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Brandywine Realty Trust (NYSE:BDN)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Brandywine Realty Trust Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press *0 on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jerry Sweeney, President and CEO. Sir, you may begin.

Gerard H. Sweeney -- President and Chief Executive Officer

Joelle, thank you very much, and good morning, everyone, and thank you all for participating in our third-quarter 2018 earnings call. On today's call today with me 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 meanings of the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC.

So, we had a very productive third and now going into the fourth quarter, and as part of our third-quarter earnings release and 2019 earnings guidance, we also announced two significant transactions that changed our company's growth trajectory. By way of quick background, over the last several years, we've been on a track to improve our growth profile, control capital costs, create value-driving long-term mixed-use development opportunities, and effectively manage our balance sheet.

As a consequence, we substantially eliminated revenue contributions from slow-growth markets like New Jersey, Richmond, the fringes of the Pennsylvania suburbs, and all toll road properties in northern Virginia. In the process, we've reduced our same-store properties, improved our capital ratios, grown cash flow, and strengthened targeted sub-market positioning. That process has resulted in about a 24% increase in our same-store net effective rents over the last several years. We're also -- as part of our 2019 business plan -- anticipating about a 5% growth in net effective rents over 2018 levels.

So, we believe that the announced northern Virginia/Austin revenue swap builds on that track record and accomplishes the following key objectives: First, it increases our revenue contribution from Austin on a wholly owned basis from 5% to 18% of overall revenues. It transfers revenues from a sub-market with an average 2018 minus 3% cash plus 3% GAAP mark-to-market and moves that into Austin, where mark-to-market on a cash and GAAP basis have been 10% and 16% respectively in 2018.

It also moves our tenant improvement and commission dollars from a market with a close to 20% average capital ratio to Austin, where we have an average 2018 capital metric of 12%. It does reduce our D.C. met operations to 8% of total company revenues, and I think from our perspective, the toll road carter has good long-term growth potential, hence our desire to stay engaged, but our wholly owned focus will really be on our Tysons Corner portfolio, the development parcels, and a couple redevelopment candidates, one of which is in Herndon. It's a market, though, that's characterized by slower-than-Austin growth rates and higher concession costs, so our retained 15% stake in the NOVA assets results in a much better return on our invested capital by creating a different capital stack in the promote structure.

By way of example, through this transaction, we'll be increasing our return on invested capital from the low single digits to the high double digits over the next several years, and over 10% including our fee revenue. We have found that assets in these slower-growth markets can deliver the best value through a non-core capital structure, as evidenced by the 25%-plus return we're currently realizing on our investment of $25 million in the MAP portfolio.

We did -- on Pages 5 and 6 of the supplemental package -- frame out more detail of each of these transactions, and we really are pleased to have delivered such a great rate of return to our shareholders in DRA, and we thank DRA for their great partnership, and we're also delighted to launch our partnership with Rockpoint, where our 15% stake will be our retained interest with a promote structure, and we'll provide property-level services.

We have signaled all year that proceeds from any asset sales would be deployed to create earnings momentum and maintain balance sheet neutrality, and we believe that the structure of these transactions are consistent with that approach. So, with that important revenue shift as a key backdrop, we're also announcing 2019 earnings, key highlights, FFO growth, which is adjusted for the accounting policy changes that were in some analysts' estimates, and Tom will talk about the FFO growth rate at 5% at the midpoint. Our CAD growth rate -- again, adjusting for the accounting policy changes of about 2%, which does interestingly bring our two-year average annual growth rate on CAD to the top end of our 2018-2021 business plan range, as outlined on Page 8 of the SIP.

Cash gained through NOI growth will be a midpoint of 2%, which does not include the performance of any of these DRA assets that are now wholly owned. Spec revenue of $31 million is already 65% achieved, which is an improvement over last year's levels at this time. Occupancy will be between 94% and 95% by year end, with leasing levels at 100 basis points above that at 95% to 96%.

We do anticipate a below-average retention of 57%, primarily driven by KPMG's anticipated move-out. Our cash mark-to-market will be between 2% and 4%. GAAP mark-to-market will remain the high single digits between 8% and 10%, and capital will run about 14% of revenues, up slightly from our 12% in 2018, but 2018 was at that level primarily due to a large no-capital renewal. Debt to EBITDA, which Tom will touch on, will range between 6.0 to 6.3, really depending upon the level of and the financing plans for development starts that we anticipate in 2019.

So, the upshot is the 2019 forecast grows FFO, grows CAD, keeps the balance sheet strong; our capital ratios remain on track with strong mark-to-market. The 2% same-store midpoint is at the bottom of our long-term range, so we'll remain focused on trying to improve that during the course of the year. We also do expect at least one development starting in 2019.

So, with that 2019 overview, just a couple moments on our 2018 business plan, which is totally on track, and all of our metrics -- with the exception of those requiring adjustment due to the DRA and Rockpoint transactions -- are on track. Some specific data points: We entered the quarter at 93% occupied and 95% leased. Mark-to-market on a GAAP basis -- very solid 11.4% and 14% for the year, both in excess of our target range, and our mark-to-market on a cash basis was also above the upper end of our range.

Retention -- 75%, ahead of our targeted 67% range for the year, and as we anticipated and we've talked about on a couple of previous calls, our same-store numbers for the quarter were almost 14% on a cash basis and 3.4% on a GAAP basis, and that did include the addition of some of those other assets coming in to the same-store for this quarter. Leasing capital remained well within our targeted range of 10-15%, with a 12% posting for the quarter. As a result of the transactions that we anticipate closing in the fourth quarter and given the continued progress in our '18 business plan, we did narrow our 2018 FFO guidance to a range of $1.36 to $1.40 per share.

A couple moments on development: The land bank remains within our targeted 3-4% of assets. Development capacity remains about 15 million square feet, with about 50% of that square footage being targeted for office, life science, and related spaces, with the balance being mixed-use. Our Broadmoor complex in Austin and Schuylkill Yards in Philadelphia provide an outstanding opportunity for us to grow our earnings base significantly by effectively executing these multiyear master plan developments -- obviously, as warranted by real estate and capital market conditions. We did outline our development activities on Pages 15 to 17 of the supplemental package. Pipeline right now stands at 832,000 square feet with total cost of $271 million, of which $105 million remains unfunded. Bottom line, we're 93% leased with an average cash yield on cost of 9.2%.

A couple of project specifics: 500 North Gulph Road has turned out to be an outstanding renovation success story. The project will be completed and stabilized by the end of this year. Cost of slightly less than $30 million will generate a projected 9.3% initial return on cost and will generate an average return just shy of 13% on a cash basis over the tenant's lease term. At Garza, which is our mixed-used development in southwest Austin, we have generated almost $31 million of land sale proceeds and recognized a $2.8 million land gain.

