Q3 2019 Earnings Call
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I'd now like to hand, the conference over to your Speaker today, Gerry Sweeney President and CEO you may begin.
Thank you very much good morning, everyone and thank you all for participating in our third quarter 2019 earnings call.
On today's call will be as always art, George Johnson, our executive VP of operations, Dan Palazzo, Our Vice President and Chief Accounting Officer, and Tom worth or executive VP and Chief Financial Officer.
Carter beginning certain information discussed during our call may constitute forward looking statements within the meaning of the federal Securities law.
Although we believe these estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.
Further information on factors that could impact our anticipated results.
Please reference our press release.
Well as our most recent annual and quarterly reports that we filed with the FCC.
So looking at our business plan, we're in great shape and substantially done for 2019. So after a very brief review of our 2019 quite.
Well outline our 2020 earnings guidance and our business plan.
Tom will then provide a synopsis of financial results and after that time, George Dan and I will be available to answer any questions you may have.
Our business plan continues to be very straightforward simply take advantage of great product and strong markets to lease space at increasing net effective rents by controlling capital costs delivering positive mark to markets with strong annual rent increases our 2019 plan accomplish that.
Objective as well our 2020 business plan.
We are 100% done on our speculative revenue target for 19, the leasing pipeline looking forward remains deep for our existing inventory at about 1.5 million square feet, including approximately 270000 square feet in advance stages negotiations.
Third quarter, we posted strong rental rate mark to markets of 9.3% gap and 4.2% cash year to date, our cash same store growth rate is 1.9%.
As you May recall, we did elect last year to keep a major renovation project in our same store pool that project 16, 76 International drive in Northern Virginia is undergoing a full renovation and is currently 21% occupied I'll touch on a little bit later, but this project.
We'll deliver and excellent return on invested capital by keeping it in the same store. However, it has had a 100 basis points and 250 basis point adverse impact on our 2019 in 2020 same store growth rate.
To illustrate this impact as well its impact on our occupancy levels. We did provide a road map of 16 76.
International drives impact on same store occupancy levels on page seven of our supplemental package.
Based on excellent progress so far we've raised the bottom end of our range I, one sent to 141 and narrowed the top end to 143 for mid point to 142.
Per share as outlined on page 10, 11 of our said we expect both.
Greater Philadelphia, and Austin to remains strong going into 2020, thereby generating good leasing activity and increasing pipeline and good leasing levels.
A quick notes on markets Austin continues to benefit from tremendous corporate attraction and end market expansion as well as a tremendous in migration of a population for the third quarter of tool up 2019, asking rents increased 6.2% year over year with 2.1.
1 million square feet of absorption in the last nine months of 2019.
A great way to illustrate the strength of Austin continued strength and growth is that over the last five years. The Austin market has added over 8.4 million square feet of office space, while increasing occupancy by over 320 basis points.
Philadelphia with it had 1 million square feet of absorption over the last year. The trophy class vacancy rate has been reduced to five per se from 5.3%. The end of a 19, which ranks among the lowest of the top 25 largest m. essays, we've continued to grow jobs over the last year and our experience.
Seeing solid demand through the third quarter, 19 was asking rents increasing 4.4% year over year.
So a lot to continues to benefit from an emerging life science sector supported by almost $1 billion at NIH funding, which ranks third nationally behind only Boston and New York City.
University City receives 42% of all NIH funds allocated to the entire state of Pennsylvania, We believe our Scoopable yards development is well positioned to take advantage of this growth acceleration in fact, Philadelphia was in the news recently when the CEO Johnson and Johnson said that Philadelphia has that been.
Tatchell to be that the silicon valley of the healthcare sector.
The comprehensive redevelopment of 16 76 is on time on budget, we add but 236000 square feet a vacant space. Our current pipeline is almost 900000 square feet, which is up significantly since our July call. We are under letter of intent and in advance.
Negotiations on approximately 110 111000 square feet.
Rent levels, we believe will be in the mid fortys.
Representing about a 15% increase over expiring rents the projections still reflect that will realize it.
Return on our incremental capital of over 20% and will stabilize that property at about a 9% yield on aggregate new basis.
Turning to the balance sheet in time will touch on US we did take advantage of the public debt markets to raise $215 million of unsecured bonds at an average rate of three per se and now at an average term of 7.5 years. This financing and proves our liquidity. We now have full availability under our 600 million dollar line of credit.
