Brandywine Realty Trust (BDN) 2018 Q2 法說會逐字稿

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

I'd now like to turn the conference over to Jerry Sweeney, CEO. Sir, you may begin.

Shelby, thank you. Good morning, everyone, and thank you very much for joining us and for participating in our second quarter 2018 earnings call.

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

Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although, we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports filed with the SEC.

So as we normally do, we'll start with the review of our quarterly results and then an update on our 2018 business plan. And as indicated in our press release last evening, our 2018 business plan is progressing quite well. We're significantly done on our revenue plan with a strong pipeline of pending leasing activity and our operating plan also remains on very solid footing. The balance sheet is strong with ample financial capacity. Based on recent activity, we're now 92% leased on our development and redevelopment pipeline. And while we don't have any investment activity building to the remainder of our 2018 plan, we do continue to actively monitor the investment market for sale and value-added acquisition opportunities.

So real estate market conditions remain strong. George will walk you through some of the specific market statistics. And summer slowdown notwithstanding, we continue to experience a solid volume of space showings and have a sizable tenant prospect pipeline of 1.8 million square feet, which is up from last quarter. So we very much remain focused on completing our '18 business plan, generating positive cash flow growth, executing leases that generate net effective rent increases and seeking growth opportunities including proceeding on our development pipeline.

And looking at operations, we entered the quarter with 92.3% occupied and 94.2% leased. We did expect these metrics to remain flat from first quarter numbers. Our business plan anticipates, and as supported by our pipeline, a sequential improvement during the second half of the year, and as such, we're maintaining our year-end targets. Mark-to-market, on a GAAP basis, during the quarter was a very strong 22.8%, which brings us to almost 16% for the first half of the year in excess of our targeted range of 8% to 10%. Mark-to-market on a cash basis was also at the upper end of our range and based on forward activity, we expect full year results to achieve or exceed these targeted ranges. Our speculative revenue plan is 92% complete on a revenue basis and 75% on a square-footage basis, with the majority of the remaining activity being in our Pennsylvania suburban and metropolitan D.C. operations. George will provide additional color on our pending activity and pipeline.

Tenant retention for the quarter was above our annual targeted 79% or 63% for the first half of the year and our annual target remains unchanged at 67%. Our average lease term during the quarter was 7.8 years, which was above our 7.2-year target. So good operating metrics on those fronts.

GAAP and cash same-store numbers were as expected and below our annual business range at minus 2.5% GAAP and 0.3% cash, which is really driven, as we talked on our previous quarter calls, by an average year-over-year occupancy decrease of 150 basis points. Again, fully anticipated, and we expect second half performance will return us to our targeted 2018 ranges.

Leasing capital for the quarter came above our targeted range at $4.29 per square feet. That was primarily driven by 3 long-term leases that we executed in CBD Philadelphia. But based on our forward leasing activity, we're maintaining our 2018 target of $2.75 to $3.25 per square foot per lease year. We expect, we will be above our range in Q3 and below in Q4. But our mark-to-market rent growth, combined with our longer lease terms and good control of our capital cost, has generated an 18% increase in our same-store net effective rents over the last several years, and we're still projecting just shy of a 7% increase in 2018 net effective rents over '17 levels.

On our balance sheet, Tom will talk about that in a few moments, but our balance sheet and liquidity metrics continue to improve as evidenced by the following metrics: We increased our weighted average maturities by 1.2 years, it's almost to 7.2 years on average. We ended the quarter with a net cash balance of $108 million with 0 drawn on our $600 million line of credit. Tom and the team did a marvelous job completing a recast of our $600 million line of credit on improved terms, including a reduction in our borrowing rate. We have also launched a recast of our 7-year term loan and anticipate that will close within the next 30 days. In pursuit of our balance sheet, the strengthening strategy, we also paid off the debt on our 1919 Market Street joint venture property that is now unencumbered and that was met by the partnership providing their pro rata share of the $88.8 million payoff of our construction loan.

Net debt to EBITDA did increase to 6.2 in the second quarter, primarily due to the additional investments of Schuylkill Yards. Again, we anticipated that and we still project being at 6.0x by year-end.

On the investment front, with the exception of previously announced sale of Evo on a small second quarter sale, we do not have any additional acquisitions or dispositions included in our 2018 plan. As I did mention though, we're continually canvassing the market for sale opportunities as well as exploring a recapitalization or exits of several of our joint ventures. The clear focus of this activity is to maintain earnings momentum and steadily improve our cash flow growth rate. Proceeds from any incremental sales will be used for joint venture simplification, value-added growth opportunities and meeting any of our development funding requirements. And on our development front, we made excellent progress during the quarter and year-to-date. All of our development activities are clearly outlined on Pages 13 to 15 of our supplemental package. Bottom line, the development pipeline now stands at 832,000 square feet and roughly $270 million. We're 92% leased at a weighted average cash yield on cost of 9.2%. The development pipeline prelease increase was primarily driven during the quarter by leasing Broadmoor Building 6 to 95%. As we previously announced, 500 North Gulph Road is a great renovation success for us. That project will be both completed and stabilized by year-end 2018. It will have a cost of $29.7 million and we'll generate a 9.3% initial return on cost and over a 12% return on cost cash-wise over the lease term.

