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Edited Transcript of BDN earnings conference call or presentation 25-Apr-19 1:00pm GMT

Q1 2019 Brandywine Realty Trust Earnings Call

RADNOR Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Brandywine Realty Trust earnings conference call or presentation Thursday, April 25, 2019 at 1:00:00pm 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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* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* 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

* John William Guinee

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

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Brandywine Realty Trust First Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Jerry Sweeney, President and CEO. Sir, you may begin.

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

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Lance, thank you very much. Good morning, everyone, and thank you for participating in our first quarter 2019 earnings call. On today's call with me are George Johnstone, Executive Vice President of Operations; Dan Palazzo, Vice President and Chief Accounting Officer; and Tom Wirth, Executive Vice President and Chief Financial Officer.

Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC. After a brief overview of our first quarter results and an update on our 2019 business plan, Tom will then provide a synopsis of our financial results, and then Tom, George, Dan and I will be available for any questions.

2019 is off to a great start. We're 92% done on our speculative revenue target and have increased that target $500,000 for the second consecutive quarter to an aggregate of $32 million. Our leasing pipeline, excluding development and redevelopment properties, stands at 1.7 million square feet, including over 300,000 square feet in advanced stage of negotiations. We have also increased our projected retention rate to 61% and our GAAP mark-to-market range to a new range of 9% to 11%.

For the first quarter, we posted positive rental rate mark-to-market of 14.6% on a GAAP basis and 3.7% on a cash basis. Leasing capital came in slightly below our 14% target, and our average lease term exceeded our business plan goal, coming in for the quarter at 7.7 years. All very solid results and we also posted a strong cash same-store growth rate of 4%.

We have maintained our original business plan range based on known activity occurring later in 2019. For example, 1676 International Drive in Tysons Corner, a project we currently have under extensive renovation, we are keeping in the same-store pool and that property will become 30% occupied at the end of the third quarter. That property alone negatively impacts our 2019's cash same-store range by over 100 basis points.

And other than D.C., which will have a negative 12% same-store growth rate this year, cash same-store across the rest of the portfolio remains very strong. For example, Austin, our same-store growth rate will range between 4% and 6% fueled by 97% occupancy levels and a double-digit cash mark-to-market. The PA Suburbs, same-store growth will be between 3% and 5%, driven by additional absorption in Radnor for both executed leases to date and far-along-stage platform. Philadelphia, we'll have same-store growth rate between 1% and 3% and that range will improve going forward when the prelease at Two Logan occupies and that free rent burns off.

So based on the very strong progress and the operating metrics and our look ahead, we have raised the bottom end of our FFO range by $0.02 to $1.39 and narrowed the top end to $1.45 per share. You should also note that this quarter reflects the NOI contribution from Austin increasing to 19%, which is up from 7% at the end of 2018.

A couple of other notes. Radnor is also making great progress. Our leasing percentage is now almost 93%. We have about 70,000 square feet remaining to reach our 2019 target. Two leases aggregating a vast majority of that space are out for signature, so we are projecting Radnor to be 97% occupied by year-end 2019.

In our supplemental on Pages 10 and 11, we did provide additional color on both the greater Philadelphia and Austin markets. Both markets remain strong with good activity levels, building pipeline and solid leasing. Austin continues to benefit from corporate attraction and multiple in-market expansions.

For the first quarter of '19, asking rents in Austin increased 17% year-over-year, which is around 1.3 million square feet of absorption. Philadelphia is also doing incredibly well with rents up 4.4% year-over-year, supported by 1.1 million square feet of tenants new to the city over the last 2 years.

It's interesting to note that our trophy-class vacancy rate of 5.3% is among the lowest of the top 25 largest MSAs in the country. Philadelphia does continue to also benefit from an emerging life science sector, supported by close to $1 billion in NIH funding which ranks Philadelphia third nationally behind only Boston and New York City.

We are also making good progress on addressing our forward rollover exposure. At 1676 International Drive, where we're investing $24 million to completely reimagine the building, construction is well underway and will be substantially completed by the end of the third quarter. Our current pipeline of deals stands at over 2x coverage of the space being vacated. Targeted rent levels represent a 15% increase over expiring rents, and we believe this project will generate a return of over 20% on our incremental invested capital and anticipate the project will stabilize at a 9% free and clear yield on the aggregate basis.

