exactly what happened?

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George D. Johnstone, Brandywine Realty Trust - EVP of Operations [10]

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Sure, Jamie, this is George. I'll jump in on that. We had roughly 73,000 square feet of tenancy that we thought was going to take occupancy in Q4, albeit late in Q4. And the fact that some of those spaces were not substantially complete and the move in and GAAP revenue recognition didn't take place caused about $0.5 million of slippage in our spec revenue target. And then, we had another 100,000 square feet -- or $100,000 of leakage from just interim commencement dates within the quarter, some that were projected to commence closer to the beginning of November commenced later into November, and so instead of getting 2 full months of GAAP revenue, we ended up with a little over 1. So that was really the cause of the $600,000 slide. None of that has any impact on our 2019 business plan. Since all of those tenancies were expected to commence in 2018, they were already fully part of our 2019 business plan. And they were not previously and are not today part of our 2019 spec revenue target.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [11]

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Okay, that's helpful. So no leases fell out of bed and nothing's changed in terms of the pipeline coming in?

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George D. Johnstone, Brandywine Realty Trust - EVP of Operations [12]

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No, no.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [13]

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Okay. All right. And then, I guess turning to Austin, can you talk more about the leasing pipeline for 405, the 35% tenant? And then, I mean I know you said 400,000 square feet of potential leases, but I assume those tenants are also looking at other projects. Can you just give us a little more comfort on if you were to go spec, why you would think that would be the good move?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [14]

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Yes. Sure, Jamie. I mean, as image, we have about 400,000 square feet. And just to be clear, when we use that number, we believe that there are 400,000 square feet of really bona fide prospects of really working the project, not just, as they say, drive-bys. We think that they range in size from 25,000 to 70,000 feet. There's been a lot of activity on the building, and I think when we're taking a look at that pipeline of deals, I think one of the catalysts for why we're announcing we're going to start that building in 45 days is, given that pipeline and what we know will be the shadow pipeline of smaller deals behind that, we need to start construction of this project to meet the delivery time frames for a lot of these prospects, given their existing lease structures. So we remain incredibly encouraged by our ability to, kind of, roll the anchor tenant we're dealing with through to a final lease execution in the next 30 to 60 days, and also significantly advance a number of the additional prospects during that period of time as well. So the expectations -- we'll start that project late Q1, early Q2. We'll deliver kind of year-end -- I'm sorry, Q1 of '21, which is at the targeted occupancies for a number of these tenants. And we feel frankly, given the size of the building at 200,000 square feet, the fact that we've got construction pricing fully locked down, everything bid, no real variability to the cost side of the equation, that our read of the market is that given the size of the tenants we're looking at, now's a good time to go.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [15]

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Okay, and how do you think about the competitive pipeline? And just timing of deliveries versus your project?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [16]

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I think we're in good shape. I think we've -- certainly, there's a number of projects on the drawing boards in Austin that have not yet started, there are some that have started or are very close to starting. I think the floor plate size here -- and we think it's an incredibly strong location downtown, the fact that it provides a fair amount of on-site parking in the CBD, are real competitive advantages for us.

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Operator [17]

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And our next question come from Michael Lewis with SunTrust.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [18]

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Jerry, I think when you went through the development projects, I didn't hear you talk about Metroplex Two. In kind of late November, early December, there were some news articles about -- out that you were looking for tenants that might be close to starting something there. Could you just give an update on tenant interest? And what's going on there?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [19]

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Sure, Michael. Yes, Metroplex Two is a project we've -- in Plymouth Meetings, one of the core sub markets in Philadelphia. We -- the reason why there was a lot of press about it in the last couple of months is we actually bought (sic) [brought] on an outside brokerage firm to launch a very broad-based marketing campaign. So JLL was part of their marketing arrangement, amplified some of the efforts of our in-house team to really get it into the marketplace. It's a fairly large building, over 300,000 square feet. So we feel as though we would need a significant pre-lease there to roll that forward. We're -- that marketing process is launched, the building is designed, preliminary pricing is locked down, so we know where we need to be from a rental rate standpoint to get between an 8% and 8.5% yield. So let's see what the market brings forth. There is a number of larger tenants starting to evaluate long-term space locations in the Pennsylvania suburbs. It -- the project sits at the busiest, the most heavily traveled intersection in the Commonwealth of Pennsylvania, I think in vergence of the Pennsylvania Turnpike, the Northeast Extension and the Blue Route. So it does provide a tremendous branding opportunity for some of these larger companies looking at it. But as we look at it right now, Michael, it's really a design building. We feel confident we'll get something to come our way. But given its size and the capital investment, it's certainly a different scale asset than a building that we're looking at it Radnor or Garza or Four Points down in Austin, Texas. So there we need to have a significant prelease with a very quantifiable pipeline of deals behind it.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [20]

