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Brandywine Realty Trust (BDN 2.83%)
Q3Â 2020 Earnings Call
Oct 22, 2020, 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 2020 Earnings Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Mr. Jerry Sweeney, President and CEO. Sir, you may begin.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Crystal, thank you very much. Good morning, everyone, and thank you for participating in our third quarter 2020 earnings call. On today's call with me as always are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Vice President and Chief Accounting Officer; and Tom Wirth, our Executive Vice President and Chief Financial Officer.
Prior to beginning certain information discussed during our call may constitute forward-looking statements within the meaning of the Federal Securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports that we file with the SEC.
First and foremost, all of us at Brandywine sincerely hope that you and yours continue to be safe, healthy and engaged. The pandemic continues to disrupt all of our lives and has resulted in a new landscape for everyone and certainly every business and its duration unfortunately remains unclear. At the time of our Q2 earnings call in July, we did anticipate a return to the workplace commencing after Labor Day and into the fall.
Given the recent headlines over that timeline for many of our tenants has been extended into 2021. And as we noted in our SIP our portfolio is about 15% occupied with variances between the different operations but we can certainly provide more color on that during the Q&A. Additional details on our approach to this crisis are outlined in our COVID-19 insert found on Pages 1 to 4 of the supplemental package.
During these prepared comments we'll review third quarter results, an update to our 2020 business plan. Tom will then summarize our financial outlook and update you on our strong liquidity position. After that Dan, George and Tom and I are certainly available to answer any questions.
So looking at the quarter, we continue to execute on every component of our business plan. We're certainly pleased that most of our 2020 objectives have been achieved. We are 100% complete on our speculative revenue target. And while the volume of executed leases was down a bit quarter-over-quarter, as you might expect, during the summer it -- regardless of the pandemic, our overall pipeline increased by over 330,000 square feet.
For the third quarter, we also posted very strong rental rate mark-to-market of 17.1% on a GAAP basis and 9% on a cash basis. In addition, the core portfolio did generate positive absorption of 102,000 square feet, which includes 47,000 square feet of tenant expansions. Also included in those absorption numbers was the full building delivery of our 426 Lancaster Avenue redevelopment in Pennsylvania suburbs, that was 55,000 square feet and 112,000 square feet of the occupancy backfilling of the SHI space again in Austin, Texas. We did experience during the quarter 58,000 square feet of COVID-related terminations. The primary one of that was Philadelphia Sports Club in our Radnor complex of 42,000 square feet and a couple other small hospitality and medical offices.
Our full year 2020 same store numbers are tracking in line with our revised business plan. For this quarter, the numbers were consistent with our business plan and were primarily driven, as you might expect, by the 9/30/2019 move out of KPMG in 183,000 square feet and the SHI move out on 3/31/20. Cash collection rates continue to be among the best in the sector. We've collected over 99% of our third quarter billings and our October collection rate continues to track very, very well with over 97% of office rents collected as of yesterday.
Also on capital. Our capital costs were in line with our targeted range as we continue to experience very good success in generating short-term lease extensions that require minimal capital outlay. Retention was 60% and slightly above our full year range. And based on fourth quarter scheduled lease commencements we will be within our stated occupancy range. As Tom will articulate in more detail, we did post FFO of $0.35 per share, which is in line with consensus estimates.
And taking a broader look at our '20 business plan, as we mentioned in the last call, any crisis embodies a level of danger and opportunity. So our first plan of attack was to fully assess risk to our business and we believe we have instituted plans to either mitigate or anticipate any adverse impacts. We do remain focused on growth, whether that's through our early lease renewal program or margin improving rebidding programs, we're continuing to work with institutional sources of equity to seek investments and opportunities where we can create earnings and value accretion.
But just looking at the risk factors that we face as part of the pandemic, first, and consistent with all applicable state, local and CDC guidelines, we did maintain a doors open, lights on approach to our buildings during the entire breadth of the pandemic thus far. While hard to fully quantify, we estimate the current occupancy levels of our buildings range from 80% in Austin to around 15% in the Philadelphia CBD to 18% in the PA Suburbs to 25% in D.C.
Now, certainly for a variety of factors primarily, public policy, employer liability concerns, mass transit, virtual schooling and other safety concerns most tenants in our portfolio, particularly the larger ones anticipate a phased return after the New Year. That certainly remains fluid and we're tracking, but it seems like the larger tenants won't be phasing back in until next year. Second, we focused on portfolio stability as a top priority with particular focus on these items, rent collections already talked about and I think we're doing fairly well. Rent deferrals, we did frame that on Page 1 of our SIP we had a total $4.5 million of deferrals with $4.1 million scheduled to repay those deferrals within the next 18 months.
Now interestingly, to-date we've already collected 14% or $536,000 of those deferrals, including a $100,000 of early prepayments. So we certainly think that we're making some good progress there. Another key focus for us is strategic tenant outreach. Information, as you may expect is key right now, and we have an outstanding on-the-ground team of property and leasing professionals in all of our operations. Their top priority is being in close touch with our tenants, understanding their concerns, their transition plans and seeing where we can provide help.
As such, we've reached out to our entire tenant base with a particular focus on those tenants whose spaces roll within the next two years. The results of those efforts are framed out on Page 2 of the SIP and have resulted in 82 active tenant renewal discussions totaling over 920,000 square feet, that to-date have resulted in 45 tenants totaling 300,000 square feet executing renewals. These leases had an average term of 24 months with about a 2.6% cash mark-to-market and a sub 5% capital ratio. We certainly hope that as we get more clarity on the pandemic that over the next couple of months we can convert some of those ongoing discussions to executed renewals.
