Brandywine Realty Trust (NYSE:BDN) Q1 2017 Results Earnings Conference Call April 20, 2017 9:00 AM ET
Daniel Palazzo - CAO and VP
George Johnstone - EVP of Operations
Jerry Sweeney - CEO, President and Trustee
Thomas Wirth - CFO and EVP
Craig Mailman - KeyBanc Capital Markets
Emmanuel Korchman - Citigroup
James Feldman – Bank of America Merrill Lynch
John Guinee - Stifel, Nicolaus & Company
Jed Reagan - Green Street Advisors
Michael Lewis - SunTrust Robinson Humphrey
Mitch Germain - JMP Securities
Rich Anderson - Mizuho Securities
Rob Simone - Evercore ISI
Bill Crow - Raymond James & Associates
Good morning. My name is Tabitha, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Brandywine Realty Trust First Quarter Earnings Conference Call. (Operator Instructions) Thank you. I'll now turn the call over to Jerry Sweeney, President and CEO. Sir, the floor is yours.
Tabitha, thank you very much. Good morning everyone, and thank you for participating in our first quarter earnings call. On today's call with me are Tom Wirth, our executive Vice President and Chief Financial Officer; Dan Palazzo, our Vice President and Chief Accounting Officer; and we have George Johnstone, executive VP of operations who is calling in from offsite and will be available for Q&A later on our call. Prior to beginning our presentation, certain information discussed during our call may constitute forward-looking statements within the meaning of 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. So with that said, as we normally do, we'll start off with the summary of our key business plan performance and then Tom will review our financial results.
So far, we are off to a solid start. During the first quarter, we made significant progress in our business plan objectives. Meeting or exceeding many of our operational leasing and investment goals. We also are reaffirming most of our business plan targets and increasing the 2 other targets that we laid out in our business plan. On the investment front, we have executed 2/3 of our $200 million disposition target, with a strong pipeline of transactions under contract or in the market for sale. And as anticipated, our portfolio repositioning is accomplishing our goals of growing earnings, cash flow and strengthening our balance sheet. And these goals are best evidenced by our strong same-store cash growth this quarter and by the increase in our full year cash mark-to-market range. Our mark-to-market for the quarter was 9.1% on a GAAP basis in excess of our targeted range. Our mark-to-market on a cash basis was lower than our range, primarily due to several known D.C. renewals but based on forward activity, we expect full results to be within the new targeted range, which we have increased by 100 basis points from 8% to 10%, to a new range of 9% to 11%.
We ended the quarter at 93.2% occupied and 94% leased. Our speculative revenue plan is 90% complete on a revenue basis and 80% complete on a square footage basis, which compares favorably to our performance in 2016. Our tenant retention rate for the quarter was also below our annual target but based on known activity, we are increasing our annual target from 68% retention to 71% for 2017.
Our GAAP and cash same store numbers for the quarter were in excess of our business plan range at 2.4% GAAP and 9.4% cash. Future quarterly activity will return us to our existing ranges for these metrics for 2017 full year. Our leasing capital for the quarter came in above our range, primarily due to 3 long term deals in CBD, Philadelphia but again, based on forward leasing activity, we are maintaining our 2017 targeted range of $2 to $2.50 per square foot per lease year. We expect we will be below our range in Q2, in line in Q3 and slightly above in Q4. But fundamentally, based on our strong mark to market cash rent growth combined with longer lease terms and strong annual escalations that has resulted in a 16% increase in our same store net effective rents since 2015, so very good operational throughput through our portfolio.
From a balance sheet standpoint, we continue to benefit from our sales program, as evidenced by improvements in of our liquidity and leverage metrics, to wit we've reduced our net debt to EBITDA from 6.6 at year end '16 to 6.3 at quarter end. We reduced our net debt to total assets from just north of 38% and year end down to 37.5% at quarter end. Our weighted average cost of debt year over year went from 4.7% down to 4.5%. And we also ended the year with ended the quarter with a net cash balance of $235 million and 0 drawn on our line of credit.
As we disclosed in our press release and discussed on last quarter's call, we did utilize $100 million of our cash reserves to redeem our entire 6.9% perpetual preferred shares at par. As noted again, this redemption did result in a onetime noncash charge of $0.02 per share during the second quarter. We are so, as a result, revising of our 2017 guidance from a range of $1.35 to $1.42 per share, down to $1.33 to $1.40 per share, solely to reflect that $0.02 noncash charge.
On the investment front, we are running ahead of pace in our $200 million disposition target. We completed $133 million of sales during the first quarter at an average cap rate below our targeted range. We also made progress on recycling our land basis and JVs by exiting our apartment joint venture in Plymouth Meeting, Pennsylvania, where we netted $27 million in cash, along with achieving a $27 million reduction in debt attribution, posted a gain of $14.6 million and internal rate of return just north of 18%.
We do anticipate using this successful round tripping on some of our other residential JVs. Before getting into our specific business plan metrics, we wanted to provide just a little color on what we are seeing in our markets, as a prelude to any questions that you may have.
