Brandywine Realty Trust's (BDN) CEO Jerry Sweeney on Q4 2016 Results - Earnings Call Transcript

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Brandywine Realty Trust (NYSE:BDN) Q4 2016 Results Earnings Conference Call February 1, 2017 9:00 AM ET

Executives

Jerry Sweeney - CEO

Tom Wirth - EVP and CFO

George Johnstone - EVP Operations

Dan Palazzo - VP and Chief Accounting Officer

Analysts

Jamie Feldman - BofA Merrill Lynch

Emmanuel Korchman - Citi

Craig Mailman - KeyBanc

Chris Belosic - Green Street Advisors

John Guinee - Stifel

Rob Simone - Evercore ISI

Mitch Germain - JMP Securities

Rich Anderson - Mizuho Securities

Jed Reagan - Green Street Advisors

Operator

Good morning. My name is Kayla, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Jerry Sweeney, you may begin sir.

Jerry Sweeney

Kayla, thank you very much. Good morning, everyone, and thank you for participating in our fourth quarter 2016 earnings call. On today's call with me today are George Johnstone, our Executive Vice President of Operations; Tom Wirth, our Executive Vice President and Chief Financial Officer; and Dan Palazzo, our Vice President and Chief Accounting 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 our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports filed with the SEC.

All right, as we normally do we'll start with a brief review of 2016 results, then provide color on the status of our 2017 business plan. For 2016 we really had a very strong ending. We met or exceeded almost every one of our operating, leasing and capital goals. On the investment front 2016 was a seminal year as well and we're starting off 2017 with solid operational execution and increase sales guidance.

From an investment standpoint we significantly exceeded our original 2016 disposition target of $450 million and substantially completed our multiple year portfolio alignment strategy. This disposition program resulted in a stronger growth portfolio, lower for capital obligations and assisted in achieving our intermediate term balance sheet targets.

More importantly the success of our sales program enables us to meet our overriding objectives of growing earnings, growing cash flow, and maintaining a strong balance sheet. As an example, our 2017 guidance represents over 6% FFO growth rate, a 10% increase in CAD and a balance sheet with $400 million of less debt than we started 2016 with.

During the last 90 days we also made excellent progress I’ll touch on later FMC Tower with the office component reaching 96% leased and having that put substantially to bed as we entered the close of the year.

So with that brief overview I'll start with the synopsis of our 2016 business plan and look ahead and then I'll turn it over to George for a review our leasing activity and Tom to review our financial results and our 2017 financial plan.

From an operational standpoint we had an excellent year and exceeded many of our key targets namely spec revenue, tenant retention, cash and GAAP mark-to-market, as well as cash same-store NOI. We leased over 4.5 million square feet, slightly exceeding the leasing activities of the past few years. We ended the year at 93.9% occupied and 95%, 1% leased up 40 and 70 basis points respectively from year-end 2015 levels.

Our GAAP mark-to-market was 12.9% for the quarter and 11.6% for the year almost doubling our target range of 5% to 7%. Our cash mark-to-market was 4% for the quarter and 2.8% for the year and also exceeding our targeted range. Tenant retention for the quarter was 87% and 70% for the year again above our original business plan forecast of 65%.

We generated $28.3 million of speculative revenue during the year which exceeded our target plan of $27.8 million. Our cash same-store NOI increased 8.6% for the quarter, 4.4% for the year well above our targeted range of 2% to 4%.

Our leasing capital came in at 244 per square foot well within our targeted range and increasing our mark-to-market rents while maintaining our deals capital spend has allowed us to increase our net effective rents by 5% year-over-year.

And looking at our balance sheet, our sales significantly accelerate the execution of our balance sheet strategy. We reduced our net debt to EBITDA to 6.6 times in 2016 year-end from 7.1 at year-end 2015. We reduced our net debt to total assets from over 42% at the end of 15% to 38% at the end of 2016. We reduced our weighted average cost of debt from 4.9% at year-end 2015 to 4.5% at the end of 2016.

We also ended the year with a net cash position of $194 million with zero balance on our $600 million line of credit. We have reduced our total debt load by 15% during the year from $2.4 billion down to $2 billion today. So we achieved many of these balance sheet goals while significantly shifting the composition and growth profile of our operating and development platform.

On the investment front as I mentioned earlier, we significantly exceeded our 2016 original business plan goals by $410 million, selling $860 million at an average cap rate of 7.3% GAAP and 7.2% cash. The average occupancy of the properties we sold during the year was just shy of 96% so higher than our overall portfolio which really does amplify the strong performance embedded in our year-over-year occupancy gain.

The timing of several transactions under contract caused us to be below our adjusted third quarter target of $900 million of sales for the year. The $40 million of sales we anticipate the close in Q4 will now occur in the first quarter of 2017. We've already closed $50 million year-to-date and have an additional $120 million under contract at cap rates well within our guidance range.

Due to the timing of these dispositions, we are increasing our 2017 net disposition guidance by $100 million from $200 million or a net increase of $60 million. With our recent land sale at Concord and the building sale at Concord we have also completed our exit from California.

