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Brandywine Realty Trust  (NYSE:BDN)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, President and CEO, Mr. Jerry Sweeney. You may begin.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Dimitri, thank you very much. Good morning, everyone, and thank you for participating in our fourth 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 VP 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 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.

We have taken a little bit more of a streamlined approach this quarter. So, our comments this morning will summarize 2018 activity, but primarily focus on our 2019 plan. After an overview, Tom will provide a synopsis of our financial results and then, Tom, George, Dan and I will be available for any questions.

We closed the year strong. We exceeded our business plan metrics on cash and GAAP mark-to-market, capital ratios, tenant retention and achieved many of our other targets, including ending the year at 95.5% leased. We did come up a little short in our spec revenue, primarily due to slower occupancy of lease phases, which also resulted in our being below our year-end occupancy target and our same-store growth rates.

On a very positive note, however, Q4 leasing activity accelerated over Q3 by 17%, and was up 3% over 2017 levels, building strong momentum for 2019. We also completed several previously announced transactions in Austin and Northern Virginia. The baseline effected this swap, reduced our DC revenue contribution to 8% and increased our revenue contribution from Austin to 18%.

It also moved capital and revenue dollars to a market with strong positive mark-to-market, and a 12% capital ratio from a market with negative mark-to-market and a 20% capital ratio. We also continued the liquidation of our Allstate JV through selling Station Square in Silver Spring at $170 million -- $107 million value at a 6.5% cash cap rate. We also acquired Quarry Lake, a 121,000 square-foot building for $39.5 million at about a 6% cash cap rate.

That asset is a perfect compliment to our Northwest Austin portfolio, provides excellent mark-to-market upside for us in a few years, and reflects our objective to continue increasing our revenue contribution from Austin to 25%. As Tom will touch on, none of the benefits of these Austin acquisitions will flow through to our 2019 same-store numbers.

During the fourth quarter, we reinitiated and fully expended the remaining capacity on our share repurchase plan by purchasing 2.5 million shares for $32 million. The Board also approved a new $150 million share repurchase plan, which we did use during January to purchase an additional 550,000 shares, bringing aggregate purchases to $39 million at an average price of $12.76 per share.

We also redeemed $7 million of operating partnership units for cash. We do plan to continue to use this repurchase program opportunistically as part of our capital deployment programs. We also announced the 5.6% dividend increase supported by improved portfolio performance and strong cash flow growth. On the development front, we closed the year with the delivery of our fully leased 500 North Gulph Road and Broadmoor Six in Austin and the sale of our Subaru training facility.

Turning to 2019. We are off to a great start. In our sup on pages 10 and 11, we did provide some additional color on the Greater Philadelphia and Austin markets. Suffice it to say, both markets remain strong with good activity, building pipeline and leasing levels. We've also raised our spec revenue target by 1.6%, and our leasing pipeline stands today at 1.7 million square feet, including 436,000 square feet in advanced stages of negotiation.

Austin continues to benefit from corporate attraction and end-market expansions, most notably Apple, Google Oracle and Samsung, as well as an emerging life science sector. Rental rates increased 6.5% in 2018, and Austin closed the year with 1.3 million square feet of absorption.

Philadelphia also closed out 2018 on a very strong note with rents up 4.4%, and with over 1.1 million square feet of tenants new to the city over the last two years, clearly reflecting continued acceleration of Philadelphia as an emerging life science and transportation-centric employment hub. The city added almost 17,000 jobs during 2018, primarily driven by growth in financial services and the healthcare and life science fields.

Looking at our plan. Our spec revenue plan is 77% completed and other than the increase in spec revenue, all of our other operating metrics remain the same as we announced in October. Overall, our pipeline of deals is stronger and levels of activity have increased across the board, including in Radnor, where our pipeline is almost 300,000 square feet versus the targeted 2019 absorption level of about 126,000 square feet.

Another item of particular note is the high level of activity that we're seeing at our 1676 Drive project in Tysons Corner. As previously announced, we're investing $24 million to completely reimagine the entire building, including lobby, restrooms, mechanical systems and a lot of the outdoor space reconfiguration, as well as improving access to the building from this -- from the road network. All of that work will be substantially completed by the vacation of the existing tenant at the end of the third quarter. That will leave us with about 200,000 square feet to lease and our current pipeline of deals already stands at well over 600,000 square feet. So, we really are delighted with how well that renovation plan has been received and are very confident of creating another successful value-add story.

