Good morning. My name is Holly, and I'll be your conference operator today. At this time, we'd like to welcome everyone to the Brandywine Realty Trust second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this 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 call over to Jerry Sweeney, President and CEO. Mr. Sweeney, I hand the floor to you.
Thank you very much, Holly, and a good summer Friday morning to everyone as well. Thank you for participating in our second quarter 2017 earnings call. On the call with me today are Tom Wirth, our Executive Vice President, Chief Financial Officer, George Johnstone, Executive VP of Operations, and Dan Palazzo, our Vice President and Chief Accounting Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give 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 file with the SEC.
To start the presentations, we normally do, I'll kick off with a summary of our key business plan performance metrics, then turn it over to George for an operations and marketing update, and then over to Tom to review our financial results. We're very pleased with the continued execution of our 2017 business plan. As noted in the press release in our supplemental package, we are 98% finished on the operating component of our business plan, and as such, we've refined our ranges to reflect this accelerated progress. Key headlines for the quarter are $0.34 per share second quarter core FFO was in line with consensus before factoring in the $0.02 charge for the preferred share redemption that we outlined last quarter.
We posted a 10.1% same-store cash growth, we are increasing our 2017 business range up to 7%-8% cash same store from the previous business plan of 6%-8%. Cash mark to market for both renewals and new leases was also very strong at almost 18%, we're moving up the bottom end of that range 100 basis points to a new range of 10%-11%. Based on second quarter retention of 77%, we're increasing our 2017 retention rate to 73% from our original business plan of 68%. Our leasing capital metrics continue to improve. We're improving our range to $1.90-$2 per square foot per lease year, or approximately 10.3% of rents for all of our leasing activity.
Due to the occupancy timing of our current leasing pipeline, we have revised our year-end targeted occupancy range to 93%-94%, down from 94%-95%. However, given strong pipeline activity, we are maintaining our 95%-96% year-end lease target. As noted in our press release, we have tightened our 2017 guidance range to $1.34-$1.38 per share. Frankly, given the 98% completion of our operating plan and in assessing the occupancy timing of our leasing pipeline, we are raising the bottom end of our range by $0.01, but also tightening the top end of the range to reflect slightly lower year-end occupancy, the staged delivery schedule of the FMC residential units, as well as having several tenants being behind on constructing their spaces and thereby us not recognizing any revenue or occupancy on those lease spaces.
On the investment front, we've executed 75% of our $200 million target with a strong pipeline of transactions either under contract or in the market for sale. On the balance sheet, we've paid off our $300 million 2017 notes with a combination of cash and line borrowings, and also, as I mentioned during the quarter, paid off our $100 million preferred share issuance. Prior to addressing specific business plan metrics, I just wanted to provide a little bit of color on what we're seeing in our markets. Our pipeline of potential lease transactions has increased to 1.9 million square feet, which is up sequentially 100,000 square feet from last quarter, which was up 100,000 square feet from the previous quarter, so good throughput through our portfolio. We also have approximately 310,000 square feet of leases out for signature. Activity through the portfolio was solid.
Traffic levels in CBD Philadelphia were up, Pennsylvania suburbs in line with our previous quarter, and Austin and Northern Virginia up quarter-over-quarter as well. We continue to see good absorption numbers in our core market areas. For example, leasing activity is up 28% year-over-year in the Pennsylvania suburbs. The 11% vacancy in the market is the lowest level in over 10 years. Austin absorption was up dramatically over Q1, and CBD Philadelphia continues to perform well with second quarter leasing levels approaching 600,000 square feet. Looking out over the next couple years, our forward lease expirations are now below 10% annually for each year between now and 2021.
George will speak to our leasing efforts, but as we view it, the acceleration of our pre-leasing efforts solidify our operating platform, position us for continued market outperformance, and we believe will safeguard us against any near-term slowdown in leasing activity. Just a couple of other pieces of color. We had a very strong quarter, leasing roughly 1 million square feet. In addition to our operating business plan being 98% complete on a revenue basis, it's also 96% complete on a square footage basis, which compares very favorably from 2016, where we were, at this time, about 86% done. As noted, our mark-to-market range for the quarter was 17.8% on a cash basis, in excess of our range, and 1.3% on a GAAP basis, which was below our targeted range.
Both of these metrics we alluded to last quarter. They were significantly impacted by the large 585,000 square foot IBM renewal at our Broadmoor portfolio in Austin, where we had a 29% cash increase and negative GAAP adjustment. Based on completing these speculative revenue targets, we have increased the bottom end of our range for both our cash and GAAP metrics by 100 basis points. Leasing capital came in at, as mentioned, $0.95 per square foot, well inside of our targeted range, again, primarily due to the large IBM renewal, which had no capital cost. Our strong cash mark to market, lower capital spend, and strong annual escalations throughout the portfolio continues to result in nice increases in our same-store net effective rents.