And we also lowered our overall cost of debt and extended our maturity schedule.
So with that.
Overview of the excellent backdrop of 2019, we also announced or 2020 business plan along with related earnings guidance.
The 2020 plan is headlined by two operating metrics that demonstrate excellent future growth potential.
Our cash Mark to market range is between eight and 10% and our GAAP Mark to market range is between 17 and 19%.
We anticipate that for 2020 all of our regions will post positive mark to market results on both a cash and GAAP basis.
Also from a forward growth perspective, our major 2020 rollovers creates significant upside due to see due to a tremendous mark to markets.
I'd say Jive rollover in Austin is a 20% cash and a 28% GAAP mark to market Macquarie in Philadelphia is an 18% cash in at 22% gap and reliance also in Philadelphia is a 20% cash and at 24% gap.
So our GAAP same store growth rate of 2.4% is driven by Philadelphia at 4.5% and the Pennsylvania suburbs of just shy of 7%, obviously due to the rollovers taking place met DC in Austin will be slightly negative due to those those roles as I noted earlier.
Our same store forecast due to the inclusion of 16 76, we don't believe reflects the strength of the of our overall portfolio and as we noted on that schedule without the inclusion of this property R. 22020 cash same store range would be showing a half to.
For the half percent, which we think is pretty solid.
Other key operating highlights spec revenue of 31 million already 50% achieved occupancy levels will close out between 94, 95% and will also be 95% to 96% leased by year end 20.
Including the rollout of Macquarie of 150000 square feet in July we do project to retention rate of 65%.
Capital, which is a key focus of ours will be brought about 14% of revenues, which is consistent with our 2019 run rate, we do projects Rolling FF FFO of 3% at the midpoint and our debt to EBITDA range, we projected at year end will be.
Between 6.1 and 6.3 times.
CAD will range between 71, and 78% and is down slightly from our 2019 range that decrease is primarily attributable to the capital on free rent to the anticipated backfill of 16 76 International drive where we are projecting absorbing.
Number of square feet within 12 months at that space being vacated.
Just to amplify a couple of vacancies impact on 20.
At 16 76, we are projecting.
About 200000 square feet of lease up at a cash mark to market, a 14.7% and about $3 million of GAAP revenue.
As part of our 2020 plan.
On the state Jive role in in Austin, we're projecting about 148000 square feet of absorption.
At a mark to market on a cash mark to market have just shy of 20%.
40% of that square footage has already been executed and we anticipate generating a couple of million dollars of revenue on a GAAP basis from.
From that SHR release, Mcquarrie, we have no.
No gap and no cash revenue in our 2020 as a result of that mid year rollout.
Just ended the further amplify that $5 million of revenue coming out of 16, 76 and SHR why is it is GAAP revenue not cash.
So the upshot is our 2020 operating forecast gross FFO at 3%.
Keeps our excuse me keeps our balance sheet strong deploy some capital into development keeps our capital ratios on track with excellent cash and GAAP Mark to markets.
We spend a few minutes on on development and investments.
When we do look at the development landscape and the investment side of our business. We do recognize that there is a lot of uncertainty in the macro environment that could impact the near term economic outlook.
Did you think back our goal for 2019 was really to get all of our targeted development projects in a full go mode with all approvals design development and marketing programs fully in place as we're closing out 19, we feel we've accomplished that objective.
But looking forward to 2020 and 21, assuming a continuation of the demand drivers that we're saying and continued strong market conditions, we do plan on placing more land into active development.
As such our 2020 plan includes two targeted development starts.
And our development pipeline can really be classified into two components, our near term production level assets and our long term mixed use masterplan developments.
Our production level assets can be completed within four to six quarters, they cost between 40 and $70 million and range in size between 100001 hundred 60160, 5000 square feet the cash yields and all these projects are targeted around 8%.
These assets are four points and Garcia in Austin, and 650 Park Avenue and 155 King of Prussia Road in Pennsylvania.
On these projects, we have a combined prospect list aggregating almost 2 million square feet. Each of these projects are ready to go pending pre leasing as I mentioned, we have to start spilled into our 2020 plan just a quick note on a couple of projects, we have under existing development for five Colorado.
Though continues on schedule and on budget. We're now 45% leased we anticipate that project will generate about an 8.5% yield on cost and the schedule holds with it for for Q2 0 completion and stabilization by 2021, the Bolton Bill.
The thing is under renovation that work will be done by.
