Earnings Call: Q3 2019

Oct 18, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Brandywine Realty Trust Third Quarter 2019 Earnings Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. You may begin. Thank you very much. Good morning, everyone, and thank you all for participating in our Q3 2019 earnings call. On today's call with me as always are George Johnson, our Executive VP of Operations Dan Palazzo, our Vice President and Chief Accounting Officer and Tom Wirth, our Executive VP and Chief Financial Officer. Prior to beginning, certain information discussed during our call may constitute forward looking statements within the meaning of the federal securities law. Although we believe these estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we filed with the SEC. So looking at our business plan, we're in great shape and substantially done for 2019. So after a very brief review of our 2019 plan, we'll outline our 2020 earnings guidance and our business plan. Tom will then provide a synopsis of financial results. And after that, Tom, George, Dan and I will be available to answer any questions you may have. Our business plan continues to be very straightforward. Simply take advantage of great product in strong markets to lease space at increasing net effective rents by controlling capital costs, delivering positive mark to markets with strong annual rent increases. Our 2019 plan accomplished that objective as well our 2020 business plan. We are 100% done on our speculative revenue target for 2019. The leasing pipeline looking forward remains deep for our existing inventory at about 1,500,000 square feet, including approximately 270,000 Square Feet in advanced stages of negotiations. For the Q3, we posted strong rental rate mark to markets of 9.3% GAAP and 4.2% cash. Year to date, our cash same store growth rate is 1.9%. As you may recall, we did elect last year to keep a major renovation project in our same store pool. That project, 1676 International Drive in Northern Virginia, is undergoing a full renovation and is currently 21% occupied. I'll touch on it a little bit later, but this project will deliver an excellent return on our invested capital. By keeping it in the same store, however, it has had a 100 basis point and 250 basis point adverse impact on our 2019 2020 same store growth rate. To illustrate this impact as well as the impact on our occupancy levels, we did provide a road map of 1676 International Drive's impact on same store and occupancy levels on Page 7 of our supplemental package. Based on excellent progress so far, we've raised the bottom end of our range of $0.01 to $1.41 and narrowed the top end to $1.43 for a mid point of $1.42 per share. As outlined on Page 1011 of our SIP, we expect both Greater Philadelphia and Austin to remain strong going into 2020, thereby generating good leasing activity and increasing pipeline and good leasing levels. A couple of quick notes on markets. Austin continues to benefit from tremendous corporate attraction and in market expansion as well as a tremendous in migration of population. For the Q3 of 2019, asking rents increased 6.2% year over year with 2,100,000 square feet of absorption in the last 9 months of 2019. A great way to illustrate the strength of Austin's continued strength and growth is that over the last 5 years, the Austin market has added over 8,400,000 square feet of office space, while increasing occupancy by over 3 20 basis points. Philadelphia had 1,000,000 square feet of absorption over the last year. The trophy class vacancy rate has been reduced to 5% from 5.3% at the end of 2019, which ranks among the lowest of the top 25 largest MSAs. We've continued to grow jobs over the last year and are experiencing solid demand through the Q3 of 2019 with asking rents increasing 4.4% year over year. Philocta continues to benefit from an emerging life science sector supported by almost $1,000,000,000 in NIH funding, which ranked 3rd nationally behind only Boston and New York City. University City receives 42% of all NIH funds allocated to the entire state of Pennsylvania. We believe our Schuylkill Yards development is well positioned to take advantage of this growth acceleration. In fact, Philadelphia was in the news recently when the CEO of Johnson and Johnson said that Philadelphia has the potential to be the Silicon Valley of the health care sector. The comprehensive redevelopment of 1676 is on time, on budget. We have 236,000 square feet of vacant space. Our current pipeline is almost 900,000 square feet, which is up significantly since our July call. We are under letter of intent and in advance lease negotiations on 111,000 square feet. Rent levels, we believe, will be in the mid-40s, representing about a 15% increase over expiring rents. The projections still reflect that we'll realize a return on our incremental capital of over 20% and we'll stabilize that property at about a 9% yield on aggregate new basis. Turning to the balance sheet and Tom will touch on this. We did take advantage of the public debt markets to raise $215,000,000 of unsecured bonds at an average rate of 3% and an average term of 7.5 years. This financing improves our liquidity. We now have full availability under our $600,000,000 line of credit and we also lowered our overall cost of debt and extended our maturity schedule. So with that overview of the excellent backdrop of 2019, we also announced our 