From a construction standpoint, nothing really more to update from last quarter. We continue to have construction activity in all of our markets. We have not programmed any further construction delays in our numbers and we are beginning to see with the exception of lumber and pressure-treated wood some downward pressure on construction costs as we're starting to see an overall shrinkage of forward construction pipelines.
And speaking of pipelines, our leasing pipeline stands at 1.6 million square feet including approximately 400,000 square feet in advanced stages of lease negotiations. As I mentioned, the overall pipeline increased by 331,000 square feet. This -- the expansion of the pipeline was driven by over 444,000 square feet of tours during the quarter, which as we noted is up 115% from last quarter. So signs in the market reawakening a bit.
From a liquidity and dividend standpoint, Tom will certainly talk about it some more detail, but the company is in excellent shape from a liquidity and capital availability standpoint as we've outlined on Page 3. After factoring in the full repayment of the Two Logan Square mortgage, we're still projecting to have about $530 million of our line of credit available by year end. We're also anticipating paying off the small mortgage during the fourth quarter of $9 million. We have no maturities in '21 and no unsecured bond maturities until '23 and have a very good 3.75% weighted average interest rate. Dividend remains incredibly well covered with a 56% FFO and a 76% cap ratio. And given those mortgage prepayments, we do anticipate that by the end of this year we will have a completely unencumbered portfolio with no wholly owned secured mortgages and no wholly owned mortgages going into '21.
Now to quickly look at our development investment opportunities. First of all, on the development front, all four of our production assets that's Garza and Four Points in Austin, 650 Park Avenue and 155 in Pennsylvania are all fully improved, fully documented, fully ready to go subject to pre-leasing. We are still actively marketing those, we have a good pipeline on those production assets. As you might expect, that's moving a bit slow, but tenants continue to look at new construction and upgrading their stock as part of their workplace return strategy.
405 Colorado remains on track for completion in Q2 of next year at a very attractive 8.5% cash-on-cash yield. We have a pipeline of almost 200,000 square feet on that project, again moving slow, but again we're pleased with the breadth of that pipeline. But we really don't expect a lot of significant decision-making to occur until we get more clarity on what's happening with the pandemic. 3000 Market, that's the 64,000 square foot life science conversion that we're doing within Schuylkill Yards, construction is under way. That building will -- is fully leased to Spark Therapeutics on a 12-year lease commencing later in the second half of 2021 at a development yield of 8.5%.
And looking at Broadmoor and Schuylkill Yards for just a moment. We are advancing Block A, which is a mixed-use block consisting of a 350,000 square foot office building and 340 apartment units that's going through final design and final approvals from the City of Austin. And we expect all those have to be accomplished by year-end. Within Schuylkill Yards, we continue a very strong push to the life science space. As mentioned last quarter and we've outlined in more detail in the supplemental package, the overall master plan for Schuylkill Yards is we can do at least 2.8 million square feet of life science space, so we have an excellent long-term opportunity to really create a scalable life science community.
3000 Market and the Bulletin Building were the first steps and their conversions to create a life science hub. We are also well into the design development and marketing process for a 500,000 square foot life science building located at 3151 Market Street. We have a leasing pipeline on that project totaling about 580,000 square feet and our goal is to be able to start that by Q2 '21 assuming of course market conditions permit.
Our Schuylkill Yards West project, which is our life science, office and residential tower is fully approved and ready to go, subject to finalizing our debt and equity structure, that project consists of 326 apartments and a 100,000 square feet of life science and office space. We currently have an active pipeline of over 300,000 square feet for those in commercial uses and based on this level of interest, we are contemplating starting that projects without a pre-lease.
Similar to our approach on 3000 where we looked at existing assets, we have commenced the construction and conversion of three -- floors three through nine within Cira Center to accommodate life science uses, that will be done in two phases. We have 34,000 square feet already pre-leased and we currently have a pipeline of 125,000 square feet.
Another interesting point on both Schuylkill Yards and Broadmoor that we can't lose sight of is that based on current approvals and the master plans in place between those two sites, they can accommodate about 5,000 multi-family units. On the equity financing front, we have an active ongoing dialog with a broad cross section of institutional investors and private equity firms. We continue to explore other asset level joint ventures in sales to both improve our return on invested capital, generate additional liquidity and provide growth capital for our development pipeline and these discussions, as you might expect, encompass both Broadmoor and Schuylkill Yards but also some of our existing assets.
Let me close on this one final point. As you know our normal practice for many, many years was to provide next year guidance during our third quarter earnings call. But these are not normal times, and as we discussed in our July call, we are not providing '21 guidance at this time. Although our Company's overall rent collections remained very strong, we have increasing visibility into our existing portfolio and even with the rent collections being the highest in the sector, we believe it's prudent to delay our '20 -- '21 earnings guidance and business plan until we have better visibility on the duration of the COVID-19 pandemic and its impact on the macro economy and in particular our markets.
Tom will now provide an overview of our financial results.
Thomas E. Wirth -- Executive Vice President, Chief Financial Officer
Thank you, Jerry. Our third quarter net income totaled $274.4 million or $1.60 per diluted share and FFO totaled $60 million or $0.35 per diluted share. Some general observations regarding the third quarter results. The results were generally in line with our second quarter guidance with the following highlights. Core -- property operating income we estimated $74 million, it came in slightly above that at $74.4 million, which was a good result.
Termination and other income. We expected that -- it ended up at 1.3 below projections, primarily due to the timing of certain anticipated transactions that we believe will occur in the fourth quarter. And then interest expense was also lower by $1.7 million over forecast, primarily due to the interest expense reduction from the loan assumption recapitalization of Two Logan Square, which resulted in a one-time non-cash reduction in interest expense totaling $2 million.