As indicated in our press release, we've updated our previously issued 2017 guidance range of $1.35 to $1.45 per share to $1.35 to $1.42 per share. The lowering of the upper range by $0.03 is due to the increased volume and the timing of our original 2017 disposition assumptions. We had originally projected $100 million and projected those sales to occur in the second half of the year. Our new guidance range is $200 million with $143 million scheduled to close in Q1 which create a $0.03 solution of our original business plan assumption of the lower volume of sales occurring in the second half of the year.

So now looking quickly at 2017, year-end occupancy levels will continue to improve to a range between 94% and 95% and our leasing levels will improve to between 95% and 96%. We're forecasting a 2017 tenant retention rate of 68%. We expect GAAP mark-to-market to range between 5% and 7% and cash mark-to-market to range between 8% and 10%.

Our average leasing capital per square foot will also improve 8% from the 2016 actual of $2.44 down to $2.25 per square foot per lease year. The combination improved mark-to-market and reduced deal spend translates into an average 2017 net effective rents improving by 10% over 2016 levels. We're also projecting a speculative revenue target of $28.7 million which is already currently 80% executed.

Same-store numbers will range between 0% to 2% on a GAAP basis and an extremely strong 68% on a cash basis. We will redeem the $100 million of preferred stock in April of 2017 for cash and as Tom will detail we'll be refinancing our $300 million of unsecured bonds that carry a 5.7% coupon with a combination of cash and debt in the second quarter.

Some quick notes on several development projects. Our 1919 Market Street joint venture with CalSTRS and LCOR is now fully opened for business. The office and retail component is 100% leased and occupied. The 215 car garage is already averaging 90% occupancy per day and we are still projecting a free and clear return of 7% and the apartments are already 76% leased and 68% occupied.

As per our original plan several years ago, we exit our apartment joint venture with Toll Brothers netting $27.2 million in cash along with achieving a $27 million reduction in debt attribution and posted a gain of $14.6 million with an IRR of 18.6%.

Our interior renovations at 1900 market are substantially complete. We remain zoning for approval for some exterior improvements which we hope to wrap up over the next couple of quarters. Construction remains on schedule and on budget for 111,000 square foot fully leased build-to-suit property in King of Prussia, Pennsylvania. That project is expected to be completed in the second quarter of 2017 with total construction cost of $28.7 million and it will generate a 9.5% free and clear return on cost.

As I mentioned earlier FMC Tower experienced great success in the last 90 days. We met our key goal of leasing up the office component by year-end 2016 and are now 96% leased. The office portion is now complete and we've also commenced operations this month on the residential component.

We also announced the signing of a Michelin-rated chef to open a world-class 3,000 square foot restaurant in the next several months. We are forecasting the office component to stabilizing Q4 2017 and our residential component to be stabilized in Q1 2018.

Our project at Schuylkill Yards is - zoning ordinances have been introduced, design planning work continues and we anticipate that project moving forward to the zoning process in the next quarter. We continue to advance planning and predevelopment efforts on our several of our development sites and are still projecting in our 2017 business plan, a $50 million construction start this year.

At this point, George will provide an overview of our fourth quarter performance, some color on 2017 and will then turn it over to Tom for a review of our financial performance.

George Johnstone

Thank you, Jerry. Another strong quarter, our leasing teams generated tremendous amount of activity during 2016 that allow us to meet or beat our operating targets. Our activity in the fourth quarter has the 2017 business plan in great shape as I’ll touch on further on a moment.

All our markets continue to see good levels of activity. The pipeline excluding development properties remains at 1.7 million square feet with 415,000 square feet in lease negotiations. During the fourth quarter we generated 94 space inspections, totaling 750,000 square feet which represents 80% of available square footage.

Turning to our three core markets, our CBD Philadelphia portfolio at 98% leased is outpacing the market by 840 basis points. Overall absorption of Philadelphia was 152,000 square feet for the quarter and 207,000 square feet for the year. Leasing activity from outside the CBD has been 21% over the past two years and Brandywine has benefited from that migration including FreedomPay's lease at FMC signed during the quarter.

Forward lease expirations on our CBD portfolio have been reduced to 136,000 square feet or 2.5% in 2017 and 453,000 square feet or 8.5% in 2018. Leases discussions are underway with most of these Tennessee.

Leasing spreads also remain strong. During the quarter our leasing spreads increased 8.7% on a GAAP basis and 7.3% on a cash basis in our CBD portfolio. The Pennsylvania suburbs also continue to perform well. We ended the year 94.5% leased which exceeds the market vacancy of 11%, approximately 50% of the regional vacancy is isolated in one King of Prussia building where eBay vacated earlier in 2016.

As we've discussed on previous calls we have a few larger blocks of space coming back in the second and third quarter in Radnor. We continue to market these spaces to both existing tenants and required - for expired - required expansion needs and prospects coming new to the Radnor submarket. Leasing spreads during the quarter within the suburban portfolio were 17.3% on a GAAP basis and 4% on a cash basis.