We're also making very good progress on our development efforts. During the quarter, we delivered Four Points 3, a 165,000-square-foot building, successfully delivered on time, on budget and 100% leased, generating an 8.5% cash yield on cost. We also signed the anchor tenant lease for 35% of the space at of our 405 Colorado project in downtown Austin. And frankly, since commencing construction, the leasing pipeline has grown significantly with over 3x coverage in our prospect lists on the remaining vacant space. This project will cost an estimated $114 million and will generate an 8.5% cash yield on cost. We're currently scheduling to open that property by year-end 2020.

At the Bulletin Building in our Schuylkill Yards development, exterior renovation work will kick off this quarter. The entire office component, you may recall, is leased to Spark Therapeutics, a life science company who recently agreed to be acquired by Roche Pharmaceutical. We anticipate completing that redevelopment opportunity during the second quarter of 2020 and achieving over a 9% free and clear yield on full cost upon stabilization.

Our development preleasing activity at Schuylkill Yards, Garza, Four Points, Broadmoor, Radnor and 650 Park Avenue and King of Prussia remain on track. We're completing the design development on each of those projects and, certainly, given preleasing achievement, could be in a position to start 1 or 2 of those project by the end of this year.

I guess just a quick update on Schuylkill Yards and Broadmoor, and we did provide a detailed status update in the supplemental package on Page 15. The bottom line, design and pricing work continues at an excellent pace. At Schuylkill Yards, we've seen a continuation in the increasing activity and the current pipeline stands at well over 1.5 million square feet, including several hundred thousand square feet of life science uses.

Equity discussions on Schuylkill Yards also remain on track. Schuylkill Yards is in a state and federal Qualified Opportunity Zone. With the final regulations being issued last week at the treasury level, we anticipate the pace of our discussions with both tax-oriented and traditional real estate investors increasing. At our Broadmoor site in Austin, we're far along in the design of a 300,000-square-foot office building, which also includes retail and a residential component that can do 300-plus apartment units. We're in the final stages of evaluating our business plan for starting that property. But again, based upon some preleasing, we could be in a position to start that first building in the next several quarters.

As you may have noted, we don't have any sales or acquisitions built into our 2019 plan. We are, however, exploring a number of asset sales to both harvest profit, generate some additional liquidity and accelerate our return on invested capital cash flow trajectory. As I mentioned on the last call, we would expect that any deployment to be relatively earnings neutral and accelerate our bottom line cash flow growth.

So to wrap it up, the 2019 business plan is in excellent shape, where achieving or exceeding our goals is very much on track. We're confident of meeting or exceeding those goals that we've outlined in our supplemental package and remain very encouraged by both the depth and breadth of our leasing pipeline on the existing inventory as well as our forward-leasing work on our development projects.

Tom will now provide an overview of our financial results.

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

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Thank you, Jerry. Our first quarter net income totaled $3.9 million or $0.02 per diluted share, and FFO totaled $60.1 million or $0.34 per diluted share.

Some general observations regarding the first quarter '19 results. Our first quarter fixed charge and interest coverage ratios were 3.6 and 3.9, respectively, a 9% and 8% improvement on both metrics as compared to the first quarter of 2018. Our weighted average share count decreased by a net 3.2 million shares primarily due to the 3.1 million share repurchase program that took place in December 2018 and early January 2019 and the December purchase of 500,000 OP units.

In accordance with the latest accounting standard, we have grouped several revenue line items into one rental revenue line item on our consolidated income statement. However, we have maintained detailed revenue composition on Page 25 of our supplemental. Looking at the rest of '19 and its second quarter, we have the following general assumptions: portfolio operating income at the property level will total approximately $84.5 million. That will be incrementally about $1.5 million higher than the first quarter of 2019. The increase is primarily due to Four Points 3 being operational for the entire second quarter and improvement of the balance of the portfolio.

