Q4 2019 Earnings Call
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Like the hand, the conference over to your Speaker today, Mr., Jerry Sweeney, President and CEO , Sir you may begin.
Crystal Thank you and good morning, everyone and thank you for participating in our fourth quarter 2019 earnings call on today's call with me as usual, our George Johnstone, Our executive Vice President an opera of operations, Dan Palazzo, Our Vice President and Chief Accounting Officer and Tom.
First our 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 assurances that the anticipated results will be achieved for further information on factors that could impact orange.
This better results. Please reference our press release as well as our most recent annual and quarterly reports that we filed with the FCC [laughter].
So after a very brief review of our 19 results I'll provide an update on the status report of our 2020 business plan. Tom then we'll provide an update us on our financial results for the year to look ahead do.
The balance of 20, and then after that the all four of us or certainly available for any questions.
We closed 2019 on a very strong note, we exceeded our business plan metrics on cash and GAAP mark to market tenant retention and achieved many of our other targets, including ending the year at 95.5% leased we achieved our speculative revenue target.
What you May recall, we increased twice during the course the year, we did come up a bit shorter occupancy target primarily due to several tennis not having completed their tenant directed fit out in a minor bankruptcy.
Our fourth quarter and full year FF, though.
Was 38 cents and $1.43 per share respectively, and both towards the upper end of our guidance ranges.
Fourth quarter operating performance was strong.
It was masked a bit by the termination of the KPMG had 16 76 International drive.
Absent their vacating our fourth quarter absorption would've been 110, 112000 square feet positive tenant retention would have been 77% and our year end occupancy would have been 94%.
Those statistics, along with the same store growth of 1.5% on a GAAP basis, and 2.7 on a cash basis, well with our GAAP rent growth in cash rent growth, we think demonstrate the underlying strength of our portfolios operating performance.
Also during the fourth quarter results some remaining joint venture properties in Charlottesville, Virginia. They aggregated about 50 $51 million in sales were a minority partner and we recorded $8 million gain an excellent those properties.
Also during October .
We completed a full building lease for our redevelopment property and Pennsylvania suburbs.
This 13 year lease rate was very much in line with our target or rent levels. The lease however was five years longer than anticipated so required more upfront capital. So we're going in initial cash yield was in the 8% range first our earlier target we picked up five additional years of term. So the overall economic returns were very much.
Such aligned with our projections that lease will commence in 2020 and wraps up and extremely successful redevelopment undertaking.
As Tom will touch on we did end the year at a 6.1, EBITDA target, which really does position us well going into 2020.
So turning to 2020, we are off to a very good start.
2020 business plan is really quite simple its first of all to take advantage of strong market conditions to meet our all of our operating targets and drive net effective rent growth.
And then secondarily to capitalize on all the development planning at approval efforts that we undertook in 2019 by getting some vertical construction underway to drive earnings growth over the next several years selling pursue the operating goals as you noted this in the software 73% done.
And our speculative revenue target our leasing pipeline remains a deep for our existing inventory, including 270000 square feet in the advanced stages of lease negotiations.
As we outlined on page 10, and 11 of our said we expect both the greater Philadelphia and Austin markets to remained strong during the year and generating good activity at building pipeline and good leasing levels looking at and Austin continues to ride the growth wave from corporate attraction efforts and end market.
Expansions, the unemployment rate fell to 2.6% towards the end of the year asking rents continue to increase year over year with about 2.1 million square feet of absorption during the full year 2019 filled up you also experienced about 500000 square feet of UBS.
Works and over the last year the trophy class a vacancy rate went down to 5% among the lowest of the top five largest MSR days.
I'd like it has grown jobs over the last year continuation of his performance. The last several years and we experienced solid demand in the fourth quarter with asking rents increasing.
4.4% year over year.
Just a one node or a major redevelopment project 16 76 international.
Comprehensive 24 million square at $24 million repositioning is substantially complete and we're in a full marketing mode.
We've already leased 75000 square feet in a lower bag.
For a mid 2020 occupancy we about 220000 square feet remaining and the current pipeline of just shy of 400000 square feet.
In addition, based on the current stacking in the building we have constructed several spec suites on the lowest available floors to accommodate smaller tenants who are in need of quick occupancy rental rate levels in our proposals in the execute at least match our pro forma rates and represented about a 15% increase over the expiring.
And.
Our 2020 business plan projects will lease an additional 125000 square feet in that during the third and fourth quarter of 20, and our spec revenue target does include in the aggregate $3 million of revenue from this project with about 1.7 million.
And yet to do.