Turning to Metro DC, the regions in the midst of a robust expansion driven in large part by the private sector. Over 72,000 jobs were added during the year with regional unemployment at 3.9%. Another 51,000 new jobs are forecasted for 2017, regional growth is expected to be driven by the professional and business service sectors.

Our Toll Road properties at 92% leased outpaced the market by 1200 basis points. Rent growth remains challenging due to the level of market vacancy, tenants are continuing to focus on amenity rich properties offering close proximity access to the Metro. We reduced our forward rollover risk to approximately 100,000 square feet or 3.3% in 2017.

In 2018, Northrop Grumman's full building Tennessee in Dulles Corner expired in the third quarter accounts for over half of our 476,000 square feet or 16% rollover. Market dynamics in Austin continue to fuel office demand. Fourth quarter absorption of 216,000 square feet marked the 24 consecutive quarter of positive absorption and absorption for the year was approximately 1.8 million square feet.

Although 872,000 square feet of space was added during 2016, vacancy fell 40 basis points to 8.3%. Our wholly-owned Broadmoor properties are 100% leased and activity on the one building being redeveloped remain steady. Our joint venture portfolio is 95% leased and continues to experience very favorable leasing spreads 10% to 12% on a GAAP basis and 6% to 8% on a cash basis.

In terms of the updated 2017 business plan, we've maintained all of our original targets but we made additional progress since the last call. Our 2.2 million square foot leasing plan will generate $28.7 million of spec revenue. As Jerry mentioned, we're 80% complete and 60% complete from a square footage perspective. This time last year we were 55% and 38% complete on comparable revenue on square footage plan.

So to include we're very pleased with our operating performance for 2016, the momentum it is provided going forward, and the additional achievement on the 2017 business plan.

And at this point I’ll turn it over to Tom.

Tom Wirth

Thank you, George.

Our fourth quarter net loss totaled $14.1 million or $0.08 per diluted share and our FFO totaled $63 million or $0.35 per diluted share. Some observations for the fourth quarter, same-store growth rate for the fourth quarter were 2.2% GAAP and 8.6% cash both excluding net termination fees and other income items. We've now had 22 consecutive positive quarters on GAAP metric and 18 for the cash metric.

G&A expense sequentially rose from $5.5 million to $5.9 million and our fourth quarter G&A was below our 6.1 million reforecast primarily due to lower professional fees. Our full year G&A totaled $26.6 million.

FFO from our unconsolidated joint ventures totaled $9.2 million above our fourth quarter projection by $0.7 million primarily due to improved leasing at our Austin joint venture. Interest expense totaled $20.4 million, a $0.4 million sequential decrease primarily due to the deconsolidation of 3141 Fairview Park in October.

For the year our 2016 cash interest expense totaled $97.5 million which is 20.6% below 2015. Other income totaled $1.7 million or $0.9 million above our projection primarily due to real estate tax rebates in our Philadelphia region and our nonrecurring.

Third-party fee income for the year totaled $26.7 million, $2.7 million above our forecast and third party expenses were $10.3 million or $1 million above our forecast. The $1.7 million outperformance is due to increased development fees and leasing commissions primarily generated from our Austin joint venture.

Unimproved real estate, in accordance with the NAREIT definition, we included a $9 million gain on the sale of unimproved land in Oakland, California partially offset by impairments on unimproved land totaling $5.6 million. The land impairments are generated from our land holdings in New Jersey and Richmond and net effect of these items is $3.4 million - resulted in a $3.5 million net gain.

CAD for the quarter totaled $41.2 million representing a 68.8% payout ratio which included 10.9 million of revenue maintaining capital. We also incurred $5.5 million of revenue creating capital expenditures. For the year CAD totaled $152.4 million representing a 73% payout ratio.

Looking forward to 2017 we note the following, for property operating income excluding term fees, third-party and other income for the quarter will be approximate $72 million to $73 million. That will include approximately – we anticipate a slight loss on NOI due to the accelerated sales forecasting for the first quarter.

G&A expense consistent with prior years, our first quarter G&A expense will be higher to the timing of expense recognition and will be approximately $8.5 million and the full-year will continue to be between 27 million and 28 million. Other income we expect to be 600,000 for the quarter and full-year $3 million.

We expect $101.5 million in term fees for the first quarter with our full year estimated $3 million. Interest expense will increase to approximately $22 million primarily due to the reduced capitalized interest. For full-year 2016 capitalized interest expense for 2017 should range between $85 million and $86 million and capitalized interest for 2017 should approximate $3.5 million, a $9.3 million reduction from 2016.

FFO contribution from our unconsolidated joint ventures should total $8.5 million for the quarter. And we're project our joint ventures will contribute approximately $36 million in 2017. Third-party fee income should approximate $25 million for 2017 and $8.5 million in related expense.