Our third quarter fixed charge and interest coverage ratios were 3.5 and 3.8 respectively. Most met -- both metrics improved sequentially as compared to the second quarter, primarily due to the Commerce Square joint venture. Both metrics exclude the one-time interest deduction -- reduction noted above. As expected, our third quarter annualized net debt-to-EBITDA started to decrease to 6.7, was primarily due to the sequential EBITDA remaining similar to the second quarter and the reduced debt levels from the Commerce Square joint venture.
Two additional reporting items. As Jerry mentioned, cash collections were 99%. Additionally, if we included third quarter deferrals, our core portfolio would have been very strong 97%. Collections for October are currently 97% however, one vendor payment anticipated to be received in the next day or so will bring us up to 95% -- 99%. Write-offs in the quarter were approximately $0.005 and primarily due to retail-related tenants. Same store, as outlined on Page 1 of our supplemental, we have included $1.1 million and $3.8 million of rent deferrals in our third quarter and year-to-date results. While not billed during the quarter, we feel that presentation will more accurately represent our current same store metrics with normalized going forward results not inflated by subsequent cash referral -- cash receipts, which is noted above is already starting to be collected.
Looking at the fourth quarter guidance. We have the following general assumptions. Property level operating income will total about $74 million and will be sequentially lower by about $500,000. The decrease is primarily due to the Commerce Square being in our numbers for part of the third quarter and they will not be in our numbers for the fourth quarter that totals about $1.5 million. Offsetting that decrease is a sequential increase in the portfolio, which will improve NOI by $1 million.
FFO contribution from our unconsolidated joint ventures will total $7.5 million for the quarter, which is up $0.3 million from the third quarter, primarily due to the full quarter inclusion of Commerce Square, offset by reduced NOI at our MAP joint venture. For the full year 2020, the FFO contribution is estimated to be about $20 million. G&A will be about $7 million for the fourth quarter and full year will be about $31 million. Interest expense will be sequentially higher by $0.8 million compared to the third quarter and will total $17 million for the fourth quarter. Capitalized interest will be $1.1 million for the fourth quarter and full-year interest expense will approximately $74 million. Of note, we repaid our mortgage at Two Logan during October. The mortgage payoff was approximately $79.8 million. That loan had an interest coupon of 3.98%. We anticipate an early prepayment of a wholly owned mortgage at Four Tower Bridge with an effective interest coupon of 4.5%. With those payoffs, we now have no maturities scheduled on our wholly owned books until 2023 -- 2022 for the term loan, I'm sorry.
Termination and other income, we anticipate that to be $4.5 million for the fourth quarter. That's up from $0.9 million in the third quarter. And net income leasing and development fees, quarterly NOI will be $2.6 million and will approximate $8.5 million for the year. There will be $0.5 million in the fourth quarter as it relates to land sales while we -- our $272 million gain represented 100% of the gain for reporting purposes, we only recognized 30% of that gain for tax purposes, and with some tax planning, we will not require a special dividend in 2020.
We have no anticipated ATM, additional share buyback activity scheduled. For the investments' guidance, no more incremental sales activity. With the acquisition of the land parcel being anticipated fourth quarter, we only have the building acquisition located at 250 King of Prussia Road for $20 million. It is scheduled to be acquired in the fourth quarter and held for redevelopment. No NOI will be generated in 2020.
Looking at our capital plan. As outlined, we have two development, redevelopment projects in our 2020 capital plan with no additional plans scheduled for the balance of the year. Based on the above, our 2020 CAD will remain in a ratio of 71% to 76% as lower capital will offset deferred rent that is repaid beyond 2020. Uses for the remainder of the year is $185,000, comprised of $25 million in development and redevelopment, $33 million of common dividends, $8 million in revenue maintaining capital, $10 million in revenue creating capital and the repayment of the mortgages at Two Logan and Four Tower Bridge as well as the acquisition of 250 King of Prussia Road.
Primary sources will be cash flow after interest of $45 million, use of the line of $68 million, use of our current cash on hand at the end over the quarter of $62 million, and $10 million in land sales. Based on the capital plan outlined above, our line of credit balance will be about $68 million. We also project that our net debt-to-EBITDA will remain in a range of 6.3 to 6.5. In addition, our net debt-to-GAV will approximate 38%, which is down sequentially from the 43% in the prior quarter primarily due to the Commerce Square joint venture. In addition, we anticipate our fixed charge ratio will continue to approximate 3.9 on interest coverage and will be 4 -- 3.9 on debt service fixed charge and 4.1 on interest coverage.
I will now turn it back over to Jerry.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Great. Thanks, Tom. So these are really not normal times as we all know. So let us close with a couple of key takeaways. First, our portfolio and operations are in solid shape with really increasing visibility into our tenants, their thought process, and what they're thinking about in terms of their return to the workplace. Secondly, with -- our deal pipeline continues to increase as those tenants begin to really think about their workplace return and us staying in touch with those tenants is key. Us outreaching to a lot of existing or new prospects is also very much a key part of our business plan. So we're happy to see our pipeline really increase during a pandemic and during the slow months of the summer.
In other observations, and we're hearing this directly from tenants both large and small, safety and health both in design and execution are rapidly becoming tenants' top priorities. And we believe that new development and our trophy-quality stock will benefit from that trend. And we're seeing the beginnings of that in the existing pipeline. Look, private equity and the debt markets have stabilized and are becoming increasingly competitive and strong operating platforms like Brandywine are really gaining significant traction for project-level investments. And then we'll end where we started, which is that we really do wish all of you and your families remain safe during these interesting times.
And with that, we'd be delighted to open up the floor for questions. And we ask that in the interest of time, you'll limit yourself to one question and a follow-up. Crystal?
Questions and Answers:
Operator
[Operator Instructions] And our first question comes from Anthony Paolone from J.P. Morgan. Your line is open.
