Good morning. My name is Tabitha, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust first 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'd like to ask a question during this time, simply press *1 on your telephone keypad. To withdraw your question, press the # key. Thank you. I'll now turn the call over to Gerry Sweeney, President and CEO. Sir, the floor is yours.
Tabitha, thank you very much. Good morning, everyone, and thank you for participating in our first quarter earnings call. On today's call with me are Tom Wirth, our Executive Vice President and Chief Financial Officer, Dan Palazzo, our Vice President and Chief Accounting Officer, and we have George Johnstone, Executive VP of Operations, who's calling in from off-site, so he'll be available for Q&A later in our call. Prior to beginning our presentation, 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.
With that said, as we normally do, we'll start off with a summary of our key business plan performance, and then Tom will review our financial results. So far, we're off to a solid start. During the first quarter, we made significant progress on our business plan objectives, meeting or exceeding many of our operational leasing and investment goals. We also are reaffirming most of our business plan targets and increasing the two other targets that we laid out in our business plan. On the investment front, we have executed two-thirds of our $200 million disposition target with a strong pipeline of transactions under contract or in the market for sale. As anticipated, our portfolio repositioning is accomplishing our goals of growing earnings, cash flow, and strengthening our balance sheet.
These goals are best evidenced by our strong same-store cash growth this quarter and by the increase in our full-year cash mark-to-market range. Our mark-to-market for the quarter was 9.1% on a GAAP basis, in excess of our targeted range. Our mark-to-market on a cash basis was lower than our range, primarily due to several known D.C. renewals. Based on forward activity, we expect full results to be within the new targeted range, which we have increased by 100 basis points from 8%-10% to a new range of 9%-11%. We ended the quarter at 93.2% occupied and 94% leased. Our speculative revenue plan is 90% complete on a revenue basis and 80% complete on a square footage basis, which compares favorably to our performance in 2016.
Our tenant retention rate for the quarter was also below our annual target. Based on known activity, we are increasing our annual target from 68% retention to 71% for 2017. Our GAAP and cash same store numbers for the quarter were in excess of our business plan range at 2.4% GAAP and 9.4% cash. Future quarterly activity will return us to our existing ranges for these metrics for 2017 full year. Our leasing capital for the quarter came in above our range, primarily due to three long-term deals in CBD Philadelphia. Again, based on forward leasing activity, we're maintaining our 2017 targeted range of $2-$2.50 per square foot per lease year. We expect we will be below our range in Q2, in line in Q3, and slightly above in Q4.
Fundamentally, based on our strong mark-to-market cash rent growth, combined with longer lease terms and strong annual escalations, that has resulted in a 16% increase in our same-store net effective rent since 2015. Very good operational throughput through our portfolio. From a balance sheet standpoint, we continue to benefit from our sales program, as evidenced by improvements in our liquidity and leverage metrics. To wit, we've reduced our net debt to EBITDA from 6.6 at year-end 2016 to 6.3 at quarter end. We reduced our net debt to total assets from just north of 38% at year-end down to 37.5% at quarter end. Our weighted average cost of debt year-over-year went from 4.7 down to 4.5%. We also ended quarter with a net cash balance of $235 million and zero drawn on our line of credit.
As we disclosed in our press release and discussed on last quarter's call, we did utilize $100 million of our cash reserves to redeem our entire 6.9% perpetual preferred shares at par. As noted again, this redemption did result in a one-time non-cash charge of $0.02 per share during the second quarter. As a result, we're revising our 2017 guidance from a range of $1.35-$1.42 per share down to $1.33-$1.40 per share, solely to reflect that $0.02 non-cash charge. On the investment front, we're running ahead of pace in our $200 million disposition target. We completed $133 million of sales during the first quarter at an average cap rate below our targeted range.
We also made progress on recycling our land bases and JVs by exiting our apartment joint venture in Plymouth Meeting, Pennsylvania, where we netted $27 million in cash, along with achieving a $27 million reduction in debt attribution, posted a gain of $14.6 million, an internal rate of return just north of 18%. We do anticipate using this successful round tripping on some of our other residential JVs. Before getting into our specific business plan metrics, we wanted to provide just a little color on what we're seeing in our markets as a prelude to any questions that you may have. First of all, our pipeline of potential leasing transactions has increased to 1.8 million square feet, which is up 100,000 square feet from the last quarter. We have also approximately 400,000 square feet of leases out for signature. Portfolio was solid with traffic levels in CBD Philadelphia up.
Pennsylvania suburban properties were in line with previous quarter traffic levels, and Austin and Northern Virginia were down slightly quarter-over-quarter. Our portfolio occupancy continues to outperform market averages, ranging from 500 basis points of outperformance in Austin to 1,000 basis points of outperformance in our Northern Virginia properties. Our leasing and property teams continue to do really exceptional work in servicing our customers and accelerating our lease-up plans. We continue to see good absorption in our core market areas. For example, absorption pace is up 20% year-over-year in the Pennsylvania suburbs. In fact, in that market, vacancy rate is at the lowest level since 2001. Austin absorption was up slightly over Q4 levels, and CBD Philadelphia continues to perform well with Q1 leasing levels of 460,000 sq ft.