Garza Ranch continues to perform for us. And to date, we've generated just shy of $30 million of land sale proceeds, and as expected this quarter, recognized a $2.8 million land gain. We anticipate in the next 30 days commencing a 250,000 square-foot build-to-suit office building that will be owned by one of our existing clients, SHI, and we will be earning development fees totaling approximately $2.6 million over the next 6 quarters.

In addition, we continue to own the final land parcel that is zoned for another office building of 150,000 square feet. We are in the active design development process for that and are actively marking that site for prelease. Our Four Points project in Austin continues to progress on budget and schedule. That's a 165,000 square-foot project, 100% leased to an existing tenant under a 10-year lease that will deliver in Q1 '19 at a projected 8.5% return on cost. It's important to note that 73% of the 45,000 square feet that tenant will be leaving behind has already been released at a almost 9% cash and almost an 18% GAAP mark-to-market.

At 906 in Broadmoor, as I mentioned, we've returned that to stabilize occupancy levels, but we did have to push it back to Q4 '18 simply due to a delay in signing a lease on that final full floor. We do expect to have just shy of a 10% return on cost coming out of that project. We continue construction of our second building in Subaru of America at our Knights Crossing campus. That tenant, as Tom will touch on, has exercised their purchase option and we anticipate working with them to sell the building during the second half of 2018.

In June, as we announced, we had made an additional investment in our Schuylkill Yards project by acquiring a second parcel for just shy of $21 million. We now own both parcels of land that will comprise the 2 building sites contemplated in phase 1. It's a covered land play with both parcels being used for surface parking. Phase 1 is in the design development process, which we plan to complete by Q1 2019. We are also working with our development partners, evaluating the ultimate product mix that will comprise that phase and exploring already a range of third-party financing options. Our objective on Schuylkill Yards is to finalize the design process, identify anchor tenants, select the joint venture financing partner with the hopes of potentially commencing our first building start in late 2019, obviously, subject to preleasing and meeting those conditions.

The Schuylkill Yards land acquisition is offset by some of our under-contract land sales and will bring our land inventory to 3.4% of assets, which is right inside our 3% to 4% land inventory target level. We've also completed all of our approvals for the 405 Colorado project in downtown Austin. We are very close to finalizing our GMP on that project and are actively premarketing this 200,000 square-foot office project with fully amenitized floor and 530 parking spaces. Activity is really good and we'll be ready to go once we secure an anchor tenancy.

Several weeks ago, as has been reported in the local Austin Press, we finalized approvals on our 6 million square-foot Broadmoor campus. That process took over 18 months and we really do want to thank the local public officials and Austin city employees who helped us achieve this milestone. It's a much overused term, but we really do believe that, that Broadmoor campus will be a transformative project that will further accelerate the growth and domain area of North Austin. Our game plan is to immediately now move forward with the planning of Phase 1, which will be a mixed-use product consisting of office, multi-family, hospitality and retail. That phase will recall site approval, but if all goes well and subject to preleasing, we would like to be in a position to commence construction on phase 1 by the end of next year.

With that overview, let me turn it over to George to talk about our operating performance, then George will turn it over to Tom to review our financial and balance sheet.

Thank you, Jerry, and good morning. We've seen a nice increase in activity levels in all of our markets since last quarter. During the second quarter, we generated 100 space inspections totaling 775,000 square feet. This traffic is up 30% over last quarter and the volume of square footage being inspected was up 53%. The Pennsylvania suburbs and Metro D.C. were the drivers of these increases. As a result, approximately 471,000 square feet of our pipeline is in advanced stages of negotiations. Conversions from tours to proposals is running 63% with 31% of those proposals further converting to executed leases.

The acquired new leasing still to be executed is 423,000 square feet. Our current pipeline of new deals in advanced stages of negotiations is 274,000 square feet with another 571,000 square feet of issued proposals for new tenancies. So with these activity levels and our existing level of prelease square footage, we remain confident in meeting our year-end leasing targets.

Shifting to our strategic markets and the underlying assumptions contained our 2018 leasing plan. In CBD, Philadelphia, during the second quarter, we increased our leasing percentage to 96.8%. Our largest block of vacancy of the full floor at 1900 Market Street, where we are in advanced negotiations for that entire space. Rollover in the city ranges between 5% 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 vacated on June 30. We have already leased 1 of these floors to a single tenant commencing in August. The second of these floors is being used by an expanding tenant in the building through November for swing space. The permanent relet of this second floor is contemplated to occur next year. Our largest 2019 rollover in the city is with Comcast at Two Logan. Their 112,000 square-foot lease expires December 31, 2018. We still anticipate them relocating, and as such, have been marketing the space. We currently have an LOI to backfill 75% of the space, if and when they vacate.