The second quarter 2020, and as we've noted that building is the office component is fully leased to spark therapeutics and we're actively leasing the first floors retail space.
Looking at our Master plan mixed use projects, which are schuylkill yards on broad more we did update the disclosure within the supplemental package on pages 15, and 16 to provide a lot more information on those projects. So a couple of quick highlights on each one scoopable yards for mass.
Our plan approvals are completely in place that design development is substantially complete on the first two buildings final pricing on those buildings is underway.
Marketing efforts continue with the pipeline still around 1.5 million square feet, including significant interest from life Science tenants. We are a very active discussions with joint venture financing sources on it to provide equity for the project.
Our existing investment base aggregating approximately $90 million will be sufficient to meet our equity requirements in the contemplated equity joint venture structures on those projects at our targeted 35% hole. So no additional cash requirements are anticipated on art school.
Our yard starts.
Prior to starting either tower, we will have final construction pricing locked down and all equity and debt financing committed and announced as part of any start announcement.
Given our read on the residential market, we could be assuming the above conditions are met in a position to go on the west tower in the next couple of quarters. The each tower, which is predominantly office and a potential life science component does require an active tenant as well as having the those costs.
And financing conditions met prior to any start up.
A final point worth, noting that you'll see on on the page in the supplemental is that our school yards Master plan can accommodate almost 2 million square feet of life Science space.
Given the strong demand drivers were seeing in that sector. We have also commenced the design development process for 400000 square foot dedicated life science building that could commence construction very late in 2020 or early 21 in a joint venture with our life science partner.
On broad more which frame is framed add on page 16, again, all approvals Don I do want to highlight that we can build about 2.7 million square feet of space and over 800 apartments with the existing buildings in place and we are into full play.
Planning and costing on three blocks with marketing launches.
Tendon, there too, which I've detailed the.
The component parts of that on our on page 16, all three blocks could be in addition to start by mid year 20, again, assuming favorable market in financing conditions stay in place discussions on the train station public space sequencing and retail hospitality initiatives initiatives.
Our all continuing at an excellent pace.
We have one acquisition program for 2020 of which is part of the previously announced transaction with Penn Medicine, We have a 160000 square foot building in Radnor that we plan on purchasing later in the year.
We do anticipate placing that building into redevelopment upon acquisition.
Excluding the committed spend we already have at our 2020 plan for four or five Colorado, the bolt and building a few other items as Tom will outline. Our plan does include $50 million that incremental spend in 20 on our two projected development starts to finance these opportunities.
These we will be evaluating well timed assets sales looking at several of our joint ventures to harvest profit generate liquidity and reduce debt attribution. We're also evaluating several value add opportunities.
And as we did in 2018 and have done in 2019, we expect any deployment to be relatively earnings neutral and accelerate bottom line cash flow growth.
So to close out 2019 plans essentially wrapped up our folks is now on our 2020 plan and we are delighted that the bottom line results is as strong effective rent growth a growth in FFO and a continued.
Solid balance sheet performance at this point I'll turn it over to Tom to review our financial results. Thank you Gerry.
Our third quarter net income totaled 6.7 million or four cents per diluted share and FFO totaled 64 million or 36 cents per year per diluted share, which met consensus estimates.
In addition, we narrowed our 2019 guidance by two cents per share and the midpoint remains 142 as compared to the initial.
First and second quarter guidance.
Some general observations of third quarter. We're operating results were generally in line with our second quarter guidance, our second quarter fixed charge and interest coverage ratios were 3.6 and 3.9, respectively.
Both metrics improved as compared to the third quarter 2018, our annualized net debt to EBITDA decreased to 6.3, which benefited from the improving operations and sale of class a 1900 for roughly $36 million.
Our 2019 guidance looking at the fourth quarter, we have some general assumptions portfolio operating income will total about 84 and a half million dollars.
FFO contribution from joint ventures, with totaled two and a half million dollars.
Gionee, our fourth quarter GNS expense will decrease from 7 million to six and a half million.
Incremental decrease is primarily due to expected timing of expenses and the full year CNS expense will total approximately 31.7 million.
Interest expense will be 20.5 million with 92% of our debt being fixed rate at the end of the quarter, but down but up to 98% fixed as a result of the bond deal capitalized interest will approximate 0.8 million full year interest expense should be about 82 million.
Termination fee and other we anticipate termination income of 2.6 million for the year other income will approximate 7 million.