I guess more importantly is looking at over the next several years, we're pleased to report that our forward lease expirations are now below 10% annually for each year between now and 2021. Those accelerated pre-leasing efforts really solidify our operating platform and we believe position us for continued market outperformance. Regarding our 2017 plan, we do expect year-end occupancy levels to continue to improve throughout the year up to a range between 94% and 95%. We did reduce our speculative revenue target by $1 million to reflect the continued acceleration of our building sales and to account frankly for a property currently under contract to a user where we had projected some speculative revenue in our 2017 plan. Same store numbers will range between 0%-2% on a GAAP basis and a very strong 6%-8% on a cash basis.
As I noted, investment sales are moving very much according to our plan. We're maintaining at this point our 2016 disposition guidance of $200 million of net sales with anticipated future sales of $67 million targeted in the second and third quarter, in line with our pro forma cap rate of 8%. We are confident of achieving this disposition target, and we currently have about $100 million of properties either under agreement or in the market for sale. One nuance to our disposition plan for 2017, our Concord sale occurred earlier than we anticipated and did generate a Section 1031 requirement. So we do anticipate making an approximately $35 million acquisition during the summer months. Our focus is solely on value add, and we have currently identified several potential redevelopment opportunities to meet this requirement. As Tom will outline, we will be repaying our $300 million unsecured bonds due in May.
They have a carry of 5.7% rate with funding through a combination of cash on hand and our line of credit as the first step in our overall debt management program. Just some quick notes on our development pipeline. Our 1919 Market joint venture project with CalSTRS and LCOR is doing great. The office and retail component remains 100% leased. The 215-car garage is already averaging 90% occupancy per day. We will achieve a free and clear return north of 7%, and the apartments are already 92% leased and 84% occupied. Interior renovations at 1900 Market are substantially complete. We're still in the final phase of zoning approval for some exterior improvements, which we hope to wrap up later this year. We are still projecting a low double-digit free and clear return from that property.
Construction is on schedule and on budget for our 111,000 sq ft, 100% pre-leased build-to-suit property in King of Prussia, Pennsylvania. We'll deliver that property during the second quarter. Project costs were reduced by just shy of $2 million, which increases our previous 9.5% free and clear return to the mid-10s. The office portion of FMC is complete and 96% leased as we reported last quarter. We did commence operations this quarter on components of our residential project. Our 3,000 sq ft restaurant is scheduled to open in June. We still expect that the office component will stabilize in Q4 this year, and the residential component be stabilized in Q1 2018. On the residential component, we did open in January, and we're still in the process of delivering finished units. Results thus far are very encouraging.
The flexible stay component's doing very well. The furnished residences are about 23% leased already, and the market rentals are already 24% leased. We're really gearing up for full delivery in the next 45 days. Given the executed leasing activity in the office component, the length of those lease terms has exceeded pro forma, but also came with a higher capital spend, as well as finalizing the residential programming between the flexible stay furnished and unfurnished units, and several upgrades. We did increase our cost level to $400 million on FMC combined project, but we're also able, based on known economics, to increase our target of free and clear return to 8.1% based upon known activity. Zoning ordinances have been introduced, and the design planning work continues on our Schuylkill Yards project.
We have continued some planning efforts during the approval timeline, and we could potentially start our public space component in the third quarter. We also continue to advance planning and pre-development on several of our development sites, including 405 Colorado and our Broadmoor master planning efforts in Austin, Texas. We are still projecting a $50 million development start that we expect to commence in the latter half of the year. I'll now turn it over to Tom for a review of our financial performance and some observational observations. George will be available for Q&A. Tom?
Thank you, Jerry. Our first quarter rental income attributable to common shareholders was $19.3 million, or $0.11 per diluted share. Our FFO totaled $56.1 million or $0.32 per diluted share. Some observations from the first quarter results. Same-store NOI rates for the first quarter were up 2.4% GAAP, 9.4% cash, both excluding net termination and other income items. We've now had 23 consecutive quarters of increase to the GAAP metric. 19 for the cash metric. Consistent with prior quarters, our G&A sequentially increased from $5.9 million to $9.4 million. Our first quarter G&A was above forecast, primarily due to some one-time professional fee items. FFO contribution from our unconsolidated joint ventures totaled $9.5 million, in line with forecast. Interest expense, $21.4 million, which approximated our forecast. A $1 million sequential increase, primarily due to lower levels of capitalized interest.
Our income and termination fees totaled $0.9 million and $1 million, respectively, did approximate our forecast. Third-party fee income and expense totaled $6.5 million and $2.4 million, respectively. Our fourth quarter CAD totaled $41.7 million, representing a 68% payout ratio, which includes $9.5 million of revenue-maintaining Capital Expenditures. We also incurred $6.3 million of revenue, creating revenue expenditures. Looking forward to the second quarter, we note the following. Sequential property-level operating income, GAAP operating income, excluding term fees, third party, and other income for the second quarter will range between $71.5 million and $72 million, as compared to the first quarter actual NOI of about $73 million. The second quarter NOI will include approximately $4 million contribution from FMC, up from $2.8 in Q1, partially offset by first quarter disposition activity, which will have a sequential dilution of $1.2 million.
In addition, the new IBM lease at Broadmoor will have a lower sequential GAAP NOI as the purchase accounting, FAS 141 income will burn off, reducing us by $1 million on a sequential basis from the first quarter. As outlined previously, while the same store NOI will benefit from the renewal of IBM, the GAAP NOI will actually decrease. G&A expense for the second quarter, due to the timing of our first quarter expense recognition and previously noted professional fees, our second quarter G&A expense will decrease to approximately $6.5 million, and for the full year, we continue to approximate about $28 million. Other income for the second quarter will approximate half a million. Our full-year estimate of $3 million remains intact. Termination fees, we expect half million in the second quarter, and our full-year estimate remains at $3 million. Interest expense and preferred dividends.
