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Brandywine Realty Trust (BDN -2.44%)
Q3Â 2019 Earnings Call
Oct 18, 2019, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Brandywine Realty Trust Third Quarter 2019 Earnings Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Jerry Sweeney, President and CEO. You may begin.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Thank you very much. Good morning, everyone, and thank you all for participating in our third quarter 2019 earnings call. On today's call with me, as always, are George Johnstone, our Executive VP of Operations; Dan Palazzo, our 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 meaning of the federal securities law. Although we believe these 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 looking at our business plan, we are in great shape and substantially done for 2019. So after a very brief review of our 2019 plan, I will outline our 2020 earnings guidance and our business plan. Tom will then provide a synopsis of financial results, and after that, Tom, George, Dan and I will be available to answer any questions you may have.
Our business plan continues to be very straightforward, simply take advantage of great product in strong markets to lease space at increasing net effective rents by controlling capital cost, delivering positive mark to markets with strong annual rent increases. Our 2019 plan accomplished that objective, as will our 2020 business plan.
We are 100% done on our speculative revenue target for '19. The leasing pipeline looking forward remains deep for our existing inventory at about 1.5 million square feet, including approximately 270,000 square feet in advanced stages of negotiations.
For the third quarter, we posted strong rental rate mark to markets of 9.3% GAAP and 4.2% cash. Year-to-date, our cash same-store growth rate is 1.9%. As you may recall, we did elect last year to keep a major renovation project in our same-store pool. That project, 1676 International Drive, in Northern Virginia, is undergoing a full renovation and is currently 21% occupied. I'll touch on it a little bit later, but this project will deliver an excellent return on our invested capital.
By keeping it in the same-store, however, it has had a 100 basis point and 250 basis point adverse impact on our 2019 and 2020 same-store growth rate. To illustrate this impact, as well as the impact on our occupancy levels, we did provide a roadmap of 1676 International Drive's impact on same-store and occupancy levels on page 7 of our supplemental package.
Based on excellent progress so far, we've raised the bottom end of our range $0.01 to $1.41 and narrowed the top-end to $1.43 for a midpoint of $1.42 per share. As outlined on Page 10 and 11 of our set, we expect both Greater Philadelphia and Austin to remain strong going into 2020, thereby generating good leasing activity, an increasing pipeline and good leasing levels.
Couple of quick notes on markets. Austin continues to benefit from tremendous corporate attraction and in-market expansion, as well as the tremendous in-migration of population. For the third quarter of 2019, asking rents increased 6.2% year-over-year, with 2.1 million square feet of absorption in the last nine months of 2019. A great way to illustrate the strength of Austin's continued strength and growth is that over the last five years the Austin market has added over 8.4 million square feet of office space, while increasing occupancy by over 320 basis points.
Philadelphia had 1 million square feet of absorption over the last year. The Trophy Class vacancy rate has been reduced to 5% from 5.3% at the end of '19, which ranks among the lowest of the top 25 largest MSAs. We've continued to grow jobs over the last year and are experiencing solid demand through the third quarter of '19, with asking rents increasing 4.4% year-over-year. Philadelphia continues to benefit from an emerging life science sector, supported by almost $1 billion in NIH funding, which ranks third nationally behind only Boston and New York City.
University City receives 42% of all NIH funds allocated to the entire State of Pennsylvania. We believe our Schuylkill Yards development is well positioned to take advantage of this growth acceleration. In fact Philadelphia was in the news recently when the CEO of Johnson & Johnson said that Philadelphia has the potential to be the Silicon Valley of the healthcare sector.
The comprehensive redevelopment of 1676 is on time, on budget. We have a 236,000 square feet of vacant space. Our current pipeline is almost 900,000 square feet, which is up significantly since our July call. We are under letter of intent and in advanced lease negotiations on approximately 111,000 square feet. Rent levels we believe will be in the mid $40s [Phonetic], representing about a 15% increase over expiring rents. The projections still reflect that we'll realize a return on incremental capital of over 20% and will stabilize that property at about a 9% yield on aggregate new basis.
