Brandywine Realty Trust (BDN) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Brandywine Realty Trust First Quarter 2018 Earnings Conference Call. (Operator Instructions).

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jerry Sweeney, President and CEO. Sir, the podium is yours.

Brian, thank you very much. Good morning, everyone, and thank you for participating in our first quarter 2018 earnings call.

On today's call with me are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Vice President and Chief Accounting Officer; and Tom Wirth, our Executive Vice President and Chief Financial Officer.

Prior to beginning, certain information discussed during this call may constitute forward-looking statements within the meaning of the federal securities law. Although, we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved.

For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports filed with the SEC.

As we normally do, we'll start with the review of our quarterly activity then an update on our 2018 business plan. And looking at 2018, the plan's off to a great start with in-line results. We are 83% done on our revenue plan with a strong pipeline of pending lease activity and our operating plan remains on solid footing. Our balance sheet is strong, we have ample financial capacity. We continue to pursue preleasing on our development and redevelopment pipeline project and are pleased with our success this quarter in both Austin and King of Prussia, Pennsylvania.

We also continue to monitor the investment market for both sale and value add opportunities.

Market activities remain in line with our business plan expectations. Tenant activity is strong and as George will amplify, we continue to have a lengthy leasing pipeline.

Our focus remains on completing our business plan, creating positive cash flow growth, executing leasing tactics that increase our net effective rents and pursuing growth opportunities.

From an operational perspective, we ended the quarter at 92.3% occupied and 94.2% leased. That sequential decline of 60 basis points in occupancy was the anticipated, due primarily to lease expiration that we had at Three Logan Square here in Philadelphia. Our mark-to-market for the quarter was a strong 10.5% on a GAAP basis, in excess of our targeted range of 8% to 10%.

Our mark-to-market on a cash basis was at the upper end of our range and based on forward activity, we expect the full range -- full year results to be within our targeted range.

Speculative revenue plan is 83% done. That compares last year at this time, without the IBM major renewing done early in 2017 to 84%, so right in line with last year. And we are about 67% done, which compares to last year as well, complete on a square footage basis.

Tenant retention for the quarter was below our target annual rate at 51%, but based on known activity, our annual target remains unchanged at 67%.

GAAP and cash same-store numbers for the quarter were as expected and below our annual business plan range at minus 4.4% GAAP and minus 1.4% cash, driven by the decrease in average occupancy year-over-year. This was fully anticipated in our plan and we expect future quarterly activity will return us to our 2018 targeted ranges.

Leasing capital for the quarter came in at $2.84 per square foot per year, at the low end of our targeted range, primarily due to several as-is renewals.

Based on our forward leasing activity, we are maintaining our 2018 target of $2.75 to $3.25 per square foot per lease year. We expect to be above that range in Q2 and Q3, and below in Q4.

More importantly though, our mark-to-market rent growth, combined with longer lease terms, and we think, good control over our capital spend, has resulted in an 18% increase in our same-store net effective rents over the last several years and to amplify that we are projecting a 4.5% increase in 2018 net effective rents over 2017 levels.

Balance sheet continues to benefit from our previous year sales programs. As evidenced by following improvements in some of these metrics, our -- we've reduced our net debt-to-EBITDA from 6.2x at year-end to 6.0x at the quarter end, and are comfortable staying within our targeted range for the year.

We reduced net debt to total assets, we also reduced our weighted average cost of debt year-over-year by 44 basis points. Ended the quarter with a cash balance of $201 million and 0, joining our $600 million line of credit.

We also anticipate launching a recast of our $600 million line of credit in the next 30 days as well as a recast of our 7-year term loan that fully will lock away our balance sheet for the next several years.

From an investment perspective, with the exception of the previously announced sale of Evo, we do not have any dispositions or acquisitions included in our 2018 plan.

As we always do, however, we're continually canvassing the market for asset in land sale opportunities as well as exploring recapitalization of several of our joint ventures, our clear focus is on maintaining earnings momentum and cash flow growth. And we continue to expect that proceeds from any sales activity that may occur during the year will prefund our development, provide for joint venture simplification, address growth opportunities as well as a continued focus on maintaining and reducing our leverage levels.

