Good morning. Thank you for standing by. At this time, we'd like to welcome everyone to the Brandywine Realty Trust third quarter 2017 earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press star then one on your telephone keypad. If you'd like to withdraw a question, press the pound key. I'd now like to turn today's conference over to Gerry Sweeney, President and CEO. Sir, you may begin.
Holly, thank you very much. Thank you all for participating in our third quarter earnings conference call. On today's call with me are George Johnstone, our Executive Vice President of Operations, Tom Wirth, our Executive VP and Chief Financial Officer, Dan Palazzo, our Vice President and Chief Accounting Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports filed with the SEC.
As we always do, we'll provide an overview of our 2017 business plan. We also introduce 2018 guidance, and we'll provide some color on those key assumptions. Before starting that component, though, several overriding comments. As noted in our press release, we exceeded our sales target by over $230 million, more than doubling our projected 2017 volume of $200 million. We have said all year that if the market presented us with an opportunity to exceed our target, that we would do it. It did, we think it's actually great news for the company. We harvested significant value creation, continued our portfolio refinement, pre-funded our 2018 development pipeline, and further de-leveraged both directly and through joint venture debt attribution. That velocity of sales, though, clearly has had an impact on our near-term earnings forecast. For several years, we've maintained that balance sheet considerations are paramount.
As we looked ahead, we see a tremendous opportunity to create great value for our company through our development pipeline. That costs money, our overriding goal is to de-leverage. We did see a window to accelerate sales while at the same time continuing to grow earnings, increase our dividend, pre-fund our development pipeline, and get on a clear, disciplined path to our 6.0 times EBITDA target. The impact was that our 2018 FFO forecast of 6% growth is below street estimated growth rates. We felt that it was effectively counterbalanced with a 16% cash flow growth rate, no funding exposure on our development pipeline, and the financial discipline of creating a stronger balance sheet by year-end 2018, in accordance with our five-year plan. All of these efforts have culminated in certainly reinforcing our cash flow trajectory.
Given our visibility on cash flow growth, we also are announcing our intention to raise our dividend by 12.5%, or $0.02 a quarter or $0.08 annually during 2018. In stepping back and looking at where we are going, the story of 2018 is really one of FFO growth, AFFO growth, dividend increase, pre-funded development pipeline, and an EBITDA target range of 6.0-6.2 times. I know that we missed consensus estimates, but that was really driven by several key factors, the major one of which was obviously the doubling of our sales target, augmented by our 2017-2018 spot known vacancies that reduced our year-over-year average occupancy rate and the burn-off of some third-party development fee income.
With FMC coming online and the other strong portfolio metrics, we felt we created the earnings momentum to accelerate the sales while still posting earnings and AFFO growth. The vacancies that George will walk you through are in projects and sub-markets where our operating teams excel, and our business plan for 2018 forecast lays out a baseline absorption pace that we believe is conservative and very achievable. Moving ahead, there are very few pieces left in our 2017 business plan, and we have good visibility on projected results. Certainly, as a consequence of that, we've either increased or tightened most of our 2018 business plan ranges. For the year, our focus, as we've articulated on previous calls, has been on operational performance, growing cash flow, and our disposition program, and we believe that focus has paid off. A very quick recap of 2017.
All of our operating goals are essentially in the bag, with 99% of our speculative revenue target achieved. We ended the quarter where we thought at 92% occupied and are at 94.1% leased. Mark-to-market for the quarter on a GAAP basis was 10.7%, 3.2% on a cash basis, which helped us maintain our 2017 range of 6%-7% of GAAP and 10%-11% on a cash basis. Retention was slightly ahead of our plan at 81%. As anticipated, our same-store numbers for the quarter were a -1.3% on a GAAP basis and 6.3% on a cash basis. For the year, we are maintaining our GAAP NOI growth rate of 0%-1%, and our cash NOI growth rate of 7%-8%. Our leasing capital metrics continue to perform on plan, so we're leaving that range intact.
On the investment front, we sold the $220 million additional assets during the quarter, primarily highlighted by two sales within our 50% ownership joint ventures, a $333 million portfolio sale in Austin, and a $106 million sale of an office property within our Allstate D.C. joint venture. Year-to-date, we've sold a total of $370 million, and are increasing our disposition target by the $230 million-$430 million for 2017. We have several other properties in the Pennsylvania suburbs aggregating about $60 million under agreement that we anticipate closing during the fourth quarter of 2017. As part of our Schuylkill Yards development, we closed on two redevelopment opportunities in University City, containing a total of 340,000 sq ft for a total pricing of $67 million.
These opportunities were funded with $30 million from the borrowings under our credit facility and $32 million of a 1031 exchange from our Concord sale in Q1 2017. We do expect to start the renovation of One Drexel Plaza in the first quarter of 2018 and anticipate about an 8.5% yield upon completion in 2019. Some other news on the development front, we did announce our anticipated construction start of a 165,000 square foot building at our Four Points Campus in Austin, Texas. This project is 100% leased to an existing tenant under a 10-year lease. They needed expansion space, with our estimated construction cost of roughly $48 million. We anticipate delivering that project in Q1 2019 at an 8.4% return on cost. We continue to make great strides in Broadmoor 6.
Our renovation of this 144,000 square foot building is really the first step in us executing our overall master plan for the Broadmoor campus. During the quarter, we leased additional square footage, bringing us to 79% leased with a strong pipeline of activity. We expect to deliver that building by the end of this year and stabilize in Q2 2018 at a 9.8% cash yield on cost. We are also continuing with construction of our second building at Subaru of America at our Knights Crossing campus. That project is also 100% leased to Subaru on an 18-year lease at a 9.5% return on cost. It also incorporates 2% annual bumps. We expect to deliver and stabilize that project in Q2 2018. On FMC, we have placed the final residential units fully into service. The hotel and service segment will close October at about 70% occupancy.