On the balance sheet, our success on asset sales enabled us to strengthen our balance sheet during the second quarter by the payoff of the $100 million preferred, and also the repayment of our $300 million unsecured bond offering or issuance upon maturity through a combination of available cash balances and borrowings under our line of credit, that we reduced effective leverage by $200 million by taking those steps. It did result in the following changes to our liquidity metrics. EBITDA went to 6.6 times, driven by the $100 million preferred share redemption. However, our fixed charge coverage increased to 3.2 from 2.9 at quarter end. We reduced our weighted average cost of debt quarter-over-quarter from about 4.5% to 4.1% at quarter end. We did end the quarter with a cash balance of $38 million and $200 million drawn on our credit facility.
On the investment front, we've completed 75% of our disposition target, or $151 million sales year to date, at an average cap rate well inside our targeted range. We are maintaining our 2017 disposition guidance of $200 million. We have another $17.5 million under contract and over $125 million in the bid process or coming to the market in the next 30 days. As I alluded to last quarter, as we get more visibility on these additional sales efforts, we will re-look at our $200 million target. If the market does present an opportunity for us to exceed this target at good pricing levels, we will. In addition, our Concord sale earlier in the year did generate a 1031 requirement. We do anticipate making an approximately $35 million acquisition during the third quarter. Our focus is on value add, and we are currently evaluating several potential redevelopment opportunities.
Just some quick notes on our development pipeline. Our 1919 Market joint venture with CalSTRS and LCOR is doing great. The office and retail component is 100% leased. The apartments are 99% leased and 97% occupied. During the quarter, we also delivered our 111,000 square foot, 100% pre-leased build-to-suit project in King of Prussia, Pennsylvania. That project was completed on time and on budget with a free and clear cash return on cost of 10.5%. We are making excellent progress on the redevelopment of our Broadmoor Phase VI renovation. The renovation of this 144,000 square foot building is really the first step in executing our overall master plan for the Broadmoor campus, which can ultimately accommodate 6 million square feet. During the quarter, we leased 80,000 square feet, bringing us to 56% leased with a strong pipeline behind that.
We do expect to deliver that building in Q4 2017 and stabilize in the second quarter of 2018 at a 9.7% cash yield on cost. We are also underway on our second building for Subaru of America at our Knights Crossing campus. This project is 100% leased to Subaru on an 18-year lease at a 9.5% return on cost with 2% annual bumps. We expect to deliver and stabilize that building in the second quarter of 2018. On FMC, we are now 98% leased on the office component. We did have a few moving pieces during the quarter. An existing tenant is expanding into the remaining vacant floor, and another existing tenant exercised their right to give back some of their space. Brandywine will be moving our corporate offices into that space in order to provide that tenant with future expansion optionality.
To facilitate that relocation, we have also already leased our current space in Radnor to a tenant who will occupy later this year. At FMC on the residential front, we are wrapping up the process of delivering finished units. We have placed the majority or 74% of the residential component into service at the end of Q2. We do expect to deliver the remaining units in the next 30 days, putting us about 60 days behind our original plan, solely due to the logistics of doing construction work in a partially occupied building. Leasing results, however, are very encouraging.
Based on all available inventory in all of the segments, at the end of the second quarter, the hotel and service residents had an average occupancy of 67%, and the market rental units are already 72% leased based on available units, or based on total units, just shy of 50% pre-leased already. That pace is running ahead of pro forma, and rates are in line with our established pro forma. We also commenced operations on our Michelin-rated Walnut Street Cafe, located at the ground level in FMC Tower. We do continue to believe the office component will stabilize by year-end 2017, and we are projecting our residential component to stabilize by the end of the first quarter 2018. Some other quick notes. During the quarter, we did receive zoning approvals for the initial phase of our Schuylkill Yards development.
We also continue to advance planning and pre-development efforts on several of our development sites, including our 405 Colorado site in downtown Austin, our Broadmoor master plan in Austin, as well as our Metroplex project in the Pennsylvania suburbs. As a final note, we continue to project a $50 million development start that we do expect to commence in the third quarter of 2017. We are in active negotiations with several prospects and are confident of one of these reaching lease execution and construction commencement by the end of the third quarter in 2017. At this point, let me turn it over to George for a review of our markets, who will then turn it over to Tom for a review of our financial performance.
Thank you, Gerry. We had another strong quarter of activity, bringing our 2017 business plan to its near completion. We've adjusted many of our targets, as Gerry mentioned, and I'll touch on further in a moment. All of our markets continue to see good levels of leasing activity. During the second quarter, we generated 78 space inspections totaling 550,000 sq ft, which represents 60% of available sq ft. Turning to our three core markets, our CBD Philadelphia portfolio remains 97% leased with only 8% rollover for 2018. Leasing spreads remain healthy. For 2017, our average mark-to-market is 3.8% on a cash basis and 15.6% on a GAAP basis. Known large move-out activity in 2018 includes 100,000 sq ft in the lower bank at 3 Logan during the first quarter. We are currently negotiating with three prospects ranging from 30,000 sq ft to 55,000 sq ft each.