2020 business plan along with related earnings guidance. The 2020 plan is headlined by 2 operating metrics that demonstrate excellent future growth potential. Our cash mark to market range is between 8% 10% and our GAAP mark to market range is between 17% 19%. We anticipate that for 2020, all of our regions will post positive mark to market results on both a cash and GAAP basis. Also from a forward growth perspective, our major 2020 rollovers create significant upside due to tremendous mark to markets. Our SHI rollover in Austin is a 20% cash and a 28% GAAP mark to market. Macquarie in Philadelphia is an 18% cash and a 22% GAAP. And Reliance also in Philadelphia is a 20% cash and a 24% GAAP. So our GAAP same store growth rate of 2.4% is driven by Philadelphia at 4.5% and the Pennsylvania suburbs at just shy of 7%. Obviously, due to the rollovers taking place, MetDC and Austin will be slightly negative due to those rolls. As I noted earlier, our same store forecast due to the inclusion of 1676, we don't believe reflects the strength of our overall portfolio. And as we noted on that schedule, without the inclusion of this property, our 2020 cash same store range would be 2.5% to 4.5%, which we think is pretty solid. Other key operating highlights, spec revenue of $31,000,000 already 50% achieved. Occupancy levels will close out between 94% 95% and will also be 95% to 96% leased by year end 2020. Including the rollout of Macquarie of 150,000 square feet in July, we do project a retention rate of 65%. Capital, which is a key focus of ours, will run about 14% of revenues, which is consistent with our 2019 run rate. We do project growing FFO of 3% at the midpoint. And our debt to EBITDA range, we project at year end will be between 6.1x and 6.3x. CAG will range between 71% and 78% and is down slightly from our 2019 range. That decrease is primarily attributable to the capital and free rent to the anticipated backfill of 1676 International Drive where we are projecting absorbing a number of square feet within 12 months of that space being vacated. Just to amplify a couple of vacancies impact on 'twenty, at 1676, we are projecting about 200,000 square feet of lease up at a cash mark to market of 14.7% and about $3,000,000 of GAAP revenue as part of our 2020 plan. On the SHI role in Austin, we're projecting about 148,000 square feet of absorption at a mark to market on a cash mark to market of just shy of 20%. 40% of that square footage has already been executed and we anticipate generating a couple of $1,000,000 of revenue on a GAAP basis from that SHI release. Macquarie, we have no GAAP and no cash revenue in our 2020 as a result of that mid year rollout. Just to further amplify, that $5,000,000 of revenue coming out of $16.76 and SHI is GAAP revenue and not cash. So the upshot is our 2020 operating forecast grows FFO of 3%, keeps our excuse me, keeps our balance sheet strong, deploys some capital into development, keeps our capital ratios on track with excellent cash and GAAP mark to markets. To spend a few minutes on development and investments, when we do look at the development landscape and the investment side of our business, we do recognize that there's a lot of uncertainty in the macro environment that could impact the near term economic outlook. If you think back, our goal for 2019 was really to get all of our targeted development projects in a full go mode with all approvals, design development and marketing programs fully in place. As we're closing out 'nineteen, we feel we've accomplished that objective. But looking forward to 2020 2021, assuming continuation of the demand drivers that we're seeing and continued strong market conditions, we do plan on placing more land into active development. As such, our 2020 plan includes 2 targeted development starts. And our development pipeline can really be classified into 2 components, our near term production level assets and our long term mixed use master plan developments. Our production level assets can be completed within 4 to 6 quarters. They cost between $40,000,000 $70,000,000 and range in size between $100,000 160,000 165,000 square feet. The cash yields in all these projects are targeted around 8%. These assets are Four Points and Garza in Austin and 650 Park Avenue and 155 King of Prussia Road in Pennsylvania. On these projects, we have a combined prospect list aggregating almost 2,000,000 square feet. Each of these projects are ready to go pending pre leasing. As I mentioned, we have 2 starts built into our 2020 plan. Just a quick note on a couple of projects we have under existing development. 405 Colorado continues on schedule and on budget. We're now 45% leased. We anticipate that project will generate about an 8.5% yield on cost and the schedule holds with it 4Q 2020 completion and stabilization by 2021. The Bolton Building is under renovation. That work will be done by the Q2 of 2020. And as we've noted, that building is the office component is fully leased to Spark Therapeutics and we're actively leasing the 1st floor's retail space. And looking at our master plan mixed use projects, which are Schuylkill Yards and Broadmoor, We did update the disclosure within the supplemental package on Pages 1516 to provide a lot more information on those projects. So a couple of quick highlights on each. On Schuylkill Yards, full master plan approvals are completely in place. The design development is