Turning to the balance sheet and Tom will touch on this, we did take advantage of the public debt markets to raise $215 million of unsecured bonds at an average rate of 3%, and an average term of 7.5 years. This financing improves our liquidity. We now have full availability under our $600 million line of credit. And we also lowered our overall cost of debt and extended our maturity schedule.
So with that overview of the excellent backdrop of 2019, we also announced our 2020 business plan along with related earnings guidance. The 2020 plan is headlined by two operating metrics that demonstrate excellent future growth potential. Our cash mark-to-market range is between 8% and 10% and our GAAP mark-to-market range is between 17% and 19%. We anticipate that for 2020, all of our regions will post positive mark-to-market results on both a cash and GAAP basis.
Also, from a forward growth perspective, our major 2020 rollovers create significant upside due to tremendous mark-to-markets. Our SIH rollover in Austin has a 20% cash and a 28% GAAP mark-to-market. Macquarie in Philadelphia is an 18% cash and a 22% GAAP, and Reliance also in Philadelphia is a 20% cash in a 24% GAAP. So our GAAP same-store growth rate of 2.4% is driven by Philadelphia at 4.5% and the Pennsylvania suburbs at just shy of 7%. Obviously, due to the rollovers taking place Met DC and Austin will be slightly negative due to those rolls.
As I noted earlier, our same-store forecast, due to the inclusion of 1676, we don't believe reflects the strength of our overall portfolio. And as we noted on that schedule, without the inclusion of this property, our 2020 cash same-store range would be 2.5% to 4.5%, which we think is pretty solid.
Other key operating highlights: spec revenue of $31 million, already 50% achieved; occupancy levels will close out between 94% and 95%; and we will also be 95% to 96% leased by year-end '20. Including the roll out of Macquarie of 150,000 square feet in July, we do project a retention rate of 65%. Capital, which is a key focus of ours will run about 14% of revenues, which is consistent with our 2019 run rate. We do project growing FFO up 3% at the midpoint and our debt to EBITDA range we project at year end will be between 6.1 times and 6.3 times.
CAD will range between 71% and 78% and is down slightly from our 2019 range. That decrease is primarily attributable to the capital and free rent to the anticipated backfill of 1676 International Drive, where we are projecting absorbing a number of square feet within 12 months of that space being vacated.
Just to amplify a couple of vacancies' impact on '20, at 1676 we are projecting about 200,000 square feet of lease-up at a cash mark-to-market of 14.7% and about $3 million of GAAP revenue as part of our 2020 plan. On the SHI roll in Austin, we're projecting about 148,000 square feet of absorption at a cash mark-to-market of just shy of 20%. 40% of that square footage has already been executed, and we anticipate generating a couple of million dollars of revenue on a GAAP basis from that SHI release. Macquarie, we have no GAAP and no cash revenue in our 2020 as a result of that mid-year roll out. Just to further amplify that $5 million of revenue coming out of 1676 and SHI is GAAP revenue and not cash.
So the upshot is, our 2020 operating forecast grows FFO 3%, keeps our balance sheet strong, deploys some capital into development, keeps our capital ratios on track with excellent cash and GAAP mark-to-markets.
To spend a few minutes on development and investments, when we do look at the development landscape and the investment side of our business, we do recognize that there is a lot of uncertainty in the macro environment that could impact the near-term economic outlook. If you think back, our goal for 2019 was really to get all of our targeted development projects in a full go-mode with all approvals, design development and marketing programs fully in place.
As we are closing out '19, we feel we've accomplished that objective, but looking forward to 2020 and '21, assuming continuation of the demand drivers that we're seeing and continued strong market conditions, we do plan on placing more land into active development. As such, our 2020 plan includes two targeted development starts.
And our development pipeline can really be classified in to two components: our near-term production level assets and our long-term mixed use master plan developments. Our production level assets can be completed within four to six quarters, they cost between $40 million and $70 million and range in size between 100,000 square feet and a 165,000 square feet. The cash yields on all these projects are targeted around 8%.
These assets are Four Points and Garza in Austin, and 650 Park Avenue and 155 King of Prussia Road in Pennsylvania. On these projects, we have a combined prospect list aggregating almost 2 million square feet. Each of these projects are ready to go, pending pre-leasing. As I mentioned, we have two starts build into our 2020 plan.