On the development front, we made excellent progress during the quarter and all of our development activities are detailed on Pages 13 through 15 of our SIP.

Our overall development pipeline preleasing levels have increased from 77% at year-end to 90% at the end of the first quarter. That increase was primarily driven by 100,000 square-foot full building, 12-year lease at our 500 North Gulph Road project in King of Prussia. Our leasing team did a wonderful job working with an existing tenant. They needed expansion and they signed a 12-year lease for us with a 2% annual bumps. That tenant is -- also has a major presence with us in King of Prussia, occupying about 250,000 square feet on a lease that goes out through July of 2028. So great example of our ability to accommodate existing tenants base needs within our targeted submarkets.

We do anticipate completing the renovation work and stabilizing 500 North Gulph Road by year-end 2018. The project cost moved up slightly due to some additional structured parking to $29.7 million, it will generate a 9.3% going in cash-on-cash return on cost and we anticipate an average return of over 12% during the term of the lease. At Garza, down in Austin, Texas, we announced another land sale. The latest sale was for a 6.6-acre parcel that was sold to SHI, one of our existing tenants at Barton Skyway. That land sale will generate a gain that we'll recognize in the second quarter, and I know Tom will touch on that. Look, while we certainly would've preferred to build the own scenario, this tenant wanted to own their own facility. We've had a great relationship for that with them over many years, so concurrent with the land sale, we entered into a proposal to service their development manager, they constructed -- to construct a 250,000 square-foot building. They currently occupy about a 180,000 square feet at our Barton Skyway project on a lease that will expire in May of 2020.

Given the desirability of that project and the overall strength of the Austin market, we already have strong activity on that space and we do expect between a 15% to 20% positive mark-to-market on the relay.

So Garza, when you look at what we've been able to do, we've generated almost $27 million of sale proceeds and we will continue to own the final land parcel that's zone for another office building, totaling 150,000 square feet.

We are actively marking that site for prelease and as we look at it, the Garza project really demonstrates our capacity to master plan a multiphase mix-used site, work through the approval process, partner with other development companies and harvest gains and then master planned project. And that's exactly our intention to replicate that type of success in our other multiphase development projects, like Schuylkill Yards and Broadmoor.

Construction does continue on budget and on schedule, at our 165,000 square-foot building at Four Points in Austin. The project is 100% leased to an existing tenant under a 10-year lease and we do anticipate delivering that project in Q1 next year, with a projected 8.4% of return on cost. At 906 Broadmoor in Austin, we did push the stabilization date back to Q4 2018 due to a delay in leasing of the final floor of that project. We do though have good pipeline of activity and are still expecting our targeted rate of return of 9.8%. Construction continues on our second building for Subaru at our Knights Crossing campus in Camden, New Jersey. That project is fully leased on an 18-year lease. We expect to deliver and stabilize that project in Q3 of '18. That tenant does have a purchase option that they can exercise upon substantial completion, which we expect will occur later this year when the building stabilizes in 2018 -- August of 2018.

In March, we also made an additional investment on Schuylkill Yards project, by acquiring a partial of ground -- the lease hold interest of partial of ground. That land partial, and an additional partial planned for June would comprise the 2 building sites contemplated in our Phase 1. The first building, as we've indicated in the past, is -- would aggregate about 700,000 square feet. The land is currently being used as a surface parking lot.

Phase 1 is currently in the design development process. We anticipate completing that design development process by 2000 -- by end of 2018. Consistent with our general approach, we do not anticipate starting any construction without a substantial prelease. And we are also working with our development partners at Schuylkill Yards in evaluating actual product mix that will ultimately comprise Phase 1 and exploring a range of third-party financing options.

New land acquisition will enable us to move forward with our sight analysis engineering work, necessary to really complete the design development process. So looking at our land inventory from a land management standpoint, the acquisitions, combined with our announced and programmed sales, will bring our land inventory to about 3.2% of our asset base, which is right inside our 3% to 4% targeted land inventory level. We continue to advance planning, predevelopment and zoning efforts on several of our other development sites, including 405 Colorado, in Austin, Texas, downtown; our Broadmoor master plan in Northwest Austin; and our Metroplex project in Plymouth Meeting, Pennsylvania.