Turning to the Pennsylvania suburbs. We executed 25,000 square feet of leases in Radnor during the quarter. None of this square-footage was within the 2 large vacates in 2017. Those spaces, 3.5 floors in total, continue to see good levels of activity and second quarter tours again outpaced the previous quarter. The pipeline in Radnor consists of 273,000 square feet, including 3 prospects over 30,000 square feet each. Both the number of tours and the square footage of tours outpaced the first quarter. We remain confident in the depth of that prospect hold to lease these remaining vacancies.

Plymouth Meeting, Conshohocken and King of Prussia all continue to perform well with less than 7% vacancy. Rollover exposure in the entire Pennsylvania suburbs during 2019 is only 7.5% with only 4 tenancies over 20,000 square feet. Each of those are currently entertaining renewal proposals.

Shifting to Northern Virginia. Tours outpaced the first quarter by 60% and the associated square footage of those tours increased 75%. We currently have approximately 78,000 square feet of leases in advanced stages of negotiations. The total pipeline in Metro D.C. totals 489,000 square feet. We continue to see a predominance of professional service and IT firms within the pipeline with an average deal requirement of approximately 10,000 square feet. Our spec suite program continues to generate positive results for quick hitting tenancies in the 3,000 to 5,000 square-foot range.

In regards to recently reported news on KPMG at 1676 International Drive and Tysons potentially moving, their 183,000 square-foot lease expires third quarter of 2024. They have an early termination option effective third quarter of next year with notice by December 31, 2018. We have a renewal proposal in front of them currently. In the event they opt to relocate, we've already proceeded with a comprehensive redevelopment review to improve access to the property, upgrade existing common areas and re-amenitize the building. Given activity in the Tysons submarket, we see a great opportunity to increase rents by 10% with a 20% return on our contemplated incremental capital investment.

Austin remains the top-performing market in the nation. Tech industry jobs account for 14% of all jobs in that market. Rents, both downtown and in the suburbs, have hit an all-time high. We leased the last floor of Broadmoor 6, as Jerry mentioned. We'll place that property into the core portfolio during the fourth quarter.

The 2018 business plan within the DRA joint venture is now 94% complete, retention for the year within that venture is 87%, and rent growth on both the GAAP and cash basis remain in the double digits.

Based on the market activity we've discussed and the leases already executed for the balance of the year, we're maintaining all of our business plan metrics and ranges. The second half of the year will generate additional occupancy and, as a result, we'll quarterly same-store NOI growth outpace that of the first half of the year on both the GAAP and cash basis. Quarterly same-store results for the second half of the year will further benefit from FMC Tower, 1900 Market Street, 3000 Market Street and 933 First Avenue coming into the same-store mix.

So to conclude, we're delighted with the continued achievement on the plan and with all of the activity levels in our markets.

And at this point, I'll turn it over to Tom.

Thank you, George. Our first quarter (sic) [second quarter] net income totaled $12.9 million or $0.07 per diluted share and FFO totaled $63 million to $0.35 per diluted share.

Some general observations regarding our second quarter results. Our quarterly operating metrics met with our expectations, although some of our same-store operating metrics were below our 2018 stated full year 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.

Consistent with our previous guidance, we recognized a $2.8 million gain on the sale of several land parcels located in Garza, at the site in Austin, Texas.

Our balance sheet continues to improve as our second quarter fixed charge and interest coverage ratios were 3.4 and 3.7x, respectively, a 10% and 6% improvement as compared to the second quarter of 2017.

As outlined during our first quarter conference call, we anticipated our net debt to EBITDA increasing due to our ongoing development in Schuylkill Yard investments. So as expected, our net debt did increase to 6.2x, but we expect to meet our 6.0x by the end of the year. Property level income totaled $76.9 million and is $1.4 million higher than our projection in the previous quarter, primarily due to increased rental revenue and some reduced operating expenses.