Just a quick note on a couple of projects we have under existing development. 405 Colorado, continues on schedule and on budget. We're now 45% leased. We anticipate that project will generate about an 8.5% yield on cost and the schedule holds with it 4Q '20 completion and stabilization by 2021. The Bulletin Building is under renovation. That work will be done by the second quarter of 2020 and as we've noted, that building is -- the office component is fully leased to Spark Therapeutics. And we're actively leasing the first floor's retail space.
And looking at our master plan mixed-use projects which are Schuylkill Yards and Broadmoor, we did update a disclosure within the supplemental package on pages 15 and 16 to provide a lot more information on those projects. So a couple of quick highlights on each. On Schuylkill Yards, full master plan approvals are completely in place. The design development is substantially complete on the first two buildings. Final pricing on those buildings is under way.
Marketing efforts continue with a pipeline still around 1.5 million square feet, including significant interest from life science tenant. We are in very active discussions with joint-venture financing sources on it to provide equity for the project. Our existing investment base aggregating approximately $90 million will be sufficient to meet our equity requirements in the contemplated equity joint venture structures on those projects at our targeted 35% hold. So no additional cash requirements are anticipated on our Schuylkill Yards starts.
Prior to starting either tower, we will have final construction pricing locked down and all equity and debt financing committed and announced as part of any start announcement. Given our read on the residential market, we could be assuming the above conditions are met in a position to go on the West Tower in the next couple of quarters. The East Tower, which is predominantly office and a potential life science component, does require an active tenant, as well as having those cost and financing conditions met prior to any start.
A final point worth noting that you'll see on the page in the supplemental is that our Schuylkill Yards master plan can accommodate almost 2 million square feet of life science space. Given the strong demand drivers we're seeing in that sector, we have also commenced the design development process for a 400,000 square foot dedicated life science building that could commence construction very late in 2020, or early '21, in a joint venture with our life science partner.
On Broadmoor, which is framed out on page 16, again, all approvals are done. I do want to highlight that we can build about 2.7 million square feet of space and over 800 apartments with the existing buildings in place and we are into full planning and costing on three blocks with marketing launches attendant there too, which I detailed the component parts of that on page 16.
All three blocks could be in a position to start by mid-year '20, again, assuming favorable market and financing conditions stay in place. Discussions on the train station, public stay sequencing and retail hospitality initiatives are all continuing at an excellent pace.
We have one acquisition program for 2020, which is part of the previously announced transaction with Penn Medicine. We have a 160,000 square foot building in Radnor that we plan on purchasing later in the year. We do anticipate placing that building into redevelopment upon acquisition.
Excluding the committed spend we already have in our 2020 plans for 405 Colorado, the Bulletin Building and few other items, as Tom will outline, our plan does include $50 million of incremental spend in '20 on our two projected development starts. To finance these opportunities, we will be evaluating well-timed asset sales, looking at several of our joint ventures to harvest profit, generate liquidity and reduce debt attribution. We are also evaluating several value-add opportunities. And as we did in 2018 and have done in 2019, we expect any deployment to be relatively earnings neutral and accelerate bottom line cash flow growth.
So to close out, 2019 plan is essentially wrapped up. Our focus is now on our 2020 plan and we're delighted that the bottom line results is strong effective rent growth, a growth in FFO and a continued solid balance sheet performance.
At this point, I'll turn it over to Tom to review our financial results.
Thomas E. Wirth -- Executive Vice President and Chief Financial Officer
Thank you, Jerry. Our third quarter net income totaled $6.7 million, or $0.04 per diluted share and FFO totaled $64 million or $0.36 per diluted share, which met consensus estimates. In addition, we narrowed our 2019 guidance by $0.02 per share and the midpoint remains $1.42 as compared to the initial first and second quarter guidance.
Some general observations of the third quarter were: operating results were generally in line with our second quarter guidance; our second quarter fixed charge and interest coverage ratios were 3.6 times and 3.9 times, respectively, both metrics improved as compared to the third quarter of 2018; our annualized net debt to EBITDA decreased to 6.3 times, which benefited from the improving operations and sale of Plaza 1900 for roughly $36 million.