Just as a final note. As part of our annual review of corporate governance, our proxy this year does include several recommended changes to our bylaws and declaration of trust.

The change is, the Board is recommending to our shareholders that they approve an amendment providing shareholders the right to amend our bylaws on a direct basis, recommending a simple majority vote to approve certain mergers from our existing documents with specified super majority and opting out of the Maryland business combination act.

In addition to that, the board recently voted, as indicated in our proxy, to opt out of the Maryland unsolicited takeover act. So those all items are on the proxy for approval by shareholders.

At this point, George will provide an overview of our operating performance and then turn it over to Tom to look at our financial highlights.

Thank you, Jerry, and good morning. Activity levels in all of our markets remained solid. The pipeline, excluding development properties, totals 1.6 million square feet with 285,000 square feet in advance stages of negotiation.

During the quarter, we generated 77 space inspections, totaling 508,000 square feet. While slightly below last quarter's volume, these tours cover 56% of our available inventor. Our leasing teams are converting 59% of all tours into proposals, with 49% of those proposals further converting to executed leases.

Now shifting to our strategic markets and the underlying assumptions contained in the 2018 business plan. In CBD, Philadelphia, during the first quarter Verizon vacated its 100,000 square foot lease at Three Logan, which accounted for the entire company's negative absorption for the quarter.

As previously discussed, we've leased 85% of the space to 4 different tenants. These 4 deals were done at an average cash mark-to-market of 10%.

Rollover in the city ranges between 6% and 9% for each of the next 3 years. Our largest rollover for the balance of the year is at Cira Centre. 2 full contiguous floors totaling 55,000 square feet roll on June 30. Our 2018 plan still assumes these floors remain vacant for the duration of the year. Several tours have occurred to date and we have one proposal outstanding for half of that space.

Turning to the Pennsylvania suburbs. The large Radnor vacates in 2017, continues to see good levels of activity and first quarter tours outpaced 4Q '17. The pipeline in Radnor consists of approximately 290,000 square feet, including 5 prospects over 20,000 square feet. Our selected demo and common area improvements have all been completed.

King of Prussia continues to perform well, currently 93.2% leased and our recently signed lease of 500 North Gulph Road highlights the dynamics of that submarket.

While overall sentiment about Northern Virginia is negative, we feel good about our current position. We're currently 91.6% leased with manageable rollover through 2021. Tours in our Northern Virginia portfolio were up year-over-year for the second consecutive quarter. The pipeline of new deals is 275,000 square feet, and we have approximately 100,000 square feet of leasing remaining in the 2018 plan.

We recently completed building improvements at cooperative way along the Toll Road and at 8260 Greensboro and Tyson's, to better position those buildings within the market.

Our specs week program continues to generate favorable results for tenants seeking quick occupancy.

Shifting to Austin. The economy is the fastest growing among large cities. Job growth for the 12 months ended January was 3.7%, second in the nation. While our Broadmoor 6 redevelopment remains 79% leased. We are in continued negotiations for the balance of that space. The 2018 business plan for our DRA joint venture is 90% complete, retention for the year within that JV is 85%, with rent growth on both the GAAP and cash basis in the double digits.

In terms of same-store NOI, the large move out that occurs in the second half of 2017, coupled with the Three Logan vacate earlier this year caused a negative same-store growth metric in Q1. These same factors will result in the second quarter, again performing below our annual range.

It's worth reiterating that our current 83-property same-store portfolio will increase in the third quarter, when FMC tower, 1900 Market Street, 3000 Market Street and 933 First Avenue transition into the same-store.

With these additional 4 properties in the mix, our second half of the year same-store NOI will range between 10% and 13% on a cash basis and 4% to 5% on a GAAP basis.

So to conclude, we're delighted with the continued achievement on the business plan and with the activity levels in our markets. And at this point, I'll turn it over to Tom.

Thank you, George. Our first quarter net income totaled $44.2 million or 25% -- $0.25 per diluted share, and FFO totaled $57.3 million or $0.32 per diluted share.