Looking forward to the third quarter of 2018, we have the following general assumptions: Portfolio operating income will total approximately $78.5 million and will be $1 million higher as compared to the second quarter of '18. The increase will be primarily due to FMC office residential and retail operations, which should generate about $1 million of incremental GAAP NOI. Speculative revenue. Since we are 92% complete with our 2018 speculative revenue plan, the leasing that remains to be completed in 2018 totals $2 million. That remaining $2 million represents just over $0.01 per share of FFO, and therefore, represents minimal impact to our 2018 guidance. Subaru National Training Center. We are in the process of completing the training center and expect the training center to be substantially completed and occupied during the third quarter. For the third quarter, we anticipate income of approximately $700,000 and $1.4 million for the year. In addition, we are in the process of selling the project to Subaru and anticipate that incurring during 2018, we are working on that project at this point, therefore, until we have a final number and how costs will be allocated, we've not put that into our disposition plan. We do not anticipate any income beyond 2018. FFO contribution from our unconsolidated joint ventures will be $6.5 million. In June '18, our 1919 Market Street partnership repaid the construction loan through a pari-passu cash investment by both partners. The investments of the partnerships was done through parent company loans with our share being $44.4 million. The property is now unencumbered with any third-party debt. G&A for the third quarter will decrease from $7.5 million to $6.5 million and our annual G&A should approximate $28.5 million. Interest expense will remain steady at approximately $19.5 million with fixed-rate debt being 98.6% of our portfolio. Capital interest will be approximately $800,000.

During July, we refinanced our current line of credit, which currently has an initial -- which currently had initial May '19 maturity date has now been extended through July 2022. And improved -- we've also improved the incremental borrowing costs and financial covenant terms also improved.

Termination fee and other income will approximate $1.1 million. Net management and leasing and development fees for the quarter will be $2.5 million and we have no incremental ATM or share buyback activity planned.

Additional financing activity. In addition to the amended extended line of credit, we anticipate closing on 2 additional financings transactions during the quarter. Term loan C, we anticipate closing a recast of our term loan C from a 7-year loan to a 5-year loan with no change in the maturity date. The current loan is swapped to fix at approximately 3.7%, with a recast of our loan, our interest rate spread will decrease by approximately 50 basis points, resulting in an interest savings of about $1.3 million annually. We're also refinancing our MAP joint venture in which we are a 50% partner. The loan will approximate the current outstanding balance, but lower our interest rate spread by roughly 3.5%, resulting in interest rate saving to Brandywine of approximately $3 million annually. That is expected to close this quarter also.

Turning to our capital plan. Based on the midpoint, the projected 2018 CAD coverage ratio will be roughly 14% above last year and the range remains 65% to 71% based on increased 2018 dividend. The use of the balance -- for the balance of the 6 months will total about $230 million. $115 million of development and redevelopment projects, primarily sale points, Subaru and 500 North Gulph Road. Common dividend will be $65 million. We expect $17 million of revenue maintaining capital, $24 million of revenue creating capital, $5 million of term loan and line of credit financing costs and $4 million of mortgage amortization. Sources for those uses are going to be $110 million of cash flow after interest payments, $47 million from the sale of Subaru, that is an estimate for right now, and $73 million of use on cash on hand. Based on that capital plan, our projected cash balance will be approximately $35 million at the end of the year. Again, no use of our line of credit. We continue to project net debt to EBITDA to be roughly 6x at the end of the year. And debt to GAV will remain in the high 30% area. In addition, we anticipate our fixed charge coverage ratio improving to 3.5x and our interest coverage improving to 3.9x by the end of the year.

I'll now turn the call back over to Jerry.

Tom, thanks. George, thank you as well. So to wrap up, the 2018 business plan is progressing extremely well. We know we have a ramp at the end of the year. We believe that we've risk-assessed the pipeline and are confident of achieving our leasing numbers. And our focus really does remain on growing net effective rents, doing everything we can to narrow the gap between FFO and cash flow. And our 2018 plan, as we execute it, we think will provide a great platform for continued growth in further years.

So with that overview, we're delighted to open up the floor for questions. (Operator Instructions) Shelby?

(Operator Instructions) And our first question comes from Jamie Feldman from Bank of America Merrill Lynch.

Jerry, you mentioned continuing to do some more JVs sales maybe some asset sales but trying to keep the limited dilution from earnings. Can you just talk about -- more about your thought process, what assets might be -- what you might be thinking about selling? And if you start to see -- it seems like your guidance is trending towards the higher end of the range. Would you do something more dilutive then, if you -- it seems like earnings was -- core earnings was heading beyond the top end? How should we think about that?

Yes, great question, Jamie. Thank you. The -- look, our perspective is always -- we always have a number of properties in the market for us. We've termed it price discovery. I mean, right now we have assets in Pennsylvania, Maryland and Northern Virginia, informally on the market trying to identify what we think pricing could be. And our real objective there is, we take a look at assets that we think are not generating the type of internal growth that we're getting out of a lot of our other properties and identifying those for profit harvesting opportunities. I think from a recycling perspective, as Tom touched on, we clearly think the balance sheet is in good shape. Our business plan projection show it continuing to improve over the next several years. So as we look at recycling or selling assets, I guess, one of our objectives is to replace that revenue. Strategically, we would like to see a higher revenue contribution coming out of our Austin, Texas market. We have a number of joint ventures with DRA and Och Ziff, the 2 larger ones that, as we've talked before, our objective is to recapitalize or exit those over the next year or so. So they can certainly wind up being receivers for proceeds from any asset sales. I think it's all driven by the desire to continue to accelerate our cash flow growth rate. So when we look at the net effective rents we're generating from certain properties, if we feel like the current and near-term forecast from those properties is such that we really can't maintain, the rate of growth we're seeing in other properties, we definitely talk to people both formally and informally about trying to buy those. So the objective we have is to continue to refine the portfolio, so it's very much focused on growth. And as a transition, when we're selling assets to replace that with other value-add opportunities or other assets that would be coming out of some of our joint ventures.