For the market rate rental residences, we are currently 68% occupied and 75% leased. Our revenue pace for 2017 is behind the original plan, but with all units now delivered, rates and absorption are in line with our pro forma, and we do expect the residential component will be stabilized by Q1 2018. We also continue to advance planning and pre-development efforts on several development sites, including 405 Colorado, Garza, our Broadmoor master plan, and our Metroplex projects in the Pennsylvania suburbs. We are also finalizing plans for two smaller renovation projects in the PA suburbs that we expect to deliver in late 2018 and early 2019. From an overall standpoint, the development pipeline is 83% pre-leased, and our projected 2018 development spend has been fully funded through the sales accelerations.
As Tom will review in much more detail, we did tighten our guidance range from $1.34-$1.38 per share to $1.32-$1.34 per share, primarily driven by those factors I mentioned earlier. Looking at 2018, the headlines of the plan are the 6% increase in year-over-year FFO growth, 16% increase in cash flow, punctuated by a 12.5% dividend increase. We have issued an FFO range of $1.36-$1.46, which, as I acknowledged earlier, is below street consensus, primarily, again, driven by those factors. We have also included to provide some additional guidance to the analysts and our investors, a new page in our supplemental package, which compares our 2018 plan to the five-year metrics and targets we laid out at our recent investor day, so you can easily track our forecast versus our five-year plan that we outlined during that meeting.
In quickly looking at our 2018 plan highlights, it's based on $26 million of speculative revenue, which is 49% complete. 2018 year-end occupancy levels will range between 94%-95%. Leasing levels will improve to between 95%-96%. However, as I noted, our average same-store occupancy in 2018 will be around 92.5% versus our 93.5% average in 2017, which is primarily driven by the large tenant vacates that we've highlighted on previous calls that are occurring during 2017. Obviously, from a mathematical standpoint, that lower average occupancy has impacted our annual same-store growth rate for 2018. We are forecasting a retention rate of 67%, and a blended GAAP mark-to-market to range between 8%-10%.
While we expect 4%-6% cash mark-to-market on new leases, our blended cash mark-to-market will be between 0%-2% after adjustments for the Northrop Grumman lease that George will talk about during his presentation. Same-store numbers, as a consequence, will range between -1% to +1% on a GAAP basis, and 1%-3% on a cash basis. Leasing capital is up slightly year-over-year, primarily driven by the lower levels in 2017, due to the no-capital IBM renewal that we did for 586,000 square feet in the first half of 2017. The capital costs remain well with inside our 10%-15% of revenue targets. We do anticipate our net effect of rents will increase 6.6% from 2017 levels. We are not programming any acquisitions or sale activity during 2018.
We are projecting, however, one additional development start that we anticipate will range between $50 million-$100 million during the year, based on a pretty strong pipeline of potential deals. Just to reinforce, we will not start any new development without a significant pre-lease. Tom will touch on our financing plans on our unsecured bonds or on term loans. As a final point, as has been noted, a real beneficiary we see of our 2018 plan is the achievement of our real goal to grow cash flow and improve our CAD payout ratio. With our 2018 CAD payout ratio, will range between $1.05-$1.15 per share. When you factor in our target at $0.02 per quarter or $0.08 per your dividend, increasing that to $0.72 a share, we do anticipate our CAD payout ratio will be 65% at the midpoint.
On an FFO basis, again at the midpoint, our 2018 payout ratio will be around 51%. With that overview, let me turn over to George to look at our operating performance, including some color on our 2018 business plan. George will then turn it over to Tom to review our financial performance.
Thank you, Gerry, and good morning. We're pleased with our third quarter results. The substantial completion of the 2017 business plan and the momentum of our operational performance that has generated into the coming year of 2018. Leasing activity remains robust in all of our markets. The pipeline, excluding development properties, stands at 1.7 million square feet, with 557,000 square feet in advanced stages of negotiation. During the quarter, we generated 82 space inspections totaling 506,000 square feet, which represents 55% of available square footage. Turning to our three core markets and the underlying base assumptions contained in the fourth quarter of 2017 and our 2018 business plan. For CBD Philadelphia, we're currently 93% occupied and 96% leased. During the third quarter of 2017, FMC Tower and 1900 Market Street were placed into service, and we acquired 3000 Market Street.
We expect to finish 2017 94% occupied and have several transitional vacancies in our 2018 plan. First, as discussed on previous calls, a 100,000-square-foot tenant will vacate 3 Logan Square on December 31st. We've assumed in our 2018 plan that 60% of this space is reabsorbed, 40,000 square feet in June and 20,000 square feet in November. Based on the tenant's expiring lease, we have a slight roll-down in cash rent and a 20% increase in GAAP rent. At Cira Centre, two full contiguous floors totaling 55,000 square feet roll on June 30th. Our 2018 plan assumes these floors will remain vacant for the duration of the year. Our leasing plan for 2018 in the city will result in a year-end occupancy between 95%-96%, up 100 basis points from our projected year-end 2017 occupancy.
However, as a result of these transitional vacancies, the average occupancy of our CBD same-store properties will be 94% in 2018 versus 96% in 2017, or 200 basis points lower. Turning to the Pennsylvania suburbs, the focus remains on Radnor based on move-outs that occurred earlier this year. As we discussed previously, five tenancies totaling 189,000 square feet vacated during 2017. To date, we have leased 64,000 square feet, with 28,000 square feet taking occupancy in the fourth quarter of 2017 and 36,000 square feet occupying next January. We have assumed 96,000 square feet will be reabsorbed in the third quarter of next year, with the final 29,000 square feet taking occupancy in 2019. The cash mark-to-market on these spaces range between 6%-8%.