Some general observations regarding our first quarter results. Our quarterly operating results met our expectations, although some of our operating metrics were below our stated ranges, we expect incremental improvement throughout the balance of the year. As a result, we have not adjusted any of our 2018 business plan metrics. Our balance sheet continues to improve, as our first quarter fix charge and interest coverage ratios were 3.3x and 3.6x, respectively, a 14% and 9% improvement compared to the first quarter of 2017.

The first quarter sale of Evo helped us reduce our net debt-to-EBITDA to 6.0x, a 9% improvement from the first quarter of 2017. Our balance sheet improvement has been confirmed by Moody's and they've changed our outlook from stable to positive during the quarter.

We anticipate that our net debt-to-EBITDA may move higher in the next quarter, but we expect it to stay within our range of 6.0x to 6.2x by the end of the year.

Looking forward to the second quarter of 2018, we have the following general assumptions. Our portfolio operating income levels will be approximately $75.5 million and will be sequentially the same as the first quarter due to the following, as we see FMC and the residential operations will generate an incremental $1 million of GAAP NOI, offsetting that increase will be a reduction in the core NOI, which will also include $500,000 of demolition cost.

FFO contribution from our unconsolidated joint ventures, which totaled $6 million. G&A for the second quarter will decrease from $8.7 million to $7.5 million and our annual G&A should approximate $28.5 million.

Interest expense will remain steady at approximately $20 million with a capitalized interest of $500,000. By the end of the second quarter, we plan to refinance our current line of credit, which currently has an initial May 2019 maturity date. We anticipate extending the maturity through June 2022 with borrowing terms that are similar to the current facility.

Concurrent with refinancing our line, we will also recast our current unsecured term loan C from a 7-year term loan to a 5-year loan, with no change in the current maturity date. While the interest rate is swapped to fix, the recash should result in a lower incremental borrowing rate and reduce our interest cost in second half of the year.

Termination fees and other income will approximate $2 million. Net management and leasing development fees should be $2.5 million. And land sales, including in our 2018 guidance, we forecasted about $2.5 million of land gains during 2018 and we expect to record that in the second quarter. That will be comprised of the transactions that were done at Garza, regarding the office sale that we just announced and the previously announced sales of the hotel and the residential components, both will be recognized in the second quarter, as we complete certain infrastructure work that will allow us to recognize those gains.

If there are no incremental ATM activity. Our capital plan, based on our midpoint projected CAD -- coverage ratio will increase by 14%. And our coverage will be 65% to 71% based on our increased 2018 dividend.

Usage for cash for the balance of the year will be $320 million comprised of $140 million of development and redevelopment projects, $98 million of common dividends, $28 million of revenue maintaining and revenue -- and another $28 million of revenue-creating CapEx, $6 million of mortgage amortization and $20 million to purchase the next land parcel in Phase 1 of Schuylkill Yards. The sources to fund that will be a cash flow from -- cash flow of $155 million after interest and using our line for $165 million -- cash on hand of $165 million. Based on the capital plan outlined below, cash balances will be approximately $35 million at the end of the year with no balance on our unsecured line of credit.

As we look at, where we will be at the end of the year? For fixed charge ratio, we expect to be at 3.4x and our interest coverage improving to 3.7x by year-end '18.

I will now turn the call back over to Jerry.

Great. Thank you, Tom, and thank you George. So our 2018 plan is on track. The first quarter came in just as we expected it would. We do recognize that there is a ramp up in leasing activity implicit in our 2018 business plan execution. We are fully focused on achieving all those objectives. As George touched on, we think the pipeline of leasing activity through the company is strong and in line with what we expected at this time of year. And our leasing team and our field operations are focused on making sure that we optimize every opportunity to make transactions, continue to improve our proposal to lease execution percentage, focusing on direct lease transactions.

So we think, given the product we have, the talent of the leasing teams we have in our field operations by great property management operations that we are in very good shape to fully execute on our 2018 plan.

With that, Brian we'd be delighted to open up the floor for questions. As we always do, we ask that in the interest of time, you limit yourself to 1 question and a follow-up. Thank you very much.