The number support our previously indicated guidance at this project will generate in excess of a 20% return on incremental capitalize on incremental capital and we expected the stabilized around 11% yield on the fully loaded basis.
The 20 operating plan is also headlined by two metrics that we think demonstrate excellent earnings potential.
Our cash Mark to market range is between eight and 10% and our GAAP Mark to market ranges between 17 and 19% our best in recent memory, we do anticipate for that for the year all of our regions will post positive mark to market results on both a cash.
And GAAP basis.
Furthermore, our disciplined focus on controlling capital costs, which we expect to stay below 15% for 2020 combined with this mark to market does result in us growing net effective rents in our 2000 plan by 8%.
Also from an earnings acceleration standpoint, the major 2020 rollovers do create significant upside.
21, and 22 SHRM for example, in Austin is a 20% cash and at 28% GAAP Mark to market Macquarie in Philadelphia is an 18% cash and 22% gap and reliance again in Philadelphia is a 20% cash and at 24% GAAP Mark to market.
We do expect our GAAP same store to be in the range of 2% to 4%, primarily driven by Philadelphia, which is about 4.5% and the Pennsylvania suburbs coming in just shy of 7%.
For obvious reasons met DC in Austin will be negative due to the KPMG and the say chime move outs.
One point that we think is worth amplifying is our same store forecast due to the inclusion of 16 76, we don't really think reflects the underlying strength of our portfolio. For example, without the inclusion of this property. Our 2020 cash same store range would be.
2.5% to 4.5% we did illustrate the impact this in more detail on page seven of our supplemental package.
Just a couple of quick Orange on major vacancies I've already chatted about 16 76, essentially there we have 125000 square feet, the lease up and need to generate $1.7 million of GAAP revenue in the latter half of the year SHR.
We have that $2.7 million of GAAP revenue from 184000 square foot roll cash mark to market is over 19%.
80% of that is already booked so what's left to do is just north of $500000 of of additional spec revenue.
We take a look at them Mcquarrie rollover at our Commerce square building enough in Philadelphia, we don't have any leasing or any GAAP revenue really projected as part of our 2020 business plan. It's also important to recognize that the remaining open assumptions in our plan are predominantly smaller spaces back no single.
Vacancy is larger than 17000 square feet.
It is George can amplify if of interest we've already executed 81% of or anticipated renewals for the year and an active negotiations underway with significant percentage of the remaining balance.
Now for the for the looking forward for capitalizing on all of our development approval work during 2019 during the past year, we achieved all of our goals on all of our development planning efforts. We completed the full approval the full design development to construction pricing on all of our.
Production assets that being GARS in four points in Austin 650 Park in 155 King of Prussia Road in Pennsylvania. So we are in a full go position on all four of those projects.
And as we noted last quarter. These excuse me these assets can be completed within four to six quarters.
They will cost between 40 and $70 million. So the aggregate investment is in those four assets is just north of 200 million Dollarss. They range in size between 100160 5000 square feet. The cash yields on each of them are circling, 8% and on the of these projects we have combined prospect.
List of 1.8 million square feet. So they are ready to go and we do have.
As Tom will touch on two development starts build into our 2020 plan.
A quick observation on a couple of our existing developments four or five Colorado in downtown Austin is on track for year end 20 completion. We are now 52% leased 97000 square feet remain and we have a leasing pipeline of over 200000 square feet project.
Cost remains at $114 million and we are targeting a yield on cost at 8.5%.
And expect that to stabilize in mid 21, the both in building here in Philadelphia that renovation. The extra work is ongoing and we will be completed on budget and on schedule. In early Q2 of this year as you may recall that entire building at least the spark therapeutics a life science company owned by Roche Pharmaceuticals.
And we still projected 9.3% free and clear return.
In looking at our large master plan mixed use projects.
On pages 15, and 16 in our sub we did provide more information the highlight a few points.
The our full Masterplan approvals are now in place. That's two years ahead of schedule. So we're able to accomplish all of the zoning overlays in 2019, the design development and pricing is substantially done on the first two buildings marketing efforts do continue with.
About a 1.1 million square foot active pipeline and a significant component of that being life science tendencies. We are in very advanced discussions with joint venture equity financing sources and as we've indicated before our current front money investment balance in in that both of those projects.
Approximating $90 million should be sufficient to meet the equity requirements under our contemplated joint venture structures.
If we are successful in finalized in the current equity and debt financing negotiations, we will be in a in a position to go on the west tower in the first half of 2020. These tower, which is obviously a larger project with primarily office in the life science component will require an anchor tenant and weaker.
Continue that process as well in addition to working on the equity and debt financing arrangements.