Similar to the city, these Radnor vacancies will result in an average occupancy of 89% in 2018 versus 92% in 2017, or 300 basis points lower. Turning to Metro D.C., the Northern Virginia office market drivers continue to be Metro access and fully amenitized buildings and office parks. Regional job growth continues to be driven by the professional and business service sectors, adding roughly 19,000 jobs or 22% of all jobs added over the past year. We extended our largest lease rollover in the region by renewing Northrop Grumman for five years in Dulles Corner. We're presently 51% complete with the regional business plan. Additional renewals account for over 50% of the remaining plan in our D.C. leasing for 2018. Tour activity during the quarter were 21 tours totaling 150,000 square feet, which was both flat quarter-over-quarter and year-over-year.
Our leasing plan for D.C. in 2018 calls for year-end occupancy between 91%-92%, a 100-200 basis point improvement over 2017 year-end levels. Market dynamics in Austin remain strong and positive. At Broadmoor, we're now 79% leased, and with the existing pipeline of prospects, we expect to be 100% leased by year-end 2017. The remaining portion of our DRA joint venture continues to perform well and projects to continue along those lines in 2018. A handful of short-term renewals are anticipated to be finalized in the coming months, and cash rent growth will continue to be north of 10%. Our overall 2018 plan's off to a good start. While the handful of transitional vacancies described earlier impact our same-store NOI performance, our leasing plan lays a clear path to year-end occupancy between 95%-96%.
As Gerry mentioned, the primary driver of our 2018 same-store numbers is the impact of these transitional vacancies and having the average same-store occupancy being 90 basis points lower than our 2017 levels. Our mark-to-market cash metrics adversely impacted by the as-is renewal with Northrop Grumman, but as we detailed on page three of the supplemental, our new leasing cash mark-to-market will range between 4%-6%. The same store will return to growth levels ranging between 3%-5% on a GAAP basis, and 2%-4% on a cash basis in the fourth quarter of 2018. Leasing capital per square foot has escalated over prior year levels, but at 12% of rents, we remain well within our targeted 10%-15% range. Our budgeted leasing assumptions also contain a third-party brokerage commission assumption for every deal.
Our historical run rate of direct deals is 30%, which could lead to an overall reduction in leasing capital going forward. At this point, I'll turn it over to Tom.
Thank you, George. Our third quarter net income totaled $18.8 million, or $0.11 per diluted share, and our FFO totaled $61.9 million, or $0.35 per diluted share. Some observations for the third quarter are same-store NOI growth for the third quarter was a negative 1.3% GAAP, but positive 6.3% cash. Both excluding net termination fees and other income items. We've had 19 positive quarters of the cash metric improving. While we've had negative quarterly same-store GAAP NOI growth, we continue to anticipate positive growth for the full year. G&A expense decreased from $6.7 million to $5.8 million, and our third quarter G&A was below our $6.5 million forecast, primarily due to the timing of professional and other fees that will be incurred in the fourth quarter.
FFO from our unconsolidated joint ventures totaled $8.9 million, below our third-quarter projection by $0.6 million, primarily due to the sale of 7101 Wisconsin during the quarter. Interest expense totaled $19.7 million, a $600,000 sequential decrease from the second quarter, primarily due to the unsecured bond repayment from the previous quarter. Our third-quarter CAD totaled $42.3 million, representing a 67.1% payout ratio. During the quarter, we incurred $9.8 million of revenue maintaining capital and $5.1 million of revenue creating capital. Looking for the fourth quarter, property-level operating income for the fourth quarter will remain relatively unchanged, with an increase in FMC being partially offset by the sale of one property that's held for sale in our wholly-owned portfolio. G&A expense for the fourth quarter will be approximately $6.5 million, and for the full year, we're approximating $28 million.
Other income excluding FMC retail, we expect fourth quarter to approximate $500,000, and for the full-year estimate, it's $3.5 million. Termination fees, also $500,000 for the fourth quarter, with a full-year estimate of two and a half. Interest expense for the fourth quarter will be $19.5 million, and our full-year numbers should approximate $81 million. FFO contribution from our unconsolidated joint ventures should total about $6 million. The sequential drop of $2.9 million is primarily due to the sale of 7101 Wisconsin, the partial quarter sale of Austin Joint Venture, and included in that is also a $1.2 million prepayment penalty for the early extinguishment of debt, which will be a deduction for our FFO in the fourth quarter. We project that our joint ventures will contribute about $36 million for 2017. Third-party fee income should approximate $27 million, with $9 million of related expense.
Our general business plan assumptions include the increase in our targeted sales range to 430. Acquisitions totaled $67 million. Both acquisitions represent development and redevelopment opportunities, as mentioned by Gerry, and the initial 2017 combined GAAP yields will create no accretion in 2017. Our share count on a weighted average basis is 178.4 for the fourth quarter, with no additional buyback or ATM activity. Our 2017 capital plan ratio will be between 71%-80%, reflecting a $9 million revenue create at CapEx for the balance of the year. Our capital plan for the fourth quarter is comprised of $40 million of development and redevelopment, primarily FMC, the Subaru Training Center, Broadmoor at Four Points, the acquisition of One Drexel Plaza for $37 million, a $28 million common dividend, $6 million of revenue-creating CapEx, and $1 million of mortgage amortization.