Second quarter interest expense will decrease to approximately $21 million, primarily due to the anticipated payoff of our bonds that mature on May 1st, totaling $300 million at a rate of 5.7%, partially offset by lower capitalized interest. Our second quarter preferred dividend, for the partial quarter up to the redemption date, will total $300,000. FFO contribution from our unconsolidated joint ventures should approximate the first quarter at about $9.5 million, and in fact, our joint ventures will contribute about $37 million for the entire year. Third-party fee income should approximate $25 million for the income and $8.5 million for the related expense. No changes. As we look at our business plan assumptions, net sales of $200 million. To date, we have sold 133 or 68%. We're not changing that target. The unsecured bonds will be paid off at maturity. Bank term loan.
We anticipated in the last quarter of doing a bank term loan between $150 million and $200 million to partially fund that bond maturity. We've assumed a 3.25% rate. However, as we assess our other liability management alternatives, which could include the 2018 bonds, we've delayed the execution of the term loan to either late second quarter or early third quarter. The preferred shares, as discussed, have been redeemed at par. The redemption did generate a one-time non-cash charge of $0.02. Primarily, it's all related to unamortized original issuance costs that are being written off. That charge, as we've discussed in the past, was not included in guidance and therefore, caused us to have a $0.02 revision. Land sales. We do have some land sales under contract, though we have to program no FFO gains or losses as a result in our guidance.
We continue to have an estimated 178.3 weighted average shares for dilution purposes. Looking at capital, we continue to project 2017 capital coverage between 71% and 64%, reflecting around $35 million of revenue maintaining CapEx at the midpoint. Primarily, cash uses and sources for the balance of the year will total $650 million. The primary uses will be $125 million for development and redevelopment projects, $86 million of aggregate dividends, $31 million of revenue-creating CapEx, the $300 million bond payoff, the $100 million redemption of the preferred, and $4 million of mortgage amortization. The sources to fund that are $125 million of cash flow after interest payments, $64 million of speculative net sales, a $250 million term loan, use of our cash of about $200 million, and $11 million residual land sales, primarily Garza.
Based on the capital plan and the $250 million term loan being executed sometime during 2016, we anticipate having a cash balance that approximates $35 million at year-end. The redemption of the preferred will cause our debt-to-EBITDA ratio to increase from the 6.3 times, which Gerry noted earlier, will increase by 0.3 to the second quarter. However, the removal of the preferred dividend will also improve our fixed charge ratio by 0.2 times, put us over three. We also project that our year-end debt-to-EBITDA ratio remains in the mid-six area. In addition to our debt to GAV will remain approximately 40% by the end of the year. We continue to be mindful of the current interest rate environment, and we are considering a number of refinancing options that may include potentially addressing the 2018, $325 million bond maturity at 4.95%. I'll now turn the call back over to Gerry.
Thank you, Tom. To wrap up, 2017's off to a great start for us. We really do believe that this year represents a continuation of our growing operating cash flow, improving our CAD payout ratios, growing NAV, and really positioning the company with a very solid operating platform for future growth. Just one other closing comment. I would like to remind everyone that we will be hosting an investor day on May 8th, with a series of presentations by management that will start at 10:00 A.M., and that will occur in our FMC tower at Cira Centre South. With that, we'd be delighted to open up the floor for any questions. As we always do, we ask that in the interest of time, you limit yourself to one question and a follow-up. Operator?
As a reminder, if you'd like to ask a question, please press star one. Your first question comes from the line of Michael Lewis with SunTrust.
Morning. Thank you.
Morning.
Gerry, I think you mentioned Northern Virginia a bit soft. It looks like the D.C. metro occupancy came in a bit, but the NOI was up, I think the rents looked like they were up. Since the election and everything, what's changing there? Are you seeing improvement in that market? Do you think over the next year that's kind of a drag on your same store NOI, or is it getting better and catching up?
Michael, our objective is to get that portfolio back to above 90% leased by the end of the year. That's clearly our more challenging market. Since the election, I think the psychology in the market has turned certainly more positive with the expectation that there'll be more government contracting opportunities, more of an emphasis on Homeland Security, cyber security. Certainly, as our team is speaking to our tenant base and to prospects, there seems to be a more positive bias to the feedback we're getting. We really haven't, however, seen that translate to any significant increase in quantitative data in terms of either absorption or leasing activity levels. Certainly, psychology is a good starting point. From our perspective, we're just hoping we're not going to see a Trump bump slump, where things start to reverse. The mean where they were before.
Certainly, look, we're very mindful of the work we need to get done in Northern Virginia. We have built into our capital plan, renovating several of our existing projects along the toll road to reposition them to generate higher levels of return on invested equity, very similar to what we did on our Dulles Corner project a few years ago that has been a wonderful success for us. It's very much an aggressive marketing stance we're taking down there. Again, the psychology's been positive, and we're tracking a number of different situations that hopefully will translate to better-than-business-plan improvements for us.