We are under way on our 250,000-square-foot build-to-suit for SHI. That building will be delivered by year-end '19, and we do anticipate earning development fees approximating $2.6 million over the next six quarters. In addition, at Garza, we have another land site that can do 150,000-square-foot office building. We are heavily into the design development process, and based on market activity, plan to be in a position to start that building by year-end 2019. Similar story at Four Points, our other development under way in Austin, a 165,000-square-foot building, 100% leased. We anticipate delivering that project in the first quarter of '19 at a projected 8.5% return on cost.

Similarly, we have a 175,000-square-foot building PAT at Four Points, and like Garza, based on market conditions, could be in a position to start that by year-end '19. Broadmoor -- we pretty much wrapped up our 906 renovation. That project is 96% leased with an initial cash return on cost of just below 10%. 405 Colorado in downtown Austin is ready to go. Construction pricing is just about finalized, active marketing is under way, the pipeline is excellent and building, and we do plan on breaking ground there once we secure pre-lease. We're targeting 8.5% cash return on cost on an estimated budget of $110 million.

During the quarter, we also completed construction of our second building for Subaru of America. They took occupancy of that building a couple months ago and will be purchasing the building during the fourth quarter. We expect to record a $3.5 million gain at closing. Our total profit thus far at Knights Crossing development in Camden has been over $13 million. Design development for Schuylkill Yards Phase 1 is well under way. We're evaluating the final product mix and also actively exploring a range of equity financing alternatives. The objective remains as we mentioned in the last call, which is to finalize the design, identify a tenant pipeline, select equity financing partners, and then commence on the start of the first project hopefully by the end of 2019.

Master plan-related work is under way and done as of last quarter at Broadmoor. We're now into the site planning process for Phase 1, which will consist of office and multifamily, and if all goes well and subject to market conditions, we could be in a position to also start Phase 1 by year-end 2019. It's interesting -- on Broadmoor, with our baseline approvals in place now for an incremental 5 million square feet with an investment base per square foot of less than $2 per billable foot, we have tremendous embedded equity value in that land holding and are frankly quite pleased with the level of interest we're seeing from both tenants and potential partners.

Before I wrap up, a couple of explanation points in the '19 forecast. We are expecting -- as I mentioned -- a below-average retention rate of 57%, primarily driven by KPMG, in the fourth quarter of 2019. The blended GAAP mark-to-market will be between 8% to 10% and cash mark-to-market between 2% and 4%. Same-store numbers, again, will be between 1% to 3% on a cash basis. We do expect our leasing capital to be around 14% of revenues. We are not programming any further acquisition or sales activity during '19, and as we identified in the supplemental package, we do anticipate at least one development start in a range between $50-110 million occurring during the course of the year. So, with that, let me turn it over to George for an overview of third-quarter operations and some color on our '19 business plan.

George D. Johnstone -- Senior Vice President, Operations

Thank you, Jerry, and good morning. It was a busy third quarter, and the 2018 business plan is virtually complete. More importantly, our continued leasing momentum has the 2019 business plan off to a good start. During the third quarter, we generated 114 space inspections, up 14% from last quarter. The amount of square footage inspected totaled 942,000 square feet, up 22% over last quarter.

The Pennsylvania suburbs were the leader from a number-of-tours perspective, while Philadelphia CBD saw the biggest gain in terms of square footage. The pipeline excluding development and redevelopment properties remains at 1.8 million square feet. Approximately 450,000 of this pipeline is at advanced stages of lease negotiations.

The fourth-quarter 2018 activity still left to achieve is minimal. Based on the contribution of our eight toll road properties into the Rockpoint joint venture, we did adjust four of our 2018 business plan metrics. Spec revenue decreased $1 million to $25.3 million. Tenant retention increased from 67% to 72%. GAAP same-store NOI growth declined 75 basis points at the midpoint and GAAP mark-to-market increased from a previous range of 8-10% to a range of 13-14%. All other metrics will perform as previously guided.

Turning to our markets and the underlying assumptions contained in our 2019 business plan, for CBD Philadelphia, we're now 98%, having leased the last full floor at 1900 Market Street during the quarter. We have also executed an 85,000-square-foot lease to backfill four of Comcast's five floors, which will be vacated December 31st, 2018 at 2 Logan Square. This backfill lease will take occupancy in 2020. The next largest rollover in the city for 2019 is a 27,000-square-foot tenancy with a renewal notice due on or before January 31st of 2019. All expectations are that this option will be exercised. Mark-to-market for leases in Philadelphia will range 2-4% on a cash basis and 11-13% on a GAAP basis.

In the Pennsylvania suburbs, we're 93% leased, with the majority of our leasing still to be achieved in Radnor. We have three larger blocks of space totaling 93,000 square feet available. Activity and touring levels remain encouraging. We have proposals out for 70,000 square feet, ranging from 5,000 square feet to 35,000 square feet. Two-thirds of this available inventory is assumed to be leased in our 2019 plan.

Rollover exposure in the Pennsylvania suburbs during the year is only 7%, which is manageable. Only three tenancies over 20,000 square feet, and each of them are currently entertaining renewal proposals. King of Prussia's revenue contribution will increase beginning in the fourth quarter of 2018 with 500 North Gulph Road coming online.

Shifting to metro D.C., in Tysons, we have one known and one potential large move-out during 2019. AT&T will vacate 83,000 square feet next August, relocating to corporate-owned facilities. At 1676 International Drive, KPMG has the ability to terminate their 183,000-square-foot lease effective September 30th, 2019, with notice by year-end '18. We anticipate receiving notice shortly, and our business plan assumes they will terminate early.

Our comprehensive redevelopment planning continues to make progress at 1676. This plan entails improving vehicular access to the property, upgrading existing common areas, both indoor and out, and upgrading amenities within the building. Our plans have been well received by a number of brokers and prospects to date. Inquiries about the building have been numerous, with prospects ranging from 25,000 square feet to 175,000 square feet. Demand for product in the Tyson sub-market provides a great opportunity to increase rents by 10%, with a 20% on our contemplated incremental capital investment.

In Austin, we're 96% leased at our currently renovated Broadmoor 6 building. Layering in the 12 assets being acquired, our Austin portfolio is 95% leased. Rollover for 2019 is less than 4%. Rent growth in Austin continues to be robust. We'll see leasing spreads between 13% to 15% on a cash basis and 20% to 22% on a GAAP basis.

In terms of the operating metrics for our 2019 business plan, it's worth noting that the previously mentioned Comcast, AT&T, and KPMG move-outs account for 250 basis points of occupancy and 230 basis points of same-store cash NOI. It's also worth noting that the acquired Austin properties will generate cash NOI growth between 9% and 10% for 2019. These properties are not part of the same-store mix for 2019, but would have a 70-basis-point impact on that metric. And, at this point, I'll turn it over to Tom.