A known full-floor move-out at Commerce Square in the third quarter of 2018 has already been leased to an expanding tenant. These activity levels have us remaining confident in the strength and vibrancy of the downtown market. Turning to the Pennsylvania suburbs, with the delivery of our build-to-suit property in King of Prussia, our non-Crescent market properties are now 90% leased. The majority of our King of Prussia vacancy is isolated in a 150,000 sq ft building, which is only 18% occupied. This property is currently being marketed for sale to a user. Shifting to the Crescent markets, and in particular, Radnor, the first of our known move-outs began to occur during the quarter. A 50,000 sq ft tenant relocated to our build-to-suit property in King of Prussia, a 16,000 sq ft tenant relocated to FMC Tower, and a 28,000 sq ft tenant downsized and relocated outside the portfolio.
We have since relet that 28,000 sq ft space. In the third quarter, the last of these large move-outs will occur from a 49,000 sq ft tenant at the Radnor Corporate Center. Interest and activity during the quarter resulted in 15 tours totaling 48,000 sq ft in Radnor. The pipeline today for Radnor consists of 25 prospects totaling 132,000 sq ft, 10 of which are at the proposal stage. Our common area improvements in the buildings are well underway, and selected demo is occurring in a number of these recently vacated suites. We remain extremely confident in our team's ability to source, negotiate, and close deals to backfill these spaces. Turning to Metro D.C., the Northern Virginia office market continues to be a tale of have and have-nots, with highly amenitized Metro locations outperforming commodity suburban product. Regional job growth continues to be driven by the professional and business service sectors.
Our tour activity in Metro D.C. was up 73% over Q1 and 27% year-over-year. We're presently 90% leased and outpace the market by 1,200 basis points. Our largest tenant roll in 2018 is Northrop Grumman's full building tenancy in Dulles Corner, expiring next September. We're in continued negotiations on an extension of this lease and look to wrap this process up in the next 45 to 60 days. Austin's overall market dynamics continue to shine. Access to labor and the affordability of housing continue to fuel job growth and office demand. Second quarter absorption was 879,000 sq ft and marked the 26th consecutive quarter of positive absorption. Tenants in the market are extremely active, with more than 12 million sq ft of active requirements throughout the city. Technology tenants lead the way, accounting for nearly one-third of that demand.
At Broadmoor, we have leases out for signature on an additional 28,000 square feet or 20% of the Building 6 redevelopment project. In terms of the updated business plan, as Jerry mentioned, we've adjusted several of our metrics, but specific to occupancy and lease ranges. While we have lowered the occupancy 100 basis points due to several tenants delaying their occupancy beyond year-end, we are maintaining our year-end lease range of 95%-96% based on leasing achieved to date and the strength of our pipeline. With that, I'll turn it over to Tom.
Thank you, George. Our second quarter net income attributable to common shareholders totaled $4.1 million, or $0.02 per diluted share, and FFO totaled $57.4 million, or $0.32 per diluted share. As outlined during our first quarter call, our second quarter results include a charge for the par redemption of our 6.9% perpetual preferred shares. The charge totaled $3.4 million or $0.02 per share. Excluding that charge, our earnings and FFO would've been $0.04 and $0.34 per share respectively. Some observations regarding the second quarter results. Same-store NOI growth rates for the second quarter were 1.2% GAAP and 10.1% cash, both exclude net termination fees and other income items. We've now had 25 consecutive quarters of increases to the GAAP metric and 21 for the cash metric. G&A totaled $6.3 million, slightly below our reforecast in the first quarter.
FFO contribution from our unconsolidated joint ventures totaled $11.5 million, ahead of our reforecast, primarily due to a termination fee in our Austin portfolio and improved operating results. The space associated with the termination has already been leased to a tenant expansion. Interest expense totaled $20.3 million, which is below our forecast, and $1.1 million sequential decrease, primarily due to the payoff of the 2017 $300 million bond maturity funded through a combination of cash and our line of credit. Other income and termination fees totaled $1.0 million, in line with our forecast. Third-party fee income and expense totaled $7.1 and $2.3 respectively, also in line with forecast. FMC Tower GAAP NOI totaled $2.6 million, below our $4 million estimate due to some one-time deal-related write-off costs, timing of tenants taking occupancy, and the staged availability of our residential units.