Net management and leasing development fees will be 2.5 million and approximate 9 million for the year.
Financing activity during the fourth quarter, we took advantage of the public debt markets and issued 200 million of secured bonds at a premium to generate about $214 million of net proceeds the issuance comprised of reopening of our 20 429 bonds each for 100 million the issue.
That's resulted in reducing our unsecured line of credit to zero weighted average interest rate on those funds is 3% the weighted average maturity of seven and a half years for center of fixed rate debt is now above 98% and both bond issuances are now index eligible.
Based on our capital plan, which includes 45 million up development and redevelopment 15 million of revenue maintain 10 million of revenue creates spending across the 18 and a half million for the acquisition of Radnor land.
Our cash balance will approximate 50 million at year end.
Based on our estimated fourth quarter EBITDA capital's spend we continue to projected our net debt EBITDA ratio will be within six soda six three range with the main variably being the timing and scope of our development activities and related capital spend in addition, our debt to JV will remain in the low 40% range.
We anticipate fixed charge to be three six and our interest coverage to be three NIE by year end.
Looking at 2020 guidance at the midpoint net income will be 29 cents per diluted share and FFO will be $1.46 per diluted share.
Some of our general assumptions portfolio operating results property level GAAP ally will increase approximately $10 million year over year, primarily due to Drexel Plaza, which will generate $2 million as part takes occupancy during the year and $8 million increase.
Yes in same store.
Rely on a GAAP basis.
FFO from our unconsolidated joint ventures will total about $10.5 million Gionee should range between 30 and $31 million.
On the investment side, we had no sales activity built into the plan.
But we do have the acquisition of 250 King of Prussia Road, and Ragnar, Pennsylvania, as Jerry mentioned for $20 million and we do have to development starts.
That will not generate any earnings in 2020.
Interest expense will increase approximately 80 to 83 million.
Primarily due to also in that number includes our pay off of the for tower bridge mortgage which will occur in December for about $9 million capitalize interest interest will increase from 3 million to three and a half million primarily due to building a four or five Colorado and we will we anticipate paying off are too low.
Logan mortgage on May Onest, which is approximately $80 million and at a rate just below 4%.
Land sales and tax provisions should nets about zero termination fees and other income should total about $10 million.
Net management and development fees will be $8 million.
Which is about 1 million and a half below our 19 2019 estimate while property management fees will remain constant we anticipate lower development fee income as a development projects at Garza for SHR and Radnor for Penn Medicine are completed during the first half 2020.
We have no anticipated ATM or share buyback activity.
Turning to the capital plan, we do project had will be slightly lower and our coverage will be between 70 was 78%. The main contract contributors to the lower coverage is due to increase a straight line rent and the releasing of the space at 16, 70 cents, which is anticipated to occur within the 12 months of.
KPMG, leaving the space our total planned for the year, it's about $500 million. It's comprised of about 135 million of development and redevelopment of which 50 million, it's going to be new development starts for the year at 135 of common dividends revenue maintain should be 63 million.
Revenue creates should be 50 million.
As I mentioned, we showed about $90 million of mortgage payoffs for two Logan and for Tower Bridge 7 million a mortgage amortization 20 million for the acquisition of 250 King of Prussia Road. The sources for that will be about 20 $220 million of cash flow after interest.
220 million for the use of the line of credit $50 million of cash on hand, which we anticipate at the end of 19 at about $10 million in land sales based on our capital plan. Our line of credit balance will be about 220 at the end of the year. We project net debt to EBITDA will range between six why didn't Sixthree again the main.
Area, well being timing of development. In addition, our debt to GE aviation be maintained in the low 40, 40% range. In addition, we anticipate fixed charge will improve to three seven and our interest coverage will approve to forero I'd like to turn the call back over to Jerry Great. Tom. Thank you very much.
With that we're delighted to open up before for questions. We do ask US we always do that it in the interests of time, you limit yourself to one question and a follow up operator.
Thank you ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or you wish or move yourself from the Q. Please press the pound cake once again to ask a question. Please press star and then one now.
And our first question comes from Manny Korchman from Citi. Your line is open.
Hey, good morning, everyone.
Jerry in your remarks, you mentioned, the macro economy, and how that might impact.
Leasing or kind of desires.
Can you talk about that sort of contract within both the life science space.
The tendency that that's likely targeting.
The the often development.
Yes, good morning Manny.
It's a great question and I think looking at the two different sectors I mean, certainly.