First of all, our pipeline in potential leasing transactions has increased to 1.8 million square feet, which is up 100,000 square feet from the last quarter. We have also approximately, 400,000 square feet of leases out for signature. Portfolio was solid with traffic levels in CBD, Philadelphia, up. [CBD], Pennsylvania suburban properties were in line with previous quarter traffic levels. And with Austin and Northern Virginia were down slightly quarter-over-quarter. Our portfolio occupancy continues to outperform market averages, ranging from 500 basis points of outperformance in Austin, to 1,000 basis points of outperformance in our Northern Virginia properties. Our leasing and property teams continue to do really exceptional work, in servicing our customers, and accelerating our lease-up plans.
We continue to see good absorption in our core market areas. For example, absorption paces up 20% year-over-year in the Pennsylvania suburbs. And in fact, in that market, vacancy rate is at the lowest level since 2001. Austin absorption was up slightly over Q4 levels. And CBD, Philadelphia, continues to perform well with Q1 leasing levels of 460,000 square feet.
I guess more importantly, as looking out over the next several years, we are pleased to report that our forward lease expirations are now below 10% annually for each year between now and 2021. Those accelerated pre-leasing efforts really solidify our operating platform and we believe, position us for continued market outperformance. Regarding our '17 plan, we do expect year-end occupancy levels to continue to improve throughout the year up to a range between 94% and 95%. We did reduce our speculative revenue target by $1 million to reflect the continued acceleration of our building sales and to account frankly, for a property currently under contract to a user, where we had projected some speculative revenue in our 2017 plan. Same-store numbers will range between 0% to 2% on a GAAP basis and a very strong 6% to 8% on a cash basis. As I noted, investment sales are moving very much according to our plan. We are maintaining at this point, our 2016 disposition guidance of $200 million of net sales with the anticipated future sales of $67 million, targeted in the second and third quarter, in line with our pro forma cap rate of 8%.
We are confident of achieving this disposition target and we currently have about $100 million of properties, either under agreement or in the market for sale. One nuance to our disposition plan for 2017, our Concord sale occurred earlier than we anticipated and did generate a 1031 requirement. So we do anticipate making an approximately $35 million acquisition during the summer months. Our focus is solely on value-add. And we have currently identified several potential redevelopment opportunities to meet this requirement. As Tom will outline, we will be the repaying our $300 million unsecured bonds during May. They have a carry of 5.7% rate with funding through a combination of cash on hand and our line of credit as the first step in our overall debt management program.
Just some quick notes on our development pipeline. Our 1919 Market joint venture project with CalSTRS and LCOR is doing great. The office and retail component remains 100% leased. The 215 car garage is already averaging 90% occupancy per day. We will achieve a free and clear return north of 7%. And the apartments are already 92% leased and 84% occupied. Interior renovations at 1900 Market are substantially complete. We are still in the final phases of zoning approval for some exterior improvements, which we hope to wrap up later this year. And we are still projecting a low double-digit free and clear return from that property.
Construction is on schedule and on budget for our 111,000 square foot, 100% pre-leased build-to-suit property in King of Prussia, Pennsylvania. We will deliver that property during the second quarter. We did realize some final construction cost savings, so project cost will reduce by, just shy of about $2 million, which increases our previous 9.5% free and clear return to the mid-ten's. The office portion of FMC is complete and 96% leases were reported last quarter. We did commence operations this quarter on components of our residential project. Our 3,000 square foot restaurant is scheduled to open in June. We still expect that the office component will stabilize in Q4 this year. And the residential component be stabilized in Q1 '18.
On the residential component, we did open in January. And we are still in the process of delivering finished units. Results thus far are very encouraging, the flexible stay components are doing very well. The furnished residences are about 23% leased already, and the market rentals are already 24% leased. So we are really gearing up for full delivery in the next 45 days. Given the executed leasing activity on the office component, the length of those lease terms have exceeded pro forma, but also came with the higher capital spend, as well as finalizing the residential programming between the flexible stay furnished and unfurnished units and several upgrades. We did increase our cost level to $400 million on FMC combined project, but we are also able based on known economics to increase our targeted free and clear return to 8.1% based upon known activity.
Zoning works just have been introduced and the design planning work continues on our Schuylkill Yards projects. We have continued some planning efforts during the approval timeline. And we could potentially start our public space component in the third quarter. We also continue to advance planning and predevelopment on several of our development sites, including 405 Colorado on our broad more master planning efforts in Austin, Texas. And we are still projecting $50 million development start that we expect to commence in the latter half of the year.
I'll now turn it over to Tom for review of our financial performance and some observational observations. And then George will be available for Q&A. Tom?
Thank you, Jerry. Our first quarter rental income attributable to common shareholders was $19.3 million or $0.11 per diluted share. And our FFO totaled $56.1 million or $0.32 per diluted share. Some observations from the first quarter results, same-store NOI rates for the first quarter were up 2.4% GAAP, 9.4% cash, both excluding net termination and other income items. We've now had 23 consecutive quarters of GAAP -- increased to the GAAP metric and 19 for the cash metric.
Consistent with prior quarters, our G&A sequentially increased from $5.9 million to $9.4 million. Our first quarter G&A was above forecast, primarily due to some onetime professional fee items. FFO contribution from our unconsolidated joint ventures stood at $9.5 million, in line with forecast.
Interest expense, $21.4 million, which approximated our forecast. And $1 million sequential increase, primarily due to lower levels of capitalized interest. Our income and termination fees totaled $0.9 million and $1 million, respectively and did approximate our forecast. And third-party fee income and expense totaled $6.5 million and $2.4 million, respectively. Our fourth quarter CAD totaled $41.7 million, representing a 68% payout ratio, which includes $9.5 million of revenue maintaining capital expenditures. We also incurred $6.3 million of revenue creating revenue expenditures.