On the CAD, we had second quarter CAD of $42.9 million, representing a 66% payout ratio. That includes $10 million of revenue-maintaining capital expenditures. In addition, we incurred another $5.8 million of revenue creating capital. Looking forward to the third quarter, sequential property operating income, GAAP operating income, excluding term fees, third party, and other income for the third quarter will range between $72 million-$73 million as compared to the second quarter actual NOI of $71 million. The third quarter NOI will include approximately $5.5 million contribution from FMC and $0.6 million incremental from 933 First Avenue, and that'll be partially offset by some disposition activity in the first quarter, second quarter that will affect the third quarter for $400,000. G&A expense should be $6.5 million, and our full year will approximate $28 million.
Other income for the third quarter will approximate $0.5 million, and our full-year estimate is $3 million. Term fees are expected to be $2 million for the third quarter, and our full-year estimate has been reduced to $2 and a half million. Interest expense for the quarter will decrease to approximately $20.1 million. FFO contribution from our unconsolidated joint ventures should approximate $9 and a half million, and we project that our joint ventures will contribute about $37 million for the year. Third-party income should approximate $25 million for the year and $8.5 million in related expenses. Looking at our business plan assumptions, net sales to date, excluding sales, total $151 million, and we're about 75% on the target. During the fourth quarter, we anticipate executing on a term loan to pay down our current line of credit. We've assumed an all-in rate of 3.25%.
However, we're assessing other liability management alternatives, as well as looking at some sales volume. We have delayed this planned execution of the term loan from the beginning of the third quarter to the fourth quarter. Again, we will get more visibility on that as sales pricing comes in. Land sales, while we have some under contract, there is no programmed FFO gains or losses including in our guidance. We have a planned 178.3 million weighted average shares with no additional share buyback or ATM activity. Looking at our capital plan for the balance of the year, we continue to project CAD to have a coverage ratio of 71%-64%, reflecting $30 million of revenue maintaining capital. Other uses for capital include $100 million for development and redevelopment activities, $57 million of aggregate dividends, $25 million of revenue creating CapEx, and $3 million of mortgage amortization.
Primary cash sources will be cash from operations after interest payments totaling $95 million, $15 million in remaining net asset sales, and $250 million bank term loan proceeds. Based on that capital plan as outlined, we will generate $180 million of cash, which will result in a line of credit balance of roughly $20 million at year-end. As projected, the redemption of the preferred shares will cause our net debt-to-EBITDA ratio to increase by 0.3 in the second quarter. However, the removal of our preferred shares dividend helped improve our fixed charge ratio, as Gerry mentioned earlier. We still project that our year-end net debt to EBITDA will remain in the mid-sixes. In addition, our net debt to GAV, approximately 40%.
We continue to be mindful of the current interest rate environment, and we are considering a number of refinancing options that may include potentially addressing the 2018 $325 million bond maturity before that date, and that is at a rate of 4.95%. I will now turn the call back over to Gerry.
Tom, thank you. George, thank you as well. To wrap up, our 2017 business plan is essentially in the books. We're focused now on staying ahead of the leasing curve, executing our early renewal program, wrapping up and stabilizing all of our development projects, and really further establishing a platform for growing cash flow and growing net asset value. With that, we'd be delighted to open up the floor for questions. We ask that in the interest of time, you limit yourself to one question and a follow-up. Holly?
Ladies and gentlemen, if you would like to ask a question, press star then one on your telephone keypad. To withdraw a question or if your question has been answered, you may remove yourself from the queue by pressing the pound key. Our first question will come from the line of Jamie Feldman, Bank of America Merrill Lynch.
Thank you and good morning.
Good morning.
Gerry, I guess if you could just, Gerry or Tom, just talk a little bit more about the delays that you mentioned that are pushing back guidance. I guess the bigger question on our mind is just, are you seeing a slowdown in leasing at all? Or this is purely just building out space that's causing kind of later revenue recognition. If you could give a read-through into just kind of market conditions.
Sure, be happy to, Jamie.
That would be helpful.
Yeah, be happy to, Jamie, and we'll all kind of tag team it. Look, I think from our perspective, the most important number that we held firm on was our year-end leasing percentage. We maintain that at the 95%-96% range. We thought that that really reflected kind of a velocity that we're seeing through the portfolio. When we look at our pipeline of deals being in that, 1.9 million square feet, again, sequentially up from the last two quarters from 1.7 million, having about 300,000 square feet of leases out for signature, I think we feel very confident that we're going to meet those year-end targets with the continued momentum we've built through.
I think when we did take a look at the occupancy timing, frankly, we were probably a little too over-optimistic in terms of how we could get some tenants into space when previous tenants who were relocating or vacating weren't leaving until kind of May to July. The leasing activity's been there, but the occupancy break did occur when we're looking at some tenants who we thought could get in in December. Really very little, if any, revenue impact, but they did impact the occupancy statistic. We expect them to occupy kind of in Q1. From a kind of a market velocity, depth of deal pipeline, I think we really continue to see some good metrics there as we evaluate our weekly leasing activity.