With a lot of the political dialogue taking place.
Across the country on.
The regulatory risks facing big Tech.
While we haven't seen any any direct impact on that it is it is creeping into conversations circles. So.
There's no question that potential for any type of legislative action.
The adverse public policy decisions, primarily coming from a federal level, but certainly some susceptibility to state level.
Could have an impact on the growth expectations of of some of the major absorbers of space on the technology sector side again haven't really seen any any definitive action steps being taken in response is something that may happen in the future.
But certainly that is creeping into more and more conversations in terms of forward planning activity.
I think the same thing holds true quite candidly on a life science space, where you certainly have an awful lot of bulk of.
Dialogue in the in the public sector on health care costs.
The profitability of pharmaceutical companies concentration of wealth among large employers in that life science space that I think that does create a bit of the of the of an overhang in terms of what some of.
Some companies may be looking to do again.
It just out there is kind of the yellow flag pending the outcome of some of these political processes, but theres no question in any sector regulatory risk in public policy always provide a potential in.
Positive or adverse impact on growth plans and I mean, given the current dialogue that we're all hearing.
In the public space public sector space Theres certainly.
Again, some yellow flag is out there depending on how some of those things turned out.
Great and then just quickly on 16 76.
I will like to discuss this quarter are those the same ones as last quarter and just kind of your expected timing on converting thats a fully.
I did we actually had last time, we were last call Manny we run under letter of intent now we're in active lease negotiations pretty far advanced so.
We are certainly anticipating that rolling into a lease.
Thank you Sir.
Thank you.
Thank you.
Our next question comes from Jamie Feldman from Bank of America Merrill Lynch. Your line is open.
Great. Thank you and I appreciate the color on that potential development start funding I guess, if you were to handicap.
What's most likely would they may be more of your production assets. You mentioned there are some of the larger project projects and then.
Thanks.
How do we how should we think about potential asset sales like the magnitude and maybe even the yield or the cap rate on that.
But you might be selling.
Hey, good morning, Jamie.
In terms of the.
Near term development starts I think given the pipeline that we're saying we would anticipate a higher probability right now to the what I call the production level assets, who either a GARS or four points or 650 or.
Or 155.
And they again can be delivered within four to six quarters. So given the level of pre leasing there the pricing coming out where we anticipate it would be I think we're certainly gearing up for one or two of those to start I think on broad more we're really excited about the demand that we're saying.
Those blocks that were planning.
Clearly could be in a position with finals.
Site plan approval on building permits to go mid year 20.
So we assign a pretty good profitability to one of those starts going as well.
And then Scoopable yards right now, we'll see how the final pricing works out we are we do have a very healthy pipeline.
That we feel pretty good about.
The discussions we're having with potential equity partners, which are clearly very important to that project for us are progressing nicely.
But if I, we had to handicapper right now our guess is that the the higher profitability, which is kind of reflects the $50 million in the plan will be coming out of those production level assets and in terms of asset sales.
As you well know we're always in the market exploring different types of sales opportunities.
The.
We continue to be very pleased with the level of response that we see even that one sale down in northern Virginia very active bid process good pricing.
A pretty wide array of potential buyers that markets your heart relief fluid and attractively priced.
And we would expect.
US to prune some assets in the Pennsylvania suburbs as a primary receiving receiver of or generator of additional funds.
In the latter part of 2020.
Okay, and then are there any land sale gains in your 2020 guidance.
Jamie This is Tom we don't have any material land gains sales. We did say that is going to be about $10 million of land gains sales.
Any gains of that nature will be less than a penny.
Probably close to half a penny.
Okay, great. Thank you.
Thank you.
Thank you. Our next question comes from Craig Mailman from Keybanc capital markets. Your line is open.
Just a clarification so.
KPMG are they.
Out of the numbers kind of October Onest right.
Correct correct.
Yes, correct.
I'm just curious you guys kept argues against the same for this year.
Hundred and 30 basis points of Commencements kind of in the bag so far.
But then you're going to lose most of the.
160 basis points of the remaining expirations rate I'm just I'm just curious could you walk me through how you get to 94 95 from 93 with the drag from KPMG.
Yes, Craig good morning, it's it's George.
KPMG did did leave.
930, we've got additional explorations the pre lease that we have will commence in the fourth quarter and then there are a couple of move outs.
That immediately get back filled in the fourth quarter. They don't show. So you see the exploration, but there's no pre leased listed in our number because the space isn't vacant as though.