FFO contribution from our unconsolidated joint ventures will total $3 million and is $700,000 below the first quarter primarily due to interest on the new mortgages that were put in place at our NoVa joint venture portfolio. G&A for the second quarter will decrease from $9.8 million to roughly $8 million. The incremental decrease is primarily due to accelerated deferred compensation expense recognized during the first quarter. Our annual G&A should continue to approximate $30 million to $31 million.

Interest expense will remain at roughly $21 million with 91% of our debt being fixed rate. Capitalized interest will approximate $0.5 million, and full year interest expense will approximate $84 million to $85 million. Termination fee and other income. We anticipate termination fees being minimal for the second quarter and $2 million for the year. Other income will be $1 million for the second quarter and will approximate $6 million for the year.

Net management fee and development fees. Quarterly NOI will be $3 million, and we approximate $11.5 million for the year. Land gain and tax provisions will be a net positive $1.5 million for the second quarter, an approximate $3.2 million for the year, as we continue to monetize noncore land holdings.

From financing activity, Northern Virginia, we did close on 2 mortgages with 200 million -- $207 million of initial proceeds, and we received just over $30 million in net proceeds in April. Based on our capital plan, which includes about $120 million of development and redevelopment, $40 million of revenue maintained, $25 million of revenue-create capital and spending approximately $18.5 million for the acquisition of Radnor land, our line of credit balance will approximate $250 million at year-end.

Due to the full quarter effect of our fourth quarter transactions, additional borrowings on our line of credit and lower sequential EBITDA, our net debt to EBITDA did increase to 6.5x. However, based on future increases to EBITDA and several potential earnings-neutral divestitures, we continue to project that net debt to EBITDA will remain in a range of 6.0 to 6.3, and the big main variable being timing and scope of our development activities and related capital spend. In addition, our net -- our debt to GAV will approximate to low -- will be in the low 40 range. We are anticipating our fixed charge ratios to be 3.6, and our interest coverage to be 3.9 by year-end 2019.

I now turn the call back over to Jerry.

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

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Great. Thanks, Tom. With that, we're delighted to open up the floor for questions. (Operator Instructions)

Lance?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question come from the line of Manny Korchman from Citigroup.

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

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Jerry, just given the rental rate growth in Austin as well as the demand you've seen for 405 Colorado, how much upside is there…

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

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I'm sorry Manny, the last part of your question cut out. I heard the upside and lost.

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

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How much upside do you have in the development yield there? It's healthy already. But given significant rent growth, is there more room for that yield demand in that project?

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

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I think that's a great point. We -- the asking rents that we have on the prospect list we have at 405 are in excess of the baseline returns that we have built in. So we think there could be some upside to the targeted yield, obviously, subject to being able to execute leases. But certainly, we've been very pleased with the depth of the demand we've seen since we started moving dirt and dropping the caissons and think we'll be able to continue to push the rents up.

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

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And then if we go back to your comments on dispositions, could you be a little bit more specific on what type of properties or geographies you might want to sell?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [7]

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Yes, I think right now, we're targeting -- evaluating sales from assets in the Pennsylvania suburbs, which is -- we have a -- still a fairly large presence. I think our major core focus still remains Radnor, King of Prussia contract. And we do have some properties outside of those core sub-markets that we're in discussion with some potential buyers.

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Operator [8]

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Your next question comes from the line of Jamie Feldman from 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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Just a follow-up on the last question. So what's the magnitude of the asset sales you guys are contemplating? And did I hear you say correctly that it would not be earnings dilutive?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [10]

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Jamie, we're kind of targeting -- if we find acceptable pricing, kind of, layered in properly, we're targeting kind of in the $100 million range. And the expectation to be able to match on that with some activities that we'll try to make as earnings dilutive as possible, just as we did in 2018.

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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. And then I guess just bigger picture, with the TIER-Cousins merger, how do you guys think about the impact on the competitive landscape in Austin? And kind of what that means with -- for your portfolio?