Anthony Paolone -- J.P. Morgan & Co. -- Analyst
Okay. Thanks, and good morning, everyone. Jerry, I think last quarter you had talked about rents in the market generally holding up and you hadn't seen much diminution if any at that point. Can you give a little bit of color on where that stands today as you're getting deeper into the discussions of renewals and such with your tenants?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Certainly. Good morning, Tony, hope all is well. Look, we are continuing to see fairly good stability within our portfolio, and I think the harbinger of that or the look through the glass is really through the renewal program that we have. I mean, we're not really seeing any concessions that need to be made, kind of as a part of post-pandemic concerns. We're very much focused in terms of the pipeline increasing, the rental rates that we had in place pre-pandemic are still the ones we have in place today.
Certainly, in a couple of markets, like in Austin, for example, I know there is a lot of concern about the increase in sublease space down there, we can certainly talk about that. We haven't really seen any real erosion of rent yet. Certainly, the overhang of the sublease space might create that particularly in CBD Austin where there's more than 1 million square feet of sublease space available and the announcement the other day of partially Energy's acquisition could have an impact as well.
But in that case, Tony, we've been saying that on the 405 we have targeted kind of the mid-8% return on cost-free and clear there. We can reduce rents by more than 10% and still -- asking rents by 10% and still generate about an 8% return. But, George, why don't you amplify any things you're seeing throughout the portfolio?
George D. Johnstone -- Executive Vice President, Operations
Yeah. I think, Tony, the real evidence has been in the 45 early renewals that we've done. Even those deals albeit short in terms of averaging 24 months of extensions, still had a 2.6% increase in the cash mark-to-market. So I think even as it relates to the new deals as Jerry alluded to, the asking rents that we have, have been holding up. We haven't really seen that much pressure on that. I think tenants are a little bit more focused on what their TI dollars will get them in terms of building the space the way they want it to, ensure that they've got a proper capacity for workstation, turning radius within the space, etc.
Anthony Paolone -- J.P. Morgan & Co. -- Analyst
Okay, thanks. And then my second question is maybe a two-part on life science. I think it was last quarter you had mentioned converting 56,000 square feet of Cira, and I just couldn't tell if what you laid out in your comments is an expansion of that, conversion or if that was the same amount of space.
And then the second part of that, just would love to get some color on the nature of the tenants that would look at a converted space like that versus perhaps, wanting to go into a new build or more specific life science type building? Like, are they OK working with lawyers and accountants and stuff like that or is there a crossover with the pipeline you talked about for the Schuylkill development with the same pipeline that would go into this converted space? So any color there would be helpful.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Sure. And, Tony, you're right. I mean, in the first phase, that is why I mentioned two phases at Cira, the first phase around that 56,000 square feet that's the lower several floors. And then we are incorporating capacities due to conversion for the other floors as we need to work, see the market demand over the next couple of years. The pipeline of transactions we're saying on that really have not indicated any concern about it being and called a mixed-use commercial project at all. In fact, the -- any concern that might be there is really being more offset by the ability of us to deliver space fairly quickly. I mean a number of these companies looking for space in the very near term, which is really one of the catalysts behind doing this conversion, doing it on an accelerated basis. And we actually do view over time that, that original building we did at Cira Center will essentially be incorporated into the whole ecosystem we're creating at Cira Center.
Anthony Paolone -- J.P. Morgan & Co. -- Analyst
Okay, thank you.
Operator
Thank you. Our next question comes from Jamie Feldman from Bank of America. Your line is open.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Great. Thank you, and good morning. Can you talk more about the incremental 300,000 square feet in the leasing pipeline? Where is that located? It sounds like maybe a lot of that's at Schuylkill Yards, but just more color on where the incremental demand is?
George D. Johnstone -- Executive Vice President, Operations
Yeah, sure. Jamie, good morning, this is George. Just so we're all clear, when we talk about the volume of the pipeline that's always exclusive of our development and redevelopment projects. So Jerry did cover the Schuylkill Yards and 3151 Market Street pipelines in his commentary but the increase in the normal core portfolio. We had a very good quarter of touring activity, 444,000 square feet and a lot of that really was in both Philadelphia CBD and in the Pennsylvania Suburbs where we saw the largest amount of pipeline contribution. And we're also continuing to now see with the summer coming to an end, an elevated amount of touring activity at our 1676 International building in Tysons, so they probably had about 140,000 square feet of additions to the overall pipeline.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Okay. And then in terms of....
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
I guess, Jamie, on the development pipeline I think the -- Thanks, George, for that clarification for everyone. I mean, we do have a pretty good pipeline on our Schuylkill Yards project as it continue to grow. Pieces of that relate to a couple of the anchor institutions in University City. We're looking for some expansion. Despite I think some of the macro impact of the pandemic on some of those institutions are still -- they're still looking forward to increasing their market share and expanding their research capacities.
And then we have a variety of life science companies who are looking at both, Schuylkill Yards West and our 3151 project and within our Schuylkill Yards West project we have several life science companies, certainly but we also have a number of law firms and financial service firms that are also looking at Schuylkill Yards West as a new location.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Okay. And the 300,000 square feet, does that include renewals or that's all incremental demand.
George D. Johnstone -- Executive Vice President, Operations
It's all incremental. Yeah.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
So in case not met it would actually increase occupancy.
George D. Johnstone -- Executive Vice President, Operations
Correct.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Okay. And secondly, can you just talk us through the largest vacancies in the portfolio? I know you've got Macquarie and Standard Reliance to work on. And then just thinking about the expiration schedule, you got some big loss from expirations over the next I think, 16 months or so based on your schedule?