The Schuylkill yards Master plan can accommodate almost 2 million square feet of life Science space as I mentioned last quarter. We are proceeding with the design development on a 400000 square foot dedicated life Science building and in addition to that.
The new ground up life Science building, we noted on page 13 that we have started the conversion of 3000 market Street and existing 60000 square foot office building into a life science facility design in pricing is is being finalized with selective.
Demo already underway, we do expect to be able to deliver that project in the first quarter of 2021.
That decision was really driven by the tremendous near term demand, we're seeing from smaller life science companies with the objective that we can if we get them into 3000 market, we can capture their future growth at school yards.
Turning to Austin, our broad more development again, all approvals Don.
As we've noted in this up we can do 2.7 million square feet and 855 apartments with the existing buildings a substantial that are substantially side. The emin a couple other tenants in place or into full planning and costing on three blocks as detailed in the sub block.
A anat will be in a position is start by mid year 2020.
Discussions on the train station public space sequencing and our retail hospitality initiatives are continuing at an excellent pace. We're also in discussions with private capital sources as we finalize the financial plan for an accelerated buildout of this overall redevelopment.
We only have one acquisition program for 2020, which is a 160000 square foot building in Radnor that we're purchasing as part of our overall transaction with Penn Medicine.
This project is an exciting redevelopment opportunity in one of the regions Premier sub markets right now we anticipate closing that per on that project in the second quarter of 20 and moving it immediately into redevelopment on the disposition front, we are marketing several smaller buildings and the Pennsylvania sub.
Burbs and continue to have numerous discussions with private equity sources on both the acquisition and disposition fronts.
As you know our 20 plan has $50 million incremental spend projected on our two development starts as we've indicated previously to finance. These opportunities we will be consistent with what I just mentioned the evaluating well timed asset sales looking at some of our existing.
Joint venture structures to harvest profits profits and it makes for as we generate sufficient liquidity and maintain our balance sheet targets. So to close our focus is now in executing our 20 business plan. We're delighted that the bottom line results for 2020 is a strong cash to market cash mark to market net effect.
The rent growth, 3% FFO growth rate and a debt to EBITDA range between 6.1 and 6.3.
I'll now turn the presentation over to Tom for an overview over financial results. Thank you Gerry our fourth quarter net income totaled $16.7 million or nine cents per diluted share and FFO totaled 67 million or 38 cents per diluted share which were at the upper end of our guidance estimates some general.
Observations regarding the fourth quarter results.
Operating results were generally in line with our third quarter guidance. Some one highlight is our operating expenses did benefit from lower tenant reserves, while our gionee was negatively impacted by some one time transactional and professional costs and other income was below our four.
Cast also for the fourth quarter due to some timing of anticipated transactions, our fourth quarter same store capital Y.
Growth was negatively impacted by some tenants that had some substantial completion delays and tenant leasing slides all of which will commence in the first quarter of 2020 .
Our fourth quarter fixed charge and interest rate coverage ratios were 3.7 at 4.1, respectively. Both metrics improved as quick as compared to the fourth quarter of 2018 and were better than our forecasted results.
Our fourth quarter annualized net debt to EBITDA decreased to 6.1 and at the lower end of our six so to Sixthree guidance. The ratio benefited from improved operating income and higher than expected year end cash balances increasing cash was primarily due to the delay of our acquisition of the land parcel red or Pennsylvania.
Which we anticipate will close during this quarter and sales proceeds from the the joint venture interest in Charlottesville, Virginia.
Looking forward to the first quarter of 2020, we at the following general assumptions portfolio operating income will total approximately $84 million and will be sequentially lower by a million dollars primarily due to increased operating expenses.
FFO contributions from our unconsolidated joint ventures will total about two and a half million dollars for the first quarter, which is down about 400 million from the fourth quarter.
And 200000 200000 after adjusting for the PGP sale and Charlottesville for the full year 2020 of the FFO contribution is estimated to be.
And a half million dollars shannay, our fourth quarter DNA will increase from 6.9 million to $9.5 million that sequential increase is consistent with prior years and primarily due to the timing of deferred compensation expense recognition for the full year DNA expense, we estimate will.
Total about $32 million.
Interest expense will be about $20.5 million for the first quarter with 97.5 of the balance.
Fixed rate on our balance sheet capitalized interest will approximate 700000 and full year interest rate will approximate $82 million.
We are in looking at that plan, we have several capital items, we are talking about.
One assumption is the pay off of the for tower bridge mortgage about $9 million in November 2020, capitalize interest will be about between 3.2 million.
Up a little bit for last year.
On to pay off the two Logan mortgage which matures on May Onest. This mortgage approximate $80 million at just under 4% rate.