Looking at our business plan assumptions, revised our sales to $200 million and we've got 85% of that either sold or under contract today. Unsecured bond maturity in May 1 at 5.7% will be paid off. We will also look to redeem at car our preferred shares at $100 million during April and then we plan to finance that with cash on hand and also issue a bank term loan.

We're anticipating a term loan between $150 million and $200 million to partially fund those maturities and redemptions and we've increased our assumed rate from 3% to 3.25%. We don't have any contemplated speculative acquisitions in our guidance while we have some land sales under contract we've not programmed any of that FFO into our 2017 guidance since a gain or loss and we should have $178 million weighted shares for the year and that includes no buyback or ATM activity.

As outlined in our 2017 guidance assumptions, we've highlighted that we anticipated an additional $100 million of sales. In our initial guidance we had $100 million of sales at $4.0 million of dilution.

Based on our revised guidance to $200 million, we believe that most of those dispositions between 70% and 75% will occur during the first quarter and only 15% to 20% occurring during the second half of the year. As a result, the increased sales volume net of fourth quarter sales shortfall and the accelerated timing of our 2017 disposition activity will approximate $9 million of dilution. Based on the performance of the balance of our portfolio being in line with guidance, that resulted in the reduction in the upper end of our FFO guidance.

Looking at our capital plan, we continue to project 2017 CAD between 71% and 64% and we reflect $35 million of rough - roughly of revenue maintaining CapEx get to the midpoint of that guidance. Primary cash uses will be $155 million of development, aggregate dividends totaling $117 million. We still anticipate putting $23 million into our capital joint ventures and revenue creating should total $38 million for the year.

We plan on paying off the bonds as I mentioned redemption of the current shares at $100 million and we did retire $27 million of debt attribution as a result of the Parc at Plymouth meeting joint venture sale and we have 5 million of mortgage amortization.

Looking at the sources we anticipate $192 million of cash flow from our properties after interest expense, $200 million of asset sales. Our bank term loan used $250 million and $15 million of JV financing on Encino Trace which we would anticipate putting on during the first half of the year. Based on this capital plan and using $250 million term loan we will have cash balances approximating $80 million to $85 million at year end. We also project our debt-to-EBITDA to remain in the mid-6 area.

In addition our debt to GAV will be approximately – just below 40%. We continue to be mindful of the interest rate environment and we're considering a number of financing options besides the ones mentioned previously which could also include taking a look at not just our 2017 maturities but the 2018 also.

I will turn the call back over to Jerry.

Jerry Sweeney

Great, thank you. And George, thank you as well.

So to wrap up, 2016 really did close out strong. It was a transformational year in terms of our operating platform and setting a much stronger growth platform going forward. So really do anticipate that 2017 will be a strong continuation of our drive towards growing operating cash flow and growing NAV and our focus on improving forward growth, reducing for capital spend will generate solid NOI growth, strong same-store performance and positive mark-to-market.

Just finally, we will be hosting an Investor Day. Save the date cards will be going out shortly. There will be an evening event on the night of May 9 and the Investor Day will be May 10. So please keep an eye for those save the date notices.

And with that, we would be delighted to open up the floor for questions. We ask that in the interest of time, you limit yourself to one question and a follow-up. Kayla, please open up the line please.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Jamie Feldman from Bank of America, Merrill Lynch.

Jamie Feldman

Thanks. Good morning. So I'm hoping you can provide a little bit more color. I think you had mentioned some Radnor expirations; and Northrop as some kind of leasing you still have to get done. Can you talk about progress for that space, and then also what's in your guidance?

George Johnstone

Sure. So in Radnor we've got really three larger blocks. So they all expire in July of 2017. One of those is the 50,000 square foot lease that's moving out of the portfolio to King of Prussia. The other is FreedomPay which will be moving down to FMC. And then the third is HTH which is which is moving and doubling in size by going to the build-to-suit that we're doing for them in King of Prussia.

So because of the fact that they all expire in the third quarter and knowing that the construction turnaround will take a couple of months, we really don't have - we have a little bit of space but not much of that space coming back into the plan late in the fourth quarter.

But we feel great about having inventory in Radnor. It's one of the things that we haven't had for a number of years and with our additional lease up in King of Prussia, we think we're sitting in a good spot in the Pennsylvania suburbs.

Northrop Grumman is an 18 expiration, it's our largest expiration at 18. They continue to go through a couple of extensions on a short-term basis. So we now have them expiring Q3 of 2018 and we continue to have a dialogue but we know we’ve got a little bit of runway on that transaction.

Jerry Sweeney

And Jamie just to add on to George's comments, one thing that’s actually interesting in the Pennsylvania suburbs now is you've really seen a pretty steady resurgence of leasing activity and increasing rents in King of Prussia and Plymouth Meeting. So I think that's historically how things have gone in this market in terms of one the core markets of Radnor, Conshohocken get very tight, typical it will be a certain number of tenants would look to migrate outside from a price point standpoint.

So we’re actually having been in the high 90s in Radnor for a number of years. I think our leasing team is actually pretty excited about the prospect of getting back some very marketable space to kind of release that and we think will be a good mark-to-markets.