Looking forward to the second quarter, we note the following: sequential property level operating income, cap operating income excluding term fees, third-party and other income for the second quarter will range between $71.5 million and $72 million as compared to the first quarter, actual NOI of about $73 million.
The second quarter NOI will include approximately $4 million of contribution from FMC, up from 2.8% in Q1, partially offset by first quarter disposition activity, which will have a sequential dilution of $1.2 million.
In addition, the new IBM lease of Broadmoor will have a lower sequential GAAP NOI, as the purchase accounting has 141, income will burn off, reducing us by $1 million on a sequential basis from the first quarter.
As outlined previously, while the same-store NOI will benefit from the renewal of IBM, the GAAP NOI will actually decrease. G&A expense for the second quarter, due to the timing of our first quarter expense recognition and previously noted professional fees, our second quarter G&A expense will decrease to approximately $6.5 million. And for the full year, we continue to approximate about $28 million.
Other income for the second quarter will approximate $0.5 million, our full year estimate of $3 million remains intact. Termination fees, we expect $0.5 million in the second quarter, and our full year estimate remains at $3 million.
Interest expense and preferred dividends. Second quarter interest expense will decrease to approximately $21 million, primarily due to the anticipated payoff of our bonds that mature on May 1, totaling $300 million at a rate of 5.7%, partially offset by lower capitalized interest.
Our second quarter preferred dividend for the partial quarter, up to the redemption date, will total $300,000. FFO contribution from our unconsolidated joint ventures should approximate in the first quarter at about $9.5 million. In fact our joint ventures will contribute about $37 million for the entire year. Third-party fee income should approximate $25 million for the income and $8.5 million for the related expense, no changes.
As we look at our business plan assumptions, net sales of $200 million to date, we have sold $133 million or 68%. We do not have, we are not changing that target. The unsecured bonds will be paid off at majority. The bank term loan, we anticipated in the last quarter of doing a bank term loan between $150 million and $200 million to partially fund that bond maturity. We've assumed the 3.25% rate. However, as assess our other reliability management alternatives, which could include the 2018 bonds, we've delayed the execution of the term loan to either late second quarter or early third quarter.
The preferred shares, as discussed, have been redeemed at par. The redemption did generate a onetime noncash charge of $0.02. Primarily, it's all related to unamortized original issue discount original issuance costs that are being written off. And that charge, as we discussed in the past, was not included in guidance and, therefore, caused us to have a $0.02 revision. Land sales, we do have some land sales under contract. Though we've to program no FFO gains or losses as a result in our guidance. We continue to have a estimated 178.3 weighted average shares for dilution purposes.
Looking at capital, we continue to project '17 capital coverage between 71% and 64%, reflecting around $35 million of revenue maintaining CapEx at the midpoint. Primarily cash uses and sources for the balance of the year will total $650 million. The primary uses will be $125 million for development and redevelopment projects, $86 million of aggregate dividends, $31 million of revenue creating CapEx, the $300 million bond to pay off, $100 million redemption of the preferred and $4 million of mortgage amortization.
The sources to fund that are $125 million of cash flow after interest payments, $64 million of speculative net sales, $250 million term loan, use of our cash of about $200 million and $11 million residual land sales, primarily Garza. Based on the capital plan and the $250 million term loan being executed sometime during 2016, we anticipate having a cash balance that approximates $35 million at year end. Redemption of the preferred will cause our debt to EBITDA ratio to increase from 6.3 times, which Jerry noted earlier, will increase by 0.3 to the second quarter. However, the removal of the preferred debt will also improve our fixed charge ratio by 0.2 times to put us over 3. We also projected our year end debt to EBITDA ratio remains in the mid 6 area, in addition to our debt to GAV will remain approximately 40% by the end of the year. We continue to be mindful of the current interest rate environment. And we are considering a number of a refinancing options that may include potentially addressing the 2018, $325 million bond maturity at 4.95%.
I'll now turn the call back over to Jerry.
Thanks Tom. So to wrap up, 2017 is off to a great start for us. We really do believe that this year represents a continuation of our growing operating cash flow, improving our CAD payout ratios, growing NAV and really position the company with a very solid operating platform for future growth.
Just one other closing comment. I would like to remind everyone that we will be hosting an Investor Day on May 8, with a series of presentations by management that will start at 10:00 in the morning. And that will occur in our FMC Tower at Cira Center South.
So with that, we'll be delighted to open up the floor for any questions. As we always do, we ask that in interest of time, you limit yourself to one question and a follow up. Tabitha?
[Operator Instructions] Your first question comes from the line of Michael Lewis with SunTrust.
Jerry, I think, you mentioned Nothern Virginia, a bit soft. It looks the D.C. Metro occupancy came in a bit but the NOI was up. And I think the rents looked like they were up. Since the election and everything I mean, what's changing there? Are you seeing improvement in that market? Do you think over the next year, that's kind of a drag on your same-store NOI? Or is it getting better and catching up?