(Operator Instructions) And our first question comes from the line of Craig Mailman from KeyBanc Capital Markets.

It's Jordan Sadler here with Craig. Question regarding that -- so regarding your statements of your tenancy, here we are in April, are you feeling increased optimism or is it just you're directly in line with what you had anticipated a few months ago, in terms of the appetite for space?

Jo, I think we continue to be pretty bullish on what we're seeing throughout the portfolio. Certainly, with the 83 or so same-store properties, we think all those properties are well-positioned in our submarkets. The pipeline -- the forward look we have in activity still is pretty good. I mean, we are not moving though of the mindset we have of being very aggressive in pursuing all leasing opportunities, where we need to compromise some of the economic terms to accelerate absorption. We are certainly doing that in some markets. We never lose sight of the fact that where we think we have leverage with the tenants or any particular products. I think in general, when we talk to our leasing teams -- again whether it's an Austin of Philadelphia or even as George touched on, in DC, we're feeling pretty good about our ability to execute the plan that we've laid out and move forward on that basis. I don't know George if you have any other...

Yes, I think we are encouraged by the volume of space inspections, our team continues to do a great job in converting, we're still seeing good levels of direct deals, which sometimes has given us the ability to kind of renew tenants before they even want to go out. So look at the market and speaks to the relationships that we have, both in the brokerage community and with tenant space. So you know, we're kind of at the same point in terms of achievement as we were a year ago. So we -- I think we still feel confident in the plan that we've laid out.

And then, as it relates to the investment market, you're through the asset bill guidance, you've talked about remaining open and willing. What would -- what was the most dense in terms of incremental opportunity to pair the portfolio or to raise capital here in this type of environment to fund development to whatever else you can put money to work? What else in the portfolio would it be considered noncore or a good opportunity to sell today?

Great question, Jordan. I think when we look at the portfolio, we are where we were last quarter as well, which is -- we have a few remaining properties in our -- kind of our other categories in the CIP, which includes some properties in New Jersey, a couple of buildings in Delaware, some of our buildings in Maryland. So I think we continue to have a dialogue with the investment market, either through the brokerage community or with direct buyers on a reverse inquiry basis of -- and potentially trying to achieve some of those sales. And in the meantime, we are -- we always keep our eye on where we think there are some other opportunities to add some value through buying something that needs to be fixed. And so we wanted those avenues that we've laid out as part of our multi-year business plan, as we continue to look at some of our joint ventures as an opportunity to either sell assets there or to recapitalize, refinance, which changes the level of NOI contribution we get from those projects. So certainly, similar to what we did at Evo in the first quarter. We looked through our joint venture portfolio. There are some other properties there, that are either near-term candidates for recapitalization or refinancing and potentially someway to harvest some dollars there that can go in to our core development pipeline or create the capacity to maybe pursue value-add acquisition opportunity.

And our next question comes from the line of Manny Korchman from Citigroup.

George, maybe if you think about the leasing pipeline that Jerry talked about in his remarks, can you just give us some flavor as to what types of tenants are those? Are those tenants that are expanding better within your portfolio? Or new-to-market tenants?

Yes, a little bit of a mix, Manny. We do continue to see good levels of tenant expansions. We saw that last quarter with the Comcast deal with Three Logan. This quarter, with the 500 North Gulph Road transaction, but it varies a little bit market to market. I think downtown, it's a nice blend between expansion and new tenants. In Northern Virginia, it's predominantly new tenants that we're seeing and we're seeing good levels of activity in these recently completed renovations we've done at both corporate way and at 8260 Greensboro, kind of bring in new tenants to these buildings that they haven't seen in the past as a result of our improvements. Much the way we did with Dallas Choir last year. Pennsylvania suburbs, similar to the city. It's a little bit of a blend, some expansion of the existing tenant fees and some new tenants kind of moving sub-market to sub-market coming from either landlords to Brandywine space.

Got it. And you talked about, I guess, the concessionary environment, maybe if you could give us an update on what you're seeing in terms of concessions and sort of how you're managing those, especially with some of the larger leases you're doing?