We continue to make excellent progress in our development pipeline. As was included in the press release, we are closing in on a pre-release of our 405 Colorado project in Downtown Austin, a $114 million, 200,000 square-foot office building over a 520 car parking deck. More importantly, we have an extremely strong pipeline of deals, aggregating almost 400,000 square feet. So, given that pipeline and the depth of it and our confidence in its execution, we're planning to start this project in the next 45 days.

Our development lease activities at Schuylkill Yards, Garza, Four Points in Radnor are all progressing well. We're completing the design development process on each project and giving pre-leasing achievement could be in a position to start one or two of those projects by year-end 2019.

Just given the size, a quick update on Schuylkill Yards. We did update the disclosure in the SIP on page 15. Design and pricing work continues at an excellent pace. We have seen a real upsurge in activity through our marketing campaign and our pipeline (ph) today currently stands at over 1.5 million square feet, including several 100,000 square feet of life science uses.

Equity sourcing discussions on Schuylkill Yards also remain extremely encouraging. To refresh everyone's memory, Schuylkill Yards is in a federal qualified opportunity zone, which has generated significant interests from a variety of capital sources, looking for both excellent real estate investments with federal capital gain deferral advantages.

The goal for Schuylkill Yards is to have the projects in a position to start over the next four quarters, of course, assuming favorable market and financing conditions. On Broadmoor, we're designing a 350,000 square foot office and retail site, as well as a residential site that can do 300 plus units. We plan to, again, subject to real estate and capital market conditions be in a position to start either one of those or both over the next four or five quarters.

From an investment standpoint, we do not have any sales or acquisitions built into our 2019 plan. We are, however, exploring the sale of some assets to harvest profit, generate additional liquidity and really accelerate our return on invested capital and cash flow growth trajectory. As we did in 2018, we would expect that any deployment of this type to be earnings neutral or positive and would accelerate bottom line cash flow growth.

So to wrap up, the 2019 business plan is in excellent shape. We're confident of meeting all of our goals. We remain very encouraged by the depth of our leasing pipeline on both, our existing inventory and our growing development pipeline.

Tom will now provide an overview of our financial results. Tom?

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

Thank you, Jerry. Our fourth quarter net income totaled $121.8 million, or $0.68 per diluted share, and our FFO totaled $64.3 million, or $0.36 per diluted share. Some general observations about 2018 results. Our balance sheet metrics continue to improve, as our fourth quarter fixed charge and interest coverage ratios were 3.5 and 3.8, respectively, a 10% improvement on both metrics as compared to the fourth quarter of 2017.

Our fourth quarter net debt-to-EBITDA improved to 6.0. Our repurchase of 3.1 million shares had no material impact on our fourth quarter earnings since the shares were purchased later in the quarter. While our year-end occupancy and speculative revenue were below target, the variance is primarily due to timing of tenants taking occupancy of some tenants but we anticipate remaining in holdover through 2018. That allowed us to achieve our 95.5% portfolio leasing, which represents the midpoint of our range.

Looking at 2019 guidance for the first quarter and year. Property-level income will total approximately $83 million and will be incrementally $3.5 million higher than our fourth quarter number. The increase is primarily due to Austin's acquisition totaling -- Austin's acquisition totaling $7.5 million, partially offset by the JV of our properties at Northern Virginia and the balance coming from the completion of our 500 North Gulph Road and Four Points developments.

Our FFO contribution from unconsolidated joint ventures were totaled $3.5 million, and is $2.5 million below our fourth quarter number, primarily due to lower interest in the NoVA joint venture as compared to the Austin joint venture, the sale of Station Square asset and the non-cash increase to ground rent due to the new accounting standard.

G&A for the first quarter will increase from $5.6 million to $9.5 million. The incremental increase is primarily due to the timing of deferred compensation expense, recognition and consistent with prior years, our new capitalization policy will also increase G&A.