Termination fee and other income we continue anticipate termination other fee income totaling 4 million for the first quarter and 11 and a half million for the year.
Net management fees quarterly NOI will be two and a half million dollars and will approximate 8 million for the year.
Land sales and tax provision, we expect to nets to zero and we have no anticipated ATM or share buyback activity.
On the investments.
As Jerry mentioned guidance assumes no new sales activity.
Building acquisition activity is for 250 King of Prussia Road for $20 million and an additional land parcel at Raptor wished it gets delayed to the beginning of 2020 and Thats another $18 million.
Any development starts that we have which is $50 million in our liquidity, we do not expect them to generate if they do start any earnings in 2020.
Our CAD range is 71% to 78%. The main contributors is going to be some higher straight line rent. This year versus next just under $10 million and again, the releasing space at 16 76.
It's going to generate.
Revenue maintain capital of a died due to the tenants that will come in within the first year of the vacancy. Our total uses in capital for the year is 535 million hundred $50 million of development hundred $35 million of common dividends.
Revenue maintain capital of 64 million.
Revenue create a 50 million mortgage amortization 7 million 90 million of debt pay offs, which I mentioned earlier for the mortgages.
Acquisition of 250, King of Prussia Road for 20 million and the acquisition of the land for 19 million primary sources will be cash flow of 220 million a 215 million of line use.
Using up to 90 90 million of cash we have on hand, and roughly 10 million of land sales that we have programs based on that capital plan. Our line of credit balance will be approximately $250 million at year end. We also projected our net debt to EBITDA will range between six one and sixthree with the main.
Variably being timing and scope of our development activities. In addition, our.
Debt to JV will be between 40% to 43%.
In addition, we anticipate our fixed charge ratio will approximate 3.7.
And the interest coverage will approximate 4.1.
Ill now turn the call back over to charity.
Great Tom Thank you very much.
With that we are delighted to open up before for questions. As we always do we ask the interest of time, you limit yourself to one question and a follow up.
Crystal.
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 Touchstone telephone. If your question has been answered what are you wish from move yourself from the Q. Please press the pound Keane once again to ask a question.
Our and then one now.
And our first question comes from James Feldman from Bank of America. Your line is open.
Great. Thank you and good morning.
Morning, just wanted to.
I wanted to start which is kind of the financing side. So two questions. One is can you just talk more about potential JV partners or just kind of what you are lining up in terms of magnitude in size.
And your fees for some of these larger developments and then secondly, I know you did include any sales and guidance, but it sounds like you could be doing sales. If you start some of these developments.
If you could talk about their earnings impact on that or is that not going to be meaningful.
Yes.
Jamie Thanks for the question.
On the joint venture side.
That.
We the one that we're in very advanced discussions relate to our projects at school yards and frankly, they're very consistent with what we have indicated before.
The objective would be for Brandywine to remain at 35% partner in those transactions equity source would wind up providing 60 Fox on the equity we would line up.
Construction and mini Perm debt financing through our banking syndicate.
There would be market rate development fees in their leasing fees, obviously property management fees for Brandywine.
We do expect that this structures were contemplating right now will be reflected in the final documentation. So we feel very good about how those discussions are going.
As we focus on on the broad more development.
We certainly have a worldwide.
Range of institutions, who we are talking to about a variety of financial structures App Baltimore.
Ranging from participating in a couple of the earlier phases to providing infrastructure funding.
All of those we think will progress over the next couple of quarters and again, if you think about the comments, Tom and I made no we're really gearing up starting.
The first vertical construction and site work at broad more.
Very early in the second half of 2020, so our goal would be to have finalized those venture structures.
Sometime by mid second quarter of this year and have a lot more clarity you can share with our investor base I think we know as we've been indicating we do think that.
One of the sources of capital for these production level assets are going to be some of the smaller asset sales and we do both we do believe in our plan that the timing of those sales.
We will have neg built negligible impact on 2020 guidance.
And that's been kind of the model we set forth.
In the last several years, we'd expect that continue as well.
Great. Thank you I guess, just a follow up so it sounds like nuclear is probably one partner and am I right, probably more maybe multiple partners depending on the right way to think about it well.
I think I think so but but please give us latitude is as some of these discussions and Bob I think our focus in at school yards is quite candidly on the first two buildings.
And I think we're talking too.
Couple of years for really one primary partner on.
Both of those buildings or broad more I think Jamie we're we're still in the process of bedding through a number of.
Of expressions expressions of interest and advanced discussions on how that will ultimately lay out whether it's above and institutional partnered it helps us on the on the on the residential side, where the mixed use cider or some of the retail in infrastructure developments.