Okay, that's helpful. And then I guess, for George or Tom, you talked about some of the expirations and even some of the space that, if it's expiring you're taking about LOIs to backfill. Is there any way to ballpark just kind of -- when you're thinking about '19 some of the earnings drag from some of the downtime that we'll see on those assets?

Yes, not at this time, Jamie. I mean, I think some of those larger ones, they haven't played out definitively as either a renewal or an absolute vacate. So I think, as we kind of near the end of the summer and start to put forth our 2019 budgets and address that on our next call, we'll have much more clarity.

And our next question comes from Craig Mailman with KeyBanc.

Just a follow-up on Comcast. On the 75% LOI, kind of, what would be the timing of that commencement? And also, I apologize if I missed this, the mark-to-market on that potential lease?

Yes, it's a mid- to late-'19 backfill. Some of that will be subject to -- if Comcast gets out on time and in fact does move out. And the mark-to-market is probably, kind of, low double-digits.

I mean what do you think the probability that they stay is at this point? I know you guys are marketing and have an LOI, so you probably think it's low, but, kind of, given your past interactions with them.

Well, they're great -- Craig, they're a great client. And they have so many moving pieces, we try and be flexible with them. They -- we've been, from an operating standpoint and from our financial projections, we're assuming they're going to be leaving sometime during the year. We don't know that for sure. But as we always do, we want to try and make sure that we have covered play. So the leasing team has done a really good job of identifying a tenant who has a requirement. We think by the time we kind of work through the LOI process with them, we'll have a much higher level of idea what Comcast actually wants to do. And we'll see which path we take at that point.

That's helpful. Then just curiously, you have Comcast at the potential exit, you talked about KPMG potentially extracting early termination rate. Just as we, kind of, look at the same-store guidance that you guys gave at the Analyst Day last year, that 2% to 5%. You guys are coming at the low-end of this year and you may have some potential drags. I'm just curious, as you guys, kind of, look out -- how you guys are feeling about maybe getting to the mid or high end of that range in '19 or '20, kind of, what is the fall in your favor for that to happen?

Yes, a couple of things and we'll tag-team discuss. The -- we are going to start realizing the benefit of a number of properties where we've created a lot of value and NOI growth coming into our same-store later this year. As George touched on, we're right now in the process of really spending a lot of time with our, not only just our '19, but also our '20 rollovers, Craig, to try and figure out where they're -- what they'll wind up doing. Certainly George touched on a big sense that we have in our numbers for '19 will be at KPMG. Will they stay, will they go? We don't know. We have a great relationship with them. We have a excellent proposal in front of them. We have a wonderful team in our D.C. operation that works with them. But we've also started a process of what could be a very exciting, kind of, redeveloping and repositioning of that property and getting back a large block of space that, we think, has a significant positive mark-to-market. If that eventuality comes into play, that would have a depressing effect on our 2019 same-store, but could also create much more accelerated growth in 2020 and beyond. So we've really identified all of our, kind of, '19 targeted renewals. Discussions are underway with all of those tenants at this point. And our hope would be, as we always do on our third quarter call, we'll announce our 2019 guidance once we have more clarity. We -- I this -- wouldn't be fair to anybody to handicap where that number is right now until we get some more visibility on some of the rollovers.

And our next question comes from John Guinee from Stifel.

My primary question is about cost of capital, but my secondary question is, looks like KPMG is about $41 full-service in Tysons, getting a 10% increase in that rent seems to be a threat. But let me know about that. My primary question is really cost of capital. You guys have a lot of development out there. Do you think, in today's world, you're better off just trying to finance it all with JV capital as opposed to common shares? Said another way, is JV capital about priced the same way or is it materially lower in your minds?

John, Jerry. We -- look, our plan is, particularly given where our equity price is and where REIT market generally is in terms of equity pricing, that we certainly are viewing JV capital as a transitional strategy for us to continue to grow the revenue stream of the company. Not only is it a better cost of capital than entering the market for issuing shares, which we would never do at this level. It's dilutive to our existing shareholders. So JV capital tends to be a pretty good pathway for us. As you know, on our Schuylkill Yards development, we've already brought into well-healed development partners in -- for both the residential product as well as the life science product. And the combination of, I think, Brandywine's institutional contacts theirs and their capital will enable us to pull together a very good financing plan. Obviously, that will be supported by the lease-up plan of whatever we build at Schuylkill Yards to generate what we think will be a very good return on Brandywine's invested capital. So we have always viewed JVs as a transitional capital structure for us, given kind of the volatility in our public market equity cost of capital. And certainly, as we look forward to whether it's a Schuylkill Yards or a Broadmoor or some of these other undertakings, discussions and contemplating joint venture equity is certainly a key part of that.