Our annual SG&A should still continue to come in between $30 million and $31 million. Interest expense will increase to $20.5 million, with fixed rate interest being 98.6%. Capitalized interest should approximate about $0.5 million (ph) and full year interest should approximate $84 million to $85 million. Term and other income will total $1 million for the quarter.

Net management, leasing and development fees will be $3 million for the quarter and will approximate $13 million for the year. Land and tax provisions will net to a positive $2.5 million, and we did lose about $900,000 of income related to the Subaru National Training Center.

On the share repurchase, our recent activity will lower our weighted average share count to 178.5, and the numbers don't reflect any additional buyback but we remain opportunistic. On the financing side, term loan C, we closed that in December with a recast of our term loan to a new five-year loan with no changes in the maturity date. The recast of the loan allowed us to lower the interest -- the effective interest rate by 55 basis points.

Our Northern Virginian joint venture financing, we anticipate closing that financing during the first quarter of 2019 and receiving approximately $30 million of net proceeds. Regarding the change in our accounting standard, we issued initial guidance. We highlighted a $4.6 million or $0.03 charge, representing a reduction in the amount of internal leasing cost we had capitalized and an increase in our ground rent expense due to a new straight-lining guidelines.

We also noted that we had not yet concluded on a accounting treatment of a ground lease on one of our joint ventures. Since that date, we have determined that the ground lease expense will increase about $3.3 million, representing a non-cash increase to ground rent expense and negatively impacting the income from our joint ventures.

Based on our current capital plan for 2019, includes $165 million of development, $55 million of revenue maintaining, $40 million of revenue-creating spend and approximately $18 million for the acquisition of the Radnor land.

Our line of credit balance will be about $220 million at year-end. We project that our net debt-to-EBITDA ratio between 6.1 and 6.3, and we'll maintain a variable being scope to the development activity. And that will vary based on the scope of the development activities during the year. In addition, our net debt to JV will remain in the low 40 range, 40% range. We continue to anticipate our fixed charge ratio to be around 3.4, and our interest coverage improving to 3.6 by year end '19.

And I'll now turn it back over to Jerry.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Tom, thanks. With that, we're delighted to open up the floor for any questions. And as we always do, we ask, in the interest of time, you limit yourself to one question and a follow-up. Dimitri?

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from Manny Korchman with Citi.

Emmanuel Korchman -- Citigroup -- Analyst

Good morning, everyone.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Good morning, Manny.

Emmanuel Korchman -- Citigroup -- Analyst

Let me start with the 1735 market. You guys did not buy the asset, but I'm sure you consider it, given your market share in Philadelphia. Maybe you can just share your thoughts as to why you did not acquire that asset? And then also how the value of that asset translates to sort of value to your (inaudible) of assets?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Hey, Manny. I can barely hear you. But I don't relate to the 1735. When we looked at that project, I think it's fairly stable with not a lot of vacancy. So from our perspective, we thought and as events yesterday proved out, the building would trade at a very low cap rate and a very strong price per square foot.

So, we didn't feel that we could add a lot of value to that as part of our marketing platform. And that it's someone else on that, given the stability of that really being a core asset, it really did not present a competitive downside to us. We do think it's a direct look through to our properties from a pricing standpoint. But I do think Equity Commonwealth and their whole team did a great job of creating core value, as they took that property through its lease-up phase.

And our interest in buying that building was much more higher several years ago when there was a lot of lease in the deal (ph), they did a great job of stabilizing it. I think, I'm real happy to see some out-of-town high-quality thoughtful investment money moving into the city and setting a high watermark for an asset on the price per pound basis, as well as a very low cap rate. I think that validates our investment thesis. Our investment thesis is, as you all know, in the CBD is about $220 a square foot gross So, we think this is a great benchmark for us.

We think that the price that it is being bought at will create a momentum for additional rent acceleration, particularly given the fact there's very few larger blocks of space available in the market and the trophy market continues to tighten. So, really it's a good pricing benchmark for the balance of our portfolio. We think it moved from the value-add to a core acquisition with the great leasing work that Equity Commonwealth did. And from our perspective, we're pretty happy with the pricing benchmark it's setting in the market, and congratulate Equity Commonwealth for a great trade and welcome the new buyers to the city of Philadelphia.

Emmanuel Korchman -- Citigroup -- Analyst

Thanks, Jerry. I hope you guys can hear me better now.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

We can, yes.