Our 2019 guidance looking at the fourth quarter, we have some general assumptions. Portfolio operating income will total about $84.5 million. FFO contribution from joint ventures will total $2.5 million. G&A -- our fourth quarter G&A expense will decrease from $7 million to $6.5 million. The incremental decrease is primarily due to expected timing of expenses, and the full year G&A expense will total approximately $31.7 million.
Interest expense will be $20.5 million, with 92% of our debt being fixed rate at the end of the quarter, but up to 98% fixed as a result of the bond deal. Capitalized interest will approximate $0.8 million. Full year interest expense should be about $82 million. Termination fee and other, we anticipate termination income of $2.6 million for the year, other income will approximate $7 million. Net management and leasing development fees will be $2.5 million and approximate $9 million for the year.
Financing activity, during the fourth quarter, we took advantage of the public debt markets and issued $200 million of secured bonds at a premium to generate about $214 million of net proceeds. The issuance comprised the reopening of our '24, '29 bonds, each for a $100 million. The issuance resulted in reducing our unsecured line of credit to zero. Weighted average interest rate on those bonds is 3%, the weighted average maturity of 7.5 years. Percent of fixed rate debt is now above 98% and both bond issuances are now index eligible.
Based on our capital plan, which includes $45 million of development and redevelopment, $15 million of revenue maintain, $10 million of revenue create spending, approximately $18.5 million for the acquisition of Radnor land, our cash balance will approximate $50 million at year-end.
Based on our estimated fourth quarter EBITDA and capital spend, we continue to project that our net debt to EBITDA ratio will be within 6.0 times to 6.3 times range, with the main variable being the timing and scope of our development activities and related capital spend. In addition, our debt to GAV will remain in the low 40% range. We anticipate fixed charge to be 3.6% and our interest coverage to be 3.9% by year-end.
Looking at 2020 guidance, at the midpoint, net income will be $0.29 per diluted share and FFO will be $1.46 per diluted share. Some of our general assumptions: portfolio operating results, property level GAAP NOI will increase approximately $10 million year-over-year, primarily due to Drexel Plaza, which will generate $2 billion as park takes occupancy during the year and $8 million increase in same-store NOI on a GAAP basis.
FFO from our unconsolidated joint ventures will total about $10.5 million. G&A should range between $30 million and $31 million. On the investment side, we have no sales activity built into the plan, but we do have the acquisition of 250 King of Prussia Road and Radnor Pennsylvania as Jerry mentioned for $20 million and we do have two development starts that will not generate any earnings in 2020.
Interest expense will increase approximately $82 million to $83 million, primarily due to -- also in that number includes our pay-off of the Four Tower Bridge mortgage, which will occur in December for about $9 million. Capitalized interest will increase from $3 million to $3.5 million, primarily due to building of 405 Colorado and we anticipate paying off our Two Logan mortgage on May 1, which is approximately $80 million and at a rate just below 4%.
Land sales and tax provisions should net about zero. Termination fees and other income should total about $10 million, net management and development fees will be $8 million, which is about $1.5 million below our 2019 estimate. While property management fees will remain constant, we anticipate lower development fee income as the development projects at Garza for SHI and Radnor for Penn Medicine are completed during the first half of 2020. We have no anticipated ATM or share buyback activity.
Turning to the capital plan, we do project CAD will be slightly lower and our coverage will be between 71% and 78%. The main contributors to the lower coverage is due to an increase of straight-line rent and the releasing of the space at 1676, which is anticipated to occur within the 12 months of KPMG leaving the space.
Our total plan for the year is about $500 million. It's comprised of about $135 million of development and redevelopment, of which $50 million Is going to be new development starts for the year, about $135 million of common dividends, revenue maintain should be $63 million, revenue create should be $50 million. And as I mentioned, we shall have about $90 million of mortgage payoffs for Two Logan and Four Tower Bridge, $7 million of mortgage amortization, $20 million for the acquisition of 250 King of Prussia Road. The sources for that will be about $220 million of cash flow after interest, $220 million from the use of the line of credit, $50 million of cash on hand, which we anticipate at the end of '19, and about $10 million in land sales.