Sources of that will be $35 million of cash flow after interest, $86 million of net proceeds from the joint venture sale, and $59 million for the anticipated sale of the properties held for sale at the end of the quarter. This activity will result in a $60 million net reduction to the outstanding line of credit, and our year-end Net Debt to EBITDA will be roughly 6.5. Our third quarter fixed charge and interest coverage ratios were 3.2 and 3.5 respectively. Starting with the 2018 guidance, net income will be $0.39 per share at the midpoint. FFO will be 141 at the midpoint also. Our 2018 range is built with the following assumptions. Property that have GAAP NOI will increase $20 million due to the following. FMC will generate an incremental $15 million-$17 million of GAAP NOI as compared to 2017 projections.
One Drexel Plaza and 3000 Market will generate an incremental $2 million, and redevelopments, including Knights Crossing, will generate an incremental $8 million of income between 2017 and 2018. Partially offsetting those increases are the dilution from the sales that took place within our wholly-owned portfolio of roughly $8 million. FFO contribution from our unconsolidated joint ventures will total $28 million. The decrease from our projected $27 million is primarily due to the sales of the joint ventures at D.C. and Austin. G&A, between $27 million and $28 million. On investments, we have guided no new acquisitions and one development start. Interest expense will decrease to approximately $81 million to $82 million. Included in that assumption is the refinancing of our $325 million unsecured bond, which matures in April, with a new $350 million unsecured bond offering. We're probably targeting a 10-year bond for that.
Issue $200 million bank term loans during the year at 3.25%. That's to reduce the outstanding balance on our line of credit as we go into the end of 2018. Capitalized interest will decrease from $3 million to $2 million as development pipeline becomes operational. We have land sales and a tax provision which will generate $1.3 million of positive income. Termination fees and other income will be $3 million each. Net management fees will be $11 million this year on a net basis. That's primarily due to a couple of factors. One is lower construction management fees of roughly $5 million, and that's substantially due to the Subaru headquarters building at Knights Crossing, which will be completed later this year and finalized in the first quarter, and that will result in a $5 million decrease in 2018.
Lower property management fees due to the third and fourth quarter joint venture property sales. That will make about $2 million. Our plan also includes, as announced, an intent to have a $0.02 per share increase to our quarterly dividend. There's no anticipated ATM or share buyback activity. Our capital plan for 2018 will include CAD increasing 16%, and our coverage ratios will be 63%-69%. The coverage is very similar to our 2017 coverage on our current dividend. Using the 2018, looking at our uses, we've got $130 million of development. Mainly that's going to be SailPoint, the Subaru Training Center, the redevelopment of One Drexel Plaza, as well as 500 North Gulph Road and the Drexel Square development. Common dividends were $114 million. Revenue maintain will be $36 million, with revenue create at $23 million.
We will repay our $325 million unsecured bonds. We will have $7 million of mortgage amortization. The primary sources will be cash flow from operations after interest payments of $220 million, a secured bond offering of $350 million, and a $200 million term loan, which proceeds will be used to pay down the line of credit. As a result of all this, we will reduce our line of credit balance by $140 million to just about $30 million at the end of the year. We also break to have a Net Debt to EBITDA between 6.0 and 6.2 times. Our Net Debt to GAV will be in the high 30% area. We anticipate our fixed charge ratio improving to 3.3 and our interest coverage improving to 3.6.
I know I threw a lot of numbers, and I'll be available to help anyone sort those through after the call. I will now turn it back over to Gerry.
Great, Tom. Thank you. Thank you, George, as well. Yes, sorry our comments went a little bit long, but we're trying to cover 2017 and 2018. To wrap up, third quarter results were strong. 2017 plan is essentially completed. Our 2018 forecast, we think really represents earning and cash flow growth, little forward leasing risk, a stronger balance sheet, and a steady pipeline of development and redevelopment value-add opportunities. With that, we're delighted to open up the floor for questions. As we always do, we ask that in the interest of time, you limit yourself to one question and a follow-up. Holly?
As a reminder, if you would like to ask a question, please press star then one on your telephone keypad. Our first question is going to come from the line of Rich Anderson from Mizuho Securities.
Good morning. Thanks very much. First question is, a lot of moving parts in terms of investment activity. Do you see yourself committing even more to the Philadelphia region, including the suburbs over the next few years? It seems like that's the direction this company is going, that already leveraged to that market, but do you see reason for that percentage, over the next few years to continue to go up, and if so, by how much? If you can give that kind of color.
Hey, Rich, Gerry. I don't think we really anticipated going up that much. I do think that the activity was a little skewed this year because of what we saw was a significant pricing window in Austin, where we wound up selling 1,000,001 sq ft through our JV. Certainly, we have a lot of expectation to continue to invest in that marketplace. We just frankly thought that given where pricing had gone to, that our better deployment mechanisms in the Austin market were primarily on the development front. Certainly, given our land holdings at Four Points, Garza Ranch, as well as the significant master planning opportunity at Broadmoor, we have a really good, clear path there to increasing the revenue contribution coming from Austin. We'll certainly continue to take advantage of the opportunities we see in Philadelphia.
Given our footprint, we do have a unique position to see a lot of activity. I think we have also sold a lot in the Philadelphia area, and we would certainly anticipate that even as part of our 5-year plan, as we're moving forward on liquidating the remaining properties in New Jersey and Delaware, that there'll be some selective pruning over the next couple of years. I would expect that of some of the Philadelphia assets as well.
Okay. Fair enough. Then, a lot of talk about Amazon HQ2. Can you provide any color about how Brandywine and the city and the state is approaching that opportunity? Obviously, many cities interested in having a discussion with them. Anything you can share on this call to talk about that potential for you and for the city?