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [12]

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Well, we recognize every market we're in is very competitive with high-quality companies that we compete against at both the development and operating level. We think that teams at Cousins and TIER are both high-quality teams. We've been competing against them both independently for a period of time. And we would expect that their combination doesn't really change our competitive landscape much at all as we look at our position in Austin, Texas. We have a very good asset base in Austin, both existing with a very strong forward development pipeline. So I think we viewed it as an event in Austin that simply consolidated our competitors, but doesn't change our approach or our perspective on our goal to continue being very successful in that market.

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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. And then last, I know you mentioned 1676, your backfilling progress. Can you just talk about the 2 large leases in the CBD Philly? And what the -- what your thoughts are there on getting those leased up?

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

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Sure. And the first one really is Macquarie, which really doesn't move out until the end of July in 2020, and they're moving out of approximately 150,000 square feet. We already have full coverage of that square footage based upon the prospect list we have now, and we fully expect that list to grow. We're looking at a very positive mark-to-market on re-tenanting that space. It could clearly have an impact on same-store growth rate coming out of Philadelphia in 2020. But I think, even as we've laid out in the supplemental package on our market overview, there's very few large blocks of space greater than 100,000 square feet in the city and very, very few that are at kind of the top of the bank, which is where Macquarie will be vacating.

So given the length of time, our marketing team has just really kind of launched the full-blown marketing campaign. It's been very well received. Again, we're looking forward to a strong mark-to-market there. It'll have, obviously, some disruption for a couple of quarters on the revenue from that space. But the replacement of revenue, we think, will be a nice uptick to our growth profile as we look forward to '21.

And on Reliance, George, why don't you put a word on that?

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George D. Johnstone, Brandywine Realty Trust - EVP of Operations [15]

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Yes, Jamie, this is George. And Reliance will expire on 12/31 of '20. I think all of the same market dynamics pertains to that space as well. But given the fact that it's a little bit further out, we've had a few tourists to date, but certainly nothing yet at the proposal stage. But again, given the large blocks or lack thereof in other competitive buildings, we feel good about that space as well for lease up in 2021.

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

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Yes. The other nuance there, as Macquarie is vacating, as I mentioned, the upper bank, which has the smaller floor plates, Reliance is mid-bank, which has the larger floor plates. So if you look at from a marketing-platform standpoint, we're very encouraged to having both the high-visibility, smaller floor plates available at a Macquarie situation and having a larger-floor-plate capacity coming out of the Reliance. So we think we're in a very good position. You never want to lose a tenant obviously, but it's a known fact that we're dealing with. And we think, given the rental rates currently being received on those spaces, what we anticipate, I think, Jamie, the continued upward pressure on trophy-class rents in the city. We think we'll be able to generate some significantly positive mark-to-market coming out of both of those rollovers.

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Operator [17]

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Your next question comes from the line of Craig Mailman from KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [18]

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A few potential dispositions here. I've heard your responses already but just curious on maybe a larger deal, like a joint venture of a stabilized asset. Just kind of curious how you guys are thinking about timing of that ahead of potential capital needs and kind of balancing the bigger check you may get from a deal like that versus adding a little bit more complexity to the story again with additional joint ventures?

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

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Craig, we didn't hear the first part of your question, but I'll answer the best I've heard and if I've missed it, please let me know. The -- on the disposition front, I mean, some of the transactions we're looking are clearly smaller in size and kind of were in that $100 million range, I outlined earlier, and we'll see if we make progress on those over the next couple of quarters.

We're certainly always looking at whether we should do a larger scale capital transaction on 1 or 2 of our assets. And yes, I think when we look at that, given our market position, some of the markets we're in, we do find a number of buyers who're willing to pay premium pricing, would like to keep us involved because of our operating history in those projects as well as our marketing platform and deal pipeline. So we really evaluate whether we're doing outright sale or a joint venture or retain a minority stake and a fee revenue stream really based upon the what the market tells us. We typically enter the marketplace on either a -- open completely to a sale and if the market tells us that the buying pool wants more active on-site engagement, then we certainly evaluate a joint venture there.