Yes, I think on the larger lease requirements. We're balancing kind of the entire concession package between free rent, the TI, but then also with the length of lease term and the rent steps in that. For deals that we did in the first quarter, again, about -- only about 20% of the deals we've been in the first quarter had a free-rent element to them. So that was a good kind of trend line for us in the first quarter. The TI's again, we're kind of in that 10% to 15% ratio of total rents over the lease term that we want to allocate capital to. That capital being both the tenant improvement and the leasing commission.

Yes, I think I'll add on to that. I think one of the major point that's kind of creating us the need to kind of balance the tension is really on the construction cost side. So we've actually seen an ability to kind of move rents up. In fact, in some of the growth reports, the average asking rate in Philadelphia broke $30 for the first time ever. So you're seeing rents moving to right direction. I think given the quality of the product we have, and it's not without exception, but generally speaking, we kind of have the right product in the right submarkets. So our leasing teams are able to kind of, I think, drive a pretty good economic result. We are always trying to balance that with the capital outlays. And that's why all 3 of us always talk about how we control capital cost. But if you take a look at unit pricing, that's continued to trend up. And in some cases, unit pricing was trended up higher than rental rate increases. So we're trying to compensate for that by, obviously, moving nominal rents higher. Really focused on trying to lengthen lease term to the extent we can. And always analyzing every lease through kind of this window, if you know, are we actually increasing net effective rents. And look, in some markets and some product, we are in a much stronger negotiating situation than others, but I think generally from a portfolio management standpoint, we do feel like our ability, as we mentioned in the comments, to move our net effective rents up over 4% this year is a good step in the right direction. So controlling capital tends to be the highest element balancing the tension on a deal-by-deal basis.

And our next question comes from the line of Jamie Feldman from Bank of America.

So I guess, I want to focus on the ramp, both for same-store NOI and even to get to your earnings guidance. So if you -- can you -- like how much of the same-store bike in the back half of the year is already baked in versus requires you to hit your leasing targets? And I guess a similar question, just on hitting your guidance?

Well, I mean I think in terms of the -- our range assumes that we hit our open spec revenue. So as we laid it out in the supplemental, I mean, we've got about 600,000 square feet of leasing to achieve, that leasing is going to generate an additional $4.6 million of up spec revenue and most of that is all within kind of the same-store portfolio. The assets that are transitioning in to same-store are fairly well leased at this point. So we obviously need to hit that. We've got the pipeline, as we've talked about. That's square -- that open square footage, about 40% of it is in Pennsylvania, 25% in the city and 25% in DC, with the last 10% really being the open floor at Broadmoor in Austin.

Okay, but I guess like of the cash piece, how much of it is actually transitioning those assets into the portfolio? Were already -- I think, were already baked in?

Well, I think everything is baked in other than this remaining $4.6 million.

Right. Okay.

Yes, I think -- and Jamie, I think, also as we look at FMC, as we mentioned earlier, coming into the quarterly same-store, but we do still expect the NOI ramp to come from our -- from components of FMC that weren't there in the first quarter, that will be -- will still increase as we go throughout the year, as you relate to -- don't tell me that it's all right times.

Okay. And then Jerry, I know you'd mentioned some assets that you still consider noncore. I mean what are your big picture thoughts on weighing earnings dilution versus asset sales at this point?

Great question. The -- I think as we look at it Jamie, we have -- we do really all the heavy lifting in the rearview mirror, in terms of portfolio pruning. So we think we have the ability to be more surgical on how we sell assets. And certainly modulate that to a great degree to other deployment opportunities. So if you think about our 2 major predicates over the last year has been, get the portfolio to where we want it to be, the right product, the right submarket, the right quality. And get the balance sheet into that targeted range that we've outlined as part of our '18 plan.

We are there, we know we got some forward funding commitments on the development side. We want to make sure that we have an ability to kind of move sales to generate capital to fund those forward commitments and renovation projects we have underway. So I think we really do believe, as we talked on the last call that as we embark on sales, one of our key issues is to maintain earnings momentum as well as really accelerate cash flow growth. And that's kind of those 2 points along with the balance sheet are really the drivers behind how we are looking at our investment program.