Okay.
Alright, thank you.
Welcome.
Thank you.
Our next question comes from Craig Mailman from Keybanc capital markets. Your line is open.
Hey, guys.
I wanted to circle back on the.
Occupancy piece back in October you guys seem pretty confident you were going to.
Target for the year and I know, Jerry you mentioned kind of construction delays and the bankruptcy could you just elaborate a little bit more about.
Kind of some specifics about we're really it was it seemed like a big Miss relative to your conference back in October .
Yes, I'm not sure I would categorize a big Miss by any stretch, but it George So let me refer to you and kind of walk through some of the detail. There. Yes. We added we really kind of had three moving pieces Craig.
The smallest of which was a 20000 square foot bankruptcy in Austin that.
You know kind of came out of nowhere. So we ended up getting that space back.
In early December and and we feel good about.
The space that we got back in.
Hi, David incorporated into our plan to to re let in 2020.
The other two components really where.
Tenants not substantially completing their.
Tenant fit work these are conditions, where the tenants building out the space and Brandywine is not.
And so our policies to date have been that if that space isn't substantially complete and we're not recognizing income on it we don't reflected as occupied and that was about 50 basis points. When it was all said and done.
And then the third piece, we're just some leasing slides themselves that we we felt confident back on the October call that we were going to get them paper. They were quick move ins because the space was.
In fact ready for tenancy and those occupancy slipped into January and they have subsequently to year end occupied so those were really of the through the three pieces you said that onto a georges observation on its dependent directed fit at these are leases that have commenced direction.
You did tenants are there the tenant is behind schedule on completing their attending fit out and based upon the revenue recognition rules because that space is not quote unquote ready for its intended use we cannot recognize revenue so.
We've had this a number of we have this a number of quarters, where from our perspective. The leases signed the tenant is either into free rent period or in some cases actually paying us cash rent, but they've yet to complete their fit out and therefore, we can't recognize revenue so as George.
Just on that.
And ongoing struggle because to the extended tenant once to their own Fidel.
We certainly are happy to have them do that.
Subject to trigger dates on the lease commencement so that we know that any of their delay.
It doesn't affect the commencement data lease.
The vast majority of times 10 is complete their space well ahead of schedule therein, Theres always cases, where there's a where that does not occur.
And what industry with the bankrupt and often.
They were a.
Small more us on mortgage.
Mortgage lender.
And then.
Just on the Macquarie interline spaces any update there.
Progress and back drilling.
Yes, Greg it's a it's George again.
We're seeing most of the activity on on the Macquarie spaces, obviously, because they come back to us first.
But seeing activity on both we've got we've got proposals out on about 40% of that space already and we've got a handful of inquiries and tours not yet at the proposal stage, but but we've got a pipeline that actually exceeds the 150000 square.
Feed that we're getting back from Macquarie.
Reliance again those are.
Contiguous floors, and we have seen a couple of inspections by some larger tenants that have either a 21 or maybe even the first quarter 22.
Occupancy event in there just kind of out seeing what the opportunities are.
And again, we don't get that space back from reliance until 12 31 of 2020.
But in addition to that Craig. We also have the team has done a great job and kind of forward planning exactly what selective demo we want to do.
We've got programs in place to upgrade some of the common areas. So the expectation would be several what we did frankly at 16 76.
As soon as that tenant vacates will be in there the plan will be wasn't locked and loaded we will have.
All that permits in place to go and immediately commenced work. So we can accelerate delivery of some of that space and.
Certainly as you know from previous discussions the.
The bifurcation that space between.
Smaller floor plates upper tower in baseline really gives us a range of options to present to the tenant market. So even on the larger for place, where we'll be prebuilding, some spaces, including putting some furniture and they're trying to accelerate the potential occupancy dates of those.
Of those floors.
Gotcha, one quick follow up on Jamie's question on the financing piece sounds like you guys are still trying to figure out the.
For more structure.
But how much is kind of pricing playing into that.
The discussion to this for you guys close to your partners on expectations or is that kind of more of a sticking point on then maybe just the credit structure.
No no I wouldn't say there that pricings.
Pricings in issue at all.
Thank you.
Yeah.
Thank you.
Our next question comes from Jason Green from Evercore. Your line is open.
Good morning, I appreciate the color on the fiscal year 20 move outs I guess, if you're able as we look out over 21 and 22, we know reliance's, leaving space greater than 100000 square feet thought it was in 21, but you guys. Just mentioned at the end of 20, but I guess outside of reliance are there any other kind of 102 150000 or greater.