We're clearly we're in the middle of the kind of the summer doldrum, it's hard to get some leasing execution done. I think generally throughout all of our markets, we're seeing some pretty good activity. I know, George, do you want to add any color to that?
Yeah, Jamie, just to kind of pick up on that point, the length of time it's taking to close leases hasn't really changed. The pipeline at 1.9, while 300,000 of it is out for signature, we've got 1.3 million of it in the actual proposal stage and 300,000 in kind of the tour stage. As expected, I think we're going to see maybe a little bit of a continued slowdown in tours, but the focus is really working the 1.3 million square feet portion of that pipeline who are in possession of proposals to get them fully negotiated, executed, and then start the tenant fit-out process, which will inevitably spill over into the first quarter of 2018.
Okay, that's helpful. I know you gave color on the Northrop lease in the third quarter of 2018, but can you just remind us your largest known move-outs between now and the end of 2018? Also the largest leases or spaces you have left to backfill, if you could give us an update on progress there.
We talked about Northrop and then the 100,000 sq ft at 3 Logan. Next largest is a two-floor tenancy at Cira Centre that doesn't expire until the third quarter of 2018. We are assuming a vacate of that space, and currently have it on the market. Next up is a 49,000 sq ft tenant in Dulles Corner, who will be renewing a little bit over half of their space and a two-floor tenancy, so we're marketing the one floor we know we're going to give back. We've got two 35,000 sq ft, one in Radnor, one in Metro D.C., who both have leases in hand right now to renew. We've got one at Commerce Square, which I alluded to in my commentary, a 30,000 sq ft give back, and we've already re-let that to an expanding tenant.
Everything else then kind of drops off below 30,000 sq ft. The largest vacancies that we're dealing with are really from the most recent move-outs here in Radnor. Six spaces in total, about 120,000 sq ft, the largest of which is a 35,000 sq ft full floor. We've got two 15,000 sq ft that can be combined into a contiguous 30. Like I said, the pipeline in Radnor is encouraging at this stage of the game, given the fact that these tenants just recently moved out.
Okay, thank you.
Our next question will come from the line of Manny Korchman with Citi.
Hey, guys. Good morning.
Good morning.
Tom, if we could just spend another second on FMC. Generally, I didn't get a complete read on whether or not leasing there was sort of slower than you expected, or maybe you just expected a faster pace or somewhere in between. The second question is, it just looks like the NOI there actually dipped 2Q versus 1Q. I'm just wondering what was going on there.
Sure, Manny. There were a couple things to your point. One is that we did have below contribution NOI from the residential. Again, the staging of some of the spaces coming online was a little delayed, and we think that is temporary. Also, though, in the quarter, we did have about an $800,000 charge to the property related to some deal costs based on some of the tenant movement. Therefore, some tenants that didn't make, we had costs of about $800,000, which did hit the NOI line. We do not expect them next quarter. That was a larger part of why we were below on that. On the office side, we do have a couple of tenants that George had mentioned. One in particular that's in, didn't take occupancy yet of space. They are in the process of building it out.
While it's leased, it's not coming online as quickly as we thought. Again, that's a temporary delay, and we would expect that to resolve itself by the end of the year.
You guys mentioned a bunch of projects where you were in different stages of entitlement. Just if we had to sort of draw a roadmap of when things come online or when you get entitlements, when you start building, could you sort of give us some color on that?
Sure. I think, Manny, I was alluding to some of our existing development projects. The training center that we're doing for Subaru on an 18-year lease, that's actually underway now, and they're kind of highlighted on our development page, along with Broadmoor Six and Gulph Road. In addition to that, we do continue the entitlement process on 405 Colorado, which we expect to get the approvals perfected there by the end of the year. Our Broadmoor master plan that we're going through in Austin, which we expect to get that, again, by the end of the year. We have some entitlement work underway on a project we call Metroplex in suburban Philadelphia. We expect to get that in the next couple quarters. The objective there is to bring those projects to fully entitled, complete the design development process, and then really continue to launch the pre-marketing campaign.
Any potential start in those three projects is completely conditioned upon our ability to find at least a 50% pre-lease anchor to bring those into construction commencement. On the Schuylkill Yards project in the city of Philadelphia, we did achieve approvals in June for phase one, which consists of about 1.3 million net sq ft. We will start the design development process on those now. That will take 12 to 15 months. During that period of time, we'll also be launching our marketing campaign to try and find a large anchor tenant to start one of those projects. Our business plan right now for 2017 really only includes one $50 million construction commencement. We have a couple of opportunities we think that might get executed shortly that would enable us to meet that business plan objective.