I think in terms of complexity, it's a fair observation. But I think when you take a look at what we've been able to do over the last several years as part of a multiple-year discipline, one of our objectives was really to reduce the number of joint ventures we've had and reduce the amount of capital we have invested in those joint ventures. So over the last couple of years, we've done a fairly good job of kind of reducing the overall level of exposure we have to JVs, where I think as we've laid out -- I just checked it on Page 6 of the sup, we had over 50% cumulative reduction in both the debt attribution and a corollary decrease in the amount of capital we have invested into some of these joint ventures.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [20]

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That's helpful. And I know that you guys have been cleaning up the portfolio and have some more of these kinds of $100 million assets or kind of pooled assets in noncore markets. But as you guys look at the scale of development you may have over time at Broadmoor and Schuylkill and elsewhere, I mean, is it avoidable to do a bigger JV or transaction? And kind of how do you guys think about timing on that? Is it just you do it when the capital is there or do you try to thread the needle and minimize dilution and do it closer to needs of capital?

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

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Well, hopefully, achieve both goals. But I mean I do think that we were pretty clear on as we're looking at, Craig, a project where the buildings like the Schuylkill Yards are much larger in scope. I mean these are buildings of dollar investment, $400 million plus. We've always laid out that part of our investment strategy with that project is to find a joint venture partner, again, whether it's a tax-oriented cost for opportunity fund investor or traditional real estate investor, to mitigate our forward capital commitments as well as minimize, the extent possible, the impact on our balance sheet.

We do have 2 other partners with us at Schuylkill Yards: a residential company, Gotham; and a life science company, Longfellow. They both have financing abilities on their own. So as we're starting to lay out that large forward capital of commitment, just is integral to our thought process is kind trying to get a prelease pulled together. There's also the discussion we're having with equity investors to make sure that we are in a position that when we announced one of those buildings moving forward, we can present back to our shareholders a bowtie package that identifies what the preleasing is, what the targeted returns are and what the financing plan will be.

The benefit we have, frankly, with the Schuylkill Yards is we have a fair amount of money already invested in Schuylkill Yards through both the predevelopment work, the land acquisitions, completion of some of the infrastructure. So we're actually hopeful that when we do announce a joint venture that the amount of equity that's already invested will really serve as our forward capital call to get those projects completed.

As we look at some of the other projects, whether it's a Radnor or a King of Prussia Road or a Garza or a Four Points, they tend to be, call it, $40 million to $60 million transactions that will bleed in from a cost and current standpoint over 4 to 6 quarters. So we think those production-level investments, we can actually manage very well within our targeted disposition plans and not really create any downward pressure on earnings. So we really do bifurcate how we look at our development pipeline between projects the scale of Schuylkill Yards versus project the size of, frankly, like the Four Points 3 building that we put forward. That's 164 -- 165,000 square feet. Garza is the same range. The remaining building at Four Points is the same range. Radnor is the same range. 655 Park Avenue is a little bit smaller than that.

So when we take a look at the diversity of the development pipeline we have, we're really in a position where we can be very intentional about the financing strategies to make sure that we do thread that balance between maintaining a strong balance sheet with liquidity and having as little impact as possible on the earning solution by prefunding it with asset sales.

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Operator [22]

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Your next question comes from the line of John Guinee from Stifel.

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

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Jerry or whoever, every time we turn around, we hear more about hard costs going up in these various markets. Can you talk a little bit about your take on hard cost and development cost overall, both when it comes to second-generation space in your core portfolio and also development.

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

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Sure. Well, all those people you're talking to, John, I think are telling you the truth. I can't test every one of them. But there's clearly a lot of upward pressure on construction cost across the board. And I think in markets where you're seeing good velocity, you're seeing that actually translate into an acceleration of asking rents so the net effect of rent levels stay in the same range. But I think generally, we've seen, as we start tracking or as we've been tracking construction cost, I mean, we've seen an average, generally across the board, of escalations running between 3% and 5% really over the last 5 years or so. Labor increases have been between 3% and 4%.

We've had -- based upon a report I just reviewed with Sberbank 13 CMs in the region, those essentially forecasting that they see forward material pricing stabilizing. There has been significant downward pressure on CM fees partially as a way to offset some of the increased costs. Labor is still very tight and frankly, given the various trades, could be a harbinger of some troubled times ahead of me. You're seeing in many of the more technical trades, a lot of the workers have retired, and they're trying to replace a lot of those folks. So we're definitely seeing some real pressure on labor and particularly at the MEP trades.