We ended the quarter. So that's really kind of how we roll up to maintain that same 94 95 range.
Got you so those pre leases are necessary.
Vince on the leasing page right.
Okay Gotcha Gotcha then.
Just another quick one so on the 400000 square foot dedicated life Science building could you kind of give us a sense of.
What you guys. Thank you might own on that and Drexel.
Pass on don't they typically have a right of first offer for like 15% of each building.
Yes.
A couple of points there.
Greg, we're anticipating kind of being in that 50% range in terms of the ownership of the of the life Science dedicated project.
We Drexel does have an opportunity to participate in our projects going forward.
As frankly does any kind of whose interest it.
The drexel's their varieties are rolling right Theres no notice period, they could wind up being a part of our life Science building.
What we're seeing really is a burgeoning demand coming out of the anchor employers here on University city, whether it be children's hospital.
University pass on Pennsylvania Medical system.
Actually university and all of their various.
Academic and research initiatives, the with Star Institute So.
I think in assessing the depth and the and the diversity of the demand I think we felt very good about launching that design development process.
As the building physical form begins to take shape from a plans and specs standpoint will commence the marketing of that and how it would be that we could identify some tendencies as we're going through the the design development process.
Would it be like a 100% buildout as lab space of all the improvements or would it just be geared towards lifesize tenants, who want to clustered together.
If the actual specific build that will be driven by.
Individual tenant requirements, the physical specifications of the building the ventilation the mechanical systems.
Ceiling heights floor loads et cetera, we'll all be designed to be convertible into wet dry lab administrative.
So provide complete optionality in terms of interior layout to what the tenant requirements might be.
Great. Thank you.
You're welcome.
Thank you.
Next question comes from John Tiny from Stifel. Your line is open.
Right.
One curiosity question I've, just got ask at though when you walking around the country.
Traveling around the country and you see a wonderful park like your new pockets, Google some of them are clean and very user friendly and some of them are full of tense and homeless people.
Our Philadelphia is finest able to keep that park.
Pleasant and usable.
It is very pleasant eminently usable and.
Being adopted very quickly into the into the.
The public cityscape in Philadelphia, we have.
Between Brandywine personnel.
Between the University City district folks as well as Philadelphia's finest there's there's a very coordinated campaign.
That's been incredibly successful John not just at Drexel square, but also it at our Seer Green Park to make sure that we are.
Always keeping those parks as friendly as possible to the general public.
And then the second question you've been very very good about raising your dividend the last.
Two years, what are you thinking about the dividend this year and what's your.
Taxable issues.
Well I think from a taxable standpoint, Tom I'll defer to you, but I think from a dividend standpoint, yes look we we are encouraged by some of the forward signs were saying.
The ranging John from a real estate level of the forward pipeline I think we're really pleased with the strong mark to markets were saying.
Both primarily on a cash base gas very important too, but as they say can't buy groceries with GAAP.
So having really effective good cash rank gross the annual Escalations, we're building into our projects. What we think are some really good near term convertible development opportunities that will it grow cash flow tremendously in fact that there'll be no ongoing capital costs all of those are very positive.
Attributes our board looks at in evaluating the dividend growth plan.
I think what we're looking for right now just some a little more visibility on executing the capital side of that plan.
It's no secret that construction costs have continued to escalate not just for base building, but for T.I.s, you well now and we have a number of very interesting initiatives underway to kind of keep a lid on those construction cost escalations, which I think are really resulting and keep our capital costs in that.
14% of revenue range, which is really very good. So we're able to generate net effective rent growth. So if those two elements come together kind of the forward leasing visibility with that positive mark to market as well as the the good containment on executing leases from a capital standpoint, I think the board has always bias to me.
Making sure the shareholders received.
A very effective share of our of our growth model Tom on that on the tax on.
On the dividend side, we don't have any pressure on the dividend based on the current recurring taxable income were having obviously, if we do have some asset sales depending on when they happen and what those assets may generate in capital gains we would have to assess whether there's a need to raise it.
At this point based on our operating plan for 2020.
There is no.
Taxable reason to raise the dividend.
Great. Thank you. Thank you John Thanks.
Our next question comes from Jason Green from Evercore ISI. Your line is open to.
Good morning, just a question on school yards can you talk more about the interest specifically for the office portion of school yards. If there any changes to previously requirements for the project to get started.
Sure Jason Good morning.