Other than the Subaru transaction that I mentioned, Broadmoor underway, Gulph Road underway, the only 2017 start we're contemplating is that $50 million start sometime in Q3.
Great. Thanks, George.
You're welcome.
Our next question will come from the line of Craig Mailman with KeyBanc.
Hey, guys.
Morning.
A follow-up question on the development piece. Just curious of the kind of the 1.3 million sq ft, the proposal stage, and I guess the other, call it 300,000 sq ft that's not out for signature on your proposal. How much of that is for either spec development or an anchor for
Sorry, for build-to-suit or an anchor for like a spec start?
Yeah. Good morning, Craig. Actually, none of it. In our leasing pipeline, we're really focused on our existing same-store portfolio. The numbers that I alluded to and that George amplified, really relate to our existing properties. I say our existing inventory.
Any possibility you could give us a sense of the tenant sizes that you're out there looking for some, like either Schuylkill Yards or a spec start in Austin or elsewhere?
I think, we're talking to tenants ranging really between 50 and about 200,000 sq ft.
That's helpful. Just on 3 Logan, just curious what type of mark-to-market we could expect from the backfill of the 100,000.
Significant, because that space was leased to Verizon at the time that we acquired it a number of years ago. We're looking at low double-digit, both cash and GAAP mark-to-market there.
Great. Thanks, guys.
Thank you.
Our next question will come from the line of Richard Anderson with Mizuho Securities.
Good morning, everyone.
Good morning, Rich.
When I look at this report, like you get a lot of outperformance when you look at cash numbers and maybe slight underperformance when you look at GAAP numbers. That's not exactly universally correct, but in that range. I know you reiterated your CAD payout range for 2017, would you argue that if you were to give an actual AFFO number, that the pressure is upward at the AFFO line versus slightly downward at the FFO line?
It's a good question. I think, look, when we're looking at our balance-of-the-year projections, we think we're in a very good shape to control capital spend as a percentage of lease rents. I think one of the things that we're really happy with coming out of the quarter, Rich, was that our capital spend was just north of 10% of rents. That's for all leasing activity, new leases, renewal leases, revenue maintaining, revenue creating. We look at the whole bucket. We're really trying to do everything we can to optimize the investment we make in each individual lease. Certainly, look, one of our key driving business plan goals is to really increase our cash flow. That was behind a lot of our asset sales. That is implicit in every part of our leasing strategy. It's a key component of our forward development pipeline thinking.
Tom, weigh in on the FFO side, but I think from our perspective, in looking at what really is going to drive growth, we want to drive the cash flow. I know we do percentages versus a range now on the CAD number, but, Tom, what do you think?
Rich, on the CAD, we are seeing our capital costs go down. We leave a wide range for right now on that number as a result that it is a cash number. There can be some volatility to when we get actual TI spend and actual cash going out the door. We keep it wide until we see a reason to either bring it in a little bit, and then maybe as we get into the third quarter call with the fourth quarter, more visibility, we'll probably change that range. I would agree with Jerry. We are seeing good cash flow and therefore, hopefully as we narrow that range for the balance of the year, you'll see it improve. It is a volatile number, and that's why we don't really change that range too much during the year.
Got you. Then, I guess somewhat related to that, this time last year, or maybe, I guess it was in March of last year, you raised your dividend a little bit, a $0.01 a quarter. Haven't done that yet this year. Would you say that if not for some of these occupancy delays, let's call it, maybe you would've been more in consideration of a change to dividend policy at this point in the year? Are the two interrelated, I guess I'm asking.
Rich, we think the two are unrelated. Again, we look at the tightening our range on the occupancy level. It's been a topic of much discussion in the last 24 hours. The reality is that's really just a little bit of a slide from existing leasing activity. We really do believe that the underlying strength of the portfolio is very strong. Certainly, the board looks at all the elements that drive the business, and I would say that they are pretty happy with the level of leasing activity we've had, our occupancy statistics. Certainly, when we take a look at our positive mark-to-market, and our ability to really contain concession costs, they're very strong indicators of how we think the value proposition for the company will be for the next several years, with at least as much visibility as we can.
The tightening of the occupancy range this quarter was not a factor at all in the board's thought process on the dividend. I think they continue to be very focused on how we can return value to the shareholders, and we'll see how they evaluate the current cash flow picture as the year progresses. Perfect. Thanks very much.
Our next question will come from the line of Michael Lewis with SunTrust.
Jerry, I think you said you're moving your headquarters so that a tenant could potentially expand in the future. I may be misunderstanding. Does that mean if the tenant does expand, you'll have to move again? Are there any material costs related to the move?