Based on our capital plan, our line of credit balance will be about $220 million at the end of the year. We project net debt to EBITDA will range between 6.1 times and 6.3 times. Again, the main variable being timing of development. In addition, our debt to GAV should be maintained in the low 40% range. In addition, we anticipate fixed charge will improve to 3.7% and our interest coverage will improve to 4%.
I'd like to turn the call back over to Jerry.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Great. Tom. Thank you very much. With that, we're delighted to open up the floor for questions. We do ask, as we always do, that in the interest of time, you limit yourself to one question and a follow-up. Operator?
Questions and Answers:
Operator
[Operator Instructions] And our first question comes from Manny Korchman from Citi. Your line is open.
Emmanuel Korchman -- Citigroup Inc -- Analyst
Hey. Good morning, everyone. Jerry, in your remarks, you mentioned the macro economy and how that might impact leasing or it's tenant desires. Can you talk about that construct within both the life science space and tech tenancy that's likely targeting the Austin development?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yes. Good morning. Manny. It's a great question. And I think looking at the two different sectors, I mean, certainly with a lot of the political dialog taking place across the country on the regulatory risk facing big tech, while we haven't seen any impact on that, it is creeping in the conversation circles. So there is no question that potential for any type of legislative action, any adverse public policy decisions primarily coming from a federal level, but certainly some susceptibility at the state level, could have an impact on the growth expectations of up some of the major absorbers of space on the technology sector side.
Again, haven't really seen any definitive action steps being taken in response to something that may happen in the future, but certainly, that is creeping into more and more conversations in terms of forward planning activity. I think the same thing holds true quite candidly on the life science space, where you certainly have an awful lot of dialog in the public sector on healthcare costs, the profitability of pharmaceutical companies, concentration of wealth among large employers in that life science space that I think that does create a bit of an overhang in terms of what some companies may be looking to do. Again, it's just out there as kind of a yellow flag pending the outcome of some of these political processes, but there's no question in any sector regulatory risk in public policy always provide a potential positive or adverse impact on growth plans. And I mean, given the current dialog that we're all hearing in the public sector space, there is certainly again some yellow flags out there depending on how some of those things turn out.
Emmanuel Korchman -- Citigroup Inc -- Analyst
Great. And then just quickly on 1676, the LOIs you discussed this quarter, are those the same ones as last quarter and just your expected timing on converting that fully?
Thomas E. Wirth -- Executive Vice President and Chief Financial Officer
Yes. I mean I did, we actually had last time we were last call. Manny. We were under letter of intent now were inactive lease negotiations pretty far advanced, so we're certainly anticipating that rolling into a lease.
Emmanuel Korchman -- Citigroup Inc -- Analyst
Thanks, sir.
Unidentified Speaker
Thank you.
Operator
Thank you. Our next question comes from Jamie Feldman from Bank of America Merrill Lynch. Your line is open.
James Feldman -- BofA Merrill Lynch -- Analyst
Great. Thank you. I appreciate the color on potential development starts and funding. I guess if you were to handicap the two starts, what's most likely, would they be more of your production assets you mentioned, or some of the larger projects? And then in that light, how should we think about potential asset sales, like the magnitude and maybe even the yield or the cap rate on the assets you might be selling?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yes. Good morning. Jamie. In terms of the near-term development starts, I think, given the pipeline that we're seeing, we would anticipate a higher probability right now to what I call the production level assets, so either Garza or Four Points or 650 or 155, and they again can be delivered within four to six quarters. So given the level of pre-leasing there, the pricing coming out where we anticipated it would be, I think, we're certainly gearing up for one or two of those to start.
I think on Broadmoor, we are really excited about the demand that we're seeing. Those blocks that we're planning clearly could be in a position with final site plan approval and building permits to go mid-year '20. So we assign a pretty good probability to one of those start scaling as well. And then Schuylkill Yards right now, we'll see how the final pricing works out. We do have a very healthy pipeline that we feel pretty good about. The discussions we're having with potential equity partners, which are clearly looking forward to that project for us, are progressing nicely. But if we had to handicap it right now, our guess is that the higher probability which reflects the $50 million in the plan, will be coming out of those production level assets.