Square foot tenants that we should be thinking about in modeling and 2021 and 22 that are likely to move out.
Well at this point, we think we're going to have a major rollout down in in northern Virginia with with.
Northrop Grumman and I think George work on a couple of other ones that most of all set but we do have a few more very.
Large rollover with IBM in Austin that we're confident.
Renal there.
In Philadelphia, we've got a large law firm that were already in active discussions with about renal and.
And then reliance was the other I mean, those bets really the inventory of kind of the.
Six figure square footage type tenants.
Okay, and then just curious this might be a little bit of overanalyzing on our part, but looking at the school yards page in the supplemental we noted that it no longer refers to opportunities zones is there any reason for that and then just more broadly with some of the news going on about opportunities zones. If there is kind of any opinion that you guys can share about what's going on.
Yes.
It should say opportunities yes. This if we change the if they will be change to bullet.
Hey, Jason as the fourth full it down all under overview.
Okay.
So its day, it's still there yes, the federal opportunities out I look I will tell you a number of the equity partners that we initially talked too.
On scope we are.
We're very interested federal opportunities and I think I think some of those discussions.
Took some time because there was some debate in Washington on what the actual final regulations would be and I think there was there some.
Points of debate in the tax and investment community of what those requirements would be I think that dust to settle and certainly we continue to have surprisingly good reaction from investors, who are focused on opportunities to invest in very high costs.
Quality.
Real estate and I think one of the things that we have learned to these opportunities owned discussions is that where the federal regulation was was is directed towards getting money into.
Areas that had been lacking in investment.
Our location next to the train station universities I think has given a lot of the of the investors. We have spoken to a lot of comfort that the investment thesis has been proven because of the work we've done it.
At Sears Center with Spark Therapeutics. The main post office building FMC tower et cetera, So I think weve resonated well for both at federal opportunities on standpoint, but also and probably more importantly that the the execution level in the real estate has gone very well.
Got it thank you very much.
Okay.
Thank you.
Next question comes from Manny Korchman from Citi. Your line is open.
[noise] and we're going to take our next question from Amit.
From Mizuho your line is open.
Hi, Good morning, everyone. Good morning first.
Good morning, Gary first question Discovery labs, the large development that's happening in King of Prussia.
For life Sciences, I mean, do you look at that anything that's going to be competitive against what you're doing is copel yards or is it kind of because it's so far we are 30 minutes. So you don't receive that competing product.
Excellent question, and I guess, I and we certainly have tracked that.
That development and I think.
Two reactions one is I think it's wonderful because I think what it really speaks to is the real accelerated emergence of the growing life signed sector here in Philadelphia, driven a lot by the cell therapy technologies, the tremendous research being done by the with Star Institute the pharma comp.
Monies organizations like obviously spark therapeutics and now Roche children's hospital. So from our perspective, it's been a really strong independent validation of that this market really is primed for accelerated life science development. So that's very very good.
News for us.
Relative to competition I think we've always operator on the standpoint that we compete against everybody.
And we'll be will be challenged to present schuylkill yards as a preferred location and efficiency.
Module compared to any other location within the regional marketplace.
But were but fundamentally even recognizing that competitive threat or potential I think we're just really excited about the the fundamental demand drivers that we're seeing in this market segment to win.
We talked about the.
No the conversion of 3000 market, that's really been totally focused and driven by the fact that our leasing team is seeing a tremendous number of.
Emerging life science companies with good financial sponsorship and Great research capacity, who kind of a short timeline to actually start the plant a flag and we thought that.
3000 market could provide an excellent opportunity to capture some of that near term demand and as those companies implement their research capacity and start going through trials and raise more capital that we could capture their growth at school yards. So.
And then just another quick one if you don't mind, the Northrop Grumman lease when does that expire.
That expires.
On January January of 21, yes.
Anyone that building, we have plans underway to do one of two things either significantly renovated and or or sell or joint venture. So we're pretty far along in the thought process there.
Okay.
Thank you. Our next question comes from Daniel is mail from Green Street Advisors. Your line is open.
Great Good morning.
Good morning leasing pipeline in Philadelphia, or these mostly tenants in the markets or are you noticing any new out of towners, taking a look affiliates.
Nation.
Yes, I think we look at the pipeline it's.
It's probably broken down.
Any by about 50% outside the city, 50% inside the city.
What's inside the city.
Overall growth so its net growth not just share shuffling. So I think we feel pretty good about the the kind of regionwide in northeast corridor marketing program.
I will tell you number the.
The the life Science excuse me companies are are really from outside the area.
So we think theres a little bit of this feeling there.
And the major office or traditional tenants that were tracking down.