Yeah, Michael, good morning. Look, I think we're always driven by what tenants want to do. One of the things that occurred here at Radnor is we had a tenant that really wanted our space. We got a very good cash mark-to-market and a very good GAAP mark-to-market, too, on the lease. That kind of opened our eyes to relocating. We had a tenant in FMC who had an ability to give back some space. They exercised that. I think from our perspective, we're moving into their space. Very similar to what we did here when we relocated to Radnor originally, and we're positioned to stay there for a number of years, or if another tenant wants to expand, a new tenant wants to come in, we'll relocate, and certainly, we don't view there to be any material capital costs related to that future relocation.
Okay. My second question, you did a lot of renewal leasing. The renewal percentage was high. That's great. Maybe you could just explain to me why the cash rent spread was so much better than GAAP on the renewals.
Yeah. I think that really related to the IBM lease renewal, which I'll defer to George and Tom to walk you through that math.
Yeah. IBM clearly was the driver on the cash. If you pull IBM out of the statistics for renewal, the cash would've been about 1.5%, then that GAAP would've gone from 1.1% up to 18.1%. Part of that was just the GAAP nuance of the FAS 141 adjustment from when we bought the assets. We just had a tremendous pickup in cash on 585,000 sq ft with IBM.
Okay, thanks.
Our next question will come from the line of John Guinee with Stifel.
John Guinee here. Thank you.
Sure.
Couple questions. Drilling down at the tenant level in both D.C. and Austin, can you talk about just what appears to be continued migration or expansion of tech companies in Austin, and why that's happening and where they want to locate, which sub-markets? Also in D.C., Washington, D.C., talk a little bit about what you think is happening within the defense contractor industry. For example, although everybody seems to say tenants want to be at heavily amenitized Metro locations, it sure isn't helping the Rosslyn-Ballston Corridor, while on the other hand, the non-Metro served Dulles Corridor seems to be doing pretty well.
John, it's George. In Austin, I think the tech companies are clearly appealed by the access to that labor market, and they're really expanding really throughout all three markets. The Northwest up at The Domain, and that's what has us very intrigued on our development opportunities at Broadmoor downtown. We're seeing it even in kind of the Southwest portfolio where our DRA venture properties are. Some of that is continued growth of companies already in Austin, and then we've seen a number of tech companies relocating from California to Austin. In D.C., look, we fortunately have reduced over the years the number of leases and the exposure to defense contractors. But as everyone knows, Northrop is one of the larger ones. Given the fact that they're in Dulles today, I think they like that location, and Metro is going to be delivered to Dulles ultimately.
I think that being kind of the primary example that we're seeing. We've got the large lease that I talked about in my commentary, and then we've got a smaller 30,000-square-foot lease with them in Dulles Corner that they've got execution copies in front of them. You're right. I think they may be less attracted to amenitized. Sometimes I think it's the disruption of a move that often keeps them in place.
Great. Jerry, it is sort of the end of July, you've got a development start for the third quarter, if you're actually going to break ground by the end of the third quarter, you've got to know which building you're going to start. You have to negotiate a contract with the general contractors, etc. Can you give us any more color as to which building you're starting?
Well. We actually have a couple in the queue, either one of which could hit. They are both in Austin. That's what we're thinking at this point. Either one would be heavily pre-leased. Really on Austin, to add on to George's good comments, I think Austin just has a very powerful dynamic going. 160 people a day moved into Austin last year. You had 100 new companies locate there. I think what we're seeing, John, is kind of interesting. We're really seeing that market transition from one that was really driven a lot by tech companies. I think the comparative cost between Texas and California were certainly a key driver there. That's why you now have Apple as one of the largest employers in Austin, Texas. You've had Facebook grow there dramatically. Google's taking a lot of space.
A lot of it is a labor pool attraction, a lot of it is the cost advantage of locating into that marketplace versus some of the traditionally tech-driven California markets. An interesting thing that occurred, which I think speaks really well to Austin's long-term growth potential, is Merck had embarked on a national search for where to relocate their life science business. They selected Austin. You've had the opening of the Dell Medical School, along with the health campus. That will be a huge driver of medical technologies and some significant investments.
We're really encouraged, I think, from what we see within our existing tenant base in Austin, and even the prospects we talk to, who really still view Austin from a relative standpoint compared to some other Southwest cities, California, as possessing a lot of the right ingredients for a long-term corporate home or a big regional operation.
Great. Thank you.
You're welcome.
Our next question will come from the line of Jed Reagan with Green Street Advisors.
Hey, good morning, guys.
Good morning, Jed.
Could you potentially, just to follow up on that last one, could you potentially start both of those Austin developments?
It's possible, though, Jed. I think the timing is such that we really feel one is something that would be undertaken in 2017. The second one, just given some of the issues being negotiated, particularly in terms of space requirements, things like that, is probably more attuned to be in 2018.
Would these be fully pre-leased or partially pre-leased?
They would be heavily pre-leased.