Thank you. My second question is, you sold some land in Austin and Richmond, and it looks like there's some more coming. Has there been any change in your view of land, based on where we are in the cycle and likelihood of starting new developments? Or, I guess a part B to that question, as you look at your land, is there more of a focus on Schuylkill Yards and the Austin land as kind of the source of kind of development going forward, and maybe you trim some of the rest?
Yeah, look, I think when we go through our land inventory, we have a page in the book on it. Our primary focus right now is we think our land at about 3.5% or 3.7% of our asset base is in the range where we want it to be. We do think, though, that there are a number of parcels of property that we have on the market for sale that either are no longer part of our core market growth strategy or are primarily better suited towards alternative uses but don't have the scale or the location to warrant us doing a transaction like we did with Toll Brothers in Plymouth Meeting. We clearly are looking at a number of the parcels of ground in Pennsylvania, New Jersey, Virginia, as potential fodder for generating capital for the company.
When we do look at land, we think we've got a very good forward land development pipeline opportunity in Philadelphia, we're not really looking to acquire much more land in Philadelphia that we don't already control. In Austin, we do think that the site we have downtown, and more importantly, we think the tremendous growth opportunity long term that Broadmoor will create gives us sufficient land basis there to really grow our portfolio significantly.
Thanks. I look forward to seeing you in a few weeks.
Thank you. Do we.
Your next question comes on the line of Jamie Feldman with Bank of America.
Great. Thank you. Good morning.
Hi, Jamie.
Can you talk more about some of the space that went vacant during the quarter, exact locations and just lease prospects to backfill and what's in your guidance versus maybe expectations to get it backfilled in 2018?
Yeah, I think when we took a look at why we had negative absorption during the quarter, it really came from several tenants. One in the Pennsylvania suburbs, we had about a 50,000 downsize of operations, which we knew was coming, it was clearly part of our plan. Then had a similar situation in a couple of our buildings downtown and one of our remaining assets over in New Jersey. What we really saw, Jamie, was what we knew was going to happen as part of our overall business plan. No real surprises there. One of the floors that we received back at downtown, we've already got some very active prospects for that now, anticipate leasing it up by the end of the year.
As we take a look at our forward pipeline, we certainly think that the occupancy levels, the absorption pace we've targeted are very achievable.
Okay. Then can you talk longer term about your plans for the residential and hotel space at FMC?
I think the intermediate focus for us is just complete it and get it leased up and starting to generate the revenue that we're anticipating. As I touched on, I think we're very happy with how that's being received in the marketplace. I think longer term, just as we looked at with the Plymouth Meeting joint venture, we'll certainly start to evaluate some of these other residential JVs. There may be a more near-term optimal price point for us on some of those projects than our typical core office holdings. When we developed FMC, we set it up to be a potential condo interest.
As we reach stabilization, we'll certainly take a look at that, as we will, frankly, with some of our other mixed-use projects to see if the continued cap rate compression that we continue to see on the residential side creates a nearer-term value point than we might have otherwise been thinking.
Okay. Do you think, long term, you'll want to keep a stake just to help to control the asset as long as you own the office? Not necessarily?
I think it's too early to call, Jamie. I think, what we really want to do right now with FMC is just get it locked away and meet all of our targets. We certainly are open to a number of different capital structures, not just on that project, but on any of our projects. I don't want to prejudge that we're going to be completely out or partially in or at this point. I think you should understand that we have a very open mind to what the ultimate structure or our residual position would be based upon where we see we create the most value for our company.
Okay. Thank you.
You're welcome.
Your next question comes from the line of Emmanuel Korchman with Citigroup.
Hey guys, good morning. If we look at your lease expiration schedules, especially what's left in 2017, it looks like those rates are significantly below your portfolio average. Is that just a matter of mix, does that drive sort of the, I guess, outsized rent rollover expectations for 2017? On that same front, if we look at 2018, do those rents being closer to average imply that rent rollovers might be a little bit softer?
Well, I know one of the big upticks that we're seeing, anticipate for 2017, as Tom touched on, is the solid mark-to-market we're getting on IBM. George, maybe you can pick up the second part of Manny's question.
Sure. Yeah, I think the balance of 2017, which there isn't a whole lot left, only a handful of deals above 15,000 sq ft. A number of those are in fact expiring at advantageous rates for us, and that's kind of why we've got the embedded mark-to-market ranges that we do. I think when we look at 2018, we've got a couple of higher rents in D.C. that market still hasn't fully recovered. I do think you'll continue to see some cash roll-downs, into 2018. I think for the balance of the portfolio, I think we've seen rent growth levels where that trend will be positive for 2018.
Great. Then a question for Tom. Tom, as you think about guidance or maybe your presentation of guidance, with something like speculative revenue, the fact that that now came down quarter-over-quarter because sales were executed. Am I thinking about it correctly in that that didn't imply the sales or that the mix of the assets you were going to sell has changed? If we look forward from here, if you sell the additional, call it $70 million that you have in guidance, does that mean the speculative revenue could come down again? Does your speculative revenue number now foresee the sales you're going to make?
Hi, Manny. No, it is a speculative number based on a number of transactions that we have out in the market. We won't move that speculative revenue target till we feel something is sold or under contract, and we feel good about the sale. The speculative revenue target could adjust again if we sell certain assets that had activity planned for the back half of the year.