substantially complete on the first two buildings. Final pricing on those buildings is underway. Marketing efforts continue with a pipeline still around 1,500,000 square feet, including significant interest from life science tenants. We are in very active discussions with joint venture financing sources on it to provide equity for the project. Our existing investment base aggregating approximately $90,000,000 will be sufficient to meet our equity requirements in the contemplated equity joint venture structures on those projects at our targeted 35% hold. So no additional cash requirements are anticipated on our Schuylkill yard starts. Prior to starting either tower, we will have final construction pricing locked down and all equity and debt financing committed and announced as part of any start announcement. Given our read on the residential market, we could be assuming the above conditions are met in a position to go on the West Tower in the next couple of quarters. The East Tower, which is predominantly office and a potential life science component, does require an active tenant as well as having those costs and financing additions met prior to any start. A final point worth noting that you'll see on the page in the supplemental is that our Schuylkill Yards master plan can accommodate almost 2,000,000 square feet of life science space. Given the strong demand drivers we're seeing in that sector, we have also commenced the design development process for a 400,000 square foot dedicated life science building that could commence construction very late in 2020 or early 2021 in a joint venture with our life science partner. On Broadmoor, which is framed out on Page 16, again, all approvals done. I do want to highlight that we can build about 2,700,000 square feet of space and over 800 apartments with the existing buildings in place. And we are into full planning and costing on 3 blocks with marketing launches attendant there too, which I detailed the component parts of that on Page 16. All three blocks could be in a position to start by mid year 2020, again assuming favorable market and financing conditions stay in place. Discussions on the train station, public space sequencing and retail hospitality initiatives are all continuing at an excellent pace. We have one acquisition program for 2020, which is part of the previously announced transaction with Penn Medicine. We have 160,000 square foot building in Radnor that we plan on purchasing later in the year. We do anticipate placing that building into redevelopment upon acquisition. Excluding the committed spend we already have in our 2020 plan for 405 Colorado, the Bolton Building and few other items, as Tom will outline, our plan does include $50,000,000 of incremental spend in 2020 on our 2 projected development starts. To finance these opportunities, we will be evaluating well timed asset sales, looking at several of our joint ventures to harvest profit, generate liquidity and reduce debt attribution. We are also evaluating several value add opportunities. And as we did in 2018 and have done in 2019, we expect any deployment to be relatively earnings neutral and accelerate bottom line cash flow growth. So to close out, 2019 plans essentially wrapped up. Our focus is now on our 2020 plan, and we're delighted that the bottom line results is strong effective rent growth, a growth in FFO and a continued solid balance sheet performance. At this point, I'll turn it over to Tom to review our financial results. Thank you, Jerry. Our 3rd quarter net income totaled $6,700,000 or $0.04 per diluted share and FFO totaled 64,000,000 dollars or $0.36 per diluted share, which met consensus estimates. In addition, we narrowed our 2019 guidance by $0.02 per share and the midpoint remains $1.42 as compared to the initial first and second quarter guidance. Some general observations of the 3rd quarter were operating results were generally in line with our 2nd quarter guidance. Our 2nd quarter charge and interest coverage ratios were 3.63.9 respectively. Both metrics improved as compared to the Q3 of 2018. Our annualized net debt to EBITDA decreased to $6,300,000 which benefited from the improving operations and the sale of Plaza 1900 for roughly $36,000,000 Our 2019 guidance looking at the 4th quarter, we have some general assumptions. Portfolio operating income will total about $84,500,000 FFO contribution from joint ventures will total $2,500,000 G and A, our 4th quarter G and A expense will decrease from $7,000,000 to 6,500,000 dollars The incremental decrease is primarily due to expected timing of expenses and the full year G and A expense will total approximately 31,700,000 dollars Interest expense will be $20,500,000 with 92% of our debt being fixed rate at the end of the quarter, but down to but up to 98% fixed as a result of the bond deal. Capitalized interest will approximate 800,000 dollars Full year interest expense should be about $82,000,000 Termination fee and other, we anticipate termination income of $2,600,000 for the year. Other income will approximate $7,000,000 Net management and leasing development fees will be $2,500,000 and approximate $9,000,000 for the year. Financing activity. During the Q4, we took advantage of the public debt markets and issued $200,000,000 of secured bonds at a premium to generate about $214,000,000 of net proceeds. The issuance comprised of reopening of our 2429 bonds each for $100,000,000 