George D. Johnstone -- Executive Vice President, Operations
Yeah, sure. The large existing vacancies in the wholly owned portfolio are really at 1676 International in Tysons. And as I mentioned previously, we are starting to see some increase in the pipeline there. The Macquarie and Reliance vacancies at Commerce Square, which are now within the joint venture structure, no significant change obviously during this past quarter. We continue to do several spec suite builds on some of the lower floor space. We had leased part of one floor previously and have the balance of that floor now constructed for spec suites to have some hopefully, accelerated quickening occupancy.
Reliance, still a little bit early in terms of a true pipeline there but we're hopeful that as the fall progresses and post-election that we start to see some increased activity over there. The rollover schedule for 2021, really there are kind of four kind of larger ones to talk about. We've talked about most of, if not all of these in the past, but Northrop Grumman at 2340 Dulles. Our plan when that lease expires on 12/31 of 2020 is to shift it into either a redevelopment mode, continue to market the property to potentially sell and or JV it those plans are progressing.
We've had some preliminary inquiry about the building from the brokerage community, and so we continue to vet that. The second largest is IBM and a 199,000 square feet at Broadmoor in Building 5 that will come back to us on March 31st, and the plan is to then convert that building and its underlying land into the overall development planning at Broadmoor.
Third largest is Comcast. Four floors over at Two Logan Square 88,000 square feet. We have already back-filled one of those four floors. That was a kind of a deal that was a little bit of a quick hitter for us. They're going to take occupancy -- actually we're going to terminate Comcast a month early and immediately back-fill it with its replacement tenant. And again, where that lease expired we had close to a 30% mark-to-market on the cash rents with only a 10% capital ratio on a six-year deal. So again, I think that building being trophy-class and what tenants are looking for, we feel good about the prospects for the other three floors.
And then the last one is, some of the space over at Cira Center coming back to us and one of those is a full floor in that lower stack 27,000 square feet and that is part of our life science conversion that Jerry just spoke to.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Okay, thanks. That's very helpful. So just to confirm, when does the Comcast expire?
George D. Johnstone -- Executive Vice President, Operations
Natural expiration is 2/28/21 and one of those four floors we will terminate a month early.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Okay. And then do you have any updates on the Dechert, Blank Rome and Baker leases?
George D. Johnstone -- Executive Vice President, Operations
Yeah, continuing to negotiate with all three of them. Active dialog. No pen to paper at this point but expectation is that we should be able to retain a good portion of those tenancies. And again, those are all in our 2022 expiration timeframe.
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Okay, great. Thank you.
George D. Johnstone -- Executive Vice President, Operations
Thanks, Jamie.
Operator
Thank you. Our next question comes from Steve Sakwa from Evercore ISI. Your line is open.
Steve Sakwa -- Evercore ISI -- Analyst
Thanks. Good morning. Jerry...
George D. Johnstone -- Executive Vice President, Operations
Good morning.
Steve Sakwa -- Evercore ISI -- Analyst
Noticed that many of your assumptions didn't change obviously for the year end 2020. I would guess the one that jumped out at me was the percent leased I guess on the core portfolio of 94% to 95%. So I'm doing the math right, that sort of implies 275,000 square feet of absorption from a leased perspective not necessary in occupancy perspective.
And I think you mentioned that you did about a 100,000 square feet of absorption in Q3. So just kind of walk us through sort of how you're going to achieve that lease percentage just given the softness in the leasing environment.
George D. Johnstone -- Executive Vice President, Operations
Yeah, sure. Steve, this is George. Let me take that -- take the first crack at that. Again, I think part of the reason we still feel that, that range is attainable is kind of the strength of the pipeline. We also have a couple of fourth quarter of '20 expirations where we're in advanced dialog and actually have a couple of leases signed, so that when those fourth quarter vacates occur, the backfill is there but because it's not vacant today, it does not hit our pre-lease statistic. So again, I think -- again the pipeline at 1676 some of that looks promising, and we're hopeful that we have a productive remainder of the fourth quarter to get some of these deals across the finish line.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yeah. And as George mentioned and it was in our comments. I mean, a good portion of that is coming out of the pipeline activity we have, which is we have a number of tenants who're in advanced stage of negotiations as well. So when we kind of risk assess that we thought we still had a pathway to get to that number.
Steve Sakwa -- Evercore ISI -- Analyst
Great. And then maybe, Jerry, just to kind of circle down on Austin in 405 Colorado, I realize it's still maybe three quarters out from completion but maybe just talk a little bit about the 200,000 square foot pipeline is -- are those tenants really kind of all in the market with existing kind of upcoming aspirations? Is there anybody kind of new or expanding in the market to take that? And then, you did mention kind of the increase in sublease space. I'm just curious, the competitive nature of the sublease against new construction.
George D. Johnstone -- Executive Vice President, Operations
Yeah, Steve, great question. And look, the pipeline, which as you said, about 200,000 square feet now has a number of tenants that have been in the pipeline for the last couple of quarters, a couple of law firms and several financial service firms. We're talking to a couple of technology companies and look, one of the things with 405 is the fairly small floorplate building, very highly amenitized with one whole sky lobby floor and over 2.5 per parking on site, which is a rarity in the Austin CBD market.
So we're very focused on getting some of those leases put away or some of those prospects translate the lease execution in the next couple of quarters. The curtain wall in the building is substantially done, some of the interior finished work is starting, so while we're still doing hard hat tours, the hope would be by December, we'll be able to actually get people through in a more of kind of finished way and we think that will certainly generate some activity.
So the leasing team is very encouraged by the increased level of activity that we're seeing there. Obviously, we're all frustrated with the pace of how that pipeline progresses. And I think, Steve, as we look at it, we're still -- our proposer is still out in the mid-40 range, rental rate range with the same level of concession packages that we had programmed. And I think one of the things that we don't really necessarily see that there could be downward pricing pressure what we're seeing now.