Thomas E. Wirth -- Executive Vice President, Chief Financial Officer

Thank you, George. Our third-quarter net loss totaled $43 million or $0.24 per diluted share, and FFO was $63 million or $0.35 per diluted share. Some general observations regarding our third-quarter results: Our third-quarter net loss was generated by an impairment that was the result of an announced joint venture in northern Virginia, which generated an impairment charge of close to $57 million or $0.32 per diluted share. The impairment includes unamortized straight-line costs of almost $16 million and estimated closing costs of about $5 million.

Our quarterly operating results met our expectations and an incremental improvement is expected in the fourth quarter. As George outlined, we have adjusted our 2018 business plan metrics to reflect anticipated sale of the northern Jersey portfolio into a joint venture and current operating trends. Our balance sheet continues to improve, with our fixed charges and interest rate coverage ratios being 3.5 and 3.8 respectively, a 9% improvement on both metrics as compared to our third quarter of 2017. Our net debt to EBITDA remained constant at 6.2, and depending on the timing of the announced transactions, we anticipate our normalized ratio to be lower at year end.

Property-level income totaled $78.5 million, which was in line with our projections. Looking to the fourth quarter, we have the following assumptions: Property-level operating income will total about $79.5 million and will be flat compared to the third quarter -- up a little bit from the third quarter by $1 million. The increase is primarily due to improved occupancy that we expect to occur in our core portfolio.

As George mentioned, we are 96% done on spec revenue. The remaining is roughly $1 million, so, less than $0.01 of FFO per share, so, minimal impact on guidance. Subaru -- we will recognize about $1 million in interest income. That will be from the capital lease this quarter. We do anticipate them buying the building during December of 2018. We do not expect any income beyond 2018 as a result of this transaction. FFO contribution from unconsolidated joint ventures should be about $6 million. G&A will increase from $6-6.3 million, primarily due to some timing on expenditures. Our year-end number is still at $28.5 million.

Interest expense will remain steady at 95.5, with fixed-rate debt being 98.6%. We expect capitalized interest to be about $1 million for the quarter. Termination and other will total approximately $0.5 million and NOI from our management fee and developments will be $3.5 million with no additional activity either in ATM or buyback. Additional financing activity -- in October, we do plan on closing on Term Loan C. We expect that loan to be recast from a seven-year loan to a five-year loan with no change in maturity date or the amount of the term loan. The loan is already swapped to a 3.7 rate. By recasting it, we will decrease our spread by roughly 50 basis points, resulting in interest savings of about $1.3 million on an annual basis.

Looking at our capital plan for this year, we still expect to keep our range of CAD. Included in our usage is about $460 million, including $333 million from the Austin asset acquisition and related mortgage payoffs, with one of the mortgage payoffs occurring in early '19, when it becomes open for prepayment. We have $65 million of capital spend, roughly $32 million of dividends. Our revenue maintain is roughly gonna be $15 million for the quarter, with revenue create about $10 million.

Term loan and financing costs will be about $5 million, mortgage amortization of $2 million, and on the sources side, we have the net proceeds we anticipate out of the northern Virginia joint venture and related financings of about $292 million, $50 million from cash flow after interest, roughly $45 million of proceeds from Subaru, and using cash on hand of $70 million, and we will roughly have $5 million of debt at the end of the year on our line. We anticipate our net debt to EBITDA remaining in the low 6.0 area and our net debt to GAV in the high 30s. In addition, we anticipate our fixed charge ratio remaining constant and our interest coverage remaining constant at year end from right now.

Looking at '19 guidance, at the midpoint, net income will be $0.41 per diluted share and FFO will be $1.42 per diluted share. Based on that, some of our assumptions in that -- the first one is to outline our accounting change. We anticipate about a $4.6 million reduction in earnings, primarily due to the internal leasing costs that cannot be capitalized and an increase to our ground rent expense based on the straight-lining guidelines. Of note, we have not yet concluded on one particular ground lease that's at one of our joint ventures, and therefore we have not included that in guidance, and we will update you as that gets to year end, probably on the fourth-quarter call.

Of this accounting change being about $0.03, in terms of how it was in guidance for consensus, I believe roughly 20% -- a little less than 20% of our analysts had this in guidance. The remainder did not, so, for the most part, this was not included in most of the numbers from the analyst community in terms of our consensus.

Portfolio operations: GAAP NOI will increase roughly $28 million for the year. Austin acquisition will generate about $34 million. FNC should generate an incremental $5 million. One Drexel Plaza and 3000 Market should generate about $3 million. Our redevelopment of 500 North Gulph Road and our development of SailPoint should generate about $8 million. The sale of the D.C. assets will reduce GAAP NOI about $21 million. Then, looking at our FFO contribution from our unconsolidated joint ventures, we have about $17.5 million of that this year, a $7.5 million decrease from 2018, primarily due to having a 50% interest sale in the Austin joint venture offset by our new 15% interest in the northern Virginia asset.

In G&A, we expect to be between $30 million and $31 million. The primary increase is due to the accounting change, which will generate $1.6 million of additional expense due to capitalization. On the investment, we have no set acquisitions or dispositions, and we have one development start. Interest expense will increase to approximately $81-82 million. This will include about $4 million on our line of credit, as we do expect to have borrowings throughout the year. Capitalized interest will be between $2-3 million. Land sales and tax provision will be a net $1.5 million positive. We expect term fees and other income to total about $5 million, which is approximately what we're running in 2018. Our net management fees will total about $11 million, which is somewhat consistent with the numbers for '18 also. No change in our quarterly dividend and no anticipated ATM or buyback activity.

As we look at capital, it's a $360 million plan, $120 million of development and redevelopment, common dividends of $130 million, revenue maintain of about $50 million, revenue creating of about $25 million, mortgage amortization of $7 million, and mortgage payoff for the Austin portfolio related to one mortgage that won't be paid off until early '19 of $28 million. Primary sources are cash flow after interest payments of $230 million and using the line for about $130 million throughout the year, which will bring our line balance to roughly $135 million by year end. We anticipate that that debt to EBITDA will be reduced and say around 6.0 to 6.3. The main variable will be how our developments are done during the course of the year and how much money we spend on those and whether we find financing activity or JV partner equity to lower those ratios. We also believe our fixed charge and our interest cards will be 3.4 and 3.7 respectively. I will now turn it back over to Jerry.