It is the buzz nationally, isn't it? Look, I think, from how we view it, first of all, we thought it was an extremely smart move by Amazon to kind of create an open auction, and at least publicly, without any broker or site selector or outside advisory firm. We thought from Amazon's standpoint, it really created almost kind of a perfect screening device for them to get the best bids and proposals. I thought it would really kind of reflect their disruption of existing real estate practices, which is really what has always kind of defined Amazon all the way through. Look, we're fortunate from Brandywine's standpoint to be in the mix in Philadelphia, Austin, and some participation through our land sites in the overall submission by D.C.
I guess our observations having worked through it now, it's great to see cities come together and align themselves at a political, business, academic, civic level to really present their cities well. I'm sure that's happening in every city around the country. We're obviously most familiar with the city of Philadelphia and Austin. We have a great Brandywine team working with the local officials on the submissions. I think there'll be excellent submissions coming from both cities. I think from a Philadelphia standpoint, I think everyone in the city should be proud of the great effort that was put forth. I think the city will be presenting a very attractive package to Amazon, along with great cooperation from the state. Who knows where it goes. I think when we assess Philadelphia, we think it's tremendously well-suited.
It's a great location in the Northeast Corridor, excellent healthcare and university system, great mass transit access, great quality of life. Walkable communities, vibrant neighborhoods, emerging business climate with some good traction in job growth, affordable housing, and tremendous labor pool access. Austin defines vibrancy and growth. It's fast-growing, supported by University of Texas and the emerging health systems down there. Great tech sector, really is a Silicon Valley East, great cultural and an amazing can-do attitude in that city. I think our role is we're just enthusiastically supporting each city's bid, and stand kind of at the ready to assist the cities in whatever they need us to do to sell the positive aspects of Amazon making decisions to locate into either one of those cities or Washington, D.C.
Okay, great. Great call-out. Thanks, Jerry.
You're welcome, Rich.
Our next question is going to come from the line of Jamie Feldman, Bank of America Merrill Lynch.
Thank you. I guess just following up on Rich's question, can you talk about specific sites that Brandywine owns that have been part of those bids?
Well, I think, Jamie, I think some of the bidding is actually confidential, but I think certainly it's been in the press that we believe our Schuylkill Yards development here in Philadelphia and kind of the Domain Broadmoor section of Austin, where we obviously have a big presence, will be part of that city's bid as well.
Okay, that's helpful. Then, can you just talk more about the leasing market in both the suburban and CBD Philly? Just kind of what you're seeing on the ground and as you're thinking about backfilling some of these vacancies, maybe just some more color around what gives you comfort on the numbers and maybe the prospects of even beating those numbers.
Yeah, sure. George Johnstone and I will tag-team it. Look, I think, the numbers are still showing we've got good velocity through the portfolio from a leasing standpoint. There are a number of reports that have come out in the last couple of weeks that have talked about some increasing resurgence in key parts of the Philadelphia suburbs. King of Prussia in particular, I think is getting some increased traction, driven by a number of factors, but also by the fact that there's an announced effort now to expand a rail line to King of Prussia. Radnor continues to be a surprisingly strong performer for us. We have, as George Johnstone touched on, we had about 186,000 square feet come back to us, which you never want to see.
If it had to be in one market, we'd rather it be in Radnor than in Horsham or Great Valley or the 202 corridor. Same thing in Philadelphia. Some of the space we have coming back that was in 3 Logan, which was a big nut we knew that was coming our way. The move out of the company at Cira for the two floors, we again knew was coming. We've got a lot of pre-marketing going on and some good traction. We're feeling very good about the numbers we put in the plan. As George Johnstone and I both touched on, you never want vacancy, and you never want vacancy when it affects some operating metrics like same-store growth. The reality is, it happens. We've locked down a lot of other leasing exposure for 2018 that we feel really strong about.
I think the challenge for the company now is just to kind of outperform these assumptions that we know are achievable within the 2018 plan. George Johnstone?
Yeah, I think, Jamie Feldman, to add to that, I think there are good blocks of space in good buildings. I think, look, if you want to be a tenant in Radnor, Pennsylvania, you've got to talk to Brandywine, and if you want to be in a trophy building in the city of Philadelphia, you've got to talk to Brandywine. We currently have 31 vacancies within our portfolio in the city. 18 of those have been vacant less than a year. I think when we do get vacancy, we're able to kind of turn it around. Our 2018 business plan, we identified the floors where we've got active prospects and active dialogue, and those where we didn't, we took a little bit of a conservative route and slid some of those to 2019.
Okay, that's great. Thank you.
Thanks, Jamie.
Our next question will come from the line of Craig with Bank of America.
Hey, guys. Jerry, maybe just want to follow up on the disposition outlook here. You guys have done a really good job repositioning the portfolio over the last several years, but as a consequence, there's really been almost zero FFO growth. I'm just curious, as you guys look at the portfolio today, kind of how much more you think you need to sell? I guess your guidance in 2018 has almost nothing in it, but you ratcheted up kind of 2017 dispositions as we've gone along. I'm just curious your shadow pipeline of potential dispositions, where that could be relative to what you guys have kind of baked in the guidance.
Yeah, Craig, great question. Look, I think from our perspective, the push has really been to make sure that we put the company in the best position going forward. A consequence of a lot of our sales has been a muted FFO growth rate. We're always trying to balance that versus the real focus we've had on really getting our balance sheet to where we wanted it to be. One of the drivers, I think, behind our thought process this year was, we were going to put a lot of things in the marketplace. We'd see where pricing discovery came in, and then make the appropriate decision on kind of point pricing for what we had in the market, and how we viewed that point pricing versus value.