But when we look ahead to the amount of sublease space and frankly the gap between sublease rates, existing building rates and the new building rates, we think there could be some downward pressure, which is why we're certainly flexing our financial model that even if we went up reducing our proforma rents by 10%, we're still able to deliver about an 8% yield. But the major upstart [Phonetic] right now is -- from a leasing standpoint is let's get a few more of these leases signed and across the finish line we think that will build some momentum as the Austin market continues to open back up.
Steve Sakwa -- Evercore ISI -- Analyst
Great. Thanks.
Operator
Thank you.
George D. Johnstone -- Executive Vice President, Operations
Thank you, Steve.
Operator
And our next question comes from Manny Korchman from Citi. Your line is open.
Emmanuel Korchman -- Citigroup -- Analyst
Hey. Good morning, everyone.
George D. Johnstone -- Executive Vice President, Operations
Hey, Manny.
Emmanuel Korchman -- Citigroup -- Analyst
Jerry, maybe just spending a little bit more time on life science. It's been a space that we've seen a lot of owners and developers talking about converting or building new space in, yourself included. So just wondering maybe specifically for Schuylkill, if you think about just the supply picture, where else might there be competitive supply that comes up in either existing or new product? And from the demand you're seeing, are those tenants that you think end up in that greater Philadelphia market or are these tenants that might have national pursuits and they're trying to figure out where they end up?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yeah. Thanks, Manny. I'll answer the best I can. The -- we do view that the competitives that we have in Philadelphia for life science is -- the University City Science Center, which again is about 8 blocks west of where we are at FMC Tower. And there is also the Discovery Center in the Pennsylvania suburbs, which is a privately owned former GSK facility that's being converted to more up-to-date life science use. There is one building in the East Market Street, Calder, an older building that they are positioning some of their vacancy to be life science, and that building is in close proximity to Jefferson University Health Care System, so they have the basis for some demand drivers there.
We -- when we look at the competitive set, number one, I think they're all good and high-quality competitors. I think what we can deliver is a better location and a very good high quality and efficient design. Most of the tenants that we are talking to, Manny, to go to your, I think your second question, I think the bias is they would always rather be in new-build and I think that's why we're seeing such a great upsurge in activity on both Schuylkill Yards West and our 3151 project.
The challenge on that new build is that it takes 24 to 36 months to actually deliver the space and a number of these tenants are facing near term requirements that they need to fulfill rather than wait for that. So one of our objectives as it really was with 3000 Market Street was to kind of create some near-term space deliveries that would be attractive to other -- to some of those life science tenants in our pipeline. For better or for worse, we wind up leasing that buildings entirety to Spark Therapeutics who had a real near-term demand and that's when we pivoted to Cira to take a look at that from an engineering design load, HVAC standpoint, to see what the conversion cost there would be in the lower bank.
Fortunately, we've built in a lot of design flexibility when we built that building years ago, so the costs aren't prohibited by any stretch. So we're able to present 30,000 foot floorplates to some of those tenants and be in a position to deliver that by the second half of 2021, which has a lot of value. But I think we do view that life science is one of the real green shoots in the Philadelphia region and not just being driven by the major anchor institutions as it has historically been, there are a number of tenants on our pipeline that are new entrants to the Philadelphia marketplace.
I think the first-mover advantage that Philadelphia has generated in cell and gene therapy and the continued massive investment by University of Pennsylvania Health Care Systems, Wistar Children's Hospital of Philadelphia as well as the -- and augmented by the increase in NIH and venture capital funding, I think has really created a solid springboard here for locations like Schuylkill Yards to really have the opportunity to create something that's scalable and attractive to these companies in terms of its creating an ecosystem with some durability.
Emmanuel Korchman -- Citigroup -- Analyst
Thanks, that's great color. In the past, when we've spoken to life science developers, there has been some hesitation to do mixed-use, especially with residential. Have you seen that sentiment change? Are people willing to either live in a life science building or are life science tenants willing to be in a building that's partially residential?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yeah, it actually depends on the composition of what that life science company is doing in the building. So if it's a lot of Level 1 work, it's not too concerning at all to the life science company, and in the case of like Schuylkill Yards West, Manny, to go to your point specifically, there the -- there's separate lobbies for all of those uses. So there is a level of privacy and confidentiality that we've built into the design of the building to make sure that there's not that concern about a resident walking into a lobby with white coats or vice or a whitecoat walking into a building with someone walking their small dog.
So the -- I think you can design some of that segregation into the building, which we've done with Schuylkill Yards and there again, the commercial component is only about 200,000 square feet and we're only really anticipating about 100,000 square feet of that to be a combination of life science/research labs. The balance we think will be a locked office space. And then certainly, a dedicated life science building we're dealing with larger tenancies there that are looking -- and larger floorplates, they're looking for a dedicated life science component.
Emmanuel Korchman -- Citigroup -- Analyst
Right. And then last one for me. Just can you talk about what you're seeing in terms of multifamily rents and demand in Philly market?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yeah. Actually, they're holding in there very well. There really has not been a lot of downward pressure, particularly at the higher end of the curve. So we've just completed our kind of monthly market survey and the feedback across both existing stock projects under construction are still very much in line with what our pro forma assumptions are. I think we're also -- we are planning down -- there could be a slight slowdown in rental rate growth and maybe a marginal increase in concessions going in. So we have already built that into our Schuylkill Yards West pro forma. But right now, it seems like the fundamental demand drivers seem to be in pretty good shape.
Emmanuel Korchman -- Citigroup -- Analyst
Thanks, Gerard.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Thanks, Manny.
Operator
Thank you. Our next question comes from Michael Lewis from Truist. Your line is open.