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Got you, that's helpful. And my second question, I'm going to look for a little more color on the share repurchases. When you had your last conference call, the stock was around $14.34, you talked about the impact to leverage, the impact that it could have to earnings and NAV and maybe, at that point, it wasn't as attractive. Obviously, you got a better entry point, stock now has rebounded a little bit. How do you kind of -- assuming another pullback, do you have more, kind of, capacity before you start worrying about leverage? Do you think about other ways to fund that to kind of keep it neutral? Just your general thoughts around the repurchase program.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [21]

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Yes, it's a great question, and Tom and I will tag team this because it's always a challenging decision because we're very focused on maintaining a strong balance sheet. That's why we're very happy to close the year at 6.0x. Look, I think when we started to look at it, we were fortunate given the investment activity that we pulled together in the fourth quarter did generate some additional liquidity for us. And I think as we saw the REIT office market continue to kind of slide down the slope and us moving down very quickly with it, it just became too attractive an opportunity. We know the assets underlying the real estate very well. It's -- even though if you compare the implied cap rate on the repurchase versus some of our development yields from our perspective, it's a no-risk transaction. So that's why we're saying, we will keep that out there and why the board approved a larger share repurchase plan to make that a key piece of our capital deployment landscape that in the event that the market does pull back again, that may certainly change our investment strategy in other areas. But I think certainly, any management team should be very focused on what the value is of their public currency and how that relates to intrinsic asset value and what -- and that becomes an attractive investment for us that has to be viewed in the context of the cost of running our portfolio, the growth we can create of our development pipeline and maintaining a strong balance sheet.

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Operator [22]

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And our next question comes from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [23]

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You guys have a strong development focus, couple big projects. I think you have a pretty low land basis in most of these positions, but at the same time hard costs appear to be going up. Can you do 2 things: one, talk about any value that may be in your land basis; and then 2, talk about, if you build a high-quality office building at Schuylkill or Broadmoor, what's that going to cost you all in on a per-pound basis?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [24]

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Yes, sure, John. We do believe we have a very attractive land basis in our existing inventory. I think in the supp -- I don't know the exact page, but it kind of lays at an average investment base of less than $20 a square foot. Now a lot of that, frankly, is driven by 2 things: one, our investment basis per square foot at Broadmoor, given the rezoning we were able to achieve at the very high density, puts our land basis below $5 a foot. Even when we factor in kind of the infrastructure cost to create the road network, we still think the land basis we have is roughly 30% of current market value. So I think we have a lot of embedded value there. The transaction that was pulled together with Schuylkill Yards provides Brandywine with a uprolling option that with extensions can go out well over 25 years, so we can actually match the land takedowns to the milestone schedule we have with our -- arranged with the university, but we have extensions to that. So it gives us some downside protection against being in a situation where we had to carry a line of excess land. And then a lot of our other partials, as you know, are 1 or 2 building sites in close proximity or in some of our existing parks that become great expansion opportunities for our tenants. So hopefully, that answers your question on the land side. Construction costs are really a challenge. I mean, we -- to kind of insulate ourselves from that, we're taking all of these development projects all the way through CDs and a range of pricing exercises to really lock down an owners' budget that really equates to a GMP. So we have full knowledge of current pricing to move things forward. Look, I think it -- a 405 or $570 a square foot when we're looking at the building that Schuylkill Yards were between 6 and -- well, call it about $600 a square foot depending upon the design considerations, maybe a little bit higher. But we had clearly seen upward pressure on glass, both curtain wall and storefront, fenestration plans, steel is at a premium, concrete has been a real accelerator and even things like sheetrock is going through the ceiling. So we've definitely seen a high increase in construction, which is why we're trying to really lock down all of our cost models so we know exactly what we need to ask for rents to get the required returns we have. So it's created some real squeeze points, so I think your question's very much on point.