Heavily pre-leased. Okay, great. In terms of the dispositions, how are the pricing and the pacing of dispositions going this year relative to your expectations? Then maybe just in general, have you seen any noticeable changes in the capital markets this year in terms of investor demand or pricing levels?
I think the disposition pace is going pretty much as we anticipated. It's kind of the tale of two cities. I think some of the really non-core assets that we're trying to fundamentally move out of the portfolio, I think there, Jed, we're seeing the bid lists are a little bit smaller. We kind of know who the potential buyers might be almost before we go to market. You can kind of pretty much benchmark where you think the pricing levels will be, there really has not been any change there. The length of time to get the deals closed tends to be kind of in 90-120 days versus kind of a 60-day cycle because of their equity raising and either CMBS or bank financing requirements. That's very much in line with what we anticipated.
When we're looking at some of these assets where we think there's good opportunity to harvest some great value because of the leasing status or the quality of the property or where it's located, we put some of these properties in the market for kind of a price discovery, I think we're pretty pleased with the depth of the demand. The pricing levels are holding very firm. In fact, we've created some very nice auction processes on some of our higher-quality offerings. The deal terms are tight, you're kind of at 30/30 due diligence, 30-day close, sometimes even quicker. I think we're pretty happy with kind of the range of what we've put on the market to sell.
Certainly, the pricing levels we've gotten year-to-date on a lot of these asset sales have been well inside what we typically put in our financial models, a mid 8% cap rate. As we're looking at the balance of the year, we're very confident meeting our $200 million disposition target well inside our targeted range. Depending upon how some of these price discovery processes go on some of the other assets we have in the market, as I mentioned in my comments, we could actually exceed that benchmark on a net basis.
Sorry if I missed this, if that did happen, you exceeded the target, would that potentially lessen the $250 million term loan need that you kind of outlined earlier?
Yeah, it's possible. I think Tom pointed that out in his comments, which is, certainly we want to take a look at all our combined sources and uses before we make a decision on the debt side. Certainly, one of the things that occurred during the second quarter, we're really happy about, which was our ability to essentially take $400 million of fixed encumbrances between a $300 million bond and a $100 million preferred, and essentially exit those payoffs by utilizing cash, and only increasing our debt take out that by 50% of the $400 million, or $200 million on our line outstanding. We think that's a very effective tool that we can use through generating these sales efforts to kind of layer into our debt management plan.
Sure, that makes sense. Maybe just the last one for me, maybe one for George, I'm not sure. Can you give a sense of what kind of rent growth, if any, you're seeing around your markets at this point? Have you seen any changes in the concession environment this year?
Yeah, concessions have remained relatively unchanged. When we kind of look at cash mark to market, I had given the 3.8% in my commentary in downtown Philadelphia, Pennsylvania suburbs running about 5.2%, and we are still about a negative 3% cash in D.C. Shifting over to the GAAP side, 15.6% in the city, 17.4% out in the suburbs, and 7.4% positive GAAP rent growth down in D.C. based on length of lease and the rent bumps that we are getting, typically between 2.75% and 3%.
As far as sort of asking rent, just kind of market asking rent growth, are you seeing any upward pressure there?
Not at this time. Things have remained relatively status quo on kind of asking rents and where we are effectively cutting the deals.
Great. Thanks very much.
Thank you.
Our next question will come from the line of Mitch Germain with JMP Securities.
Good morning, guys.
Morning.
Just trying to understand the occupancy trend in the suburbs. I think, George, you referenced some more move-outs will be experienced next quarter. Is it really kind of next quarter winds up being the bottom, and then it kind of trends higher 4Q into 1Q next year?
Yeah. Exactly, Mitch. The next one is that 49,000 sq ft tenancy at Radnor Corporate Center that had a July move-out. Based on the pre-lease that we have in place on some of these spaces, Q3 for Radnor really does become the bottom end, and then it starts to pick up incrementally then, a little bit Q4, and then spilling into 1Q of 2018. We've got kind of the staged takedown of some of those larger spaces occurring through 2018.
Understood. Thank you. Jerry, I apologize if you already answered. I know you mentioned some value add acquisitions that were being targeted, 1031. Is there a specific market that you're focusing in on right now?
Mitch, there is. I think we're focused really kind of on the, call it the Greater Philadelphia market from a value add standpoint right now.
Great. Appreciate it. Thanks.
Thank you.
At this time, I'd like to turn the call over to Jerry Sweeney for closing comments.
Great. Thanks, everyone for joining for the call. We look forward to updating you on our business plan progression in 2018 guidance and on our Q3 call. In the meantime, have a wonderful, safe, and enjoyable summer. Thank you very much.
Thank you for participating on today's Brandywine Realty Trust second quarter earnings conference call. We do appreciate your participation and ask that you disconnect. Thank you.