Michael R. Lewis -- Truist Securities, Inc. -- Analyst
Thank you. So this morning, the Philadelphia Business Journal posted a story about rising vacancy and sublease space in Center City, sharply about leasing activity. I was wondering your thoughts on a 30 year portfolio roughly is Philly suburbs, do you think some of this maybe meant from Center City to Philadelphia suburbs or do you think, where we stand right now this is just evidence of weak demand, overall weak demand of where we are right now.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yeah. Hi, Mike. I hope you are doing well. The -- George and I will tackle this. Well, I think when we've looked at the sublease inventory in Philly, I think the answer to it, we're pretty pleased with it. I mean the numbers are fairly low. I mean in the city where we're talking about is CBD sublease space of in Class A about 320,000 square feet, which really hasn't moved all that much with the largest block being 30,000 square feet. University City, less than 30,000 square feet of sublease space, the Pennsylvania suburbs have stayed in and around that 500,000 square foot mark, which really given the size of the inventory base is fairly small and in none of those three markets have we really seen any big uptick since the crisis began?
At one level, I think the world knows the office markets are in a bit of a pause and a pause can simply be a pause without it being an Armageddon. I mean, if you think about what's going on in the world, so many folks are focused on visitor folks and things other than just their office platform right now. They are concerned about distance and public policy, mass transportation, children getting back to school. So we are -- that's why I feel pretty optimistic that our leasing team and our regional heads, I mean they're -- we're talking to tenants, brokers, political leaders, community leaders on a daily basis to try and get as good a window into what's happening as possible. And I think frankly, Philadelphia will prove that its resiliency in challenging times as we look out over the next couple of years whereas on the upside, we either grow as fast, we tend to be fairly stable when things get slower.
To get to your other question, we really haven't seen, and I'll defer to George, but we haven't seen any real significant movement, Michael, from CBD down to the suburbs or vice versa. But, George what do you say?
George D. Johnstone -- Executive Vice President, Operations
Yeah, I think most tenants and companies are just evaluating any and all options but have been somewhat slow to pull the trigger on any. So I think the sublet prospect is one where it's -- should we test to see if there is some demand for some of our space. And -- but again, we've got kind of the best of both worlds that we've got this Center City and the suburban locations and even within our own portfolio, we've yet to really see anybody say, hey, can I do something out in the suburbs even on a short-term basis to maybe allow me to get more people into the office and not have to worry about mass transportation or other concerns they might have about longer commutes because of home schooling, etc. So, well, I think the more visibility we get on the pandemic each and every day, I think you'll start to maybe see some companies start to make some of those decisions. And again, as I said I think given our inventory locations, we've got an opportunity to kind of capture some of that whether it's city like out of the suburbs or vice versa.
Michael R. Lewis -- Truist Securities, Inc. -- Analyst
Okay, thanks. And then my follow up is kind of a big picture question as well and maybe Jerry already answered it, but I'm going to ask it anyway because I think investors are less concerned about the next few quarters and the stocks are kind of pricing off of what people think the permanent impacts of this may be. So would you say -- do you think we have any more clarity on office demands long term versus a quarter ago or less because I hear you on the pipeline activity and the tours are up and we've had some pass at the time. But on the other hand, we still have the low physical occupancy. Labor Day came and went, now we'll see what happens next year. What do you think about kind of the range of outcomes and the clarity we have into whether the office business is now whatever -- to take the trajectory and now it's that trajectory minus 10% or whatever it is. How do you kind of think about the long term?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yeah, it's a great question and certainly it's something we're spending a lot of time as a team and as a Board thinking about. Look, I think we still remain very optimistic and I gave you a couple of data points probably since the last quarter. I think the longer this is going on, I think the more we are hearing consistently across our office base that they can't wait to return to the office. So to go to your -- Michael, your observation on kind of the low level of occupancy, you can never dismiss the fact that public policy at this point is paying a fairly large role in what tenants want to do. That public policy has a couple of different elements to it.
One is, like for example here in Philadelphia, the city public health guidelines are that if an employee can tele-work, it's feasible for them to tele-work, they must tele-work. So employers don't really have the public policy stamp of approval to be bringing people back into the office except on a very voluntary and a very essential basis. And we're seeing that certainly with the dissonance in Texas between the state and the city governments.
So that is a bit of a gating issue for people bringing their tenants back in. This question of employer liability is a big issue as well as the issue of mass transit. So I think there are other factors besides people not wanting to come back to the office, enjoying working from home that is preventing these comps from ramping up their occupancies. So that is one point and I think another point is that certainly from what we're seeing and again it's early in the stage, but we are certainly seeing that while there could be a cyclical decline in office demand, we think the compensating factors there will be the replanning and redensification of space.
I think one of the brokerage firms had a report, they were thinking maybe about a 10% decline in office demand on a gross basis, but about 5% of that would be made back up through the redensification of space. We are going for a number of space planning exercises with some of our existing tenants and topic one on their mind is how they create work space area for each of their employees with greater circulation patterns.
Whether that's a durable trend or it goes away when the vaccine comes along, we don't really know but I think the signs are very encouraging that one the downward pressures on office over the last decade has been this condensing of workspace I think that trend, which had been slowing anyway is certainly going to go in the opposite direction for the foreseeable future. And yes, there is more and more studies coming out for both small and large companies that continued remote work is having a significant adverse impact on productivity.
And human nature being what it is, I mean we're actually seeing now in our some of our tenants is, when the leadership of the company comes back to the office, the people that work for those leaders typically want to come back as well. So you have that whole social dynamic and team effort taking place. So we still remain pragmatically optimistic that the office market will return to some level of stability as the pandemic starts to ease and we also do think and we firmly believe this is that there will be a greater emphasis on higher quality, well maintained stock owned by well-capitalized landlords and I put our public company peers in that category with us. We tend to own the best space in the market, we tend to run it in a very, very professional, proactive manner with great tenant outreach programs. What used to be points about HVAC, etc. on Page 15 of an RFP, they're now Page 1. And I think companies like Brandywine are really resonating quite nicely. Hope that answers your question. I apologize for going a little too long.