Okay. And then just finally, we are moving kind of in the later stages of the cycle here. Just thoughts on supply risk in Philadelphia and Austin? And how that might impact your business going forward?

Yes, look, we are always focused on supply risk. Unfortunately in Philadelphia, there is not a lot on the near-term horizon on the office side, couple of projects that are kind of in renovation, like a 2400 market, are having some great leasing success. That's really anchored by Aramark as our new corporate headquarters. But in terms of larger blocks of space in the city, I think the last -- and I saw there were 6 or 7 blocks greater than 100,000 square feet. So there is really not a lot of excess supply right now in the marketplace. So we feel pretty good about that. But also, very much focused on getting any deal we do, heavily preanchored. I think the same thing even in Austin, Texas where there is tremendous demand drivers and I know a lot of other local companies have been moving on spec development. I think we're still holding through to our perspective, that if we're developing the right product, it's in the right location, it's designed well and thoughtfully, that we should be able to identify a tenant to anchor that property before we start construction.

And so we still are holding to that kind of 50% preleased target across the board and we really don't see that changing, certainly not at this point in the cycle anyway.

Our next question comes from the line of John Guinee from Stifel.

Couple of questions. I think probably one for Jerry and one for Tom. First Jerry, if you look at the Schuylkill Yard's, roughly $5 million square feet of development and you capitalize all your ground leases, you add in your cost to your park. So what's the land basis per FAR in very sort of a rough range?

Yes, the -- it's going to be in that $40 square foot range, John. Probably between $40 and $45, depending upon how that sequences in. The leasehold interest that Tom referred to and I referred to in terms of the partially what -- that's around $35 in FAR.

Okay. Then -- I also noticed you have about 50 acres under auction with 600,000 square feet of development right? That looks like a 0.25 FAR zoning -- almost industrial zoning. Can you discuss what you got, under auction for 50 acres?

Oh, yes, that's been under auction for a long time. That's a parcel of property in Northeast Philadelphia that we have under auction from PIDC and that is zoned for a low density flex space or industrial space.

Got you. Okay, and then Tom, you've been very helpful on your releasing et cetera. And I think you mentioned that your revenue-maintaining CapEx was about $28 million and your revenue-creating CapEx was about $28 million. And we understand fully the releasing cost and the mark-to-market, both cash and GAAP to the revenue-maintaining portion. Can you elaborate on the revenue creating, that space has been vacant for more than a year? What you think your releasing cost per square foot per lease year and what the spreads will be on that square footage? And what percentage of that square footage is relative to the revenue maintaining?

Yes, John, for 2018, our revenue-creating capital per square foot per lease year is actually in -- within the same range as our maintaining. If you simply just blended them all together, we are still kind of in that business plan range that we've outlined for this year. So we haven't -- we have had cases in the past where revenue-creating has trended higher, but we're at a point in the cycle, at least with our space, that that capital requirement is running similar on a per square foot per lease year basis.

And John, to add to that, we have added sort of our ratio of square feet that are going to -- that are in our revenue-maintain bucket, to the square feet that are in our revenue-create buckets on 20 and we can go through that. You can see the square feet and how we're going to -- how they balance between the 2 and can create a ratio on our actual cost spent, which is obviously cash, compared to a trailing of how many square feet are in the bucket of maintain and create.

Our next question comes from the line of Rob Simone from Evercore.

Just a quick question on JFK 1. You guys mentioned that you're still in the planning process and that it's may be going to end -- wind up by the end of the year. I'm just curious, could you guys maybe talk about the -- how you are thinking about kind of carving up the building between different types of tenants? And then maybe how much of the activity out in the market is really informing that process? And then just a quick follow-up after that.

Okay, great. Look the market activity is defining a lot of things, certainly as we go through the design development process. The first building is programmed for about 700,000 square feet of total space. We anticipate somewhere around 50% of that will be office space. And the balance we are thinking through where that's with our residential partner Gotham doing apartments, included in that or whether it's a life science kickoff. So I think we're still thinking about that first building in Phase 1 being in that size range and we would anticipate that the office component would be roughly in the 350,000 square-foot range.