Gerard H. Sweeney -- President and Chief Executive Officer

Great. Tom and George, thanks very much. So, to wrap up, 2018 business plan is essentially completed, and the 2019 plan that we outlined we think represents good earnings, continued cash flow growth, good balance sheet, and really, a steady pipeline of development and redevelopment opportunities that we hope are actually done during the course of the year. So, with that, we would be delighted to open up the floor for questions. We would ask that in the interests of time and a follow-up. So, Joelle, we can open up the line to questions now.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press *1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press #. Again, that's *1 to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Jamie Feldman with Bank of America Merrill Lynch. Your line is now open.

Jamie Feldman -- Bank of America Merrill Lynch -- Director

Great, thank you, and good morning. I was hoping you guys could talk more about downtown Philadelphia. We know you've got the Macquarie move-out coming; you've got the Standard Reliance move-out coming. How do you guys think about the prospects to backfill those spaces? I know there's a differentiation between the trophy market, where you guys own a lot of your assets, and the rest of the market. So, just big picture of how you think that market looks over the next couple of years and your prospects.

George D. Johnstone -- Senior Vice President, Operations

Sure, Jamie. I'll take the first stab at it. Look, Macquarie and Reliance are both examples of tenants who have opted to move into new space. Macquarie is 150,000 square feet net. We did go direct with one of their subtenants in 70,000 square feet beyond Macquarie's expiration. They're the top eight floors of Commerce Square. You can't ask for better space and better views there. They're about 30% of our 2020 rollover in the city, about 12% of the company. But, they're expiring at a rental rate that is kind of below market, so we do see an opportunity to move rents, and I think -- look, the likely backfill of that space will ultimately be someone who makes a similar move.

Reliance is almost a year later. They expire with exercising their early termination notice 12/31/20. They are five floors in the middle bank of 2 Commerce Square. Markets are probably plus or minus 10% below market today, so we see a good opportunity, and I think quite honestly, that then gives us a nice mix of inventory when we kind of get into late '20, early '21 of middle-bank trophy space, top-of-the-structure space, and then, most likely, some new development, all at varying price points.

Gerard H. Sweeney -- President and Chief Executive Officer

Just to add onto that -- thanks for that, George. You never wanna lose a tenant, period, if you can keep them. With that being said, what we have here is a combination of time and great inventory. So, our leasing teams are already well on top of identifying backfills for that. As George touched on, the Macquarie space -- we've already put away a big piece of that with the permanent tenancy of a sublet, but I think we've already seen really good upticks in activity, and frankly, we have not had larger blocks of space on West Market for a number of years and have been out of play on a couple of tenant moving along that carter, so, these two spaces give us that opportunity with a positive mark-to-market. And, in addition, it gives us that price-point differentiation that we really do like. We have the low against the 1900 product, now Commerce Square competing, being in the game with the different price points with all of our market activity at Schuylkill Yards and University City.

Jamie Feldman -- Bank of America Merrill Lynch -- Director

Okay, thanks. And then, after the northern Virginia/Austin trade, how do you think about your portfolio positioning today? Any markets you think you'd still like to be smaller or greater in?

Gerard H. Sweeney -- President and Chief Executive Officer

Yeah, I think this was a big move, and I think we're really looking forward to generating the returns that we think we get out of Austin. Look, we've kept a good footprint in the Dulles toll road carter. I think that market has some good long-term upside. We have indicated that over time, suburban Maryland and a couple of pockets out in the Pennsylvania suburbs will probably be feeder properties for generating some additional capital to fund our development pipeline, but I think fundamentally, when we look back over the last couple years, the company's operating platform is in really good shape.

We're always gonna have rollovers that impact one metric or the other, and certainly, we were going through the rollup of the numbers, we were hoping for a higher same-store number, but yet, we had these rollovers within the same store. But, we take a look at that same-store metric juxtaposed with the positive cash mark-to-market between 2% and 4%, the good GAAP mark-to-market in the high single digits up to 10%, and keeping our capital costs within that band of 10-15%. We think that's a great prescription for generating growth going forward, though I think you'll see us always, Jamie, fine-tune the portfolio, particularly to make sure that we're always mindful of making the right real estate decision and also being very mindful of the capital constraints that are there with us every day with public market pricing.

Jamie Feldman -- Bank of America Merrill Lynch -- Director

Okay. If I could just ask a follow-up -- I know I'm only allowed to -- your guidance shows 2% AFFO growth. If you look ahead -- forward years beyond that, do you think that number can rise with some of these big move-outs, or you're kind of stuck in this AFFO --

Gerard H. Sweeney -- President and Chief Executive Officer

No, I think we would expect that to rise. I think when we took a look at the numbers for this year, we were coming off an extraordinarily strong year in '18. It's actually going to be north of 11%, and just in taking a look at where we think some of the capital deployment opportunities are over the next 12 months, we felt that it was a little over-weighted based upon our historic run rate, so we certainly do believe that we're gonna be able to -- with this portfolio -- get that portfolio back to the targeted range on our 2018-21 business plan.

Thomas E. Wirth -- Executive Vice President, Chief Financial Officer

Jamie, I think as we look at that long-term growth rate for CAD, which has been above our FFO, we still think that trend long-term over our business cycle will be higher, continue to go up.

Jamie Feldman -- Bank of America Merrill Lynch -- Director

Do you think in '20?

Thomas E. Wirth -- Executive Vice President, Chief Financial Officer

In '20 -- '20 will probably be a little positive. I don't think it'll be very positive, but I think as we look at '21 as we get some of the leasing done, we will be within the 5-7% range we've outlined.

Jamie Feldman -- Bank of America Merrill Lynch -- Director

Okay. All right, thank you.

Gerard H. Sweeney -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question will be from Manny Korchman with Citi. Your line is now open.

Emmanuel Korchman -- Citigroup Research -- Director

Hey, good morning, everyone.

Gerard H. Sweeney -- President and Chief Executive Officer

Good morning, Manny.

Emmanuel Korchman -- Citigroup Research -- Director

Jerry, as you thought about the Dulles transaction, retaining 15% of it and collecting a fee and potential promotes -- weighing that versus selling it all, cleaning out the structure, getting out of that market completely, why did you choose to retain the 15?

Gerard H. Sweeney -- President and Chief Executive Officer

It's a great question. Here's how we thought about it: Fundamentally, I think this was a capital allocation decision. We do like the toll road market long-term. We think there's some good things going on there. We also think we have an absolutely fabulous local team who's really very adept at identifying value points for us. But, we really did feel that bottom line, moving from a lower-growth market where we have a smaller platform to a higher-growth market where we're a market leader made a lot of sense, and fundamentally, we thought it makes the company more valuable. I think with the...

Being on a path to increase our revenue contribution from Austin to 25% of revenues, and then, in this quarter's supplemental, we also broke out our revenue differentiation between CBD Philadelphia and University City. We have about 20% of our revenues coming from University City. We think that 25% coming from Austin with all the great attributes that market has, 20% coming from University City, which is one of the top-performing urban sub-markets in the country with tremendous catalyst for life science, academic, and residential expansion, we thought creates a great value platform for the company.