Jamie Feldman

Okay, that's helpful. And then my follow-up. You had commented DC -- I think you used the term robust. Can you talk more about what you're seeing there, and what your expectations are going forward?

Jerry Sweeney

Yes, I mean we’re seeing a lot of increased activity. I'm not sure that we can necessarily say that it’s all due to the election but just the overall deals and more importantly the size of the deals in the marketplace has kind of picked up in the last 90 days. I mean we're seeing anywhere from 60,000 to 400,000 square foot transaction in the Greater DC markets. So again our largest block of vacancy in the Toll Road is about 30,000 square feet.

So the team has done a good job in kind of getting those back to nine handle on occupancy and we kind of just – we've amenitized the Dulles Corner portfolio. So we’re feeling good about where we sit and we're feeling good on some of the increased activity we're seeing elsewhere in that marketplace.

Jamie Feldman

And what sectors are you seeing mostly?

Jerry Sweeney

Mostly private sector, I mean so it’s not really defense or contract driven more private sector and professional services.

Jamie Feldman

Okay. All right, great. Thank you.

Operator

Our next question comes from the line of Emmanuel Korchman from Citi.

Emmanuel Korchman

Hi guys, good morning. If we just look at two things: the dispositions -- just help us understand what changed to get those pools. I understand the part of them being later from 2016 into 2017, but what made them move earlier from late 2017 to early 2017?

Jerry Sweeney

Yes, Manny a great question I think, as you know from our previous calls we always keep a fairly sizable pool of assets in the market for we call price discovery. And when we look back in October at kind of the visibility we were seeing on forward sales activity, I think we were seeing a fairly limited pool that was circling at price points that were prior below our overall expectation. And I think what we’re really saw happened in December was people and again a lot of the assets we're selling are assets we've always considered to be non-core that there were spot opportunities to accelerate that.

So for example, our team did really nice job in our Concord, California asset kind of restructuring a major lease. That lease required some get back of space and had a pretty forward capital spend for us. So we looked at what we thought the present day that property was to us and the team we reintroduced the property to the market and because of some connections point with that tenant some other buildings and generally what's happened in that marketplace, we are able to find a buyer who wanted to close pretty quickly on the asset. And that certainly accelerated a big asset sale that we would think would be later in the year.

Same thing with couple of our Pennsylvania suburban assets, we had one asset that an office building about 130,000 square feet that our expectations will be marketing in the fourth quarter. We received a number of - but we got some good leasing activity done. We received a very qualified reverse inquiry to sell that building that will close sometime in February at a very good cap rate and a good sale price for us.

And then we had a couple of kind of lower quality sales that we really weren't sure where the buying pool would be. One in Maryland for example it's really a land redevelopment, it's older office product really kind of functionally obsolete. So we were kind of evaluating take it through the rezoning process, rezoning it for residential and for retail and in as much that's not really a core market for us. We started to research the market and found the buyer who felt that was a good opportunity for them.

So I think we just did - we were getting feedback on some of the assets we had for sale in the early stages of three marketing where we got some pretty good traction. And certainly not knowing our interest rates are certainly taking a hard look at our capital plan, we’re between our preferred stock and the bond maturity. Our main focus was really to generate good liquidity while at the same time reduce our exposure to these non-core assets. So that answer your question?

Emmanuel Korchman

It does, thank you. And Jerry, maybe one more for you. If we look at -- if we go through your comments and we look at developments you have under plan, it sounds like starts in 2018 could be pretty big. Am I understanding that correctly? And how do you think about debt funding when the time does roll around?

Jerry Sweeney

I think when we look at - well 2017 we think will hopefully get one build-a-suit moving forward. In 2018, I think it's purely Manny a function of where we see the market. I think what we’re doing right now is what is on Schuylkill Yards project or the Broadmoor development in Austin, with Knights Crossing in New Jersey, I think we're just really focusing a lot on pre-marketing, making sure that we have our approvals perfected.

We're far enough along in the design development process so we can effectively price the assets from a construction standpoint. And then see where the market goes. I think you know we certainly hope we'll be able to get some things done in 2018 but we’re very carefully watching all the macro forces, what’s happening with the construction pricing and the tenant demand drivers really for what we want to do in 2018.

Emmanuel Korchman

Great, thanks guys.

Operator

Our next question comes from the line of Craig Mailman from KeyBanc.

Craig Mailman

Thanks guys. Just to follow up on the sales question, Jerry, you noted you guys always have a decent amount in the market. I'm kind of surprised on the timing here. What's the possibility that you guys could ramp dispositions even further? And what do you think timing on that could be, given what you have in the market?

Jerry Sweeney

Craig, great question. I think when we took a look at, knowing full well that we were running ahead in terms of sale closings than we anticipated back in October last time we had our call, we did spend a lot of time focused on what we really thought we could deliver in 2017. So when we program that $200 million that really does reflect what we have kind of under letter of intent what we anticipate closing as Tom touched on kind of in the next 60 or 90 days.