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Operator [25]

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And our next question comes from Daniel Ismail with Green Street Advisors.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [26]

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Can you give a little bit more color on the Radnor land acquisition? And as well as the developments with Penn Medicine?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [27]

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Yes, sure. Thank you. Look, I guess first of all, I mean, Penn made the announcement back in October and it really didn't roll through our numbers until this quarter. But I guess, first of all, we're always delighted to continue our relationship with Penn. They've been a great client. It's an excellent transaction for us, in that it grows our university business, which we think is a very viable growth avenue for us. It expands our connection to life sciences, which is again, very important to what we're seeing here on the ground in Philadelphia and Austin. And really, it further establishes our market domination in Radnor. Deal's really straightforward, Daniel. I mean, it's -- we will serve as the development manager supporting the Penn team in construction of a 250,000 square-foot, $200 million advanced outpatient medical facility. Penn will own and finance the project. We are simply a fee developer. It's very similar to the transaction we have with Subaru in New Jersey, where we oversaw the design development and construction processes. As part of the transaction, there were 2 other pieces: one is, we'll also purchase, later this year, an adjoining site that can do a 100-room hotel and a 150,000 square-foot office building. The design development on both pieces is underway now. We're talking to a very nice pool of hotel companies on the hotel site and building a pre-leasing pipeline that -- the game plan is to have the design development process wrapped up by the end of this year, and hopefully, be able to line up a pre-lease tenant to move that forward. That would be about a $65 million project. And finally, the third part is that Penn is currently in a 220,000 square-foot medical facility, essentially across the street from the new site that they're building on. We have entered into a forward agreement to buy that 220,000 square-foot building for around $21 million. And it will either be a renovation opportunity for us or a tear-down to create a new product. We're going through that analysis now. But we would anticipate that being a closing for Brandywine in late first or early second quarter of 2020. Does that frame it out?

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [28]

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Yes, that's helpful. Maybe switching to Austin. On the acquisition, you mentioned some under-market rents on the building. Can you just frame how below-markets -- how below market the rents are? And then provide a little more color on the lease role on the property?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [29]

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Yes, sure. It's a property that we bought -- it's in close proximity to Broadmoor as part of the master-planned community with outdoor trail, lake front. I mean, a tremendously well-appointed property. The short-term role, we've got about $90,000 rolling in a couple of years in 2021. The average rents and price are just north of 20 in a market where the rents today are around 26. The rollover schedule that this building has layers in perfectly with our overall rollover to the existing Austin portfolio. So we thought it blended in very well from a risk management standpoint. And frankly, we're still in the tenant aggregation business in Austin. So it gave us access to a couple of additional tenants. We think that they may have some growth opportunities in controlling their tenancy on a building that we think has good long-term value and a good location. It seemed to make a lot of sense for us.

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Operator [30]

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And our next question comes from Jason Green with Evercore.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [31]

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Just wanted to circle back on Quarry Lake and get an understanding for how you think about acquiring assets in that market versus any additional future development opportunities that you have in your portfolio.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [32]

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Yes. Look -- I mean, what I think that the numbers are really clear that the bias we have in that market is to build versus buy. I think this was an interesting opportunity that we decided to move on. But if you take a look at our -- the land page in our supplemental package, it shows that we can build 6 million square feet in that market. While a bulk of that is at Broadmoor, we have other great development sites at Garza and our Four Points development. So given where pricing for existing acquisitions is versus the spread we think we can achieve on the development side, I think the heavier emphasis on capital allocation will be on the -- will be to development.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [33]

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Got it. And then circling back to Broadmoor, you've talked about planning an office and residential piece for about -- or an office piece for about 350,000 square feet unit to residential. Is there a preference to which piece comes first? And is there a certain structure that you're more inclined to take with either or both those assets?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [34]

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Yes, great question. I don't think there's a real preference to which one we do first, so we're running both concurrently through the design development process. I mean, clearly on the office front, in a building that size we would be looking for a sizable pre-lease to launch it, and we're being very thoughtful in terms of kind of creating a retail pod with that building. So we start to build that overall sense of place that's very important as we think strategically about the Broadmoor rollout. Look, the residential market's very strong. You have a 130 people a day moving into Austin; that's a great location. We continue a very active dialogue with CapMetro and public officials on creating a public/private partnership for that train line, which, while at a nascent stage of its evolution, certainly, we think has a lot of long-term potential. So I think we're running both concurrently, and we'll see what the market brings.