And, as we looked at trying to figure out how to bridge the long-term potential we see in the toll road with the near-term capital allocation decision process we go through and bridging ourselves to when that market recovers, I think we felt that the 15% promote provided a good upside if the market improves, as we hope it will, and during that market transition, provided a well-capitalized, smart partner to help us work through both the capital sharing arrangement and also potentially providing a more effective return on invested capital mechanism to grow a platform in that market. It does give us the ability to really focus our wholly owned activities in Tysons, where we do think we have a great opportunity between 1676 and 1900.

We know there are near-term disruptors to same-store, but we think we can get a great return on incremental invested capital in both of those buildings and create some strong rental rate growth. And, we also kept a proxy out in the Herndon market with our 2340 property, which right now is fully leased, but that's a 250,000-square-foot building that if that tenant would decide to vacate, we would have a development opportunity out there as well. So, the 15% is a proxy for us to maintain some growth and a better return on vested capital metric coming out of that marketplace because we still do believe it has good long-term viability with a lot of the tenancies and the continued move in the silver line out to the airport.

Emmanuel Korchman -- Citigroup Research -- Director

Thanks, Jerry. And then, in Austin, can you just frame for us how that deal came together? Was it something that DRA approached you on? Did they wanna sell their stake to somebody else, or is it something that you wanted to increase your exposure to and you approached them?

Gerard H. Sweeney -- President and Chief Executive Officer

Well, the DRA venture was formed a number of years ago. It gave us a tremendous opportunity to acquire almost $800 million of assets we wouldn't have been able to acquire before. We did sell, Manny, the first tranche -- you may recall -- a bit ago, and we viewed the assets remaining in the venture as higher-growth, well-positioned assets we would liked to have stayed involved in.

So, with the partnership approaching its five-year lifecycle, I think both DRA and Brandywine thoughtfully evaluated how we could optimize market pricing for all the assets, so there were a number of discussions that involved a lot of third parties to assess independently what we thought market value would be on those assets. Certainly, Brandywine -- knowing those assets as well as we do, plus the promoted structure we had built into the deal gave us an opportunity to completely meet our fiduciary obligation to DRA and deliver great returns to our shareholders.

Emmanuel Korchman -- Citigroup Research -- Director

Thanks, guys.

Operator

Thank you. Our next question comes from John Guinee with Stifel. Your line is now open.

John Guinee -- Stifel Nicolaus -- Managing Director

Great, thank you. A couple of questions. I guess the first one would be noticeable change in your dividend policy. Can you walk through your thinking on that?

Gerard H. Sweeney -- President and Chief Executive Officer

John, there's no change in our dividend policy. I think the board will continue to evaluate that with the 2019 business plan just coming out. I think the board will certainly continue to evaluate what to do with our dividends. I think from a coverage standpoint, both on an FFO and a CAD standpoint, we are very well covered. The board continues to maintain that we want to continue delivering increasing returns to our shareholders, so I'm sorry if any of the comments would lead you to believe that we've changed our dividend policy -- quite the opposite.

I think we're pretty excited about the level of cash flow growth we've had over the last 24 months that would provide an opportunity for the board to evaluate the dividend, as the 2019 plan has a higher level of execution. I think in Tom's comments, he was just indicating the 2019 business plan did not include any ATM purchases, any acquisition or disposition activity, or any increase in the dividend. This is a framework for all of the analysts' models.

Thomas E. Wirth -- Executive Vice President, Chief Financial Officer

Correct. John, I was just implying what kind of cash flow was going to be coming out of the '19 plan. And, at this point, we haven't -- last year, as you recall, we did include a dividend increase. This year, it was just stating that we haven't included one as a planned item.

John Guinee -- Stifel Nicolaus -- Managing Director

Got it, OK. And then, the follow-up -- a couple, A and B. One is where do you think...? Clearly, JV capital is advantageous to issuing common equity right now. At what point in time, at what level do you think your share price needs to be where you think that issuing shares is a more attractive cost of capital than entering into these large joint ventures? And then, just more of a curiosity question, it looks like you're going to be expensing leasing cost to the tune of $2.2 million into property operations. How does that work?

Gerard H. Sweeney -- President and Chief Executive Officer

I guess a couple points there, John -- A and B, so we'll try and attack it. I think from a share issuance standpoint, I think when the stock price earlier this year was north of $18.00, we were selectively using the ATM to both equate some financial capacity as well as to recharge the balance sheet. I think we're far, far away from that given the existing stock pricing. So, I think from our perspective, we need to be incredibly disciplined about how we can create long-term growth potential by focusing on every dollar's return on that incremental investment.

So, certainly, doing transactions like we have done over the years by -- call it privatizing portions of the portfolio through these JV structures to create a better return to our public equity base is a very viable alternative. I continue to be very impressed with the level of private capital that is looking to invest in real estate operations with great operators. So, as we went through the process for the northern Virginia transaction, for example, the pricing differential between a wholly owned sale and a venture sale was really at a point of indifference, so we felt we had the opportunity to create some great upside momentum for our company, both in the near-term and the long-term basis, by retaining an equity stake in that.

As we've gone over, we've sold an awful lot of real estate directly without retaining any ownership stake, so it's really kind of a price point discussion with each asset trade, and also more a market assessment of where we think that asset fits long-term into our desire to generate some growth.

John Guinee -- Stifel Nicolaus -- Managing Director

Great, thank you.

Thomas E. Wirth -- Executive Vice President, Chief Financial Officer

And, John, on the capitalization, I guess we have -- the capitalization affects two areas of our income statement. So, the general rule is that if you have direct commissions, whether they be external or internal, those are allowed to be capitalized, but with our internal, there's certain personnel that receive both a base, a bonus, and a commission as a blend. Any portion that's not a direct result of a lease, such as a salary or a bonus -- those will be expensed going forward. That's the new rule, whereas before, we were saying as long as those were below a market-rate commission, you could capitalize all of that.

Those personnel are in two different places, so we have some costs that are running through G&A, which were certain personnel that were in the G&A area that were part of the leasing process, and we also have people that are brokers that are in our third-party management business that are going to be seeing less capitalization against that revenue. So, from that standpoint, you'll see an adjustment to our operating income for the balance of it.

John Guinee -- Stifel Nicolaus -- Managing Director

Interesting. Thank you.

Gerard H. Sweeney -- President and Chief Executive Officer

Thank you, John.

Operator

Thank you. Our next question comes from Craig Mailman with KeyBanc Capital Markets. Your line is now open.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Good morning, guys. Just curious here how you think buyers are underwriting Amazon right now in northern Virginia and maybe give us some insight as to why the transaction should be now versus waiting for an announcement.

