I'd only consider the mortgage interest as an addition expense, so rather than $16,776 per year of additional expense, it'd instead start out at an annualized $11,400 in the first month, and steadily drop over the next 359 months (assuming 30 year mortgage).

So your expenses would be $51,400/yr (and the mortgage interest portion of that would drop a little every month), or $1.285M needed, covered by your now $1.3M retirement portfolio. Yes, you would be drawing down $56,776 from your portfolio that first year, but about $5,400 of that initially would really just be a conversion from the stocks/bonds you had in your portfolio into real estate (1 undiversified property, yes, but you'd certainly have more diversification than if you kept the house paid off with all $300k tied up in it).

In other words, as long as the mortgage rate is less than or equal to your withdrawal rate, the numbers would match up, with the added complexity that you're obligated to convert a small portion of your stocks/bonds into real estate each year (initially 0.4% of your total portfolio per year, ramping up to 1.2% per year by the end of the 30 year mortgage, assuming your portfolio stays around $1.3M; obviously history says its more than likely to grow over 30 years even after withdrawals). And you would likely still come out ahead even if your mortgage rate exceeds withdrawal rate, given the likelihood that you're portfolio grows faster than your withdrawal rate.