Also factor into that our desire to get our balance sheet down to that 6.0 times, and preserve some capacity for executing a development pipeline that we think will create great growth going forward. As we were looking at the 2018 business plan, we're really down to a very small component of our existing portfolio that we'll continue to do price discovery on. That really relates to those three markets I mentioned on one of the other questions, kind of New Jersey, suburban Maryland, and Delaware. The only other proviso to that is if you take a look at a couple of our larger sales this year, they've really come out of our joint ventures. Which has been a great harvesting profit opportunity with both our partner at DRA and Allstate.
That was very consistent with what We were hoping to do in terms of reducing the debt attribution we were getting from those JVs as a key point of balance sheet strengthening. We do actually look at this point, 2018 being fairly benign in terms of sales. That being said, we'll continue to kind of keep track of the marketplace and see where we can, at the margin, make money through a sale and deploy that money into a more accretive opportunity.
That's fair. Tom, maybe could you walk me through how 6% FFO growth from midpoint to midpoint year-over-year translates into 16% AFFO growth?
Sure. The change in the AFFO growth rate is really coming from our reduction in some of our costs related to free rent. As we look at our straight line in deferred rent, which is sitting this year, we're expecting it to be close to $15 million. We see that going down to roughly $9 million. That is part of it, is that we expect to see smaller growth. Plus, I think our CAD numbers are going to be a little lower in terms of revenue maintaining also.
If I could sneak one third one in here. Jerry, you're still adding to Schuylkill Yards, additional sites. Just curious, that sub-market, that development kind of how much more would you be a buyer of, to kind of fit in the rest of the pieces?
Yeah, Craig, I think from our standpoint, the One Drexel Plaza site was always contemplated as part of Schuylkill Yards. When we look at the overall framework of what we're trying to achieve at Schuylkill Yards, the other acquisition was a redevelopment opportunity that came our way, and fit very well into it as a receiver for a 1031 property. We think that block between JFK Boulevard and Market Street, bounded by 30 and 32nd Street, is kind of where we are. We don't really anticipate, as part of Schuylkill Yards, any additional pieces we need to fill in. They were the pieces that were both originally contemplated. With One Drexel Plaza, we'll place that into redevelopment pretty much immediately and really commence the physical work next year.
The 3000 Market Street building, we think is a fabulous redevelopment site as the build-out continues to occur.
Great. Thanks, guys.
Thank you, Craig.
Our next question will come from the line of Michael Lewis, SunTrust Robinson Humphrey.
Hi, thanks.
Hi, Michael.
Hi. The decision to telegraph the dividend raise, your yield is already pretty competitive, I think. Is your taxable income to the point where it's pushing that up, or is it really just a decision to, you've got some good cash flow growth, if you want to share that?
It's that simple. I think when the board and management team sat down to evaluate, increasing our dividend creates an additional cash call of about $14 million. We're growing cash flow by call it between $26 million and $30 million-plus. I think the perspective the board made based upon our pathing to get down to our original debt target, was that we've had patient, engaged shareholders, and certainly, we felt that it was an appropriate step to increase their share of cash flow. We're in good shape in terms of the taxable dividend standpoint, that really was not a driver.
It was more just the visibility we have for 2018 and beyond in terms of where we believe our cash flow is going, really gave the board great comfort, particularly when juxtaposed against how we view the solidity of the operating platform, with the operating metrics we're posting, as well as frankly, the very little forward rollover exposure over the next several years that our market leaders in George have really pulled together to create a fairly low-risk profile for the company in terms of revenue generation.
Thanks. My second question, Jerry, I saw that you're one of the leaders working to help bring high-speed rail to King of Prussia. Maybe it's early in that process, but maybe you could talk a little about the likelihood, the timeframe. Are there sources of funding for that?
Yeah, I think it's a coalition that's formed of about, in aggregate, about 600 individuals and organizations that, Michael, are trying to get one of our major commuter lines, a spur created off that to go through the King of Prussia Mall, and then through the King of Prussia Business Park, where we have a number of assets. I think it has a lot of momentum. I think it's been identified as a regional transportation priority. King of Prussia is a major employment center in the Philadelphia suburbs. Obviously, it has Simon Properties' King of Prussia Mall, which is now the largest mall in the United States. It has a resurging residential and commercial base, there's a tremendous number of employees that commute from Philadelphia by car out to King of Prussia.
I think between the business community, the political community, and the Regional Transportation Authority, SEPTA, we've all really identified this as a real economic imperative to ensure that King of Prussia accelerates its competitive advantage going forward. The costs are north of $1 billion. The environmental impact study's been completed. The pre-funding for all the engineering work is pretty much in place. There's never any certainty in this kind of climate. I think that the powers that be, so to speak, have really viewed this rail spur as an incredibly important component of ensuring the region accelerates its competitive position. From a public policy, regional transportation authority, and business community, it certainly seems like it has a lot of momentum behind it to achieve the goal by the early 2020s.
Great. Thank you.
You're welcome.
Our next question will come from the line of Manny Korchman with Citi.
Hey, good morning, everyone.
Good morning, Manny.
Jerry, if we look at sort of your completed dispositions over the last couple of years, it seems like the volume's been great, pricing has been good. It doesn't seem like the rest of the portfolio is sort of getting the growth you'd expect from selling off sort of the bottom, if you will. Am I reading that right? Is sort of the resulting growth in line with what you expected to be post all of these non-core sales?