Michael, our objective is to get that portfolio back to above 90% leased by the end of the year. That's clearly our more challenging market. Since the election, I think the psychology in the market has turned certainly more positive with the expectation that there will be more government contracting opportunities, more of an emphasis on homeland security, cyber security. So certainly, as our team is speaking to our tenant base and to prospects, there seems to be a more positive bias to the feedback we are getting. We really haven't however, seen that translate to any significant increase in quantitative data, in terms of either absorption or leasing activity levels but certainly, psychology is a good starting point. From our perspective, we are just hoping we are not going to see a Trump, bump, slump where things start to revert back to the mean where they were before. But certainly, we're very mindful of the work we need to get done in Northern Virginia. We have built into our capital plan, renovating several of our existing projects along the Toll Road, to reposition them to generate higher levels of return on investment equity. Very similar to what we did on our Dulles Corner project, a few years ago, that's been a wonderful success for us. So it's very much an aggressive marketing stance we are taking down there. Again, the psychology has been positive, and we are tracking a number of different situations that hopefully would translate to better-than business plan improvements for us.
So my second question, as you sold some land in Austin and Richmond. It looks like there's some more coming. Has there been any change in your view of the land based on where we are in the cycle and likelihood of starting new developments? Or I guess, the part b to that question, as you look at your land as there's more of a focus on Schuylkill Yards, and the Austin land, as kind of a source of tenant development going forward and maybe you trim some of the rest?
Yes, but I think we go through our land inventory, we have a page in the book on it. Our primary focus right now is we think our land at about 3.5% or 3.7% of our asset base is in the range where we want it to be. We do think though, that there are number of parcels of property that we have on the market for sale that either are no longer part of our core market growth strategy or primarily better suited towards alternative uses but don't have the scale, where the location to warrant us doing the transaction, like we did with Toll Brothers and Plymouth Meeting. So we clearly are looking at a number of the parcels of ground in Pennsylvania, New Jersey, Virginia, as potential fodder for generating capital for the company. When we do look at land, I think we think, we've got a very good forward land development pipeline opportunity in Philadelphia. So not really looking to acquire much more land in Philadelphia, that we don't already control. And in Austin, we do think that the site we have downtown, and more importantly, we think the tremendous growth opportunity long-term, that Broadmoor will create, gives us sufficient land basis there to really grow our portfolio significantly.
Your next question comes on the line of Jamie Feldman with Bank of America.
Can you talk more about some of the space that went vacant during the quarter, exact locations and just lease prospects to backfill? And what's in your guidance versus maybe expectations to get it backfilled in '18?
Yes, I think that when we took a look at, why we had negative absorption during the quarter, it really came from several tenants: one in the Pennsylvania suburbs, where at about 50,000 downsize of operation, which we knew was coming, it was clearly part of our plan and then, had a similar situation in a couple of our buildings downtown in one of our remaining assets over in New Jersey.
So what we really saw Jamie was, what we knew was going to happen as part of our overall business plan, so no real surprises there. One of the floors that we received back downtown, we've already got some very active prospects for that now. So I anticipate leasing it up by the end of the year. But as we take a look at our forward pipeline, we certainly think that the occupancy levels, the absorption pace we've targeted are very achievable.
Okay. And then can you talk longer term about your plans for the residential and hotel space at FMC?
Yes, I think the intermediate focus for us is just complete it and get it leased up and starting to generate that revenue that we are anticipating. As I touched on, I think we are very happy with how that's being received in the marketplace. And I think longer term, just as we looked at with the Plymouth Meeting joint venture, we'll certainly start to dialogue with some of these other residential JVs. There may be a more near term optimal price point for us on some of those projects than our typical core office holdings. So when we developed FMC, we set it up to be a potential condo interest. So as we reach stabilization, we'll certainly take a look at that. As you will find, there are some of the other mixed due projects to see if we continued cap rate compression that we continue to see on the residential side creates a near-term value point that we might have otherwise be thinking.
Okay. But do you think long term you'll want to keep a stake just to help control the asset, as long as you're on the office? Or not necessarily?
I think, it's too early to call, Jim. I think, what we really want to do right now with FMC is just get it locked away and meet out all of our targets. We certainly are open to a number of different capital structures, not just on that project but on any of our projects. And I don't want to prejudge that we're going to be completely out or partially in at this point but I think you should understand that we have a very open mind to what the ultimate structure or our residual position would be, based upon where we see we create the most value for our company.
Your next question comes from the line of Emmanuel Korchman with Citi.
If we look at your lease expiration schedules, especially what's left in 2017, it looks like those rates are significant below your portfolio average. Is that just a matter of mix? And does that drive, sort of the outsized rent rollover expectations for '17? And then on that same front, if we look at '18, do those rents being closer to average imply that rent rollovers might be a little bit softer?
Well, I know one of the big upticks that we are seeing, as I anticipate for '17, as Tom touched on, is the solid mark-to-market we are getting on IBM. George, maybe you can pick up the second part of Manny's question?
Sure. I think the balance of '17, which there isn't a whole lot left. Only a handful of deals above 15,000 square feet but a number of those are, in fact, expiring at advantageous rates for us. And that's kind of why we've got the embedded mark-to-market ranges that we do. I think when we look at '18, we've got a couple of higher rents in D.C.. That market still hasn't fully recovered. So I do think you'll continue to see some cash roll downs into '18. But I think for the balance of the portfolio, I think we see rent growth levels where that trend is, will be positive for '18.