Gerard H. Sweeney -- President and Chief Executive Officer

Great question, Craig. It's certainly something that we labored over quite a bit, and it's intriguing in its possibilities. We think there's certainly some more interest in that carter because of the potential of an Amazon locating there, which is why I think we're happy with the auction process on the price that we got for these assets in the low 6% cap rank range. We thought that was very good.

I think as we evaluate our position, a couple of things. It's a good window into what might happen in that market, and from our perspective, to the extent that there's a big updraft in that market, we think our retained position with our promote, but more importantly our position in Tysons Corner with the buildings we have there, the property we're retaining in Dulles Corner, and to potentially grow this venture with Rockpoint provide a really good proxy for us to participate in market recovery. And, I guess one of the other sides of that discussion is while Amazon would clearly benefit any market they go in, just like we're seeing Google benefit Austin and some of the growth taking -- any time a major tenant moves into a market, it's good news for everybody.

But, in northern Virginia, the reality on the ground is a little bit more intriguing or stark. In the Reston to Tysons carter, out to Herndon, you really have about 14 million square feet of new office that can be planned as part of the silver line expansion. Herndon itself has an over 2-million-square-foot pipeline with some more behind that that could drive that pipeline higher. When we're assessing that marketplace, there's no doubt that an Amazon Web Services, which is in the market now for requirement, an expansion by defense contractors, forays by Apple and Google, could really create some significant demand, and that's frankly what we all are hoping for.

The counterbalance to that potential demand is the size and location of the pipeline could just as easily have the impact of creating a lid on effective rent growth near-term in some of these existing products. So, I think we were really trying to evaluate how to look through that window and really create the best opportunity for our company, and we concluded that selling a portion of our toll road assets, retaining a stake in those assets that we're partially selling, and retaining a portion of our northern Virginia portfolio as wholly owned created a great opportunity for us to benefit if that market really does take off, but certainly, over the intermediate term, it gave us the ability to take advantage of what we thought was a wonderful opportunity to bring in some assets wholly owned into our company in Austin, Texas.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Right. So, it sounds like you're hedging yourself a little bit, which makes sense. I guess part of what I'm getting at is you guys said you like the market long-term, you're kind of bridging yourselves here for potentially a couple more years of weakness outside of what Amazon may or may not do, but do you think we're here in five years as the Rockpoint JV matures and we get another DRA situation where you guys sold low and are buying back high, similar to what you did in Austin?

Gerard H. Sweeney -- President and Chief Executive Officer

Well, I think when we sold the assets in Austin, I think we got great market pricing at that point. There wasn't a selling low. The markets moved dramatically. But, more importantly -- and, it dovetails onto John's question on private equity -- we're always looking at the best way to allocate capital and create the best growth rate.

What can't be forgotten with the Austin JV was that we were able to, again, move from a fairly small market position in Austin and, through that JV, acquire a number of really high-growth targeted assets that generate great rates of return to both DRA and to Brandywine during the hold period, and Brandywine then had the opportunity -- because we see some opportunity to further accelerate growth in those assets by buying them in. Interestingly, of the assets we've bought in, of the three pods of access we bought in, only one was one of the originally contributed assets. The other two were new, with River Place and Four Points, which we've been able to demonstrate that we can create value in both of those locations by leasing up the portfolio.

So, if the marketplace in five years in northern Virginia is tremendously stronger and we can harvest a lot of money by using a bridge financial structure and generate great returns to our shareholders, and then we view that some of those assets in the bench that we're contributing now have better long-term growth potential as wholly owned, I think we'd certainly want to retain that flexibility.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And then, just separately, on your '18-'21 same-store outlook of 2-5%, you guys are 2% in '18 and '19, and you have some bigger move-outs again in 2020. Do you think you guys need to reevaluate whether you can top the midpoint of that range?

Gerard H. Sweeney -- President and Chief Executive Officer

Well, look, I think the benefit we have -- look at the numbers in the third quarter here, with us bringing new properties online. The numbers on the same-store in the third quarter, as George has been articulating all year, is a great pop because we're bringing some high-performing assets into the portfolio. They'll be transitioning in again and generating very good growth with very low capital costs for the period from -- call it '19 to '21. We certainly will have some rollovers, as George talked through, in '20.

The reality -- they're not that big in the scheme of where our overall portfolio is, and whereas KP -- the 1676 project has a hit in the same-store this year -- we'll lease it up next year -- could be a tremendously strong performer in '21. One of the challenges with the same-store is it's a point-in-time snapshot that doesn't necessarily take into account the true push-through of the portfolio.

So, no, we look at our forward model and we think that those numbers get progressively better, which is why I was kind of touching on the point -- yeah, if we're generating same or good cash mark-to-market, good GAAP mark-to-market, keeping our retention rates in pretty good shape, except for in '19 with the 57% with KPMG -- that's a prescription for good, sustainable, accelerated growth. But, when you overlay that with the development pipeline we have, some assets will be 26-30 months to build, some assets will be 12-18 months to build.

We have a tremendous opportunity over the next few years to really start to generate some growth rates far in excess of what we've been generating over the past with the older portfolios. And also, Craig, a you look at the same-store grouping, this year will not benefit from the assets coming out of Austin because they don't hit same-store until next year. So, we would hope as we look at -- going out into 2021, we now start to benefit from a strong mark-to-market, and having close to 20% of our revenue coming from Austin, which is really not helping our same-store this year for '19 coming up.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

So, do you think by 2020, even with the moveouts and everything going on that you could be at that high end of near 5%, given what's rolling in and you rolling out northern Virginia?

Gerard H. Sweeney -- President and Chief Executive Officer

Look, we just announced '19 guidance. We're not going to postulate on '20 guidance at this point.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

I've got to try. All right, guys, thanks.

Gerard H. Sweeney -- President and Chief Executive Officer

Thanks, Craig.

Operator

Thank you. Our next question will be from Michael Lewis with SunTrust. Your line is now open.

Michael Lewis -- SunTrust Robinson Humphrey -- Director

Thank you.

Gerard H. Sweeney -- President and Chief Executive Officer

Good morning, Michael.

Michael Lewis -- SunTrust Robinson Humphrey -- Director

I wanted to follow up on a question about the lease accounting. I was just wondering how much leeway you have in deciding what goes into the property OpEx and what goes into the G&A because we were one of the analysts that did have the adjustment in our model; we put it in G&A, we thought maybe companies would want to shift it there because in this example, if you take that 2.2 out of your NOI and you cap that, you lose 1% of NAV for something that really has nothing to do with the business. So, just curious about that.