Emmanuel Korchman -- Citigroup -- Analyst

A question for you on the ground rent. Just so that we can be clear. The ground rent adjustment you made, impacts the lease accounting standard and it doesn't change the amount of ground rent, is that correct? Or are there two adjustments we need to make?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

No, it's a straight. It's a non-cash straight-line ground rent adjustment. So the cash we are going to be paying will continue to be the same. It's just length that and calculation of that ground rent will change.

Emmanuel Korchman -- Citigroup -- Analyst

Thanks, guys.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Thank you, Manny.

Operator

And our next question comes from Jamie Feldman with Bank of America Merrill Lynch.

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

Great. Thank you. Good morning.

Emmanuel Korchman -- Citigroup -- Analyst

Good morning, Jamie.

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

I just want to make sure it's clear. Can you talk more about the spec revenue miss for the fourth quarter and the year, and just give more detail on exactly what happened?

George D. Johnstone -- Executive Vice President, Operations

Sure, Jamie. This is George. I'll jump in on that. We had roughly 73 000 square feet of tenancy that we thought was going to take occupancy in Q4, albeit late in Q4. And the fact that some of those spaces were not substantially complete and the move in GAAP revenue recognition didn't take place, caused about $0.5 million of slippage in our spec revenue target.

And then we had another 100,000 square feet or $100,000 of leakage from just interim commencement dates within the quarter. Some that were projected to commence closer to the beginning of November, commenced later into November and some instead of getting two full months of GAAP revenue, we ended up with a little over 1.

So, that was really the cause of the $600,000 slide. None of that has any impact on our 2019 business plan, since all of those tenancies were expected to commence in 2018. They were already fully part of our 2019 business plan. And they were not previously and are not today part of our 2019 spec revenue target.

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

Okay. That's helpful. So, no leases fell out of bed and nothing's changed in terms of the pipeline coming in?

George D. Johnstone -- Executive Vice President, Operations

No. No.

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

All right. And then, I guess, turning to Austin. Can you talk more about the leasing pipeline for 405, the 35% tenant? And then, I mean I know you said 400,000 square feet of potentially leases, but I assume those tenants are also looking at other projects. Can you just give us a little more comfort on, if you were to go spec, why you would think that would be the good move?

George D. Johnstone -- Executive Vice President, Operations

Sure, Jamie. I mean, we had about 400,000 square feet. And just to be clear, when we use that number, we believe that there are 400,000 square feet of really bonafide prospects of really working the project, not just, as they say drive-bys. We think that they range in size from the 25,000 to 70,000 feet.

There's been a lot of activity on the building, and I think when we're taking a look at that pipeline of deals, I think one of the catalysts for why we're announcing we are going to start that building in 45 days is given that pipeline and what we know will be the shadow pipeline of smaller deals behind that, we need to start construction of this project to meet the delivery time frames for a lot of these -- a lot of these prospects given their existing lease structures.

So, we remain incredibly encouraged by our ability to kind of mold the anchor tenant we're dealing with, through to a final lease execution in the next 30 to 60 days, and also significantly advance a number of the additional prospects during that period of time as well. So the expectation, we'll start that project late Q1, early Q2.

We'll deliver kind of year-end -- I'm sorry, Q1 of '21, which is the targeted occupancies for a number of these tenants. And we feel, frankly, given the size of the building at 200,000 square feet, the fact that we've got construction pricing fully locked down and everything bid, no real variability to the cost side of the equation, that our read of the market is that given the size of the tenants we are looking at, now is a good time to go.

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

Okay. And how do you think about the competitive pipeline and just timing of deliveries versus your project?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

I think we're in good shape. I think we've -- certainly, there's a number of projects on the drawing boards in Austin (ph) that have not yet started. There are some that have started or are very close to starting. I think the floor plate size here, we think it's an incredibly strong location, Downtown. The fact that it provides a fair amount of on-site parking in the CBD are real competitive advantages for us.

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

Okay. Thank you.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Thanks, Jamie.

Operator

And our next question come from Michael Lewis with SunTrust. You may proceed.

Michael Lewis -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Good morning, Michael.