I think that it's a little bit of a cloudy picture, Manny, in 2018 because of the year-over-year weighted average occupancy decline. I do think when we take a look at the cash mark-to-market on new leases that we're projecting to get for 2018, certainly, look, if you're a landlord, the numbers for rent are never high enough. When you look at it, for us to be kind of forecasting a 4%-6% new lease rate in terms of cash flow, and then as part of that, we also add on a kind of a 2.5%+ annual escalator. To us, that is really very strong. When you take a look at our average rental rate that we've had in the portfolio a few years ago versus today, there's been a dramatic increase on our average rental rate.
Which is frankly, from our perspective, portfolio management-wise, given us a tremendous ability to keep our capital costs within that 10%-15% range. I do think that the growth rate that we were hoping for is, I think, implied in the numbers for 2018. It's just not translating down to the same store numbers that we ultimately think will be our long-term run rate, which is why we really, when we laid out our five-year plan, we laid out that our same store growth rate would be somewhere between 2% and 5%. We actually view that having kind of the midpoint of our same store for 2018 being at 2%, it's not the 5%, but the midpoint being 2%, it's kind of the bottom end of our range, and as George kind of walked through.
I think once we get some of these vacancies leased up at the mark-to-market that the team's anticipating, we're hoping to kind of move that up higher. As I think George outlined, by the fourth quarter, we expect getting above a 3% same store growth rate. I think we see it in those metrics. We're not seeing it this year in the same store. Certainly, in terms of the average rental rate versus our capital costs and the percentage of revenues we're investing, we think that our real focus, as we've laid out, has been growing cash flow. Like what do we actually net after all this work? I think from that standpoint, I think we're really pleased with the way things have worked out.
Just switching our focus maybe to Schuylkill Yards. Help us think about how you're approaching that. Are you thinking of that as sort of a complement to the Philadelphia CBD, or do you think that ends up being more of a drag or a draw for sort of tenants that want to be, whether it be closer to the universities, whether it be in higher tech space, whether more of a cluster, and that in turn would lead to sort of more vacancies within the CBD itself?
I actually think it has the dynamics to kind of be its own vibrant sub-market. There's clearly going to be an interplay. I think all of us who are involved in University City really view that we're at the kind of the embryonic stages of growth acceleration. We have great anchors with Penn and Drexel, Amtrak's plan, Children's Hospital, University of Pennsylvania Hospital, all those things that we've all talked about. I think it's one of those unique opportunities where, when we look at Schuylkill Yards, both near and long-term, you have the ability to kind of create a new market that is very transit accessible. We hope it will appeal to an additive type of tenant to the city, as opposed to just bringing people between the Center City and University City.
There will undoubtedly be interplay between the two markets, and we think both have their very strong points. We think University City has the capacity to bring people in from outside of the city at a pretty good pace. We're hoping to see that happen. We have two other development partners there, Gotham on the residential side and Longfellow on the life science side, and they're both actively engaged and kind of thinking through what they view their first steps to be. I know it was kind of an un-crisp answer, but I think we do view that we can kind of redefine the future of University City by the quality and the mix of product we build and augment that with a national marketing campaign.
Hey, Jerry, it's Michael Bilerman speaking. I guess when you step back from it and you think about guidance trends from 2017, and clearly the lower guidance from 2018, you've talked a lot about the accelerating sales activity, which has proven out some of the values and helped you deleverage and fund the development pipeline. That's not all of it, right? There's clearly with sales happening later in 2017, there's been other drivers that have cut 5% off what you originally thought was going to be earnings for 2017, and now you've chopped off another 5% relative to where Street expectations are for 2018. What are the other variables that's in at play in your mind other than dispositions? Because it's not all sales that are driving expectations lower than where you had them and where the Street was.
Hey, Michael. No, as I think Tom and George both outlined, when we looked at kind of 2017 and 2018 year-over-year, sales were the primary driver. Certainly, the lower average occupancy contributes to that lower FFO guidance. One of the big kind of specific situations was the burn-off of our development fee related to the third-party development we were doing for Subaru of America. Those three factors, kind of the sales, the transitional vacancy impact on same store, and the burn-off of that fee, were really the primary components of where we came at for 2018 versus what expectations were and our 2017 numbers.
In your five-year business plan, the one that goes out to 2021, you don't have earnings or cash flow or an FFO target for that. It was all operational. Is that right?
No, we actually did lay out that we wanted our CAD number to grow between 5% and 7%.
On an annual rate. I guess with the moves today, you still feel confident that from the point of when you put that out, given how much lower 2017 and 2018 FFO are going to be relative to original expectations, you'd still be able to hit that compound annual growth by 2021?
Yeah, I think so. I think actually, we laid out the average FFO growth rate, Michael, that we were forecasting was between five and seven, and we're posting a number much better than that this year. We have full confidence that every metric we laid out as part of that investor presentation, we'll be able to achieve.
Okay. Thank you.
Thank you.
Your next question comes from the line of John Guinee with Stifel.
Great. Thank you. I guess first, Tom, you had mentioned in your sources and uses, $114 million of dividends in 2018 versus 179 million shares. That equates to $0.64 a share for the year. I'm trying to reconcile that with a 12.5% dividend increase. I guess if I do the math, it really means the dividend increase isn't until year-end 2018.
No, it is this year. If I did that incorrectly, I'll let you know. No, the dividend increase is in for the entire 2018 year.
Yeah, we would expect the dividend to go up $0.02 a share, starting with the first dividend payment in 2018.
Has the board formally, in writing, cast in concrete, increased the dividend, or are they thinking about it?
The board had a special meeting to discuss the dividend and adopted the 2018 business plan, which included the $0.02 per quarter dividend increase. They will actually formally declare the dividend at our December board meeting.