Thomas E. Wirth -- Executive Vice President, Chief Financial Officer

Sure. As we look at that, Michael, we basically -- for right now -- just put the people -- we put the expense where it was in the hit. The property -- the operating expenses that we are hitting -- since they're running through where those people are, which is in the management area, those leasing agents aren't at the property level such that they would hurt same-store. The ground lease will, which we did have as a piece also, but overall NOI for the company -- yes, there will be an adjustment that would affect our cap rate, but most of those other people are sitting in our management arm and won't affect same-store.

But, certainly, we will look at those people and decide where we want to locate them for '19, but for right now, we're leaving them in the places they are. But, we do have leeway -- we look at where they're performing, and do we want to move some of those people into G&A? I think we have flexibility there. I do not think that the new reg is telling you where it needs to be located and where your people need to be classified.

Michael Lewis -- SunTrust Robinson Humphrey -- Director

Okay, great. It'll be interesting to see what other companies do with that. And then, the second question -- I just wanted to ask about EQC reportedly selling 1735 Market Street. It sounds like that could be maybe the biggest single-asset sale in the city. Just wanted to get your thoughts on that and if you think there's any read-throughs from how that turns out to values in Philly.

Gerard H. Sweeney -- President and Chief Executive Officer

Well, they do have it on the market, and it'll be interesting to see what the pricing comes in at and who the bid list is. Certainly, we continue to see almost on a weekly basis more investors expressing interest in Philadelphia, which is something we've really hoped for for a number of years. So, the expansion of the targeted investor list who are evaluating high-quality assets in Philadelphia we think is a very good thing for our inventory base, and certainly, our hope is that EQC does very well on what they're trying to do as well.

So, I think the dynamic and the motivation is moving in Philadelphia's favor. The read-through will be a function of who buys and what they're looking for. The property is pretty well stabilized. I think it's got a minor amount of leasing to do. I think certainly, we've always viewed that as part of the trophy class in the city, and so, the valuation range that comes in actually has some level of read-through to some of our existing portfolio, at least the Commerce Square buildings on Market Street.

Michael Lewis -- SunTrust Robinson Humphrey -- Director

Thank you.

Gerard H. Sweeney -- President and Chief Executive Officer

Thanks, Michael.

Operator

Thank you. Our next question will be from Daniel Ismail with Green Street Advisors. Your line is now open.

Daniel Ismail -- Green Street Advisors -- Analyst

Hey, guys. Good morning.

Gerard H. Sweeney -- President and Chief Executive Officer

Good morning, Dan.

Daniel Ismail -- Green Street Advisors -- Analyst

I appreciate the color on the Austin/NOVA swap, but can you give us your current thoughts on where dispositions start to make more sense into being recycled into stock buybacks versus being recycled into the portfolio?

Gerard H. Sweeney -- President and Chief Executive Officer

Great question. Look, share buybacks are always on our radar screen, and management and the board review that. We still have an authorized buyback plan in effect, and we could certainly expand that as well. I think when we look at the deployment of capital, I think as we've added the northern Virginia/Austin swap, we felt that the growth potential out of that portfolio plus preserving some additional financial capacity to ensure that we could fund future developments was primary in our mind, and as we were thinking through that, we took a look at current pricing levels, and incremental $100 million of share buybacks will increase our earnings between $0.03-0.04 a share, but also increase our net debt to EBITDA by two turns, and from our estimate, only add about $0.16 per share in NAV. We use that as a guiding point on what we should be doing, but certainly, from the company's standpoint, share buybacks in this type of market pullback environment are always clearly on the radar screen.

Daniel Ismail -- Green Street Advisors -- Analyst

That's helpful. Thanks, guys.

Operator

Thank you. Our next question will be from Mitch Germain with JMP Securities. Your line is now open.

Mitch Germain -- JMP Securities -- Managing Director

Good morning. Jerry, if we're thinking about development start next year, any specific market that comes to mind?

Gerard H. Sweeney -- President and Chief Executive Officer

Well, if we take a look at our near-term development starts, we're certainly actively pre-leasing -- I'm sorry, pre-marketing, Mitch -- 405 Colorado, Four Points, and our last piece at Garza. Garza -- we're completing the common area by the end of this year. Tremendous momentum with the site we sold to Trammell Crow Residential on the apartment side, the hotel is under construction, so we think that will be an incredibly sought-after site in the 150,000-square-foot range.

So, in Austin, we think that the higher-probability starts would be either 405, Garza, or Four Points. As I mentioned in the comments, with the approvals at Broadmoor in place, we are on a pell-mell pace to finalize the site planning for Phase 1, which will be an office building and probably a residential for-rent project as well. So, as that process unfolds over the next couple months, the marketing efforts on those sites will ramp up dramatically, so Broadmoor could be in that mix for a start next year as well.

Then, up in the Northeast, we're very focused on wrapping up the design development for the two buildings in Phase 1 at Schuylkill Yards. One will be some office and residential, the other will be office and life science, and we're working with our development partners on those pre-marketing campaigns as well, and frankly are seeing a pretty good level of activity. I think we're very pleased that with some large tenants we're talking to as well as some smaller tenants, with the completion of the public park early next year -- you may have seen the press release. Spark Therapeutics has leased the entire Bulletin building for us over the next 24 months. Net renovation project kicks off by the early part of '19.

We're really creating a dynamic platform to accelerate leasing activity at Schuylkill Yards, so I think that's one of the things that the entire company is very excited about, which is with these development opportunities, let's complete the design development, let's get the marketing pulled together, certainly in a capital-constrained marketplace, let's make sure we stay in touch with and build new equity financing relationships, so we are in a position to really move with alacrity as we see market demand being there.

Mitch Germain -- JMP Securities -- Managing Director

And then, you have about a 200-basis-point drag on same-store numbers for next year. Is there anything specific that's driving the offset? I think you're forecasting 1-3%. It seems like a big increase considering all those different items that are out of the portfolio. Is there anything specific I should be considering in terms of what's driving that increase?

Gerard H. Sweeney -- President and Chief Executive Officer

I think the increase that has us at the range we have despite that drag is really the properties that were added to the same-store in Q3 of '18 now being same-store properties for all of calendar year '19 -- so, FMC Tower, 1900 Market Street, 933 First Avenue in King of Prussia.

Mitch Germain -- JMP Securities -- Managing Director

Thank you.

Gerard H. Sweeney -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Manny Korchman with Citi. Your line is now open.

Emmanuel Korchman -- Citigroup Research -- Director

Hey, guys. Thanks for the follow-up. Tom, on the page in your supp -- I guess it's Page 8 -- the walk-forward from your Investor Day, it looks like your 2019 leverage is going to be higher than the 6x you guys were targeting or hitting in 2018. Is that a new target or is that a temporary phenomenon, and if so, what's causing that?