Great. And then KPMG at $41, can you really get much juice above that $41 number?

We think we're working on a pretty exciting redevelopment plan. As George touched on, not only re-amenitizes the building, create some great public spaces, reconfigures the lobby, but also, pending some approvals from VDOT, we really think we'll be able to dramatically improve the access to that building, which we think has been a serious issue for that property since it was built. So based upon everything we see, we think we can move the rental rate up into the mid-40s. And certainly has been supported by a lot of the market recon work that we've done with both our very well and knowledgeable team in that market, but also with some broker interface. New buildings are going into the mid-50s. So we certainly think that the location we have, the improved accessibility, we should be able to move it in that direction.

And our next question comes from Manny Korchman from Citi.

Jerry, let me follow up on John's question. It's a follow up on John's question. If you put that JV capital, the pricing of JV capital, how is that different on the new, sort of, large-scale developments that you guys are looking at versus achieving some of your stabilized properties and keeping the upside and maybe the risk to the company in a wholly-owned fashion?

Yes, I think on the -- the structures tend to be pretty similar, Manny, at least in terms of discussions we're having so far. We're able to retain a notional stake, putting our pro rata share of equity, and then on both the operating assets as well as the development assets create a pretty attractive promote structure. I mean, certainly our experience has been dealing with a lot of joint ventures. They want to make sure that their operating partner is fully vested and incented to outperform. So we've done a pretty nice job in the ventures we've done to date, creating a very nice promote structure that frankly, from a return on invested capital standpoint, provides a very good risk-adjusted rate of return to Brandywine for both our capital investments -- our equity capital investment, upfront as well as how we're able to perform as the JV progresses. But one of the -- the public markets are clearly in a state of volatility, which has certainly affected Brandywine's financial plan. Conversely though, there is a tremendous amount of equity capital at both the core level, core plus and optimistic level in the private equity side that Brandywine thinks we have both good relationships, good entrée and then good product to deliver. So with the REIT stock market performing as it has year-to-date, and certainly, our stock performance to be more on point, as we're contemplating these forward capital commitments, discussions with joint venture partners has really kind of risen to a top priority. That's why I did mention on the Schuylkill Yards. Our hope would be, as we go through our design development process, Manny, that really keeps our marketing program in place, that by the time we'd actually announce a transaction, Schuylkill Yards will be a bow-tie package. We'll have an equity partner lined up and anchor partner lined up all of our approvals to cost locked down through GMP. So we're able to really presenting 4 corners risk-adjusted platform to our shareholder base.

And Manny, I think, as we look at that, the current JVs that we talked about, we're in at a 50-50 position, I think as we look at something of Schuylkill Yards' magnitude, you could see us being below that, kind of, 50-50 where we may bring our equity balance down even further in terms of the capital requirement. Again, with what we hope to be some fairly attractive cost of capital as we go through that process.

And Tom, maybe sticking to the idea of magnitude or maybe the question for Jerry. If you think about the size of both the Schuylkill and the Broadmoor projects and timing, which seem to be overlapping to some extent, how do you just think about the resource strain there, not just from the capital perspective, which we've talked about, but just from the resources within the company in getting those 2 projects of that scale completed?

Great, great question. I mean, look, we have great development and leasing teams in all 3 of our markets. And we, certainly, are looking for it and planning. We're building good capacity to our internal infrastructure. So in Austin, where we have both Broadmoor moving forward, 405, Four Points, Garza, our team down there is fully staffed, excited and ready to go. So we've got a lot of great internal personnel. But then, we also have great relationships with the design development professionals, the architectural firms, the engineering firms, land planning firms, civil. So we're very good at laying out a fully comprehensive development team led by Brandywine that has a lot of external parties on it who work us through the entire design development process. So there's really not a tremendous misalignment of resources to our objective of starting these development projects.

And our next question comes from Michael Lewis from SunTrust.

Jerry, you may have surprised some people in your view that you think there should be a change in Pennsylvania to allow for commercial real estate to be taxed at a higher rate, higher than residential and the offset to cut the wage tax to spur some job growth. Could you talk about where that, kind of, stands? And then also, what's the story with the 1% tax on all construction? Is that happening? And should I assume you stand against that or...?