Michael Lewis -- SunTrust Robinson Humphrey, Inc. -- Analyst

Morning. Jerry, I think when you went through the development project, I didn't hear you talk about Metroplex II. In kind of late November, early December, there were some news articles out there, you were looking for tenant that might be close to starting something there. Could you just give an update on tenant interest and what's going on there?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Yeah. Sure, Michael. Yeah, Metroplex II is a project we've -- in Plymouth Meeting, one of the core sub markets in Philadelphia. We -- the reason why there was a lot of press about it in the last couple of months is we actually brought on an outside brokerage firm to launch a very broad-based marketing campaign.

So, JOL (ph) was part of the marketing arrangement, amplified some of the efforts of our in-house team to get into the marketplace. It's a fairly large building over 300,000 square feet. So, we feel as though we would need a significant pre-lease there to roll that forward. That marketing process has launched. The building is designed, preliminary pricing is locked down. So, we know what we need to be from a rental rate standpoint to get between an 8% and 8.5% yield.

So, we'll see what the market brings forth. There is a number of larger tenants starting to evaluate long-term space locations in the Pennsylvania suburbs. The project sits at the busiest, almost heavily traveled intersection in the Commonwealth of Pennsylvania, I think inverts to the Pennsylvania Turnpike, the Northeast extension and the Blue Route.

So, it does provide a tremendous branding opportunity for some of these larger companies looking at it. But as we look at it right now, Michael, it's really a design building. We feel confident we'll get something to come our way. But given its size and the capital investment, it's certainly a different scale asset than a building that we're looking at in Radnor or Garza, or Four Points down in Austin, Texas. So, there we need to have a significant pre-lease with a very quantifiable pipeline of deals behind it.

Michael Lewis -- SunTrust Robinson Humphrey, Inc. -- Analyst

Got you. That's helpful. And my second question. I'm going to look for a little more color on the share repurchases. When you had your last conference call, the stock was around $14.34. You talked about the impact to leverage, the impact that it could have to earnings and NAV and maybe at that point, it wasn't as attractive.

Obviously, you got a better entry point. Stock now has rebounded a little bit. How do you kind of -- assuming another pullback, do you have more kind of capacity before you start worrying about leverage? Do you think about other ways to fund that to kind of keep it neutral? Just general thoughts around the repurchase program.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Yeah. Look, it's a great question and Tom and I will tag team this. It always a challenging decision because we're very focused on maintaining a strong balance sheet. That's why we are very happy to close the year at 6.0 times. Look, I think when we sort of look at it, we were fortunate given the investment activity that we pulled together in the fourth quarter, did generate some additional liquidity for us.

And I think, as we saw, the REIT office market continue to kind of slide down a slope and us moving down (ph) very quickly with. It just became too attractive an opportunity. We know the assets underlying the real estate pretty well. It's a -- even though if you compared, the implied cap rate on the repurchase versus some of our development yields from our perspective, it's a no-risk transaction. So, that's why we're saying, we will keep that out there and while the Board approves a larger share repurchase plan to make that a key piece of our capital deployment landscape.

But in the event that the market does pull back again, that may certainly change our investment strategy in other areas. But I think, certainly, any management team should be very focused on what the value is of their public currency and how that relates to intrinsic asset value. And that becomes an attractive investment for us. That has to be viewed in a context of the cost of running our portfolio, the growth we can create in our development pipeline and maintaining a strong balance sheet.

Michael Lewis -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you.

Operator

And our next question comes from John Guinee with Stifel.

John Guinee -- Stifel Nicolaus & Company Inc. -- Analyst

Great.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Good morning, John.

John Guinee -- Stifel Nicolaus & Company Inc. -- Analyst

Morning. You guys have a strong development focus, a couple big projects. I think you have a pretty low land basis in most of these positions. But at the same time, hard costs appear to be going up. Can you do two things? One, talk about any value that may be in your land basis, and then, two, talk about, if you build a high-quality office building at Schuylkill or Broadmoor, what's that going to cost you, all-in, on a per pound basis?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Yeah. Sure, John. We do believe we have a very attractive land basis in our existing inventory. I think in the sup, I don't know the exact page but it kind of weighs at an average investment base of less than $20 a square foot. Now, a lot of that, frankly, is driven by two things.