Great. And then a question for Tom. Tom, do you think about guidance or maybe your presentation of guidance, would something like speculative revenue, the fact that, that now came down quarter-over-quarter because sale were executed, does that, am I thinking about it correctly, that it didn't imply the sales? Or that is the mix of the assets you were going to sell has changed? So if we look forward from here, if you sell the additional, call it $70 million that you have in guidance. Does that mean the speculative revenue could come down again? Or does your speculative revenue number now foresee the sales you're going to make?
Manny, you know well, we could, it is speculative number based on a number of transactions that are, that we have out in the market. So we won't move that speculative revenue target until we feel something is sold or under contract. And we feel good about the sale. So the speculative revenue target could adjust again, if we sell certain assets that had activity planned for the back half of the year.
Yes, I think, Manny, just to jump in, I mean one of the primary drivers of the change quarterly, from the last time we spoke to this quarter call was that, we did place a property under agreement to a user. That property has some vacancy that we really did anticipate generating some spec revenue for us kind of mid-Q3 and through Q4. So that was the primary driver behind the change in the spec revenue target this year. That's a fairly unique situation. We aren't really marketing the property for sale. We just were approached by a company that has a specific use for that building. It's a very good trade for the organization. So from our perspective, we decided that it's probably better for us both for '17 and long term to sell that property, even though it came at a slight down to our speculative revenue target.
Your next question comes from the line of John Guinee of Stifel.
If these questions have already been answered, let me know. First, status on Northrop Grumman, $35 full service rent. I think about 204,000 square feet in Northern Virginia. Looks like about 2018 lease expiration. Second, I think you've got may be a big lease expiration for Verizon and Three Logan. I might be wrong on that. Three, a lot of press recently about property tax increases in the commercial buildings in Center City, Philadelphia. And then lastly, how do we look at your land basis at Schuylkill Yards?
Okay. We have a couple of questions. Guys, I'll just run through it. Northrop Grumman, they exercised an extension to the last one under their lease to go out through the fourth quarter of 2018. I think they continue to assess their various options and we maintain a very active dialogue with them. They're occupying the space, so we'll see where it goes. But what was originally a kind of year end 2017 expiration, has now rolled for another 9 months. So we'll see how that works out.
Verizon is -- and we have known for a while is moving out of about 100,000 square feet in our Three Logan project. Again, that was a known move out for the last several years, so they weren't really occupying much of that space. The reality is that we have some very strong prospects for that and anticipate that when we do lease that space up, we have a very good mark to market on that. The real estate tax assessment issue in Philadelphia, the city came out with some revised assessments. We are working our way through all those numbers. The Philadelphia is not reassessed in a number of years. And from a macro standpoint, real estate tax in Philadelphia, really are below the regional average by a significant amount. So this reassessment, I think, starts the path for Philadelphia to kind of reassess their commercial property base.
As we are looking through the numbers, we think that will wind up costing us about $1.2 million or $1.3 million, as we look forward to 2018 when those assessments go into place. Assuming that there's no appeal so we're certainly, like every other landlord, we are looking through the numbers we received in the term where there's an appeal there. And on the Schuylkill Yards, I think the transaction we structured with the landowner provides a rolling option for us to take down land. And I think a price we've indicated about $35 per FAR foot, that holds flat for a number of years and escalates to a couple of percentage points a year. Hope that answers your questions.
Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.
I think last call, you had said, you really did want to go above $200 million of dispositions. But just given, you guys have what about $100 million in the market. And you're talking more about maybe, monetizing some resi positions, can we see that number move higher through the year?
Look, I think, we are still maintaining our guidance on the $200 million. The nuance to that is, as I outlined, is that with the 1031 requirement, we do anticipate that if we wind up executing on that, that we would wind up still being a $200 million net seller. So what we have done for the year, plus we have in the market, puts us above the $200 million mark. But frankly, some of those things that are in the market may not -- we may not get the pricing that we want or may not get the terms and conditions that we desire. But we are still, Craig, I think bottom line holding into that number on a net basis. We think that the combination of whatever the 1031 exchange property is and the incremental sales, as Tom's work through, we neutral FFO for the year. But look certainly, I think, it's incumbent upon anybody, any landlord to always be responsive to what the market is telling them from a pricing standpoint. So we do have a very active dialogue across the board and across all of our regions on what property pricing we can get.
As we assess that today, we are comfortable with where our guidance number is. Certainly, we would not want to preclude our harvesting some additional money later this year, if the right situation presents itself. We haven't seen visibility on that definitively yet, but certainly, I think as we've done the last several years, we always maintain an open mind to harvesting some great value in some of our real estate.
Is it fair to say that you guys are more opportunistic at the lower cap rate stuff relative to sort of 8-cap you've been guiding us toward?
Well, look our success in the first quarter were well inside the 8% cap rate range. Now that's due to some of the properties we were selling. But the cap rates that we sold the range between 5.5% and 7%. So that's one of the reasons why we put so much in the market so we can be selective as to where the best price points are, compared to how we value those properties. So we expect to continue that over the next couple of quarters.
That's helpful. And then, just on the Marine Piers, when do you expect the $9 million payment to come through once that tenant either leave or terminate?
Yes, that's going to be outstanding until that tenant expires. I think, Dan, 2020?
2020, [indiscernible] Yes. Thank you.
How much was there -- I know you guys lumped it in last quarter with the parking at Cira, how much of that NOI for the full year was Marine versus just parking revenue?
You can always say, what's the cap rate on the 21 million, for that one?