Got it. Okay, that's helpful. And then just really quickly on the 55,000 square feet of vacancy this year that's assumed to remain vacant in the plan. I was wondering if you guys could just maybe comment on what if any activity you are seeing on that space right now? And then what types of tenants?

Yes, we've had a couple of tours to date, financial service, some law firm, some coworking prospects, it's a really kind of a full gambit of what we are seeing in most of our CBD assets. So a lot of tours to date and kind of one active proposal at this time.

And then Rob, that space isn't vacated till...

June 30.

June 30. So we also have plans underway to demolish or reconfigure some of that space, based upon the pipeline of deals that we are seeing.

Our next question comes from the line of Steve Sakwa from Evercore ISI.

Sorry for the tag team here. I guess, Jerry, just going back to your commentary about sort of planning the space around Schuylkill Yards, and really I guess you probably can't comment too much about Amazon and they are -- where they are going to locate, but to the extent that Philadelphia is still in the running, how does sort of a large tenant like that influence the planning? Or how much does that kind of keep your planning on hold until you ultimately find out what they decide to do?

Yes, I think Steve. The -- look any large tenant that would come our way, as part of our Schuylkill Yards development right now, would have an impact on what our planning and sequencing is. So I think that's -- we recognize that as we go -- even as we go through the design development process, that our ability to attract a larger tenant, even beyond the size range we were just talking with Rob about, could impact what we would actually build. So we look at any larger tenant, Amazon or any other larger tenants who are floating around looking for large blocks of space. We stay close to those transactions. We recognize that there is a variability that them making a decision would create. But we don't really hold off on our current design development process. We think we have a good near-term market opportunity to do a very successful launch on a prelease basis with Schuylkill Yards. To the extent that a large add of market tenant or a large in market tenant would have a requirement all to our original development plans, we would factor that into the sequencing and negotiation process with that tenant. And we do like the high-profile nature of some of these searches, because I think what it really does is reinforce that Schuylkill Yards is a fairly unique opportunity on the East Coast, both in terms of traditional office space, mixed-use development or really a catalyst for tremendous expansion of the life science business in the Philadelphia region. So we continued as to actively market all used components in Schuylkill Yards, as we embark on the design development process and as we do in every development transaction, we are always very responsive to what the market tells us, is the right mix and the right time to have a successful launch.

And I'm just curious, how much of the Amazon, kind of using that as one of the finalist, has kind of jump-started demand from other tenants who may be weren't previously contemplating that location?

I think that's a good observation. The -- I think Philadelphia making the short list of 20, has I think #1, I think it met from a macro standpoint, raised the profile of all the really exciting things happening in the city, in this region that have -- some of these comes that may not have evaluated Philadelphia as an alternative location before, focused on it because of making that shortlist. And I think using that momentum as a platform to broaden our marketing approach has been really very successful. And -- so we were very happy that Philadelphia made the shortlist. We think Philadelphia has a tremendous amount of attributes to offer to any large, small, medium company once they come into the region. And we plan on maximizing that advantage from our marketing channels as much as we possibly can.

And our next question comes from the line of Rich Anderson from Mizuho Securities.

Just a quick one here. George or Jerry whomever, what would the same-store number be, if it's 2% cash for '18, in the absence of additional assets being brought into the pool? So just sort of a steady state portfolio, what would it be in '18? And then after you've addressed the occupancy loss, what would be kind of like a longer-term sort of growth profile, but with no moving parts?

So without bringing the floor in, that's what our current range is for 2018. When you bring the additional 4 in, that's when we start to get the lift and get to the ranges that I gave out in my commentary.

Oh okay, excuse me. So the 2% is a steady state portfolio of assets?

Right.

Okay.

Correct.

And I'm showing no further questions. I would now like to turn the call back to Jerry Sweeney for any further remarks.

Brian, thank you and thanks to all of you for participating in the call. We look forward to continuing to make progress in our '18 business plan and updating you on our second quarter call during the summer. Thanks again.

Ladies and gentlemen, thank you for participation in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.