The no no change to the pre leasing requirements on on the east how we're still targeting that 35% to 50% range of the office component, you'll recall that building has the flexible to bid to be up to a third life science. So we're trying to manage.
Manage those those two different targeted audiences.
And the the pipeline again remains pretty diverse there's a few larger tenants in there that we're we're waiting for some us for some feedback on but we're also doing a very effective job or leasing teams that is.
Really developing a pipeline of of single into floor users that we think could really add to the the pipeline execution as we move forward on the West tower, which is predominantly a residential tower.
With the right.
With the REIT equity financing in place and given the read that.
That we have on the underlying strength of this location and the debt to the residential demand drivers I think we're prepared to start that given its fairly small office component without any without having any pre lease in place. So no real change from the plan we've outlined before.
Okay, and then on four or five Colorado. The additional 10% leased was that an expansion of the tenant that was already in there or was that a new lease and then I guess, how should we think about the remaining 55% regards to how quickly that will get leased up and what demand is like you know the.
The incremental 10% was a new tenants coming in so not an existing expansion and.
Look I think we're really happy with the pipeline we have there weve were.
Three to four times covered all the remaining hundred 10000 square feet with some very near term discussions underway, we have been able to continue to push rents through the development cycle I mean, the building. We're still the garage is going up now actively know halfway through and then quite halfway up the garage levels. So I think.
We're with a pipeline we feel pretty.
Confident that we'll get some leasing done in the next several months then is that building really starts to take shape kind of Q2 in Q3 of next year I think we'll be able to lock it away, but I think as I've mentioned, we feel very confident this is one of those projects like an FMC or seer center or will be subset.
To answer at least by the Tommy open up the doors.
Got it thanks very much you're welcome.
Thank you.
Our next question comes from Daniel Ismail from Green Street Advisors. Your line is open.
Great. Thanks, good morning.
Morning, given the recent headlines have you noticed any pullback and co working activity in your markets and then as a follow up can you provide an update on some of the flexible options you guys are working on internally.
Sure.
Well I mean, there's certainly been a lot of up very public disruption in that space in the last up.
60 days or so.
I think what we've seen is a push by by some of the company's to try and get leasing transactions Don.
I think.
With the dislocation of that of the major move in the market. We works I think you're seeing a number of other comes really trying to accelerate.
Their activity. So we haven't really seen a pull back from that side from the demand side I think in talking to a lot of landlords and certainly from Brandywines perspective.
We continue to be extremely.
A focused on what the credit support.
How that credit support is evidenced on all of our co working initiatives I mean, we have.
Little bit more than 2% of our revenues coming in from a variety of co working initiatives.
From early reads, we do have one we works location.
Few other executive suite, so we're very focused on.
Making sure there is adequate quite as credit support there.
Really walk those spaces to make sure there's high levels of occupancy we're very much involved in the design of those spaces. So we think theres high level of convert ability if the operators have any issues.
And I think certainly Brandywine our backs initiative.
Illustration rates are north of 80%.
Tremendous benefit we're looking at expanding that in some of our existing projects as well as quite candidly, even within some of our development projects allocating.
Hi bar space to facilitate the flexibles, providing some of our tenants.
Flexible term lease structure that can bridge out some of their.
Shorter intermediate term demands and have a compensation structure in place for us that gives us an accelerated return on the capital we need to invest to meet that flexibility requirement.
And.
Bye.
Sensation structure would that be some sort of share over.
Market rent premium Oh, yes, I, probably was a little up Tucson that yes, I mean would be higher higher rental rate.
That would compensate us for the for not having a five year term or.
10 year term in place.
And certainly our Rx our our experience is that.
No tenants will pay that.
Premium to afford then that business plan flexibility that's important to how they run their business.
And.
Not to go over my two question when it but has that have you guys generally found that to be in the two X range or 50% or can you frame that.
Oh premium.
It's kind of it could be up I wouldn't say up to two wax, but it's probably 50% premium.
Okay, Great. That's helpful. Thanks, guys.
Thank you.
Thank you.
Im showing no further questions from our phone lines. So now, let's turn the conference back over to Jerry Sweeney for any closing remarks.
Great only closing remark is thank you for your your engagement. This morning. Thank you for continuing to follow the company.
We're very excited about where we stand today with the portfolio with the growth opportunities in the near term that we have every intention of executing and we look forward to updating you on our yearend call, which will occur in late January of next year. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.
Thanks.