I think are are pretty evenly split between kind of in an outsider market companies.
And the thing on Philly.
And tenants densify into their space. This cycle do you think your tenants have mostly gone through that phase or is there still more and more to go.
Sorry, your question cut out a little bit on us here Oh, sorry.
I was referring to densification and the trend that we've seen this cycle has been that tenants.
Densified call, it 20% or so into their space.
Do you think that trends towards some more legs to go where do you think were mostly gone through that trends.
Look I think it's going to be an ongoing trend and I think thats really where our properties are well positioned versus our competitive set I mean, what we're seeing in.
Due to the tight labor market focus on on employee culture talent attraction.
The.
The really well appointed buildings with the full amenity packages like we have tend to rise to the top of the prospect list. So.
We do think that that evaluation of the efficiency of space design will be is a secular trend in our business. We also think those maybe to your question is that I think the the original densification targets that a lot of key.
Company set.
Our had been reevaluated upward, where we bake. The initial push was to densify down to 100, 125 et cetera square feet per employee.
We're not seeing that at all we're basically seeing kind of almost a reversion to that 150 to 200 square feet per range, because what you're really seeing is where there may be a higher percentage of open floor plans or con in tier four offices, you are seeing wider circulation areas youre seeing a much more focused on space.
Collaboration.
Within tenant spaces, the creation of more common area gathering points. So we look at some of the major tendencies that we've we've done recently and certainly on even on our development projects.
We're seeing.
A pretty stable outlook on how many square feet per employee tenants will have.
In fact that a number of discussions we're really driving a little bit away from square.
Rental rate per square foot and began to focus very much on the occupancy cost per employee.
So it tends to be a much significant.
Positive selling point for us that we're able to present much more efficient for plates.
Column free 10 foot finished shillings et cetera that or are delivering a much higher value proposition to our tenant base.
That's helpful. Thanks.
Thank you.
Our next question comes from Manny Korchman from Citi. Your line is open.
I think thats better sorry about that.
Just as we think about books, Google and broad more on the large office components. You're building there are you completely dual tracking.
The deposits that are talking to tenant trying to find anchor tenants getting ready to go live with those buildings or do you need to find the capital source first to make those projects sort of life.
Hey, Matt is very much a dual tracking in fact, I mean marketing's usually sphere.
So we that's why.
We amplified during the commentary about 92019 for us on the development from was really getting through all the approvals I mean.
There are a lot of them as you all well now.
Getting completely through the design development process down the CD construction documents for for most of the projects.
Getting final pricing done because that really particularly at time of escalating construction costs you need to kind of note. Your platform is and we've got that done.
While we're doing that we're still marketing, but you want to get to the point, we have got quantitative certainty of what you what the cost of delivery will be so whether it was on projects like ours are four points for the suburban properties in Philadelphia or Schuylkill yards are broad more.
Mission critical was getting everything framed out we've done that the marketing process on every one of those projects that you to four production assets in the school yards and brought them. All those marketing efforts have been launched we've got big prospects going.
Discussions going on as I mentioned earlier.
A prospect pipeline of the development with on the production assets of almost 1.8 million square feet. So.
The our perspective quite Canada has been the more we can demonstrate.
Market demand drivers at our targeted rental rate levels.
The more.
Constructive those financing discussions are.
We'd always rather better position, where we're we've mitigated some of the lease up risk by the pipeline because that facilitates a much more constructive discussion with the financing sources.
If we think about that same sort of concept on if you get closer if you landed a pre lease.
Are you still on track to do a JV of the development project or would you then consider maybe selling or JV one of your stabilized assets is that.
Well I think the immediate near term as we're looking at over the next several months I think given the.
Given that dynamic and focusing on scoop yards, I think the bias would still be too.
To do a joint venture or at least on those first two buildings.
Thanks, guys.
Thank you.
Thank you and we do have a follow up question from James Feldman from Bank of America. Your line is open.
Great. Thank you I just wanted to follow up on your comments that Northrop. So it can you just talked about like talking about the building I think looking at your top tenants list. It's like a number eight tenants that are they moving out of that entire space I. Just think we want more color on exactly the story there.
Yes, they do play on vacating the building, which we think they've been in there about 15 years, it's a great project in our Dulles corner development and we fully expect to have a very successful renovation were successful sale. There. So we're we're going to take one of those to pass as we look forward to 21.
When they expire exactly.
The ended the year or January of 20 won't get January 21.
January of choice Okay.
And it's 250000 square feet.
Correct.
And do you have like are you in any talks fairly talks with anyone else to backfill or you think guys sales more likely. These how are you guys thinking about it well I think theres I mean, there's certainly been a tightening of large blocks of space that marketed team has identified a couple of replacement tenants.