Yeah, I think, Manny, just to jump in. One of the primary drivers of the change from the last time we spoke to this quarter call was that we did place a property under agreement to a user. That property has some vacancy that we really did anticipate generating some spec revenue for us kind of mid Q3 through Q4. That was the primary driver behind the change in the spec revenue target this year. That's a fairly unique situation. We weren't really marketing the property for sale. We just were approached by a company that has a specific use for that building. It's a very good trade for the organization. From our perspective, we decided that it's probably better for us, both for 2017 and long term, to sell that property, even though it came at a slight downtick to our speculative revenue target.
Thanks, guys.
Thank you.
Your next question comes on the line of John Guinee with Stifel.
Thank you. If these questions have already been answered, let me know. First, status on Northrop Grumman, $35 full-service rent, I think about 284,000 sq ft in Northern Virginia. It looks like about a 2018 lease expiration. Second, I think you've got maybe a big lease expiration for Verizon in 3 Logan. I might be wrong on that. Three, a lot of press recently about property tax increases in the commercial buildings in Center City, Philadelphia. Then lastly, how do we look at your land bases at Schuylkill Yards?
Okay. John, how are you this morning?
Good.
A couple questions. I'll just run through them. Northrop Grumman, they've exercised an extension to the last one under their lease to go out through the fourth quarter of 2018. I think they continue to assess their various options, we maintain a very active dialogue with them. They're occupying the space, we'll see where it goes. What was originally a kind of year-end 2017 expiration has now rolled forward another nine months. We'll see how that works out. Verizon, we've known for a while, is moving out of about 100,000 sq ft in our 3 Logan project. Again, that was a known move-out for the last several years, as they weren't really occupying much of that space.
The reality is that we have some very strong prospects for that and anticipate that when we do lease that space up, we'll have a very good mark-to-market on that. The real estate tax assessment issue in Philadelphia, the city came out with some revised assessments. We're working our way through all those numbers. Philadelphia has not reassessed in a number of years, from a macro standpoint, real estate tax in Philadelphia really are below the regional average by a significant amount. This reassessment, I think, starts the path for Philadelphia to reassess their commercial property base. As we're looking through the numbers, we think that'll wind up costing us about $1.2 or $1.3 million as we look forward to 2018 when those assessments go in place, assuming that there's no appeals.
We're certainly, like every other landlord, looking through the numbers we received in to determine whether there's an appeal there. On Schuylkill Yards, I think the transaction we structured with the landowner provides a rolling option for us to take down land, at I think a price we've indicated, about $35 per FAR foot. That holds flat for a number of years and escalates at a couple percentage points a year. Hope that answers your questions.
Great. Wonderful. Thank you.
You're welcome.
Your next question comes on the line of Craig Millman with KeyBanc Capital Markets.
Hey, guys.
Hey, Gregg.
Craig , I think last call, you had said you really didn't want to go above $200 million of dispositions. Just given, you guys have about $100 million in the market, and you're talking more about maybe monetizing some resi positions. Could we see that number move higher through the year?
I think we are still maintaining our guidance on the $200 million. The nuance to that, as I outlined, is that with the 1031 requirement, we do anticipate that if we wind up executing on that we would wind up still being a $200 million net seller. What we have done for the year, plus what we have in the market, puts us above the $200 million mark. Frankly, some of those things that are in the market, we may not get the pricing that we want or may not get the terms and conditions that we desire. We're still, Craig , I think, bottom line, holding into that number on a net basis. We think that the combination of whatever the 1031 exchange property is and the incremental sales as Tom's worked through, will be neutral to FFO for this year.
look, certainly, I think it's incumbent upon anybody, any landlord, to always be responsive to what the market's telling them from a pricing standpoint. We do have a very active dialogue across the board and across all of our regions on what property pricing we can get. As we assess that today, we're comfortable with where our guidance number is. Certainly, we would not want to preclude our harvesting some additional money later this year if the right situation presents itself. We haven't seen visibility on that definitively yet. Certainly, I think as we've done the last several years, we always maintain an open mind to harvesting some great value of some of our real estate.
Is it fair to say if you guys are more opportunistic, it'd be lower cap rate stuff relative to sort of the 8 caps you've been guiding us toward?
Well, look, our success in the first quarter, we're well inside the 8% cap rate range. That's due to some of the properties we were selling. The cap rates that we sold are ranged between 5.5% and 7%. That's one of the reasons why we put so much in the market, so we can be selective as to where the best price points are compared to how we value those properties. We expect to continue that over the next couple of quarters.
That's helpful. Just on the Marine Piers, when do you expect the $9 million payment to come through? Once that tenant either leave or terminate?
Yeah. That's going to be outstanding until that tenant expires, I think, Dan, 2024?
2020.
2020 rather, yeah. Thank you.
How much was there? I know you guys lumped it in last quarter with the parking at Cira. How much of that NOI for the full year was Marine versus just the parking revenue?
On-
Maybe a different way to say it. What's the cap rate on the $21 million for that one?
It's pretty low. It's in the 4% range, when we take a look at everything all in. It's really a future development site. We sold it to a very high-quality development company moving in from outside of the city, who plans on doing some residential waterfront development. I think, for us, it was a great transaction that moved a development site that's been on our books for a while, and we were generating some income from that based upon the Marine and the parking, the restaurant operations. Certainly, they're more equipped to make that project successful for the Marine Center.
Great. Thanks, guys.
You're welcome.
Your next question comes on the line of Rich Anderson of Mizuho Securities.
Thanks. Good morning.
Rich.