And in terms of asset sales, as you well know, we're always in the market, exploring different types of sales opportunities. We continue to be very pleased with the level of response that we see. Even that one sale down in Northern Virginia, very active bid process, good pricing, a pretty wide array of potential buyers, debt markets are really fluid and attractively priced. And we would expect us to prune some assets in the Pennsylvania suburbs. It's a primary receiver or generator of additional funds in the latter part 2020.
James Feldman -- BofA Merrill Lynch -- Analyst
Okay. And then are there any land sale gains in your 2020 guidance?
Thomas E. Wirth -- Executive Vice President and Chief Financial Officer
Jamie, this is Tom. We don't have any material land gain sales. We did say that it's going to be about $10 million of land gain sales. Any gains of that nature, will be less than a $0.01, probably close to $0.005.
James Feldman -- BofA Merrill Lynch -- Analyst
Okay. Great. Thank you.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Thank you.
Operator
Thank you. Our next question comes from Craig Mailman from KeyBanc Capital Markets. Your line is open.
Craig Mailman -- KeyBanc Capital Markets Inc -- Analyst
Hey guys. Just a clarification. So KPMG, they came out of the numbers October 1, right?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yes, correct.
Craig Mailman -- KeyBanc Capital Markets Inc -- Analyst
So I'm just curious, you guys kept occupancy guidance the same. For this year, you have 130 basis points of commencements in the bag so far, but then you're going to lose most of the 160 basis points of the remaining expirations, right? I'm just curious, could you walk me through how you get to 94% and 95% from 93% with the drag from KPMG?
George D. Johnstone -- Executive Vice President-Operations
Yes. Craig, good morning, it's George. KPMG did leave 930. We've got additional expirations. The pre-lease that we have will commence in the fourth quarter and then, there are a couple of move-outs that immediately get backfilled in the fourth quarter. They don't show -- so you see the expiration, but there is no pre-lease listed in our number because the space isn't vacant as of the end of the quarter. So that's really how we roll up to maintain that same 94% to 95% range.
Craig Mailman -- KeyBanc Capital Markets Inc -- Analyst
Got you. So those pre-leases aren't necessarily in the 4Q commencements on the leasing page?
George D. Johnstone -- Executive Vice President-Operations
Right.
Craig Mailman -- KeyBanc Capital Markets Inc -- Analyst
Okay. Got you. And then just another quick one. So on the 400,000 square foot dedicated life science building, could you give us a sense of what you guys think you might own on that? And did Drexel pass on -- don't they typically have the right of first offer for like 15% of each building?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yes. Look, couple of points here, Craig. We're anticipating being in the 50% range in terms of the ownership of the life science dedicated project. Drexel does have an opportunity to participate in our projects going forward, as frankly does any tenant who is interested. Drexel's -- their right is a rolling right, there is no notice period. They could wind up being a part of our life science building. I mean what we're seeing really is a burgeoning demand coming out of the anchor employers here in University City, whether it be Children's Hospital, University of Pennsylvania Medical System, Drexel University and all of their various academic and research initiatives, The Wistar Institute.
So I think in assessing the depth and the diversity of the demand, I think, we felt very good about launching that design development process. As the building -- physical form begins to take shape from a plans and spec standpoint, we will commence the marketing of that and the hope would be that we could identify some tenancies as we are going through the design development process.
Craig Mailman -- KeyBanc Capital Markets Inc -- Analyst
Got you. Would it be like a 100% built out as lab space with all the improvements or would it just be geared toward life science tenants who want to cluster together?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
The actual specific build out will be driven by individual tenant requirements. The physical specifications of the building, the ventilation, the mechanical systems, ceiling heights, floor loads, et cetera, will all be designed to be convertible into wet/dry lab administrative, so provide complete optionality in terms of interior layout to what the tenant requirements might be.
Craig Mailman -- KeyBanc Capital Markets Inc -- Analyst
Got you. Great. Thank you.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
You're welcome.
Operator
Thank you. Our next question comes from John Guinee from Stifel. Your line is open.