It's pretty low. It's in the 4% range, we take a look at everything all in. It's really a future development site. We sold it to have very high-quality development company moving in from outside of the city, who plans on doing some residential waterfront development. So I think, for us, we made it, it was a great transaction that moved a development site that's been on our books for a while. And we were generating some income from that based upon the marina at the park and the restaurant operations. But certainly, they are more equipped to make that project successful for the Marine Center.
Our next question comes from the line of Rich Anderson of Mizuho Securities.
So could you talk about the GAAP in cash since our NOI differential hasn't always been leaning to the cash side as substantially it is today. I'm just curious, what the shelf life of that sort of spread is. Looking back several quarters, it was kind of the reverse. And so is this kind of a 2017 event, where you have such a big cash number and a more moderate GAAP number? And should we expect that to kind of become more in line with one another starting in '18 or some point down the road?
Rich, this is Tom. This year there was because of IBM, which we have talked about in the past and the burn off of the acquisition gap NOI from the 141, there is a big dichotomy this year and that particular transaction being such a large part of our spec revenue this year, caused it to be larger than it would have been otherwise. I think though, do looking at '18, we continue to see our straight-line rent and those gap adjustments coming down. And so I think at least through '18, you're going to see the same thing occur when we look out to '18. As then, we will see our cash NOI outpacing our gap in terms of growth. So will see that going forward as trend.
Okay. And then the second question, just looking back at the kind of transcript from last quarter, I noticed you made the comment that 85% of your disposition target of 200 million then and now was either sold or under contract. I think that was kind of the terminology used. And now you have completed 66%, I'm just curious, does that 85% then and 66% now, does that sort of suggest even though you kind of went down the path of saying you've got faster with Concord. Is it may be moving a little slower than you anticipated 3 months ago?
Rich, this is Tom again. I think when we looked at the disposition target, we had that under contract. I think when we talked about our guidance and what we thought we would execute. We thought we would have 75% done by June 30. So some of the transactions may be closed sooner than we thought but I think our overall goal was to get 75% of that $200 million completed by June 30. And I don't think that we feel that, that is any different than where we are today. Some of them closed maybe a quarter or 2 or a month or 2 earlier than we thought but I think we always anticipated having 75% done by mid-year.
Okay. And then just quickly on dividend policy. You quote your CAD on a percentage number nowadays. And may I suggest that maybe you got some ideas about future dividend growth, is that a fair statement?
Well, on that one, Rich, there was some changes made. I haven't really tracked our other companies but we were changing that as a result of some guidance that came out from the SEC that is telling us that we should be talking in terms of a coverage ratio rather than a per share ratio. So that's the only reason it changed, there's nothing to be read into it on a change in policy for our dividend.
Your next question comes from the line of Jed Reagan with of Green Street Advisors.
Can you -- I just want to know if you can give us a sense of the kind of the rent growth you're seeing across your markets at this point?
Sure. George and I will tag team and I will take the first part of it. Look, I think what we are seeing in the Pennsylvania suburbs is there was a lot of good activity and a high level of leasing velocities. So we've been able to move rents up into the 4% to 5% range. Year-over-year in the CBD area, rents have moved up to 5% to 7%, depending upon the inventory class. We are still seeing rents fairly flat as we talked about in D.C. and down in Austin, they continue to have very strong upward pressure on rents. And I'm just looking through my notes right now, so when you take a look at the average asking rents in Austin, they've kind of up 11% year-over-year across the board. And when you take a look at the Class A rents in Austin, they are up just shy of 13% year-over-year.
So I think we're still in that point where we are being able to push rents fairly nicely throughout the bulk of our portfolio. Certainly in every market, Jed, we're keeping an eye on where we think deliveries are coming in. And that's one of the reasons why we are really accelerating a lot of our forward lease roll as well, which is why I highlighted the fact that one of the things that we really think that will hold the company in great stead over the next few years is that we got our annual rollover now down to 10% or below between now and 2020. But I think, we are really very much focused on seizing the moment, so to speak, on this window where rents are still pushing up and pushing up nicely on all of our markets, and making sure that we're well positioned to the event that we wind up moving to any period in the next few years where things start to slow down a little bit.
Yes, I think, Jed, I was going to say, I'm sorry. In terms of mark-to-market, we're continuing to see double-digit increases in GAAP mark-to-markets in Pennsylvania, CBD and in Austin. And we are seeing kind of low to mid-single-digit GAAP rent growth now come out of D.C.
Okay, that's helpful. And I guess, related to that the cash mark-to-market rent guidance for '17, you bumped off a little bit even though the first quarter number was pretty modest. Is that, was that a function of again, just kind of a mix of assets you're selling changing? Or is that just your rent growth is ticked up faster than expected?
Yes, it's really more based on the deals we have executed that have allowed us to push the range. More of that was based on actual forward commencing deals that we have executed. But I think, given the fact, that we do continue to see nice rent growth coming out of downtown Philadelphia and in Radnor, the clarity of the pipeline and deals we have executed, but not yet commenced allowed us to move the range.
Okay. And then just generally on Philly, looks like job growth has been pretty healthy here recently. Just wondering if you could talk about kind of the main drivers behind that? Is that state and local tax incentives? Or sort of policy positions changing? Maybe which sectors of the economy feel healthier than others?