Thomas E. Wirth -- Executive Vice President, Chief Financial Officer

We expect to keep it low, but I do think that -- and, I said it in my remarks -- I think that 6.0 to 6.3 is that we do plan on, as Jerry's outlined, starting a development, but also spending time and money on the work at Schuylkill Yards and Broadmoor, and to the extent that accelerates, that could cause our capital spend to go up, and therefore that net debt to EBITDA go up because those costs are going to come onto the balance sheet with no corresponding income, so we wanted to leave a range there.

Of course, if we end up having a partner come in on something like a Schuylkill Yards and they pay down some of our basis, that could obviously benefit us because we've incurred buying the land and already starting some of that infrastructure work. So, we wanted to leave a range where it does tick up, but I think it's temporary. I think as we look at spending money on those two multiphase sites, that's going to cause us to potentially go up, and I guess that is dependent on how the development spend comes and what kind of opportunities we see on those development sites.

Gerard H. Sweeney -- President and Chief Executive Officer

And, Manny, again, the 2019 plan doesn't anticipate any asset sales, either. So, we could generate some additional liquidity, so we really don't have any acquisition or disposition activity built into the plan. That could also serve to keep that range at the lower end. That 6.0 target is very important to us, but we thought it was also important to be transparent at this point, indicating that there is that upward impact on leverage through the development process, and that's the range that we think frames out the best and the worst case. Basically, about every $25 million of spend creates a tenth of a turn for us, but the target remains at that 6x level.

Emmanuel Korchman -- Citigroup Research -- Director

Jerry, on that disposition point, though, would that imply that you're going to be selling down land or other non-core, non-income-producing properties? Because otherwise, it doesn't help with leverage terribly much.

Gerard H. Sweeney -- President and Chief Executive Officer

I think in outright sale, I think we do anticipate hopefully having some land sales coming up, keeping our target between that 3-4% range, but also, it could be a combination of a sale and a better acquisition opportunity that generates more revenue for us. That could also be a player in that as well.

Emmanuel Korchman -- Citigroup Research -- Director

Thanks, guys.

Gerard H. Sweeney -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Bill Crow with Raymond James. Your line is now open.

Bill Crow -- Raymond James Financial -- Managing Director

Thanks. Good morning, Jerry. I think we're all looking at a whole bucketful of trends that are going on, right? We weren't densification, technology shifts, medic references, millennial workforce, and scarcity of labor, and you put all those into the bucket, and it seems like new buildings are aging faster than ever before, and I guess the question is twofold: How young can a building be today to be considered old, and what does that imply for CapEx as you think about annual inflation of the requirement to shift your buildings to today's preferences?

Gerard H. Sweeney -- President and Chief Executive Officer

Bill, great question. I think it depends to some degree on each building's physical plant. I think what we have found is that buildings with elongated, clear spans, column-free floor plates, higher deck to deck to give the potential to create more interior daylight really creates the opportunity to reimagine the building. I'll give you a great example. Our 500 North Gulph Road property was a building -- concrete superstructure -- that was built in the '70s. We took that building back to superstructure, new mechanicals, new window lines, new lobby, new lavatories, and have taken what was a real underperformer in our portfolio and created such a great physical reimagination that we had the entire building leased at a 9%-plus return before it was finished.

So, I think the trick in that algorithm is can you get a good return on incremental invested capital to justify the investment, or are you better off just selling the asset? I think we've done both over the years, where if we don't think we get a good rate of return, we'll simply sell the asset. 1676 -- the George walkthrough is another example. We think that when we evaluate the market window for that block of space, the positioning of that asset physically -- its physical configuration today -- what we can do to present it a whole different physical platform, we'll get a great mark-to-market and get a close to 20% return on incremental capital.

So, buildings vary by their design, and as we're looking at all the buildings that we either own or are looking to build, we're hoping to create some timeless aspect to our new developments by creating a volume of space that, to some degree, becomes almost indifferent to how that tenant is actually going to use that space, that they've got the physical volume -- the tight core, the window lines, the supporting mechanical systems -- that actually make that building have some durability as workplace appetites change.

Bill Crow -- Raymond James Financial -- Managing Director

Should we expect to see more assets shift from private ownership to public, given the requirements for capital?

Gerard H. Sweeney -- President and Chief Executive Officer

When you say "public ownership," do you mean --

Bill Crow -- Raymond James Financial -- Managing Director

It's deeper pockets, right? If your capital -- and, you gave the example of what you had to do to retrofit one of your buildings -- you didn't have to do that 10 or 15 years ago. The cost of ownership has gone up pretty dramatically. So, it requires deeper pockets to be an office landlord today. Is that fair?

Gerard H. Sweeney -- President and Chief Executive Officer

Well, certainly, capital costs have gone up for sure, so that is fair. Fortunately, in some markets, rental rates have gone up to provide the appropriate compensation for that. But, you take a look at our perspective, Bill -- we've got our capital costs in that range of 10-15% and have a pretty good run rate on that. That's down because of the portfolio we have today. So, even if we need to spend -- call it 40 versus 35 in TIs, if we're getting a good increase in rents, either both at point of entry but also lengthening lease terms and good rent bumps, the math works well there.

But, look, there's -- to your broader question -- there's a tremendous amount of private capital that is well-capitalized looking for places to put their equity. The overall debt markets are still fairly favorable, particularly for existing assets. So, we view the capital-driving office valuations remaining very positive, and you'll see public companies continue to invest capital where they think it's warranted in assets and private companies using a much different leverage model coming in and getting a very high return on their invested capital for either redevelopment or repositioning assets as well.

Bill Crow -- Raymond James Financial -- Managing Director

Great, thanks. I appreciate it.

Gerard H. Sweeney -- President and Chief Executive Officer

Thank you, Bill.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Jerry Sweeney for any closing remarks.

Gerard H. Sweeney -- President and Chief Executive Officer

Joelle, thank you for your help and thanks to all of you for participating in our call. We look forward to updating you on our business plan progress on our fourth-quarter call early in 2019. Thanks very much.

Operator

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

Duration: 79 minutes

Call participants:

Gerard H. Sweeney -- President and Chief Executive Officer

George D. Johnstone -- Senior Vice President, Operations

Daniel Palazzo -- Vice President, Chief Accounting Officer

Thomas E. Wirth -- Executive Vice President, Chief Financial Officer

Jamie Feldman -- Bank of America Merrill Lynch -- Director

Emmanuel Korchman -- Citigroup Research -- Director

John Guinee -- Stifel Nicolaus -- Managing Director

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Michael Lewis -- SunTrust Robinson Humphrey -- Director

Daniel Ismail -- Green Street Advisors -- Analyst

Mitch Germain -- JMP Securities -- Managing Director

Bill Crow -- Raymond James Financial -- Managing Director

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