One, our investment basis per square foot at Broadmoor, given the rezoning we were able to achieve at a very high density, puts our land basis below $5 a foot. Even when we factor in kind of the infrastructure cost to create a road network, we still think the land basis we have is roughly 30% of current market value. So, I think we have a lot of embedded value there.

The transaction that was pulled together with Schuylkill Yards provides Brandywine with a uprolling option that with extensions can go out well over 25 years. So, we can actually match the land takedowns to the milestone schedule we have with our arrangement with the University, but we have extensions to that. So, it gives us some downside protection against being in a situation where we had to carry a lot of excess land.

And then a lot of our other parcels, as you know, are one or two building sites in close proximity or in some of our existing parks that become great expansion opportunities for our tenants. So, hopefully that answers your question on the land side.

Construction costs are really a challenge. I mean, we -- to kind of insulate ourselves from that, we're taking all of these development projects all the way through CDs and a range of pricing exercises to really lock down and owner's budget that really equates to a GMP.

So, we have full knowledge of current pricing to move things forward. Look, I think it -- a $405 or $570 a square foot, when we're looking at the building at Schuylkill Yards, were between six -- well, call it about $600 a square foot depending upon the design consideration is maybe a little bit higher. But we have clearly seen upward pressure on glass, both curtain wall and storefront, fenestration plans, steel is at a premium, concrete has been a real accelerator and even things like a sheep rock is going through the ceiling.

So, we're definitely seeing a high increase in construction, which is why we are trying to really lock down all of our cost models. We know exactly what we need to ask for rents to get the required returns we have. So, it's created some real squeeze points. So, I think your question is very much on point.

John Guinee -- Stifel Nicolaus & Company Inc. -- Analyst

Great. Thank you.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Welcome.

Operator

And our next question comes from Daniel Ismail with Green Street Advisors. You may proceed.

Daniel Ismail -- Green Street Advisors -- Analyst

Good morning, guys.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Good morning, Dan.

Daniel Ismail -- Green Street Advisors -- Analyst

Can you give a little bit more color on the Radnor land acquisition and as well as the developments with the Penn Madison (ph)?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Yeah. Sure. Thank you. Look, first of all, I mean, Penn made the announcement back in October and it really didn't rolled through our numbers until this quarter. But I guess, first of all, we're always delighted to continue our relationship with Penn. They've been a great client. It's an excellent transaction for us and that it grows our university business, which we think is a very viable growth avenue for us. It expands our connection to life sciences, which is again very important to what we're seeing here on the ground in Philadelphia and Austin.

And really it further establishes our market domination in Radnor. The deal is really straightforward, Daniel. I mean, we will serve as the development manager, supporting the Penn team in the construction of a 250,000 square foot, $200 million advanced outpatient medical facility. Penn will own and finance the project. We are simply the fee developer, is very similar to the transaction we have with Subaru in New Jersey, where we oversaw the design development and construction processes.

As part of the transaction, there were two other pieces. One is, we'll also purchase later this ear an adjoining site that can do a 100-room hotel and a 150,000 square foot office building. The design development on both pieces is under way now. We're talking to a very nice pool of hotel companies on the hotel side and building a pre-leasing pipeline. That -- the game plan is to have the design development process wrapped up by the end of this year and hopefully be able to line up a pre-lease tenant to move that forward. That would be about a $65 million project.

And finally, the third part is that Penn is currently in a 220,000 square foot medical facility. Essentially, across the street from the new site that they are building on. We have entered into a forward agreement to buy that 220,000 square foot building for around $21 million. And it will either be a renovation opportunity for us or a teardown to create a new product. We're going through that analysis now. But we would anticipate that being a close-in for Brandywine in late first or early second quarter of 2020. Does that frame it out?

Daniel Ismail -- Green Street Advisors -- Analyst

Yeah. That's helpful. Maybe switching to Austin. On the acquisition, you mentioned some under-market rents on the building. Can you just frame how below markets -- how below market the rents are, and then provide a little more color on the lease role in the property?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Yeah. Sure. It's a property that we bought. It's in close proximity to Broadmoor. It's part of the master plan community with outdoor Trail Lakefront. I mean, a tremendously well-appointed property. The short-term role we've got about, 90,000 rolling in a couple of years in 2021. The average rents and price are just north of 20 in a market where the rents today are around 26. The rollover schedule that this building has, layers in perfectly with our overall rollover to the existing Austin portfolio.