The -- if you take look at some of base building items -- when I take a look at a where we're pricing, John, steel today versus where we were 5 years ago, and we're kind of going through the same exercise for FMC Tower. Steel's -- was $3,500 or so a ton back then, it's around $4,700 a ton now based upon the numbers we're seeing. So that's over 6% annual increase. We see current models up about 5%. Even some of the sub-structural work has been growing at a rate of about 5%. MEP is in that same range, probably closer to 6%.

So there's clearly a lot of pressure on construction pricing, which really is one of the reasons why I think you're seeing rental rates for new construction kind of gap out from some existing triple-net rental rates of existing product. We've clearly seen on existing inventory total capital commitments ranging from the $5 a foot to now closer to $6.50 or $7 a square foot per lease year. The metric we really look at is kind of what our capital investment is as a percentage of revenues. And I think we've been really happy with our ability, even with that upward pressure on construction pricing, we've been able to keep that range of capital cost in that 10% to 15% range.

So this quarter, we were below our 14% target for this year, and the hope is that we'll continue to be able to create some upward pressure on rents and rent growth and by lengthening lease terms to kind of keep that ratio pretty much in place.

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Operator [25]

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Your next question comes from the line of Bill Crow from Raymond James & Associates.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [26]

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Jerry, that last answer kind of led to where I was heading, and it's really looking at that capital cost to rents. And just seeing if there's a differential in the economics between urban CBD and suburban? And if so, how is that changing as we go forward?

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

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Yes. I'm not sure that the relationship is much different. I mean I think, by our experience, we've seen that we're particularly able to get longer-term leases downtown, which tends to compensate us for the differential in -- called unit pricing. So when we look at kind of our suburban assets and our urban assets, they tend to be pretty much in the same band. There may be anomalies at different points. But we're getting higher rent levels. We have converted most of our downtown rents to triple nets, so we're very getting very little expense leakage, doing the same thing in the suburbs. So trying to hedge that downward exposure given the increasing capital cost.

And then -- and to be honest, I mean, a lot of the assets build that we've had years ago that were kind of the prototypical pedestrian-quality suburban office buildings we really sold out of. So we sold lot out of those because we didn't see the same linearity between capital as a percentage of revenues and the need to put in a lot of additional base building capital. So I think as we evaluated our disposition program over the last half dozen years, a lot of that was driven by where we saw an inability, on our part given the market conditions, to generate positive net effective rent growth. So one of the things we look at is we evaluate with every lease is what that net effective rent growth is and how does that compare to where we were before. And any property that we think doesn't have the ability to kind of keep pace with our growth expectations that we have for the portfolio at large, we look to retool or get rid of.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [28]

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Yes. That's perfect. And one quick one for Tom. I heard a lot of positives about the first quarter in the outlook, and I understand the guidance that the low end being raised. What was it -- maybe I just missed this, what was it that drove the reduction to the high end just a couple of months after you provided that range?

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Thomas E. Wirth, Brandywine Realty Trust - Executive VP & CFO [29]

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Well, I think, Billy, we -- yes, we put out a pretty wide range, and I think that a lot of that -- because of those -- the order of magnitude of those sizes is really if we do anything that could be in the capital market side, whether it be acquisition or dispositions. So part of that is that we did leave a little bit of flux in there.

I think with our capital plan now being 92% done already, we felt good about taking both ends of the range down. Obviously, that could change, and we could be up towards the upper end. But I think we felt like with 92% of the plan done, we felt we could really narrow the range $0.02 on either side as opposed to what we've normally done is narrowed it as we went through the year.

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Operator [30]

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(Operator Instructions) I am showing no further questions at this time. I would like to turn the conference back to Jerry Sweeney.

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Gerard H. Sweeney, Brandywine Realty Trust - President, CEO & Trustee [31]

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Great, Lance. Thank you for moderating, and thank you all for participating in the call today. We look forward to updating you on our business plan progression on our next call. Have a great day.

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Operator [32]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.