John Guinee -- Stifel Nicolaus & Company Inc. -- Analyst
Great. One curiosity question I've just got to ask it, when you are walking around the country, or traveling around the country and you see a wonderful park like your new park at Schuylkill, some of them are clean and very user-friendly and some of them are full of tents and homeless people. Are Philadelphia's finest able to keep that park pleasant and usable?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
It is very pleasant, eminently usable and being adopted very quickly into the public cityscape in Philadelphia. We have between Brandywine personnel -- between the University City district folks as well as Philadelphia's Finest, there is a very coordinated campaign that's been incredibly successful, John not just at Drexel Square, but also at our Cira Green Park to make sure that we are always keeping those parks as friendly as possible to the general public.
John Guinee -- Stifel Nicolaus & Company Inc. -- Analyst
And then, the second question, you have been very, very good about raising your dividend the last few years. What are you thinking about the dividend this year and what's your taxable issues?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Well, I think from a taxable standpoint, Tom, I'll defer to you, but I think from a dividend standpoint, yes, look, we are encouraged by some of the forward signs we're seeing, I mean ranging, John, from a real estate level, the forward pipeline. I think we're really pleased with the strong mark-to-markets we're seeing, primarily on a cash base, GAAP is very important too, but as I say, you can't buy groceries with GAAP. So having really effective good cash rent growths, the annual escalations we're building into our projects, what we think are some really good near-term convertible development opportunities that will grow cash flow tremendously, and the fact that there'll be no ongoing capital costs, all of those are very positive attributes our Board looks at in evaluating the dividend growth plan.
I think what we're looking for right now is just some -- a little more visibility on executing the capital side of that plan. It's no secret that construction costs have continued to escalate, not just for base building, but for TIs, as you well now. And we have a number of very interesting initiatives under way to kind of keep a lid on those construction cost escalations, which I think are really resulting [Indecipherable] on our capital costs in that 14% of revenue range, which is really very good, so we're able to generate net effective rent growth. So if those two elements come together, the forward leasing visibility with that positive mark-to-market, as well as the good containment on executing leases from a capital standpoint, I think, the Board is always biased to making sure that shareholders receive a very effective share of our growth model. Tom, on the tax side.
Thomas E. Wirth -- Executive Vice President and Chief Financial Officer
Yeah, John. On the dividend side, we don't have any pressure on the dividend based on the current recurring taxable income we are having. Obviously, if we do have some asset sales, depending on when they happen and what those assets may generate in capital gains, we would have to assess whether there is a need to raise it. But at this point, based on our operating plan for 2020, there is no taxable reason to raise the dividend.
John Guinee -- Stifel Nicolaus & Company Inc. -- Analyst
Great. Thank you.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Thank you, John.
Operator
Thank you. Our next question comes from Jason Green from Evercore ISI. Your line is open.
Jason Green -- Evercore ISI -- Analyst
Good morning. Just a question on Schuylkill Yards. Can you talk more about the interest specifically for the office portion of Schuylkill Yards? If there are any changes to pre-leasing requirements for the project to get started?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Sure. Jason. Good morning. No change to the pre-leasing requirements on the East Tower, still targeting that 35% to 50% range of the office component. You'll recall that building has the flexibility to be up to a third life science. So we're trying to manage those two different targeted audiences. And the pipeline, again, remains pretty diverse. There's a few larger tenants in there that we're waiting for some feedback on, but we're also doing a very effective job. Our leasing teams that is really developing a pipeline of single and two floor users that we think could really add to the pipeline execution as we move forward.
On the West Tower, which is predominantly a residential tower, with the right equity financing in place, and given the read that we have on the underlying strength of this location and the depth of the residential demand drivers, I think, we're prepared to start that given its fairly small office component without having any pre-lease in place. So no real change from the plan we've outlined before.