The issuance resulted in reducing our unsecured line of credit to 0. Weighted average interest rate on those bonds is 3%, the weighted average maturity of 7.5 years, percent of fixed rate debt is now above 98% and both bond issuances are now index eligible. Based on our capital plan, which includes $45,000,000 of development and redevelopment, dollars 15,000,000 of revenue maintained, dollars 10,000,000 of revenue create spending, approximately $18,500,000 for the acquisition of Radnor Land. Our cash balance will approximate $50,000,000 at year end. Based on our estimated 4th quarter EBITDA capital spend, we continue to project that our net debt to EBITDA ratio will be within 6.0 to 6.3 range with the main variable being the timing and scope of our development activities and related capital spend. In addition, our debt to JV will remain in the low 40% range. We anticipate fixed charge to be 3.6 and our interest coverage to be 3.9 by year end. Looking at 2020 guidance, at the midpoint, net income will be $0.29 per diluted share and FFO will be $1.46 per diluted share. Some of our general assumptions, portfolio operating results, property level GAAP NOI will increase approximately $10,000,000 year over year, primarily due to Drexel Plaza, which will generate $2,000,000 as Park takes occupancy during the year and $8,000,000 increase in same store NOI on a GAAP basis. FFO from our unconsolidated joint ventures will total about $10,500,000 G and A should range between $30,000,000 $31,000,000 On the investment side, we have no sales for $20,000,000 and we do have 2 development starts that will not generate any earnings in 2020. Interest expense will increase to approximately $82,000,000 to $83,000,000 primarily due to also in that number includes our payoff of the 4 Tower Bridge mortgage which will occur in December for about $9,000,000 Capitalized interest will increase from $3,000,000 to 3,500,000 dollars primarily due to building a 405 Colorado and we anticipate paying off our 2 Logan mortgage on May 1, which is approximately $80,000,000 and at a rate just below 4%. Land sales and tax provisions should net to about 0. Termination fees and other income should total about $10,000,000 Net management and development fees will be $8,000,000 which is about $1,500,000 below our 2019 estimate. While property management fees will remain constant, we anticipate lower development fee income as the development projects at Garza for SHI and Radnor for Penn Medicine are completed during the first half of twenty twenty. We have no anticipated ATM or share buyback activity. Turning to the capital plan, we do project CAD will be slightly lower and our coverage will be between 71% to 78%. The main contributors to the lower coverage is due to an increase of straight line rent and the re leasing of the space at $1676,000 which is anticipated to occur within the 12 months of KPMG leaving the space. Our total plan for the year is about $500,000,000 It's comprised of about $135,000,000 of development and redevelopment of which $50,000,000 is going to be new development starts for the year, about $135,000,000 of common dividends. Revenue maintained should be $63,000,000 revenue create should be $50,000,000 And as I mentioned, we show about $90,000,000 of mortgage payoffs for 2 Logan and 4 Tower Bridge, dollars 7,000,000 of mortgage amortization, dollars 20,000,000 for the acquisition of 250 King of Crochet Road. The sources for that will be about $220,000,000 of cash flow after interest, dollars 220,000,000 for the use of the line of credit, dollars 50,000,000 of cash on hand, which we anticipate at the end of 'nineteen and about $10,000,000 in land sales. Based on our capital plan, our line of credit balance will be about $220,000,000 at the end of the year. We project net debt to EBITDA will range between 6.1 $6.3 Again, the main variable being timing of development. In addition, our debt to GAV should be maintained in the low 40% range. In addition, we anticipate fixed charge will improve to 3.7% and our interest coverage will improve to 4.0%. I'd like to turn the call back over to Jerry. Great, Tom. Thank you very much. With that, we're delighted to open up the floor for questions. We do ask as we always do that in the interest of time, you limit yourself to one question and a follow-up. Operator? Thank And our first question comes from Manny Korchman from Citi. Your line is open. Hey, good morning everyone. Jerry, in your remarks, you mentioned the macro economy and how that might impact leasing or tenant desires. Can you talk about that sort of construct within both the life science space and the tech tenancy that's likely targeting the Austin development? Yes, good morning, Manny. It's a great question. And I think looking at the 2 different sectors, I mean, certainly with a lot of the political dialogue taking place across the country on the regulatory risk facing Big Tech. While we haven't seen any direct impact on that, it is creeping into conversation circles. So there's no question that the potential for any type of legislative action, any adverse public policy decisions, primarily coming from a federal level, but certainly some susceptibility at the state level, could have an impact on the growth expectations of some of the major absorbers of space on the technology sector side. Again, haven't really seen any definitive action steps being taken in response to