Jed, look, and we certainly plan on doing, spending more time on this showing some data on our Investor Day because we know that's a key question in the minds of a number of investors. We are seeing generally good growth across all the sectors. The anchors to Philadelphia, clearly have been the [eds] and meds. And they continue to grow at a nice pace, particularly, a couple of larger institutions in the City of Philadelphia, Jefferson Healthcare system is on a big acquisition and growth mode. But more importantly, I think we are seeing a good mix of companies locating into Philadelphia, from the surrounding region primarily, driven by this demographic shift towards urban town centers and the greater lifestyle, access to mass transportation. So we tried very carefully and we'll be able to show some statics on this at our Investor Day of the percentage of absorption leasing activity is coming in from outside the city. City is also hopefully, getting a focused on tax strategies that will generate more of an open door for business to relocate downtown. They have launched a couple of programs that provide some incentives including some of wage tax credits for the companies moving into town.
And I think, a lot of the green shoots are there, we've seen a number of companies set up bases of operation in the city, even though they've maintained large employment bases throughout the region. The most recent example that's been in the news is Vanguard, which is one of the major employer in the Philadelphia region, has really opened up their first kind of incubator space in the city of Philadelphia. And we think that, that trend line or that reflects what we see as a trend line from a lot of other companies. And we certainly think that, that trend line will continue. So more to come on that at our Investor Day. But I think when we look at our year over year job growth numbers, Philly has actually posted some pretty good numbers. We had a lot of ground to make up, we understand that compared to some of the other 25 larger cities in the country. But we think that there is a lot of demographic and corporate drivers at play that are bringing more businesses long-term into the city of Philadelphia.
Okay, that's helpful. Maybe just last one, if I can. Have you guys seen any noticeable changes, so far this year in terms of the cap rate environment or in investor demand?
None. And I'm not sure if it's because of the volatility of the treasury market or what's happening in Washington. But I think we've been very pleased with the level of traction we are getting on the sales of some of our properties. As I think we've talked on previous calls, the bidding pool's not as deep as it once was, but there are still active buyers out there and we are still seeing very active CMBS, bank debt market, still a flood of private equity sitting on the sidelines looking for decent rates of return. So we've really not seen any material movement in cap rates anywhere.
Your next question comes from the line of Mitch Germain with JMP Group.
I know it's not a big dollar amount, Jerry, but capital deployment that you've got targeted for the back half of the year. I mean is there any sort of market mix that you're looking at or asset type? Maybe just kind of provide some perspective of what you're kind of considering as a value add investment?
Yes. Look, I think we're looking at -- we're really focused on trying to find another project that kind of fits what we've been able to do on in 1900 Market Street. We are able to buy a very good price per square foot, utilize our marketing development teams to turn around and generate a nice rate of return for us. Right now the primary focus of the properties we've identified are really kind of in the greater Philadelphia area. So that level, that $35 million deployment will probably be in the Philadelphia region. But to the broader question, Mitch, when we looked at our land pipeline going forward, we do have a $50 million development start in our projections for later this year. And our expectation given the kind of the pace of discussions we're having with tenants, we do expect that, that investment will most likely be in Austin, Texas. We haven't, we've got a few other prospects we're kind of dealing within the other regions, but for right now the strongest demand that we are seeing from larger users who would occupy building that size is really coming from Austin.
And I know, there's obviously a bunch of development underway in the pipeline there. The likelihood is, you won't do anything until you get that leasing commitment, correct?
That is correct.
Great. And just one more for me, Tom. I know there's a couple of ins and outs and changes on the capital plan for some of the debt coming due. So term loan got pushed, but the term loan and cash to pay down this year's maturity. And then next year, is that just going to be a refi. How should I think about just the two big tranches of debt coming due?
Sure, Mitch. The way we were looking at this year's maturity was going to be the two, meaning that the preferred and the '17 maturity was going to be a combination of cash and a bank term loan. The second part of that is '18 we were thinking that would be refinanced in '18. So that's kind of how -- and that's how we're modeled and how we're projecting things to you right now. But with the 10-year moving the way it has of late since the last announcement of the Fed rate hike, we have been more focused on maybe doing some liability management that may include the 2018 bond. So it wouldn't be something -- we were certainly considering that at this point. So I would say, right now it's just going to be refinance '17 with the cash. And the term loan, and we'll worry about '18 next year, but that may accelerate.
Your next question comes from the line of Rob Simone with Evercore ISI.
Just following up on an earlier question. I know you have the $50 million start later this year. But you've kept your development start guidance unchanged for the last couple of quarters. So I know you had commented in the past that there could be additional activity. I guess, could you talk broadly about what you're seeing on a ground, is there any upside to that number?
Rob, there could be, but if we felt strong enough about it right now, we'd be more definitive in our forecast. We have a number of discussions underway with tenants who are looking to upgrade their physical plant and move into new buildings. From our perspective, it's really a function of, does the timing and do the numbers work for us on that? So as I just mentioned a few moments ago, we are further advanced in our discussions for development start in Austin. There are a couple of other opportunities that we are pursuing in the Pennsylvania, Philadelphia regions that we'll see how they plan out, but certainly to the extent that we could do more. And the terms makes sense for us and there is a heavy level of pre-leasing. Or even from a standpoint in a broader sense, we are now beginning to see more tenants who are looking for buildings, but looking that they would own the buildings. So we would be a key developers. So very much along the lines of what we were able to accomplish with Subaru in building their North America headquarters, where we're a -- we made return on the land, when we're the developer we get the development fee. So I think we are seeing more and more tenants who are now for a variety reasons looking to own their facilities versus just enter into a long-term lease with us. So we are clearly open to both but for right now I think we are holding our guidance to the $50 million. And certainly, as events progress, we'll make sure everyone's fully aware of what we are thinking.