And that's really what we see on the horizon, I mean the good news about what we did in 2016 as we sold a lot of the assets that we were planning on selling. So our non-core asset pool is really shrinking fairly dramatically, doesn't mean won't be opportunistic, but the reality is that not knowing what the investment sales market would be, I think we just opted from a liquidity and from a portfolio pruning standpoint to accelerate some sales.

So as of right now, we don’t really anticipate anything material be on the $200 million happening in 2017. But one of the great things about this business as we know by having things in the market we’re always positioned to take advantage whatever opportunities come up. If someone comes in like we did with one of property in Philadelphia, in the Pennsylvania suburbs that was a very qualified reverse inquiry.

I think we take a look at that and compare with that pricing would be versus what the whole value would be to the company.

Craig Mailman

What do you think the dollar value of your non-core portfolio is at this point?

Jerry Sweeney

I think we are down to net $200 million range.

Craig Mailman

And then just one follow-up here. George, you pointed out that you guys are well ahead on the business plan versus where you were this time last year. Just curious what kind of kept you hesitant to move that bogie a little bit higher.

George Johnstone

I’m sorry, the last part there Craig.

Craig Mailman

Just what kept you from moving your guidance range a little bit higher, given how far along you are, at this point in the year?

George Johnstone

Well I think part of it is more the timing of when we’re getting certain spaces back. So the fact that the Radnor expirations as an example, kind of hard to move the spec revenue contribution if you are only getting space back June 30, you know you've got to have a prospect, you got to have 30 days for permitting 90 days or construction. So your window of spec revenue gain is the starts to close so.

And I think most of the renewals that we think we're going to do are pretty much done at this point. We've got a little bit of renewal activity left but for the most part with the renewals being done, you now kind of down to just the vacant space and then the question is prospecting, permitting and construction.

Craig Mailman

Thank you.

Operator

Our next question comes from line of Chris Belosic from Green Street Advisors.

Chris Belosic

Good morning, guys. It looks like you guys put up a pretty strong quarter of leasing in 4Q, and you're getting pretty full in your portfolio. Are there any places where you think that maybe you guys can start really pushing rents that will perhaps exceed some of your expectations that you are starting to look at for 2017?

Jerry Sweeney

Look we discussed that dealing, the - I do think that there are really some pockets within the portfolio, look certainly I think we really been pushing rents quite strongly in Austin and I think the supplemental lays out some of the mark-to-markets but we really had the wind in our sales in terms of having great inventory and a great team on the ground to really capitalize on what we see is a very strong demand drivers in the market.

So we continue to push the envelope with each lease proposal in Austin. And I think we do the same thing in Philadelphia, University of City I think we're very pleased with the traction we're getting there. And again from our perspective it doesn't matter pushing rents and also reducing concessions in terms of TI and free rent, and also lengthening lease terms and getting bigger bumps in.

So that's one of the reasons we cite the growth in net effective rents we've had because that's really what we kind of key in on. So we might have to on a certain transaction and not necessarily push the rents for the full envelope that we want with a certain tenant but maybe we get 3% annual bumps over 10 year term versus 2.5 or maybe we put in $35 versus $40 in TI.

So our leasing teams and frankly the quantitative tool we use internally to evaluate effective returns on leases is very much geared to kind of quantify all those different puzzle pieces that come to the right result but I think it will be interesting as we are pretty excited as George mentioned by getting some space back in Radnor. This market is tight as a drum and our expectation will be able to get some very good leasing activity and continue to push rents in this submarket beyond their historical highs.

Chris Belosic

Great, thanks. And then just one follow-up with that. Are you seeing any changing on the tenant decision-making end of things related to your ability to start getting some leasing done - both in Radnor and throughout your portfolio?

George Johnstone

This is George, I think the overall tenant decision timeline has started to compress a little bit. I think once you kind of get through the fourth quarter and holidays and businesses having their own internal budgets established, I think tenants are starting to make decisions on a more timely basis.

Chris Belosic

Okay. Thanks, guys.

Operator

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

John Guinee

A couple quick questions. First, I guess Jerry or Tom, you quoted a $2.25 per square foot, per, year, re-leasing cost. What is that number if you also include your revenue creating CapEx as opposed to just revenue maintaining CapEx.

And then the second question would be, help us understand to see a little better. Private sector job growth is not translating into decreased vacancy, and you’ve got a lot of government oriented headwinds, cap and balance is still in place. During the swamp its getting a lot of press; freeze the footprint still exists with the GSA, and there's a hiring freeze by the new administration. So my question on releasing costs and the other question on the DC marketplace.

Tom Wirth

Okay. Let me start off with the DC I think John our perspective in our Northern Virginia and Maryland and DC portfolio is just stay very much in front of current leasing activity. There is certainly a lot of I think inflicting data points and macro level. We've talked to some of the brokerage firms down there and even to our own leasing team. I will tell you there is a level of optimism that I haven’t seen in a couple of years in terms of how they view forward leasing activity will progress during 2017 and 2018.