Could we talk about the GAAP and cash, same-store NOI differential hasn't always been leaning to the cash side as substantially it is today. I'm just curious what the shelf life of that sort of spread is. Looking back several quarters, it was kind of the reverse. Is this kind of a 2017 event where you have such a big cash number and more moderate GAAP number? Should we expect that to kind of become more in line with one another starting in 2018 or some point down the road?
Rich, this is Tom. I'll answer that. This year, because of the IBM, which we've talked about in the past, and the burn-off of the acquisition
GAAP NOI from the 141, there is a big dichotomy this year, and that particular transaction being such a large part of our spec revenue this year, caused it to be larger than it would've been otherwise. I think though, looking at 2018, we continue to see our straight line rent and those GAAP adjustments coming down. I think at least through 2018, you're going to see the same thing occur when we look out to 2018, is that we will see our cash NOI outpacing our GAAP in terms of growth.
Okay.
We'll see that going forward as a trend.
Okay. I now recall the IBM thing. Thank you. Second question, just looking back at the kind of the transcript from last quarter, I noticed you made the comment that 85% of your disposition target of $200 million then and now was either sold or under contract. I think that was kind of the terminology used. Now you've completed 66%. I'm just curious, does that 85% then and 66% now, does that sort of suggest, even though you kind of went down the path of saying you got faster with Concord, is it maybe moving a little slower than you anticipated three months ago?
Rich, it's Tom again. I think when we looked at the disposition target, we had that under contract. I think when we talked about our guidance and what we thought we would execute, we thought we would have 75% done by June 30th. Some of the transactions may be closed sooner than we thought, but I think our overall goal was to get 75% of that $200 million completed by June 30th. I don't think we feel that that is any different than where we are today. Some of them closed maybe a quarter or two or a month or two earlier than we thought, but I think we always anticipated having 75% done by mid-year.
Okay. If, just quick, a dividend policy, you quote your CAD on a % number nowadays. To me, it suggests that maybe you got some ideas about future dividend growth. Is that a fair statement?
Well, on that one, Rich, there was some changes made. I haven't really tracked our other companies, but we were changing that as a result of some guidance that came out from the SEC that is telling us that we should be talking in terms of a coverage ratio rather than a per share ratio. That's the only reason it changed. There's nothing to be read into it on a change in policy for our dividend.
Okay. Fair enough. Thanks.
Thanks, Rich.
Your next question comes on the line with Jed Reagan of Green Street Advisors.
Guys.
Good morning, Jed.
I just wonder if you can give us a sense of the kind of the rent growth you're seeing across your markets at this point.
Sure. George and I will tag team that. I'll take kind of the first part of it. Look, I think what we're seeing in the Pennsylvania suburbs is there was a lot of good activity and a high level of leasing velocity, so we've been able to move rents up into the 4%-5% range. Year-over-year in the CBD area, rents have moved up to 5%-7%, depending upon the inventory class. We're still seeing rents fairly flat as we talked about in D.C. Down in Austin, they continue to have very strong upward pressure on rents and, I'm just looking through my notes right now. When you take a look at the average asking rents in Austin, they've kind of up 11% year-over-year, across the board.
When you take a look at the class A rents in Austin, they're up just shy of 13% year-over-year. I think we're still in that point where we're being able to push rents fairly nicely throughout the bulk of our portfolio. Certainly in every market, we keep an eye on where we think deliveries are coming in. That's one of the reasons why we're really accelerating a lot of our forward lease roll as well, which is why I highlighted the fact that one of the things that we really think will hold the company in great stead over the next few years is that we've got our annual rollover now down to 10% or below between now and 2020.
I think we're really very much focused on seizing the moment, so to speak, on this window where rents are still pushing up, and pushing up nicely in all of our markets. Making sure that we're well-positioned to the event that we wind up moving into any period in the next few years where things start to slow down a little bit.
Okay. That's helpful. Thanks.
I think Jed, I was going to just say, I'm sorry. In terms of mark-to-market, I think, we're continuing to see double-digit increases in GAAP mark-to-markets in Pennsylvania CBD and in Austin. We're seeing kind of low- to mid-single digit GAAP rent growth now coming out of D.C.
Okay. That's helpful. I guess related to that, the cash mark-to-market rent guidance, for 2017, you bumped up a little bit even though the first quarter number was pretty modest. Was that a function of, again, just kind of the mix of assets that you're selling changing, or is that just your rent growth kind of ticked up faster than expected?
George?
Yeah, it's really more based on the deals we've executed that's allowed us to push the range. More of that was based on actual forward commencing deals
That we've executed. I think, given the fact that we do continue to see nice rent growth coming out of Downtown Philadelphia and in Radnor, the clarity of the pipeline and the deals we've executed but not yet commenced, allowed us to move the range.
Okay, thanks. Then just generally on Philly, looks like job growth's been pretty healthy here recently. I'm just wondering if you can talk about kind of the main drivers behind that. Is that state and local tax incentives or sort of policy positions changing or maybe which sectors of the economy feel healthier than others?
Jed, look, we certainly plan on spending more time on this, showing some data on our investor day, because we know that's a key question on the minds of a number of investors. We're seeing generally good growth across all the sectors. The anchors to Philadelphia clearly have been the eds, the meds, and they continue to grow at a nice pace, particularly a couple of larger institutions in the city of Philadelphia. Jefferson Health on a big acquisition and growth mode. More importantly, I think we're seeing a good mix of companies locating into Philadelphia from the surrounding region. Primarily driven by this demographic shift towards urban town centers, integrated lifestyles, access to mass transportation.