[Operator Instructions] We have a follow-up from the line of John Guinee of Stifel.
Quick follow-up. What I think we're seeing throughout the country regarding space leasing is that, tenants will pay the freight for quality space, they will pay the freight for a space, but what they want is the turnkey TI package. And essentially, the landlord financing the move for A space. And then B and C space tends to really be lagging and that's tough to backfill that. So the end result is that the rental rate growth is often driven by the TI package for the A space? Does that make sense to you guys? Can you sort of debate that or tell us if we have that correct or incorrect?
No, I think that's a good thesis, John. I think we are seeing for the most part, construction cost continues to move up. Certainly, we are able to realize there are some DE processes, some saving as we did on one of our properties this quarter. But yes, I think tenant expectations are they want to move at a higher quality space that is very efficient so they can -- their average occupancy cost per employee is very competitive because of the efficiencies of the building, both from a column design, ceiling high, HVAC systems et cetera, but also with all new building systems in place are going for an operating expense will have some downward pressure compared to the some stay put options.
And I think from whether it's driven by the brokerage committee or by the tenants themselves, there's clearly upward pressure happening on the TI packages. And that, I think it's one of the reasons why we, a couple of years ago, really moved towards really looking to longer term leases trying to get 2% to 3% annual rent bumps so we can maintain a capital ratio on all of our deals somewhere between new deals between and around the 15% on the renewal deals closer to 10%. So that the economics work for us both from a point of sales standpoint but just as importantly in terms of the NOI growth versus what our investment base is.
But we are clearly seeing that trend line where most tenants want something that's brand-new and shiny and efficient and use that pricing discussion as a framework to evaluate stay put options. Fortunately, a lot of the properties we sold were kind of in that B&C category. So I think we're pretty well positioned to both attract tenants to our new product, but also retain them on fairly competitive terms in our existing higher end product.
[Operator Instructions] The next question comes from the line of Bill Crow with Raymond James.
We are seeing a number of markets, the trend of companies relocated into the urban markets and the suburbs. And I'm just curious how much of the success of Philly, CBD might ultimately mean a bigger challenge for your suburban markets?
Well, we always want our markets to grow. That's solves all ills. I think we've seen though, Bill, is a lot of internal growth within our markets. And it's a matter of where were those firms are deploying that growth. So, for example, we signed a large lease with a tenant with one of our properties downtown last year that was over 200,000 square foot add to their occupancy levels in the City of Philadelphia. They did vacate some space in the suburbs, but their net growth was pretty dramatic. We've seen now with a number of other tenants as well.
So look, certainly as we assess the markets that we are in, we've recognized that markets change as tenant drivers change. So one of the key drivers of our sales program quite candidly, over the years, particularly in New Jersey, Delaware Pennsylvania, Maryland and Northern Virginia markets has really been focused on, where do we think that long-term tenant demand drivers have shifted. And then what's the quality of our inventory base in those submarkets. And we fortunately, have been pretty successful in getting out of all of those. So our direct exposure, to I think that trend line you've outlined is pretty minimal.
We're not, I think we are cognizant enough to recognize that if there is a net reduction in overall demand than that could have a downward pricing effect on some of the more commodity level markets. But fortunately, I think we are pretty well insulated from that. But we've seen is some of these tenants have moved downtown into Philadelphia, in particular. They continue to maintain a pretty big bases of operations. So they're trying to basically accommodate some of their employees who wanted to be downtown for a period of time and kind of set up a flexible workstations for them.
That's helpful. George, follow-up question. You are the expert in the Philly market. And I'm just wondering what your gut's telling you as you look at downtown Philly and the development activity that is going on? How close are we to crossing that line from really healthy to overbuilt?
I think on the office side, we're still in a position of being very healthy. I mean, we have some really couple of renovated buildings coming online in the couple of hundred thousand square foot range. There's a building coming online in University City. But I think given the demand drivers we're seeing, and certainly the prospects, the list of deals that we are seeing, I think we remain in pretty good shape. So our expectations as we read the tea leaves is to make sure that we number 1, keeping the hunt for every potential prospect to, every tenant that we have anchored down for the next few years. So we're kind of hedging out bets on both scenarios. Look, I think there's been a lot of residential construction in downtown, Philadelphia, which is one of the reasons why we are so pleased in our 1919 project is doing so well. And that we're seeing such great early support for FMC. But I do think that when we take a look at the different product segments, looking down the road a year or so, there's probably going to be more of a softening on the residential side versus office. But we track all those pretty carefully and make sure we're trying to stay in front of it.
And at this time, I'll turn the call back over to Mr. Sweeney for closing remarks.
Very well, thanks everyone for participating in today's call. Again, we want to remind everybody, we would love to see everyone in Philadelphia, on May 8, starting around 10 o' clock. Tom's team is available to handle any of the logistics you may have in getting into town, but we're looking forward to really good presentation and showcasing our inventory and our management team throughout the company. So thank you very much.
Thank you. That concludes today's conference call. You may now disconnect.
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