Jason Green -- Evercore ISI -- Analyst
Okay. And then on 405 Colorado, the additional 10% leased, was that an expansion of the tenant that was already in there or was that a new lease? And then, I guess, how should we think about the remaining 55% in regards to how quickly that will get leased up and what demand is like?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
The incremental 10% was new tenants coming in, so not an existing expansion. And look, I think we're really happy with the pipeline we have there. We are 3 to 4 times covered on the remaining 110,000 square feet, with some very near term discussions under way. We have been able to continue to push rents, through the development cycle. I mean the building -- we are still -- the garage is going up now up to halfway through, not even quite half way up to garage levels. So I think with the pipeline, we feel pretty confident that we'll get some leasing done in the next several months. And as the building really starts to take shape Q2 and Q3 of next year, I think, we'll be able to lock it away, but I think, as I've mentioned, we feel very confident this is one of those projects like an FMC or a Cira Center, we will be substantially leased by the time we open up the doors.
Jason Green -- Evercore ISI -- Analyst
Got it. Thanks very much.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
You are welcome.
Operator
Thank you. Our next question comes from Daniel Ismail from Green Street Advisors. Your line is open.
Daniel Ismail -- Green Street Advisors -- Analyst
Great. Thanks guys. Good morning.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Good morning.
Daniel Ismail -- Green Street Advisors -- Analyst
Given the recent headlines, have you noticed any pullback in co-working activity in your markets? And then, as a follow-up, can you provide an update on some of the flexible options you guys are working on internally?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Sure. Well, I mean there's certainly been a lot of very public disruption in that space in the last 60 days or so. I think what we've seen is a push by some of the companies to try and get leasing transactions done. I mean, I think, with the dislocation of the major move in the market, WeWorks I think you're saying and number of other companies really try and accelerate their activity. So we haven't really seen a pullback from that side, from the demand side.
I think, in talking to a lot of landlords and certainly from Brandywine's perspective, we continue to be extremely focused on what the credit support -- how that credit support is evidenced on all of our co-working initiatives and we have little bit more than 2% of our revenues coming in from a variety of co-working initiatives, primarily we just -- we do at one WeWork's location, few other executive suites. So we're very focused on making sure there is adequate credit support there, really walk those spaces to make sure there's high levels of occupancy. We're very much involved in the design of those spaces. So we think there is a high level of convertibility if the operators have any issues.
And I think certainly Brandywine -- our [Indecipherable] initiative, utilization rates are north of 80%, a tremendous benefit. We're looking at expanding that in some of our existing projects, as well as quite candidly even within some of our development projects allocating pods of our space to facilitate the flexible -- providing some of our tenants a flexible term lease structure that can bridge out some of their short or intermediate term demands and has a compensation structure in place for us that gives us an accelerated return of the capital we need to invest to meet that flexibility requirement.
Daniel Ismail -- Green Street Advisors -- Analyst
And by compensation structure, would that be some share over market rent premium?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yes. But probably its a little of [Indecipherable]. Yes, I mean, higher rental rate that would compensate us for the -- we're not having a five-year term or a 10-year term in place. And certainly our experience is that tenants will pay that premium to afford then that business plan flexibility that's important to how they run their business.
Daniel Ismail -- Green Street Advisors -- Analyst
And not to go over my two question limit, but have you guys generally found that to be in the 2 times range, or 5,0% or can you frame that type of rental premium?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
It could be up to -- I wouldn't say up to 2 times, but it's probably 50% premium.
Daniel Ismail -- Green Street Advisors -- Analyst
Okay. Great. That's helpful. Thanks guys.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Thank you.
Operator
Thank you. And I am showing no further questions from our phone lines and I'd like to turn the conference back over to Jerry Sweeney for any closing remarks.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Great. My closing remark is, thank you for your engagement this morning. Thank you for continuing to follow the Company. We're very excited about where we stand today with the portfolio, with the growth opportunities in the near term that we have every intention of executing. And we look forward to updating you on our year-end call, which will occur in late January of next year. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 49 minutes
Call participants:
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Thomas E. Wirth -- Executive Vice President and Chief Financial Officer
Unidentified Speaker
George D. Johnstone -- Executive Vice President-Operations
Emmanuel Korchman -- Citigroup Inc -- Analyst
James Feldman -- BofA Merrill Lynch -- Analyst
Craig Mailman -- KeyBanc Capital Markets Inc -- Analyst
John Guinee -- Stifel Nicolaus & Company Inc. -- Analyst
Jason Green -- Evercore ISI -- Analyst
Daniel Ismail -- Green Street Advisors -- Analyst