We track very carefully, and we'll be able to show some statistics on this at our investor day of the percentage of absorption and leasing activities coming in from outside the city. City's also, hopefully, getting focused on tax strategies that will generate more of an open door for business to relocate downtown. They've launched a couple of programs that provide some incentives, including some wage tax credits to companies moving into town. I think a lot of the green shoots are there. We've seen a number of companies set up bases of operation in the city, even though they've maintained large employment bases throughout the region. The most recent example that's been in the news is, Vanguard, which is a major employer in the Philadelphia region, has really opened up their first kind of incubator space in the city of Philadelphia.
We think that that trend line, or that reflects what we've seen as a trend line from a lot of other companies, and we certainly think that trend line will continue. More to come on that at our investor day. I think when you take a look at year-over-year job growth numbers, Philly's actually posted some pretty good numbers. We have a lot of ground to make up, we understand that, compared to some of the other 25 largest cities in the country. We think that there's a lot of demographic, and corporate drivers at play that are bringing more businesses long-term into the city of Philadelphia.
Okay. That's helpful. Appreciate the color. Maybe just last one, if I can. Have you guys seen any noticeable changes so far this year in terms of the cap rate environment or investor demand?
None. I'm not sure it's because of the volatility of the treasury market or what's happening in Washington, but I think we've been very pleased with the level of traction we're getting on the sales of some of our properties. As I think we've talked on previous calls, the bidding pool's not as deep as it once was, but there's still active buyers out there, and we're still seeing a very active CMBS bank debt market. Still a flood of private equity sitting on the sidelines looking for decent rates of return. We've really not seen any material movement in cap rates anywhere.
Good. Thanks so much.
You're welcome.
Your next question comes on the line of Mitch Germain with JMP Group.
Good morning. I know it's not a big dollar amount, Jerry, but the capital deployment that you've got targeted for the back half of the year, is there any sort of market mix that you're looking at or asset type? Maybe just kind of provide some perspective of what you're kind of considering as a value-add investment.
Oh, yeah. Look, I think we're really focused on trying to find another project that kind of fits what we've been able to do in 1900 Market Street. We're able to buy it for a very good price per square foot, utilize our marketing development teams to kind of turn around and generate a nice rate of return for us. Right now, the primary focus of the properties we've identified are really kind of in the greater Philadelphia area. That $35 million deployment will probably be in the Philadelphia region. To the broader question, Mitch, when we look at our land pipeline going forward, we do have a $50 million development start in our projections for later this year.
Our expectation, given kind of the pace of discussions we're having with tenants, we do expect that that investment will most likely be in Austin, Texas. We've got a few other prospects we're kind of dealing with in the other regions, but for right now, the strongest demand that we're seeing from larger users who would occupy a building that size is really coming from Austin.
I know there's obviously a bunch of development underway and in the pipeline there. The likelihood is you won't do anything until you get that leasing commitment, correct?
That is correct.
Great. Just one more from me, Tom. I know there's a couple ins and outs and changes on the capital plan for some of the debt coming due. Term loan got pushed, the term loan and cash to pay down this year's maturity. Then next year, is that just going to be a refi? How should I think about just the two big tranches of debt coming due?
Sure, Mitch. The way we were looking at this year's maturity was going to be the two, meaning the preferred and the 2017 maturity, was going to be a combination of cash and a bank term loan. The second part of that is 2018. We were thinking that would be a refinance in 2018. That's kind of how our model and how we're projecting things to you right now. With the 10-year moving the way it has of late since the last announcement of the Fed rate hike, we've been more focused on maybe doing some liability management that may include the 2018 bond. It wouldn't be something We're certainly considering that at this point.
I would say right now, it's just going to be refinance 2017 with the cash and the term loan, and we'll worry about 2018 next year, but that may accelerate.
Helpful. Thank you.
Thank you, Mitch.
Your next question comes on the line of Robert Simone with Evercore ISI.
Hey, guys. Morning. Just kind of following up on an earlier question. I know you have the $50 million start later this year, but you've kept your development start guidance unchanged for the last couple of quarters. I know you've commented in the past that there could be additional activity. I guess, could you talk broadly about what you're seeing on the ground? Is there any upside to that number?
Rob, there could be, but if we felt strongly enough about it right now, we'd be more definitive in our forecast. We have a number of discussions underway with tenants who are looking to upgrade their physical plant and move into new buildings. From our perspective, it's really a function of, does the timing and do the numbers work for us on that? As I just mentioned a few moments ago, we're further advanced in our discussions for a development start in Austin. There are a couple of other opportunities that we're pursuing in the Pennsylvania, Philadelphia regions, and we'll see how they plan out. Certainly, to the extent that we could do more and the terms make sense for us, and there's a heavy level of pre-leasing.
Even from the standpoint, in a broader sense, we are now beginning to see more tenants who are looking for buildings, but looking that they would own the building. We would be a fee developer. Very much along the lines of what we were able to accomplish with Subaru in building their North American headquarters, where we made a return on the land. We're a developer, we get a development fee. I think we're seeing more and more tenants who are now for a variety of reasons, looking to own their facilities versus just enter into a long-term lease with us. We're clearly open to both. For right now, I think we are holding our guidance at the $50 million. Certainly, as events progress, we'll make sure everybody's fully aware of what we're thinking.