So, we thought it blended in very well from a risk management standpoint. And frankly, we're still in the tenant aggregation business in Austin. So, it gave us access to a couple of additional tenants. We think that they may have some growth opportunities and controlling their tenancy on a building that we think has good long-term value and a good location seem to make a lot of sense for us.

Daniel Ismail -- Green Street Advisors -- Analyst

Got it. Thanks.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Thank you.

Operator

And our next question comes from Jason Green with Evercore. You may proceed. If your telephone is on mute, please unmute your line.

Jason Green -- Evercore ISI -- Analyst

Good morning. Just wanted to circle back on Quarry Lake and get an understanding for how you're thinking about acquiring assets in that market versus future development opportunities that you have in your portfolio?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Yeah. Look, I mean, I think the numbers are really clear that the bias we have in that market is to build versus buy. I think this was an interesting opportunity that we decided to move on. But if you take a look at our -- the land page in our supplemental package, it shows that we can build six million square feet in that market. While a bulk of that is at Broadmoor, we have other great development sites at Garza and on our Four Points developments. So, given where pricing for existing acquisitions is versus the spread we think we can achieve on the development side, I think the heavier emphasis on capital allocation will be to development.

Jason Green -- Evercore ISI -- Analyst

Got it. And then circling back to Broadmoor. You talked about planning an office and residential piece for about -- for an office piece for about 350,000 square feet units of residential. Is there a preference to which piece comes first? And is there a certain structure that you are more inclined to take with either or both of those assets?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Yeah. Great question. I don't think there is a real preference to which one we do first. So, we are running both concurrently through the design development process. I mean, clearly, on the office front, in a building that size, we would be looking for a sizable pre-lease to launch it. And we're being very thoughtful in terms of kind of creating a retail part with that building.

So, we start to build that overall sense of place that's very important, as we think strategically about the Broadmoor rollout. Look, the residential market is very strong. I mean, you have 130 people a day moving to Austin. So, that's a great location.

We continue a very active dialogue with CapMetro and public officials on creating a public-private partnership for that train line, which while is at a nascent stage of its evolution, certainly, we think has a lot of long-term potential. So, I think we're running both concurrently and we'll see what the market brings.

Jason Green -- Evercore ISI -- Analyst

Got it. Thank you.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

You are welcome.

Operator

And we have a follow-up question from Manny Korchman with Citi. You may proceed.

Michael Bilerman -- Citigroup -- Analyst

Hey, Jerry. It's Michael Bilerman. How are you?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Good.

Michael Bilerman -- Citigroup -- Analyst

So, I just wanted to ask you about potential joint venture or other asset sales, particularly what EQC did in CBD in terms of marketing and generating additional interest. And you have done a pretty formidable job at refocusing the portfolio, cleaning up a lot of joint ventures and existing out of a number of markets.

I just wonder whether at this point, whether you would want to take advantage of some of the incremental interest in the CBD, where you have significant holdings to generate that incremental capital to either fund, what is becoming a very larger development platform or two, to continue to repurchase your stock on a leverage-neutral basis?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Michael, the simple answer is yes. I think we're very pleased with this price point on 1735. We have a number of processes under way where we're looking at how we can harvest some tremendously built-in gains in our Philadelphia portfolio. And we would expect to have those thoughts get more clarity publicly in the next couple quarters.

But certainly, as we look at the platform today, not in Philadelphia CBD but in Pennsylvania suburbs, we think that we're at a point given our call for capital through the development pipeline that it's incumbent upon us to really think about how we recycle some of this embedded value to fund either development or expansion into the other markets or to certainly keep the share repurchase plan on the table as well.

Michael Bilerman -- Citigroup -- Analyst

And I guess, what would be the scope of how large you would be willing to go? I recognize there is nothing in guidance today for any sort of transaction activity. But it sounds from your comments that there's certainly things that you're contemplating. So, can you give us a little bit more color about whether these would be outright sales, joint venture sales and sort of size and scope of what you're considering?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

See, I think we have roughly about $130 million to $140 million of assets that we've targeted kind of in the suburban areas that we're spending some time on. Either from a salary joint venture standpoint, I think pricing will be determining that to some degree.