Yes, Michael. Look, I think from -- the program that we're involved in through the Job Growth Coalition, which is a consortium of a number of businesses, number of civic organizations, public policy think tanks, several other real estate companies, some of the trade and service unions, is really focused on providing the city the opportunity to raise commercial property taxes as long as there's that incremental money that's raised is used to reduce business taxes and wage taxes. And I think based upon a number of financial studies that were done, that program, if implemented, would generate significant job growth in the Philadelphia -- in the city of Philadelphia and in the region by removing a high tax structure as a gating issue as well as generate some additional municipal revenues based upon that job growth. To do that requires a change to the Pennsylvania Constitution. So not an easy hill to climb. It requires us to be effective that the legislation passes through 2 successive sessions of the legislature in Harrisburg and then goes out for a CommonWealth-wide vote. We did achieve the first approval level through the first legislative session. We continue to work on getting the approvals through the second legislative session, and we'll see where that goes from there. But we think the actual -- the business program there or maybe somewhat counterintuitive as an owner of commercial real estate, we think that the opportunity to remove what we think are 2 gating issues to tremendous demand growth in the city of Philadelphia i.e. our business and wage tax structure is a very significant and positive trade-off, not just for the commercial property owners, but also for all the tenants who occupy or we would plan to occupy our buildings, and the math works out very clearly from that regard. The 1% development tax was passed by city council. The vote was very close. The bill is on the mayor's desk. The mayor will have to decide if he wants to approve that or veto it. Brandywine is very much opposed to that 1% tax. We're very much aligned with the need to provide affordable housing in the city of Philadelphia. We think that these industry-specific taxes is not necessarily a great public policy nor the right revenue stream to meet that objective.

Great. And then for George, I apologize, could you just repeat when KPMG would have to give you notice by? And then also on that early termination option, is that just a free and clear option or is there any fee associated with that?

Yes, sure. The option notice date is on, or before, December 31, 2018, and that makes it an effective termination in the third quarter of 2019.

Okay. And then there's no fee with that option?

There's no associated termination fee.

Our next question comes from Richard Anderson from Mizuho Securities.

So on KPMG, it sounds like that's going to go the route of a redev. But let's say, it doesn't and they take you on your offer that's in front of them. Is that -- what -- can you describe that offer? Is it a roll-down from the 40-ish level? Or is it in line? Or where does it stand relative to current situation?

Yes. Since the lease goes through 2024, we would -- it'll be a combination of a recast and an extension at the same time, is what we have in front of them. So it would be a little bit of a concession in the near term with an overall pickup in the GAAP rent over the long haul.

Okay, good enough. And then a bigger picture question for Jerry. The company has been on this path of de-risking the overall enterprise, both balance sheet and development and whatnot. And yet the stock still sort of hovers in this 30% AFFO discount range. What do you envision that allows Brandywine to kind of escape this sort of -- this discounted valuation? Is it -- are you just working and going with your strategy as a company and continue to do what you're doing, which hasn't worked in the sense that the stock market hasn't paid for it yet? Or do you think it will be a market event of some sort or some combination like, what are you doing or what are you thinking about in the future to get Brandywine a more deserving multiple that just hasn't materialized despite all the work that you're doing?

Well, from our -- thanks for the question. I think, from our perspective, we're laying all the foundational points to create a great road track record going forward. It took us a few years to kind of really reposition the portfolio. But when I think about the company's position today with the asset quality we have, the projected revenue growth, and very importantly, the ability for the company to have almost 13 million square feet that we can build within our own land inventory, of which a good portion of that is not necessarily office space, it provides tremendous opportunities to work with other development companies to create real value-add opportunities for Brandywine. We have certainly worked to get our balance sheet in very good shape. And to de-risk, which I think is an important predicate to future growth for us. And then certainly, I think as we've always maintained, I mean, our perspective as a public company, our job is to create value for the shareholders. And we think, at a real estate level, we're making all the right steps to do that. If the stock price doesn't move commensurate with those -- with the execution of those foundational points, I think certainly, like any other public company, the company has to be open to other alternatives.

Our next question comes from Bob Simone from Evercore ISI.

A lot of my questions have already been asked and dealt with. I guess, Jerry, you kind of touched on the stage of the planning as it relates to the Schuylkill Yards development. I was just wondering if you could, kind of, share with folks your current thinking around the mix of business between retail, resi and office there, at least in that first phase?