Michael R. Lewis -- Truist Securities, Inc. -- Analyst
No. That's alright. Thank you.
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, thank you. Just a follow-up on your last point, Jerry. For those types of core office buildings, transaction volume it's clearly fallen off. But I'm curious in the conversations you're having, if there's been any noticeable differentiation between your markets and how the office values are changing?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yeah. Hey, Daniel, how are you doing? Look, we were really pleased to have been able to achieve the venture financing at Commerce Square. We thought that resonated very well from a -- us being in the market with a fairly large value-add transaction in Philadelphia and I think we got some very good response to it and I think we executed a very good deal.
I think as we're looking at other types of venture opportunities whether it's on our development projects or on existing stock I think, while private equity and institutions are really coming back into the real estate market and in some sectors much more aggressively, in the office sector there still is a prevailing house view that most office investments are on hold until we get clarity post pandemic.
So just the same question, Michael asked and a lot of other folks ask about what's going to happen with office, until there is more clarity on that I think the bidding pool for office assets will be a bit narrower than some of the other asset classes. I think projects that have shorter average-weighted term lease renewals or value-added component will face an even narrower set of investors. But I think generally on the office side, I think you've seen a couple of trades take place where there is long duration credit backed lease structures that have been done at very low cap rates.
Or a lot of those investors are really looking at a credit stability situation compared to bond yields. And I think that will continue to create overall downward pressure or stability in office cap rates. And I think where you'll see a bit of an increase in overall cost of capital on kind of more value-add components temporarily. I think once the market has some visibility in terms of where the demand drivers are, that gap could close as well.
Daniel Ismail -- Green Street Advisors -- Analyst
Great, thank you. And then last one for me. Going back to the leasing pipeline. I don't believe you gave details regarding the composition of the pipeline in terms of industry based? And if you've noticed any more or less activity from any specific industries outside of life science within that pipeline?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yeah. Again, the pipeline in the core portfolio but for those couple of floors over at Cira Center where we're doing the lab convert or a life science conversion. Everything else would be traditional office use. And yeah, the composition of the pipeline really hasn't varied too much from kind of the existing composition of the portfolio. So we're seeing law firms, professional service and the like, so I can't say that there's any one rising or declining industry at this point.
Daniel Ismail -- Green Street Advisors -- Analyst
Fair enough. Great. Thanks, everyone.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Thank you.
Operator
Thank you. And our next question comes from Bill Crow from Raymond James. Your line is open.
Bill Crow -- Raymond James -- Analyst
Thanks. Good morning, Jerry.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Hey, Bill.
Bill Crow -- Raymond James -- Analyst
I think out of all things -- all the things you've talked about today the most surprising to me was the 8% return to the office level in Austin as -- kind of, think about Texas being more open than other markets and you referred to kind of local policy issues. That's about half the rate of New York City and lower than San Francisco. Is it a tenant issue? Is it a portfolio issue? Is it a regulatory issue? And does it suggest that maybe there will be a more permanent impact in the Austin market or maybe some other markets?
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Yeah. Bill, it's a great observation and thanks for the prompt because I should have mentioned it during our comments. One of the reasons Austin is so low at 8% is that IBM, who is a major tenant of ours down there is not coming back until after the first year. So if we excluded IBM and their square footage from that Austin calculation we're back into the mid-teens.
So I think the -- Austin, I think wound up being one of those cities that had opened up early then had some other -- had some surge issues, reduced or kind of retracted back some of that progress and now is on the way back. So I don't think it's -- when I looked at the numbers with -- after factoring IBM and frankly look, we're taking up some other large tenants like Comcast to Lincoln Financial. Those companies are being much slower to come back than the smaller companies and our average tenant size is less than 10,000 square feet.
The smaller companies come back much faster. But when you look at macro level stacks of square footage of occupancy, the big users are big users, so they have a big impact. But look, there is dissonance in every marketplace on public policy and what the public health experts and political leaders and other folks are saying in terms of when it's safe to come back, you're seeing a different level of ramp-up of mass transit agencies that is having an impact on workforce return in these major urban areas. But thanks for raising that point on Austin, because the 8% is really -- it does not reflect the composition of our portfolio down there.
Bill Crow -- Raymond James -- Analyst
And you wouldn't anticipate that IBM would be more inclined to make permanent changes than your typical tenant, it sounds like.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
No, not at all. In fact I think the larger tenants are the ones that are indicating they want to try and get back and even faster. They -- just for a variety of issues they're dealing with within their own employee base are being slower to come back.
Bill Crow -- Raymond James -- Analyst
Got you. Thank you.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Thank you, Bill.
Operator
Thank you. And that does conclude our question-and-answer session for today's conference. I'd now like to turn the call back over to Jerry Sweeney for any closing remarks.
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Great. Crystal, thank you, and thank all of you for participating in the call. Again, stay safe, stay well, stay engaged and we look forward to updating you on our business plan on our year-end call. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 68 minutes
Call participants:
Gerard H. Sweeney -- President, Chief Executive Officer and Trustee
Thomas E. Wirth -- Executive Vice President, Chief Financial Officer
George D. Johnstone -- Executive Vice President, Operations
Anthony Paolone -- J.P. Morgan & Co. -- Analyst
Jamie Feldman -- Bank of America Merrill Lynch -- Analyst
Steve Sakwa -- Evercore ISI -- Analyst
Emmanuel Korchman -- Citigroup -- Analyst
Michael R. Lewis -- Truist Securities, Inc. -- Analyst
Daniel Ismail -- Green Street Advisors -- Analyst
Bill Crow -- Raymond James -- Analyst