And then, look, given the size of the assets that we have downtown and assuming a 300 to 350 plus square foot cost, I mean, they are fairly large transaction. So, I don't want to give you a range downtown, but the buildings by their size and scope would generate a tremendous amount of liquidity for the company, which obviously creates some other opportunities for us in terms of how we deploy that incremental capital.

Michael Bilerman -- Citigroup -- Analyst

But are you thinking outright sales or joint venture sales?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Are you talking about Downtown Philadelphia or?

Michael Bilerman -- Citigroup -- Analyst

Well, either, I mean, I guess, downtown but you've brought up suburbs.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Yes. It's an interesting thought process to go through because on the -- when we look at the transaction, we did with Rockpoint, we threw our 15% ownership stake. We're generating a tremendous return on our invested capital through that structure, because it's a different capital structure, different promote structure.

The joint venture we did with DRA generated a 27% internal rate of return, the $28 million promoted value. So, we're not at all opposed to doing joint ventures, as a lot of folks we talk to about selling assets to, like us to stay in because we know the markets and the property and the tenants so well. So, I wouldn't preclude more joint venture. I think, saying, that we are very mindful of the process we've been under way on a reduced exposure to joint venture.

So, when we take a look at the absolute dollars we have invested in joint ventures, that's going down dramatically, as we have outlined in our multiple year business plan and -- whereas we used to own an equal stake in the venture, we've reduced those down to 15% to 20% type of ownership positions.

Michael Bilerman -- Citigroup -- Analyst

Thanks, Jerry.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

You are welcome. Thank you.

Operator

And we have a follow-up question from Jamie Feldman with Bank of America Merrill Lynch. You may proceed.

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

Great. I just want to get your thoughts on growing more in either life science or medical office with this new Penn medical deal you're doing. How do you think about the potential ramp up in that business line?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Well, I think we've a good foot in the door from both standpoints. From, number one, the perspective, we've got some great relationship with some educational and healthcare institutions, which provide a clear pathway into helping them grow their businesses. And then with Schuylkill Yards, for example, we have bought on a life science, a co-developer advisor with Longfellow Partners who has tremendous technical knowledge of the life science field.

So, we really do think that given what we think will be a rapidly growing life science market in Philadelphia, with I think the Merck announcement last year in Austin, I think Austin will wind up being a growing life science market as well. But we view that as a good add-on to our core business lines and it's something we have to spend more and more time on.

I mean, I think CBRE came out with a report that talked about tech talent around the country and Austin was number six. Washington, D.C. was number three. While Philadelphia is ranked fairly well on that scale, we think that -- from what we are seeing at a ground level, there seems to be a lot of accelerated growth in that arena over the next couple of years.

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

Okay. Do you think you need to add personnel, or do any thing to change your platform, marketability for that business?

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

I think there will be opportunities. Specific, I think, certainly if we are able to grow at the -- we probably would need to add some additional resources for sure.

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

Okay. Great. Thank you.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Thanks, Jamie.

Operator

And we have a follow-up question with Craig Mailman with KeyBanc Capital Markets. You may proceed.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Good morning, Craig?

Operator

If you have your line on mute, please unmute your line.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Craig?

Operator

Thank you. Ladies and gentlemen, this concludes our Q&A portion of today's call. I would now like to turn the call back over to your President and CEO, Mr. Jerry Sweeney. You may proceed, sir.

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

Dimitri, thank you. And thank all of you for participating on our call this morning. We appreciate you following the company. And we look forward to continued excellent execution on our 2019 business plan and updating you on those activities on our next earnings call. Thank you very much.

Operator

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

Duration: 50 minutes

Call participants:

Gerard H. Sweeney -- President, Chief Executive Officer and Trustee

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

Emmanuel Korchman -- Citigroup -- Analyst

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

George D. Johnstone -- Executive Vice President, Operations

Michael Lewis -- SunTrust Robinson Humphrey, Inc. -- Analyst

John Guinee -- Stifel Nicolaus & Company Inc. -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

Jason Green -- Evercore ISI -- Analyst

Michael Bilerman -- Citigroup -- Analyst

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