Yes, certainly, Rob. Look, right now we're working on phase 1, which will ultimately consist of 2 buildings. We anticipate 1 building will be life science with the smaller office component, kind of, innovative office, with a retail base with some parking. And the other building will be office and residential, the smaller scale than we have here at FMC. So less office space, about 300 apartment units and we're working through all the -- obviously, the complications involved in designing and citing those buildings. And that was one of the reasons why we went ahead and bought those 2 land parcels to give us complete flexibility in terms of Geotech work, access, et cetera, to make sure we get all the detail work done. Brandywine is out in the market trying to identify anchor tenants for the office component. We have a nice pipeline of deals, which is again, providing some visibility for us, Rob, on how much we want to size the office component. Our residential partner has completed all their market due diligence. They're very excited about the site, very excited about moving forward. So we certainly are pleased with that. As same with our life science partner, who believes that Philadelphia is an untapped opportunity for the life science businesses. We think our location and proximity to major anchor institutions, the level of NIH funding coming into the city, the continued growth of the healthcare systems provides a very, very viable program to move forward on. So in the next couple of quarters, as we finalize the planning process, we'll be able to size the buildings more appropriately. But our overall deal, just to refresh everyone's memory on Schuylkill Yards, is that only about half of the square feet that we're anticipating to build would be office. And office in that definition includes traditional office, innovative office, life science and academic space. So we certainly think within the overall rubric of the 5 million plus square feet, over a period of time developing 2 million plus of office space, which encompasses those definitions, will certainly be able to be met by market demand, and then the ability to devote the other square footage to residential, retail and hospitality, we think really gives us an amazing option to create a great neighborhood that is adjacent to the third busiest train station in the country as well as a number of premier academic and medical research institutions.

No, that's great. And then just one quick follow-up. As it relates to the resi and I guess the hospitality components, and also as you think about, kind of, JV partners and funding sources, would those be components to potentially sell down? Or would you guys like to retain some portion of ownership of them long term?

Yes, I think we have complete latitude under our master development agreement with Drexel to go either way. And I think that gives us the flexibility to kind of make a market real-time call on what provides the best return to Brandywine shareholders. So we have done situations like at Garza, for example, where we opted to sell the residential component to another development company and the hospitality component to another development company. We've had other situations like we've done here at 1919 or Evo in Philadelphia or out in Plymouth Meeting where we've maintained an ownership stake to facilitate effective financing and create a great return on our investment and then exited. So I think one of our focal points as we go into these longer-term development opportunities, is to think, how we preserve as much optionality as we can for Brandywine, because we never want to preclude our opportunity to make money by delivering a well-thought-through development project.

And our last question comes from John Guinee from Stifel.

Thanks for taking the follow-up. Two questions, Jerry or whoever. Dulles Tollway and the Silver Line seems to be doing as well, if not better than, all the other submarkets in D.C. put together. Can you talk a little bit about that? And then second, can you give any color to Amazon, seems like Austin, Schuylkill Yards and the Tollway are 3 fairly viable options for our friends in Seattle?

Well, let me take the first one, your -- first part of your question. Look, we've actually been pretty encouraged by the level of activity we're seeing out in the Toll Road. And certainly, with the Silver Line, it's doing well. And I think it's a little bit below some of the ridership projections last time I checked, but certainly building. It, I think, reinforces our belief that having optionality of access to buildings through both car, bikes, rail, bus is a great way to go. So I think as we look at our investment strategy going forward, not just in the Toll Road but other markets, it's really predicated upon being able to have that type of flexibility in terms of how people get there. Now the challenge in some of these products, as you know, is even though the market dynamics may change, it really does come down to individual product quality. And certainly, one of the great opportunities, but also one of the concerns on the Toll Road is that as that line progresses, you can have an awful lot of additional development take place. So one of the things we're very keenly focused on is, how do we balance that tremendous growth opportunity with the risk of additional development coming online, when we see first-hand, John, the different enthusiasm of the tenant base to move into newer versus older product. So we're continuing to monitor all the activity taking place and we're very happy with what we're seeing in the Tysons market. Obviously, a couple of our buildings are not really in close proximity to the Metro, but hopefully, we'll catch some of the draft up from that. But we've seen, in a number of cases, where mass transportation, while it may take some time to evolve, can be a very good long-term value creator. It's frankly, why we're spending so much time in Austin at Broadmoor with CapMetro, Charles Schwab, adjoining landowners, because even though that market is not necessarily mass transit biased today, they could be 20 years from now. And having that Broadmoor development with the potential of being Austin's really first transit-oriented mixed-use development is pretty exciting in terms of what it can do to change the trajectory even at accelerated growth rate they had in North Austin for a long period of time. On Amazon, look, our job is to serve the municipalities that are bidding. So we're -- as we get questions, comments or observations, we feel pretty good about it. In terms of our level of engagement, we'll see what Amazon wants to do. I think, certainly, a lot of the press reports are, Amazon's probably biased more towards D.C. We have no evidence one way or the other on that. Just really not involved in any discussions. But we stand at the ready to respond to any inquiries from Amazon or city or state officials on any of the sites we're involved in. I'm on Amazon Prime everyday buying stuff. So I'm waiting. I'm hoping that counts for something. But it's a great process. And we're happy to be in a position where we have a couple of sites that are being seriously considered. So we think it's a great tribute to the markets we're in as well as the assemblers of the land that we've been able to pull together.

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

Great. Well, thank you all very much for participating on a Friday morning in the summer. We look forward to updating everyone on our Q3 activity and on our third quarter call as well as rolling out our 2019 forecast. In the meantime, enjoy the rest of the summer, and thanks for your participation this morning.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.