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Operator [35]

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And we have a follow-up question from Manny Korchman with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [36]

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It's Michael Bilerman. So Jerry, just wanted to ask you about potential joint venture or other asset sales, particularly as -- with EQC bid in CBD in terms of marketing and generating additional interest, and you have done a pretty formidable job at refocusing the portfolio, cleaning up a lot of joint ventures and exiting out of a number of markets. I just wonder whether at this point, whether you'd want to take advantage of some of the incremental interest in the CBD, where you have significant holdings to generate that incremental capital to either fund what is becoming a very larger development platform, or 2, to continue to repurchase your stock on a leverage-neutral basis.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [37]

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Michael, the simple answer is yes. I think we're very pleased with this price point on 1735. We have a number of processes underway, where we're looking at how we can harvest some tremendously built-in gains in our Philadelphia portfolio. And we would expect to have those thoughts get more clarity publicly in the next couple quarters. But certainly, as we look at the platform today, not just in Philadelphia CBD but in the Pennsylvania suburbs, we think that we're at a point, given our call for capital through the development pipeline, that it's incumbent upon us to really think about how we recycle some of this embedded value to fund either development expansion into the other markets or to certainly keep this share repurchase plan on the table as well.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [38]

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And I guess, what would be the scope of how large you would be willing to go? I recognize there's nothing in guidance today for any sort of transaction activity, and it sounds from your comments that there's certainly things that you're contemplating. Particularly give us a little bit more color about whether these would be outright sales, joint venture sales and sort of size and scope of what you're considering.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [39]

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Yes, I think we have roughly about $130 million to $140 million of assets that we've targeted kind of in the suburban areas that we're spending some time on, either from a salary joint venture standpoint, I think pricing will determine that to some degree. And then, look, given the side of the asset we have downtown and assuming a 300 to 350-plus square foot cost, I mean, they're fairly large transactions. So I don't want give you a range downtown, but the buildings by their size and scope would generate a tremendous amount of liquidity for the company, which obviously creates some other opportunities for us in terms of how we deploy that incremental capital.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [40]

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Are you thinking outright sales or joint venture sales?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [41]

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I think -- I mean, are you talking about downtown Philadelphia? Or...

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [42]

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Well, either. I mean, I guess downtown, but you brought up the suburbs.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [43]

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Yes, it's an interesting thought process to go through because, I mean, when we look at the transaction we did with Rockpoint, we -- through our 15% ownership stake, we're generating a tremendous return on our invested capital through that structure, because it's a different capital structure, different promote structure. The joint venture we did with DRA generated a 27% internal rate of return and a $28 million promoted value. So we're not at all opposed to doing joint ventures as a lot of folks we talk to about selling assets like us to stay in because we know the markets and the property and the tenants so well. So I wouldn't preclude more joint ventures. I think saying that, we're very mindful of the process we've been underway on up reducing our exposure to joint venture. So when we take a look at the absolute dollars we have invested in joint ventures, that's going down dramatically, as we've outlined in our multiple year business plan, and whereas we used to own an equal stake in the venture, we've reduced those down to 15% to 20% type of ownership positions.

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Operator [44]

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And we have a follow-up question from Jamie Feldman with Bank of America Merrill Lynch.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [45]

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Great. I just want to get your thoughts on growing more in either life science or medical office with this new Penn medical deal you're doing. How do you think about the potential ramp-up in that business line?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [46]

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Well, I think we have a good foot in the door from both standpoints from: number one, the perspective we have some great relationships with some educational and health care institutions, which provide a clear pathway into helping them grow their businesses. And then, with Schuylkill Yards, for example, we have bought on a life science codeveloper adviser with Longfellow partners, who has tremendous technical knowledge of the life science field. So we really do think that given what we think will be a rapidly growing life science market in Philadelphia, with, I think, the Merck announcement last year in Austin, I think Austin will wind up being a growing life science market as well. That -- we view that as a good add-on to our core business lines, and it's something we hope to spend more and more time on. I mean I think CBRE came out with a report that talked about tech talent around the country and you had -- Austin was #6, Washington, D.C. was #3. While Philadelphia ranked fairly low on that scale, we think that from what we're seeing at a ground level, there seems to be a lot of accelerated growth in that arena over the next couple years.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [47]

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Okay. Do you think you need to add personnel? Or do anything to change your platform and marketability for that business?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [48]

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I think there'll be opportunities. Specific, I think certainly, if we are able to grow at -- we probably need to add some additional resources for sure.

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Operator [49]

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And we have a follow-up question with Craig Mailman with KeyBanc Capital Markets.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [50]

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Craig?

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Operator [51]

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Thank you, ladies and gentlemen, this concludes our Q&A portion of today's call. I would now like to turn the call back over to your President and CEO, Mr. Jerry Sweeney. You may proceed, sir.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [52]

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Dimitri, thank you, and thank all of you for participating on our call this morning. We appreciate your following the company, and we look forward to continued excellent execution on our 2019 business plan and updating you on those activities on our next earnings call. Thank you very much.

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Operator [53]

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Ladies and gentlemen, thank you for attending today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.