Great. Thanks, Jerry.
You're welcome.
As a reminder, if you'd like to ask a question, please press star one. We have a follow-up from the line of John Guinee with Stifel.
Yeah. Great. Thank you. Quick follow-up. What I think we're seeing throughout the country regarding space leasing is that tenants will pay the freight for quality space. They'll pay the freight for A space, but what they want is a turnkey TI package, and essentially the landlord financing the move for A space. B and C space tends to really be lagging, and that's tough to backfill that. The end result is that the rental rate growth is often driven by the TI package for the A space. Does that make sense to you guys? Can you sort of debate that or tell us if we have that correct or incorrect?
No, I think that's a good thesis, John. I think we're saying that, for the most part, construction costs continue to move up. Certainly, we're able to realize through some VE processes, some savings, as we did on one of our properties, this quarter. Yeah, I think tenant expectations are they want to move into higher quality space that is very efficient, so their average occupancy cost per employee, is very competitive, because of the efficiencies of the building. Both from a column design, ceiling height, HVAC systems, et cetera, but also with all new building systems in place that are going forward, operating expenses will have some downward pressure compared to some stay-put options. I think from, whether it's driven by the brokerage community or by the tenants themselves, there's clearly upward pressure happening on the TI packages.
I think that's one of the reasons why we, a couple of years ago, really moved towards really looking to longer-term leases, trying to get 2%-3% annual rent bumps, so that we can maintain a capital ratio On all of our deals, somewhere between new deals between around 15%, on the renewal deals, closer to 10%, so that the economics work for us, both from a point-of-sale standpoint, but just as importantly, in terms of the NOI growth versus what our investment base is. We're clearly seeing that trend line where most tenants want something that's brand new and shiny and efficient, and use that pricing discussion as a framework to evaluate stay put options. Fortunately, a lot of the properties we've sold were kind of in that B and C category.
I think we're pretty well positioned to both attract tenants to our new product, but also retain them on fairly competitive terms in our existing higher-end product.
Great. Thank you very much.
You're welcome.
As a reminder, if you'd like to ask a question, please press star one. Your next question comes from the line of Bill Crow with Raymond James.
Good morning, Jerry.
Good morning, Bill.
We're seeing in a number of markets that the trend of companies relocating into the urban markets from the suburbs, I'm just curious how much of the success of Philly CBD might ultimately mean that bigger challenge for your suburban markets.
Well, we always want markets to grow. That solves all ills. I think we've seen, though, Bill, is a lot of internal growth within our markets, it's a matter of where those firms are deploying that growth. For example, we signed a large lease with a tenant in one of our properties downtown last year that was over 200,000 sq ft add to their occupancy levels in the city of Philadelphia. They did vacate some space in the suburbs, their net growth was pretty dramatic. We've seen that with a number of other tenants as well. Look, certainly, as we assess the markets that we're in, we recognize that markets change as tenant drivers change.
One of the key drivers of our sale program, quite candidly over the years, particularly in the New Jersey, Delaware, Pennsylvania, Maryland, and Northern Virginia markets, has really been focused on, okay, where do we think that long-term tenant demand drivers have shifted? Then what's the quality of our inventory base in those sub-markets? We've fortunately been pretty successful in getting out of a lot of those. Our direct exposure to, I think, that trend line you've outlined is pretty minimal. I think we're cognizant enough to recognize that if there's a net reduction in overall demand, that that could have a downward pricing effect on some of the more commodity-level markets. Fortunately, I think we're pretty well-insulated from that.
What we've seen is some of these tenants that have moved downtown into Philadelphia in particular, they've continued to maintain pretty big bases of operations. They're trying to basically accommodate some of their employees who want to be downtown for a period of time and kind of set up flexible workstations for them.
That's helpful. Gerry, a follow-up question. You are the expert of the Philly market. I'm just wondering what your gut's telling you as you look at downtown Philly and the development activity that is going on. How close are we to crossing that line from really healthy to overbuilt?
I think on the office side, we're still in a position of being very healthy. There's a couple of renovated buildings coming online in the couple hundred thousand sq ft range. There's a building coming online in University City. I think given the demand drivers we're seeing and certainly the list of deals that we're seeing, I think we remain in pretty good shape. Our expectation as we read the tea leaves is to make sure that we, number 1, keep an eye out for every potential prospect. 2, every tenant that we have anchor down for the next few years. We're kind of hedging our bets on both scenarios.
I think there's been a lot of residential construction in downtown Philadelphia, which is one of the reasons why we're so pleased that our 1919 project is doing so well and that we're seeing such great early support for FMC. I do think when we take a look at the different product segments, looking down the road a year or so, there's probably going to be more of a softening on the residential side versus office. We track all those pretty carefully, and we make sure we try and stay in front of it.
Great. See you in a couple of weeks. Thanks.
Thank you.
At this time, I'll turn the call back over to Mr. Sweeney for closing remarks.
Great. Look, thanks everyone for participating in today's call. Again, want to remind everybody that we love to see everyone in Philadelphia on May, starting around 10 o'clock. Tom's team is available to handle any logistics you may have in getting into town, but we're looking forward to a really good presentation and showcasing our inventory and our management team throughout the company. Thank you very much.
Thank you. That concludes today's conference call. You may now disconnect.