something that may happen in the future. But certainly, that is creeping into more and more conversations in terms of forward planning activity. I think the same thing holds true quite candidly on the life science space where you certainly have an awful lot of dialogue in the public sector on healthcare costs, the profitability of pharmaceutical companies, concentration of wealth among large employers in that life science space that I think that does create a bit of an overhang in terms of what some companies may be looking to do. Again, it's just out there as the yellow flag pending the outcome of some of these political processes. But there's no question, in any sector, regulatory risk and public policy always provide a potential positive or adverse impact on growth plans. And I mean given the current dialogue that we're all hearing in the public sector space, there's certainly again some yellow flags out there depending on how some of those things turn out. Great. And then just quickly on 1676, the LOIs you discussed this quarter, are those the same ones as last quarter and just kind of your expected timing on converting that to a full lease? Yes. I mean, actually at last time last call, Manny, we were under a letter of intent. Now we're inactive. Lease negotiation is pretty far advanced. So we're certainly anticipating that rolling into a lease. Thanks, Derek. Thank you. Thank you. Our next question comes from Jamie Feldman from Bank of America Merrill Lynch. Your line is Great. Thank you. I appreciate the color on potential development starts and funding. I guess if you were to handicap the two starts, what's most likely? Would they more be more of your the production assets you mentioned or some of the larger projects? And then in that light, how should we think about potential asset sales like the magnitude and maybe even the yield or the cap rate on the assets you might be selling? Yes. Good morning, Jamie. In terms of the near term development starts, I think given the pipeline that we're seeing, we would anticipate a higher probability right now to the what I call the production level assets, either at GARS or 4 points or 6.50 or 155. And they again can be delivered within 4 to 6 quarters. So given the level of pre leasing there, the pricing coming out where we anticipate it would be, I think we're certainly gearing up for 1 or 2 of those to start. I think on Broadmoor, we're really excited about the demand that we're seeing. Those blocks that we're planning clearly could be in a position with final site plan approval and building permits to go mid year 'twenty. So we assign a pretty good probability to one of those starts going as well. And then Schuylkill Yards right now, we'll see how the final pricing works out. We are we do have a very healthy pipeline that we feel pretty good about. The discussions we're having with potential equity partners, which are clearly very important to that project for us, are progressing nicely. But if we had to handicap it right now, our guess is that the higher probability, which kind of reflects the $50,000,000 in the plan, will be coming out of those production level assets. And in terms of asset sales, as you well know, we're always in the market exploring different types of sales opportunities. We continue to be very pleased with the level of response that we see even that one sale down in Northern Virginia, very active bid process, good pricing, a pretty wide array of potential buyers. Debt markets are really fluid and attractively priced. And we would expect us to prune some assets in the Pennsylvania suburbs as a primary receiving receiver or generator of additional funds in the latter part of 2020. Okay. And then are there any land sale gains in your 2020 guidance? Jamie, this is Tom. We don't have any material land gain sales. We did say there's going to be about $10,000,000 of land gain sales. Any gains of that nature will be less than a penny, probably close to 0.5 Okay, great. Thank you. Thank you. Thank you. Our next question comes from Craig Mailman from KeyBanc Capital Markets. Your line is open. Hey, guys. Just a clarification. So KPMG, are they they came out of the numbers kind of October 1, right? Correct. Yes, correct. I'm just curious, you guys kept occupancy guidance the same for this year. You have 130 basis points of commencements kind of in the bag so far, but then you're going to lose most of the 160 basis points of the remaining expirations, right? I'm just curious, could you walk me through how you get to 94 to 95 from 93 with the drag from KPMG? Yes, Craig, good morning. It's George. KPMG did leave 9:30. We've got additional explorations. The pre lease that we have will commence in the Q4. And then there are a couple of move outs that immediately get backfilled in the Q4. They don't show so you see the expiration, but there's no pre lease listed in our number because the space isn't vacant as of the end of the quarter. So that's really kind of how we roll up to maintain that same 94% to 95% range. Got you. So those pre leases aren't necessarily in the 4Q commencements on the leasing page? Right. Okay, got you. And then just another quick one. So on the 400,000 square foot dedicated life science building, could you kind of give us a sense of what you guys think you might own on that? And did Drexel pass on the don't they have a right of first offer for like 15% of each building? Yes. Well, a