There are as George alluded to a number of larger private-sector employees that appear to be taking down blocks of space in the Toll Road corridor where we have a largest asset base. So certainly to the extent that I think those larger blocks get taken for market chatter, I think that does tighten that market up significantly at least in the short term and we're sitting there with our portfolio of having our largest block is about 30,000 square feet.

So I think our view on the market is the people who are involved every day are feeling more optimistic so I think that has yet to translate into defined activity. So given that I think our focus remains on, let's keep our portfolio lease let's stay abreast of all the activity in the market and see what happens over the balance of 2017 and 2018.

George Johnstone

And John its George, I think on the CapEx per foot per year, I mean if you’ve trolled the revenue creating deals in the mix it probably adds $0.50 to $0.75 to that metric.

John Guinee

Great, thank you very much. Nice quarter.

Operator

Our next question comes from the line of Rob Simone from Evercore ISI.

Rob Simone

Hi guys, good morning. A lot of the questions I had are already been answered. But at a high level, you guys are incredibly levered to the Philly CBD now. And the market's been going through some pretty incredible rent growth, and you are realizing that through your mark-to-markets today. But could you guys maybe share some of your high-level thoughts on market rent growth going forward, maybe beyond 2017, now that most of your business is locked in for the year?

Jerry Sweeney

As we look at Philadelphia, really kind of do view it is as almost three emerging submarkets with kind of the same but a little bit different demand drivers. We have - starting off kind of West moving East, University City for us has been a stellar performer. We've been able to continue to increase rents, so as we look forward over the next couple of years, we think it will be able to certainly achieve the level of rent growth we had over the last couple of years.

The Market Street West corridor, we've had 4% to 5% rent growth and we’re not really seeing anything that would dissuade us from us being – to achieve that. When we look at the Logan Square section, we do have some rollover coming up there in the next 2018 and 2019.

So I think there were being much more forward focused in terms of trying to lock down some early renewals on those early renewals we’re still getting very nice cash mark-to-markets and getting in between 2% and 2.5% annual rate increases, extending terms doing blends and extends that have really worked out very well to our benefit.

One tenant, in particular, I think the team has done a great job on getting it a long-term extension done today that enables a tentative refit their space and enables us to move our market rents up – George, what, a couple bucks a foot?

George Johnstone

Yes, I mean this is a 2021 expiration who obviously wants to take advantage of access to capital a little bit earlier kind of redo their space. They're coming off of a 15-year lease that was done under the old ownership of the property. And they feel that - they really need to kind of move now to kind of help them attract employees.

So we got find the construct that works for both of us to lock it away. I think as Jerry mentioned, the annual escalators that we’re getting I think - we expect the market to move at a similar pace if not better than the annual escalators we're getting in our rent stream.

Rob Simone

Great guys. Thanks a lot.

Operator

Our next question comes from the line of Mitch Germain from JMP Securities.

Mitch Germain

Good morning. Tom, I think you mentioned a bit of a shift or a change in your lending assumptions for the term loan. Maybe if you could just provide some perspective on what the discussions you're having with the banks.

Tom Wirth

Sure Mitch, it’s a - we gave the guidance back in October and since then the rate curve has moved a little bit even on the shorter end. So the spread we've been talking about hasn’t really changed. The demand is still there, we just felt like going up an extra quarter point in terms of thinking about the all in cost for any kind of term loan we do this year.

But it's really the demand is there, the banks are very supportive I just think the curve has moved a little bit and the spreads really stay stagnant in terms of our term loans growth.

Mitch Germain

Got you. And then, Jerry, I apologize if you already answered this, but are there any markets that you would consider doing speculative development at this juncture?

Jerry Sweeney

No.

Mitch Germain

That was quick, I appreciate…

Jerry Sweeney

No, I think it’s the time - look I mean there is a lot of velocity in the number of markets, but look frankly I think with the price we have on the drawing boards if we can attract tenants from a preleasing standpoint given their design quality, their efficiency, their locations, that’s actually telling us something about the market and it's a reality we should face before we put the shovel on the ground.

So as we look in and discuss and currently, with our development operating teams we're not really focused on any speculative development whatsoever.

Mitch Germain

Thank you, good quarter.

Operator

[Operator Instructions] Our next question comes from the line of Rich Anderson from Mizuho Securities.

Rich Anderson

Good morning and great quarter. Of the $200 million of dispositions - don't know if you said this, and I apologize if you did. But would you - you mentioned, Jerry, in an answer to another question that you estimated about $200 million of remaining non-core in your portfolio. So how much of the $200 million that you're planning to sell now is actually non-core, and how much is it that reverse inquiry type of stuff?

Jerry Sweeney

Almost everything we have on the market we're projecting to sell in 2017 Rich we view is kind of non-core.

Rich Anderson

Okay. Good enough. That's all I need. And then second question is the typical dividend question. Aside from - we all know it's a Board decision, and you'll get to at some point - but last year, a small but I would call symbolic increase to your dividend. How do you feel about your cash flow position today, taking into account the dispositions and everything else that you have to deal with, the preferred redemption; and thinking again about raising the dividend, even if slightly, this year, similar to last year?