It's a done deal.
It's a done deal.
Second is, looks like you're buying One Drexel for about $124 a foot, and you're buying 3000 Market for $546 a foot. Can you elaborate a little bit about what these buildings are and what their plan is? Looks to me like 3000 Market is one or two stories, not much to it. Can you elaborate a little bit more on what the plans are for those two assets?
Oh, sure. Absolutely. One Drexel Plaza, also known as the Bulletin Building here in Philadelphia. We're going to renovate that. We will not add any square footage to it. We'll start the reimagination renovation process, as I mentioned. They're planning now. Then physically starting early next year, and we're targeting roughly an 8.5% return on our invested cost. The 3000 Market Street building is essentially a future development site that we believe can accommodate between 700,000 and 1 million square feet at some point in the future. Essentially, for us, that's a land acquisition that will create some earning revenue for us over the next couple of years while we go through this UR master planning process.
Got you. Okay, I noticed lastly that your dispositions, your asset sales for 2017, anywhere from $166 a foot for Newtown Square, $117 for King of Prussia. The New Jersey assets, about $84 a square. Calverton, $28 a square. Concord Airport Plaza, about $95 a square. Are you done with the sub-$100, sub-$150 a foot assets, or are there more that will likely be sold?
We think we're through with the most of them. We still have a couple of assets in New Jersey that may wind up trading around the same levels as the previous Jersey sales. Yeah, we think that wood has been chopped.
Okay. Thank you.
Thank you, John.
Bye.
Our next question will come from the line of Mitch Germain from JMP Securities.
Good morning, guys.
Yes.
Jerry, just maybe if you could provide some perspective as to what was sold in Austin and how does that compare to what's left?
Okay. Great, Mitch. Thanks. I think in Austin, look, first of all, we have a great partner with DRA, and I think when you always hope you make the right calls. We formed a great partnership with them. Since we formed it, we acquired a ton of properties at what, in retrospect, was truly outstanding pricings compared to where prices have gone to, and rents and values have clearly gapped up over the last several years. As we had our partnership meeting, we looked at the kind of embedded value that we had in the overall portfolio and kind of broke it down between what we viewed as kind of growth accelerators and moderate growth drivers in the portfolio and put that second package kind of out on a very quiet marketing basis.
Received very good bids. Collectively, our teams worked through a process where we sold that portfolio and made a fair amount of money for both the partnership and for DRA and Brandywine, respectively. I think the remaining assets, Mitch, the partnership will meet. We have an ongoing dialogue, and we'll start to think about now with this tranche done, whether we want to recapitalize and refinance elements of this venture, whether we want to take a look at spinning more assets into the marketplace, depending on where pricing is, or whether we hold pat and continue to ride out the market with what we collectively think are some of the best assets in suburban Austin.
Great. That's helpful. Another guidance question. Tom, your comments had said $200 million term loan. The business plan on the supplement suggests $150 million. Just trying to understand exactly what the size of the term loan is likely to be.
I think we're leaning towards the $200. We have $150 here. I think we'll probably range between $150 and $200. I think $200 is probably where we're going to end up with that.
Got you. Thank you.
Thanks, Mitch.
Again, to ask a question, press star one. Our next question will come from the line of Chris Bolasik, Green Street Advisors.
Hey, good morning, guys.
Hi, Chris.
I was curious if you could touch on a little more from the 2018 development start that you guys have in guidance. Is that potentially in Schuylkill Yards, or is that all exclusive of anything that could potentially kick off there? Any kind of other sites that you guys are still seeing in the pipeline?
Yeah, Chris, I'm having a hard time hearing you, but I got the gist of the question. The projected development start we have right now, we have probably four or five projects that we're getting a very strong interest in. We haven't really identified which start that will be. It could be in the Philadelphia area, it could be in Austin, could be downtown, or could be elsewhere. We haven't really identified exactly as we've kind of framed out a dollar range for that. The predicate that governs all of those opportunities is that we want to be in a situation where we have a high level of pre-leasing in that 50% range to really get anything off the ground. At the current time, we don't really anticipate a ground-up construction start in 2018 at Schuylkill Yards. That could change, but that's not currently part of the thinking.
Again, as I alluded to on one of the previous questions, we have two other development partners there, and how they're assessing the life science and the residential market may be slightly different than we're assessing the office market right now.
Okay, great. Then maybe just one more. Correct me if I'm wrong, I believe earlier this year that you were targeting a low 30% leverage range by the end of 2018, and now you're showing a high 30% with the low 30% range being a longer-term target. Is that correct? If so, what pushed it out a bit?
Yeah, look, I think of the two, we view the EBITDA number being much more important. I think as you know, when you're selling a lot of assets and not quite deploying that same amount of money, it's hard to move those leverage metrics down. Tom, maybe you can add on to Chris's question.
Yeah, Chris, I think as we look, this year, as we go into 2018, we're going to be a little higher on that side. Again, the cash flow growth and where we see the fourth quarter growth on GAAP is going to get us down to that low sixes. I think as we look out the next two years, we'll now start to try to get the debt to GAV down. As the cash flow kicks in, we should be able to then lower debt primarily on the line of credit and bring our debt balances down further. We weren't looking at that as a near-term target with the sales we've done.
Okay. Thanks, guys.
Thank you, Chris.
Thank you. I'd now like to turn the conference back over to Gerry Sweeney for closing comments.
Look, thank you all very much for participating in the call. We look forward to updating you on our business plan activities with our fourth-quarter call in early 2018. Thank you very much.
Once again, we'd like to thank you for participating on today's conference call. You may now disconnect.