couple of points there, Craig. We're anticipating kind of being in the 50% range in terms of the ownership of the life science dedicated project. Drexel does have an opportunity to participate in our projects going forward as frankly as any tenant who's interested. Drexel, they're right, it's a rolling right. There's no notice period. They could wind up being a part of our life science building. I mean, what we're seeing really is a burgeoning demand coming out of the anchor employers here in University City, whether it be Children's Hospital, the University of Pennsylvania Medical System, Drexel University and all of their various academic and research initiatives, the Wistar Institute. So, I think in assessing the depth and the diversity of the demand, I think we felt very good about launching that design development process. As the building, the physical form begins to take shape from a plans and specs standpoint, we'll commence the marketing of that and the hope would be that we could identify some tenancies as we're going through the design development process. Got you. Would it be like 100% built out as lab space with all the improvements or would it just be geared towards life science tenants who want to cluster together? The actual specific build out will be driven by individual tenant requirements. The physical specifications of the building, the ventilation, the mechanical systems, ceiling heights, floor loads, etcetera, will all be designed to be convertible into wetdry lab administrative. So provide complete optionality in terms of interior layout to what the tenant requirements might be. Got you. Great. Thank you. You're welcome. Thank you. Our next question comes from John Guinee from Stifel. Your line is open. Great. One curiosity question, I've just got to ask it. So when you're walking around the country, traveling around the country and you see a wonderful park like your new park at Schuylkill, some of them are clean and very user friendly and some of them are full of tents and homeless people. Are Philadelphia's finest able to keep that park pleasant and usable? It is very pleasant, eminently usable and being adopted very quickly into the public cityscape in Philadelphia. We have between Brandywine personnel, between the University City District folks as well as Philadelphia's finest, there is a very coordinated campaign that's been incredibly successful. John, not just at Drexel Square, but also at our Sierra Green Park to make sure that we are always keeping those parks as friendly as possible to the general public. And then the second question, you've been very, very good about raising your dividend the last few years. What are you thinking about the dividend this year and what's your taxable issues? Well, I think from a taxable standpoint, Tom, I'll defer to you. But I think from a dividend standpoint, look, we are encouraged by some of the forward signs we're seeing, ranging, John, from a real estate level of the forward pipeline. I think we're really pleased with the strong mark to markets we're seeing both primarily on a cash basis. GAAP is very important too, but as they say you can't buy groceries with GAAP. So, having really effective good cash rank growth, the annual escalations we're building into our projects, what we think are some really good near term convertible development opportunities that will grow cash flow tremendously and in fact that there'll be no ongoing capital costs. All of those are very positive attributes our Board looks at in evaluating the dividend growth plan. I think what we're looking for right now is just some little more visibility on executing the capital side of that plan. It's no secret that construction costs have continued to escalate, not just for base building, but for TI as you well know. And we have a number of very interesting initiatives underway to kind of keep a little on those construction cost escalations, which I think are really resulting in keeping our capital costs in that 14% of revenue range, which is really very good. So we're able to generate net effective rent growth. So if those two elements come together, kind of the forward leasing visibility with that positive mark to market as well as the good containment on executing leases from a capital standpoint. I think the Board is always biased to making sure the shareholders receive a very effective share of our growth model. Tom, on the tax side? Yes, John. On the dividend side, we don't have any pressure on the dividend based on the current recurring taxable income we're having. Obviously, if we do have some asset sales depending on when they happen and what those assets may generate in capital gains, we would have to assess whether there's a need to raise it. But at this point based on our operating plan for 2020, there is no taxable reason to raise the dividend. Great. Thank you. Thank you, John. Thanks, John. Thank you. Our next question comes from Jason Green from Evercore ISI. Your line is open. Good morning. Just a question on Schuylkill Yards. Can you talk more about the interest specifically for the office portion of Schuylkill Yards? If there are any changes to previous requirements for the project to get started? Sure, Jason. Good morning. No change to the pre leasing requirements on the East Tower. We're still targeting that 35% to 50% range of the office component. You'll recall that building has the flexible