Jerry Sweeney

Look I think we’ve been very pleased with the rate we've been able to grow operating cash flow. In fact we had a good year in 2016 we're projecting essentially a 10% increase in an operating cash flow before dividends and development for 2017. And I think the Board reviews that metric every quarter and we sit down and talk about forward rollover exposure like some of the points that George touches on which is - what’s our rollover look like in 2018 and 2019, how we’re assessing the markets, what we look as our forward development spend, what's our revenue creating and maintaining capital.

All those pieces go into the mix in terms of focusing the Board on what they want to do is far as the dividend goes. The Board as they did in 2016 is very keen on continuing to grow return to shareholders, they simply want to make sure when they make that decision that it's rooted for the long-term and that we effectively assessed all the risks on our landscape in terms of capital cost. So things like paying off the preferreds, reducing our leverage in 2016 by $400 million, the plan was paying off the preferreds in cash, reducing the $300 million bond level through a bank term loan that again has a deleveraging aspect for us.

So the reality is I think the Board looks at the operating cash flow, growth profile of the company with our revised portfolio and feels pretty good about it. All that being said, it's their decision we view it every quarter but they recognize the importance to our shareholders of showing continued growth in both the dividend stream and our operating cash flow.

Rich Anderson

Okay. Good enough. Thanks very much.

Operator

Our next question comes from the line of Jed Reagan from Green Street Advisors.

Jed Reagan

It's Jed here with Chris. You mentioned the 2018 bonds that are maturing. Just what are your early thoughts about potentially paying those down or refinancing? And could you get at those early? And then just in general, as we look out to the next year or two, do you see the debt to EBITDA changing from that mid-6 range?

Tom Wirth

Hi Jed, it's Tom. I think on the 2018 bonds they mature at a rate just under 5%. So I think currently we would have to do may call on them. I think we’re really going to keep looking at the curve and talking about whether we think rates could start to move substantially higher from where they are right now. It's not really that compelling based on where we think we could do a 10-year now if we wanted to take them out.

So I don't think we have a set plan on them yet, but we are monitoring it to see where we think rates could go and whether we would opportunistically take them out early. On the debt to EBITDA I think this year when we take a look at 2017 while we have some cash ramp up and some NOI ramp up and EBITDA, we do have a capital spend that's still roughly in line with the amount we’re selling.

So we still don't see the debt to EBITDA moderating. I think as we look out into 2018, we do start to see it come down significantly as we get into the second half of the year, especially with the ramp up of the residential at FMC be fully stabilized after the first quarter, as well as all the NOI from the lease up coming online later this year and into next year. So 2018 starts to really show migration down.

Jed Reagan

Okay, that's helpful. And just curious how pricing for some of the recent non-core asset sales have come in, versus your initial expectations. Have you found any changes in buyer interest or cap rates for some of these, especially some of the lower-quality assets you are selling? And then are you finding transactions are taking longer to close?

Jerry Sweeney

Lots of points in that Jed, so let me try and attack it. I think look certainly when we took a look at for example the property we sold down in Maryland, I mean that was essentially that I had touched on earlier a land redevelopment play. So we had essentially concluded that given the physical plans and the location of those older buildings, it really wasn't worth the investment to put money into it to retool at his office.

So we had always carried that as essentially land redevelopment play. I think with the Ex-Dulles at California we knew we had some bank risk with that major tenant. So from our perspective the pricing we’re able to achieve was pretty much in line with what we thought it would be as the negotiations with the tenant clarified. And frankly we viewed that transaction which went off at a fairly low cap rate bear price per square foot given where the leasing structure was as - and necessary sale for us to make was non-core. We don't have a lot of marketing heft in that marketplace not a lot of tenant deal flow.

And our perspective was that for us to re-tenant that vacant space would cost us more money than liquidating that position today. But on a lot of the other sales I mean I think we’re - when I look at the cap rates we’re able to achieve and we sold a lot of properties like that in 2016 and we closed right around 7.2% to 7.4% cap rate on average cash and GAAP, what we have under agreement now is below our targeted range in most cases and we have couple of cases where it was above basis on leasing statistics.

I think the market we're trying to sell assets that are $830 million in size almost by definition the type of buyer we're dealing with is one of that's going to be relying on private equity, friends and family equity, higher levered returns, finding bank financing, mezz landing, all those things take time and that was one the ingredients behind or one of the motivation frankly behind us trying to clear the deck of lot of these assets sooner rather than later, just not having a lot of visibility into the depth of some of these financing markets going forward.

Jed Reagan

Understood. Okay. Thanks very much.

Operator

And there are currently no more questions in queue. I hand the call back over to you presenters.

Great. Thank you very much for joining us for this call. As I mentioned we are looking forward to hosting an Investor Day in Philadelphia and will be circulating save the date cards shortly on that. Thank you very much.

Operator

This is the end of today's call. You may now disconnect. Have a great day.

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