We think that there is a very good mark to market, there and I think Jamie we would be in a position by kind of the next quarter call to really frame out with the final plan as we have that renovation plans pulled together in price for the building which are very exciting.
Well, we also want to evaluate what the best financial outcome for Brandywine is as well.
Okay, what do they paying rent or like where do you think there mark to market.
There mark to markets north of 20%.
Okay.
All right and then.
It looks like as you look at your kind of speculative development alright, thanks speculative leasing pipeline. It looks like DC is kind of lagging the other markets can you just talk about what's in that number and what is it like a couple large leases that you need.
Maybe that's why is it chunkier or SDC, just kind of slower than what you've done some of these other markets I know its.
Let me than you thought.
No I think as Jerry outlined.
Theres still a 125000 square feet.
At 16 76.
In that leasing plan.
Left to achieve and then.
We've got some additional leasing in our suburban Maryland portfolio and.
The remaining.
The other buildings that we have in Tysons that 82, 60, Greensborough and 85 21 Leesburg Pike so.
So I get is there anything that's kind of falling out of bed. Since you made your first outlook or everything's kind of going as expected no. I think everything is kind of going as expected. It because 16 76 was program for the third and fourth quarter. The pipeline that we have is still tracking towards the that timeline.
And the other spaces in the other buildings.
We're really kind of 10 to 15000 square foot tendencies that again, I think just start to delay in as the year progresses.
Okay.
And then what are your big picture thoughts on supply and Austin I know, there's a lot of demand, but you got a certain pockets you guys think are starting to get a little risky.
We certainly if we will see on very continue to feel incredibly bullish on the southwest.
Primarily due to some of the the barriers to new construction. So I think were.
We're seeing tremendous pipeline of deals that are Garza development down the southwest.
Look I mean, there's there's theres a lot of square footage under construction in Austin I think the last numbers I saw where they were about about 60% pre leased.
The demand drivers still there seem very good.
So what are four points development kind of up and in the northwest. That's the one we're really tracking in terms of competitive supply Jamie, but certainly we feel good about our position with four or five and feel extremely good about will can convert Gannett Garza.
Okay, and then finally from me kind of Big picture on Northern Virginia, We keep hearing about the impact of agenda contract and what that will mean for office demand or maybe there's optimism it will pick up.
I'm curious are you guys are seeing on the ground.
If you thinking about the next kind of years so in that market.
Do you think you'll see it changes.
Demand there or just fundamentals.
Look I think from you know if you take a look at the.
Northern Virginia.
Hosted 4 million square feet of absorption.
One of the best years, they've had since I think 2006 with kind of pretty strong tech and cyber security demand, 71% of the job growth in the met DC area kind of floated into northern Virginia.
The so we're actually we're seeing rents being pushed on the new development projects, which is great.
Yes, Thats one of the things we take a look at 20 340 were given that large mark to market that George indicated.
And really not many large blocks of space available, particularly buildings that have the.
Hi level of structured parking that we have at that building, we think that there's a lot of green shoots that will further drive demand.
With the Jade I contract that maybe between Microsoft and Amazon Web search are looking for more space in the market.
You've seen a number of other major tenants kind of focus on.
The toll road quarter, I think anecdotally, what we're seeing Jamie even with the redevelopment of 16 76. It is a lot of big requirements. So many we've got proposals out the number pros, we have at or over 100000 square feet. So.
I think that marketplace from a demand perspective in terms of velocity of tenants and additional square feet looking for new homes is a much better landscape than it was last year, how that translates into net effective rent growth to the concession package I think still remains to be seen but the little.
Window, we have in first through 16 70 sixs.
In our pro forma ranked targets are being that we're keeping our capital costs right in line with our projections and so we anticipate being able to drive that too as I mentioned earlier at 9% return on cost.
This is motivated you to get bigger there I know you just did a big failed their to shrink.
Mark changed made that call.
No I think we're I think we're happy with our platform write down there now I think we continue to talk to.
Capital sources and other companies about other things to do in that marketplace, but right now the major folks in that market for us is to execute the rock point joint venture.
Efficiently and profitably.
Solve the 16 76.
The option pace for 2020 and really to.
As we get that does take a look and see what we plan on doing for future years.
Okay alright, thank you.
Thank you.
Thank you and I am showing no further questions from our phone lines and I'd like to turn the conference back over to Jerry Sweeney for any closing remarks.
Great well look everyone. Thank you very much for for participating the call. We look forward to updating you on our 2020 business plan progression in our April 1st quarter call. 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.
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