to be up to a third life science. So we're trying to manage those 2 different targeted audiences. And the pipeline again remains pretty diverse. There's a few larger tenants in there that we're waiting for some feedback on. But we're also doing a very effective job, our leasing teams that is really developing a pipeline of single and 2 floor users that we think could really add to the pipeline execution as we move forward. On the the with the right equity financing in place and given the read that we have on the underlying strength of this location and the depth of the residential demand drivers, I think we're prepared to start that given it's fairly small office component without having any pre lease in place. So no real change from the plan we've outlined before. Okay. And then on 405 Colorado, the additional 10% leased, was that an expansion of the tenant that was already in there or was that a new lease? And then I guess how should we think about the remaining 55% in regards to how quickly that will get leased up and what demand is like? The incremental 10% was a new tenants coming in, so not an existing expansion. And look, I think we're really happy with the pipeline we have there. We're 3 to 4 times covered on the remaining 110,000 square feet with some very near term discussions underway. We have been able to continue to push rents through the development cycle. I mean, the building, we're still the garage is going up now up to halfway through not even quite halfway up the garage levels. So I think we're with the pipeline, we feel pretty confident that we'll get some leasing done in the next several months. And as the building really starts to take shape kind of Q2 and Q3 of next year, I think we'll be able to lock it away. But I think as I've mentioned, we feel very confident this is one of those projects like an FMC or Sierra Center will be substantially leased by the time we open up the doors. Got it. Thanks very much. You're welcome. Thank you. Our next question comes from Daniel Ismail from Green Street Advisors. Your line is open. Great. Thanks guys. Good morning. Good morning. Given the recent headlines, have you noticed any pullback in co working activity in your markets? And then as a follow-up, can you provide an update on some of the flexible options you guys are working on internally? Sure. Well, I mean, there's certainly been a lot of very public disruption in that space in the last 60 days or so. I think what we've seen is a push by some of the companies to try and get leasing transactions done. I mean, I think with the dislocation of the major move in the WeWorks, I think you're seeing a number of other companies really try and accelerate their activity. So we haven't really seen a pullback from that side, from the demand side. I think in talking to a lot of landlords and certainly from Brandywine's perspective, we continue to be extremely focused on what the credit support how that credit support is evidenced on all of our co working initiatives. I mean, we have a little bit more than 2% of our revenues coming in from a variety of co working initiatives, primarily Regis. We do have one WeWorks location, a few other executive suites. So, we're very focused on making sure there's adequate credit support there, really walk those spaces to make sure there's high levels of occupancy. We're very much involved in the design of those spaces. So we think there's a high level of convertibility if the operators have any issues. And I think certainly Brandywine, our BEX initiative, the utilization rates are north of 80 percent, tremendous benefit. We're looking at expanding that in some of our existing projects, as well as quite candidly even within some of our development projects allocating pods of our space to facilitate the flexible providing some of our tenants a flexible term lease structure that can bridge out some of their shorter intermediate term demands and have a compensation structure in place for us that gives us an accelerated return on the capital we need to invest to meet that flexibility requirement. And by a compensation structure, would that be some sort of share over a market rent premium? Yes, I probably was a little obtuse on that. Yes, I mean, the higher rental rate that would compensate us for the for not having a 5 year term or a 10 year term in place. And certainly, our experience is that tenants will pay that premium to afford them the business plan flexibility that's important to how they run their business. And not to go over my 2 question limit, but has that have you guys generally found that to be in the 2x range or 50% or can you frame that type of rental premium? It's kind of it could be up to I wouldn't say up to 2x, but it's probably a 50% premium. Okay, great. That's helpful. Thanks guys. Thank you. Thank you. And I am showing no further questions from our phone lines. I'd now like turn the conference back over to Jerry Sweeney for any closing remarks. Great. The only closing remark is thank you for your engagement this morning. Thank you for continuing to follow the company. We're very excited about where we stand today with the portfolio, with the growth opportunities in the near term that we have every intention of executing. And we look forward to updating you on our year end call, which will occur in late January of next year. Thank you very much. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a