Brandywine Realty Trust (BDN) 2012 Q4 法說會逐字稿

Good morning. My name is Latangie and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust fourth-quarter earnings conference call. (Operator Instructions).

I would now like to turn the conference over to Mr. Jerry Sweeney, President and CEO of Brandywine Realty Trust. Please go ahead, sir.

Latangie, thank you very much. Good morning, everyone, and thank you for participating in our year-end 2012 earnings call.

On today's call with me are George Johnstone, our Senior Vice President, Operations; Gabe Mainardi, our Vice President and Chief Accounting Officer; Howard Sipzner, Executive Vice President and Chief Financial Officer; and Tom Wirth, our Executive Vice President, Portfolio Management and Investments.

Prior to beginning, I'd like to remind everyone that certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the 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 filed with the SEC.

To start our call, as is our normal practice I'll provide an overview of our three key business plan components of operations, balance sheet, and investments, as well as some color on recent transactional activity. George and Howard will then discuss the operating and financial results in more detail.

The macro economy remains the focal point in our thinking. Uncertainty remains a concern. Tenants do remain cautious on the near-term economic picture. However, generally speaking, our portfolio remains the beneficiary of tenants' flight to quality product, as is evidenced by our strong trend lines and operating metrics, as well as our moderating capital costs.

In looking at operations, 2012 was a very good year. The leasing momentum we built in the year is improving our operating metrics across the board, and we ended the year at over 88% occupied and over 90% leased. Positive pricing dynamics remain in several key markets, with strong performance particularly in several of our Pennsylvania suburban locations, CBD Philadelphia, and Austin, Texas. In addition, our operations in metro DC and New Jersey have clearly troughed and are on the path to recovery.

Retention rate for the quarter was the highest of the year at 74% and moved our overall 2012 retention rate to over 66%.

We also improved our mark-to-market on both new and renewal leases and our 2012 mark-to-market was much better than our original business plan forecast.

Capital costs continue to moderate, and we are in a much better position closing out 2012 than in 2011. We averaged capital costs of $2.10 per square foot per lease year for the fourth quarter, and our 2012 full-year number was $2.61, right within our target range.

Our same-store number for the quarter was particularly strong. For the year, we had positive same-store growth on a GAAP basis of 2.9% and 1.8% on a cash basis, which has established a very strong platform as we move into our 2013 business plan execution.

During the fourth quarter, we also had over 2.9 million square feet of inspections, which is also up year over year.

Another key positive as we look at 2013, and certainly 2014 and beyond, is our low level of [lease] rollover. For 2013, we have just 1.8 million square feet remaining to renew, which is about 7% of our portfolio, our lowest level in over seven years.

In looking at our balance sheet, we had a very active fourth quarter. From a forward liability debt management standpoint, we are in extraordinarily good shape. The overall objective of our fourth-quarter transactions was to lengthen our maturity profile, reduce our average weighted cost of debt, and increase the size of our unencumbered pool, and on each of these metrics we were successful.

Our average weighted maturity moved from 5.8 years to 6.4 years, an improvement of 10%. We reduced our weighted average debt costs by 24 basis points and we increased the size of our unencumbered pool to 86% of assets, which is the strongest in the Company's history.

All of these capital market transactions are outlined on page 8 of our supplemental package.

Reducing our debt levels below 40% and achieving a 6.5% EBITDA ratio, if not lower, remains a core objective. The pursuit of this objective is amply evidenced by the recently announced sale of Princeton Pike Corporate Center. When this sale closes, we'll eliminate our year-end line of credit balance and provide for further debt reduction.

Liquidity for the Company remains extraordinarily strong. Strong operations are driving continued improvements to our financial metrics, and rigorously adhering to our deleveraging path remains a primary objective.

On the investment front, we achieved our 2012 sales target, having sold $176 million at an overall disposition cap rate of 7.1%. Also during the year, we acquired $76 million at an average cap rate of 8.5% on a cash basis, thereby achieving our objective of being a net seller approaching $100 million.

From a joint venture standpoint, during the year we invested $22 million in our Allstate joint venture to acquire Station Square, a $120 million 500,000-square-foot project in silver Springs, Maryland.

Now turning our attention to 2013, we do expect tenant activity levels to remain strong and consistent with our expectations in all of our markets and we've had very good success since our last call. As George will touch on, our 2013 leasing plan is already 66% executed.

We are targeting a year-end 2013 occupancy target to be 90%, a 200 basis-point increase over where we stood at the end of 2012, with most of that occurring in the second half. We expect our 2013 retention rate to be 62%. And we do anticipate very strong same-store numbers with a GAAP range between 3% to 5% and a cash range between 4% and 6%. Capital costs for the year are projected to run around 12% of revenues, well within our targeted range, resulting in another year of strong CAD coverage.

Our 2013 business plan does not contemplate any capital market activity. During the year, we will continue our path to achieve our interim debt to GAV target of 40% and EBITDA multiple of 6.5 as we work towards our longer-term target of mid-30% debt to GAV and below 6 times EBITDA.

For 2013, we remain optimistic and track the interest rate climate with the overriding objective of continuing to reduce our cost of debt capital, reducing floating-rate exposure, as well as continued lengthening of our debt maturity profile. Our 2013 plan does not contemplate any common equity issuances. As evidenced by our accelerated sales program, we continue to believe that our best source of equity is simply selling non-core assets.

The final component of our 2013 plan is accelerated growth through our investment strategy. That focus remains on increasing our urban and town center concentrations. The sale of our central New Jersey asset evidenced that shift. That sale of Princeton Pike reduces our exposure to New Jersey to 6% of revenues, which is down significantly from several years ago and very illustrative of our shift to urban and town center metro markets.

Looking ahead, more capital sources are focused on office space. This appetite is driven by the low rate environment, emerging visibility on economic outlook, and relative yields. Our 2013 plan originally contemplated us being a net seller of $100 million. We are increasing that to $221 million, giving improving fundamentals and increased investor focus.

The Princeton Pike sale of $121 million is the first step in that execution. That sale occurred at approximately an 8.5% cap rate and $150 per square foot. We anticipate that the remaining $100 million of dispositions will occur in the second half of the year at a targeted 8% cap rate.

The plan right now does not incorporate any acquisitions, and to the extent we find any, they will be financed by additional sale activity.

In looking at some other activity, recall that our land investment is around $102 million. We did add in the supplemental package on page 34, a land summary schedule, to provide more visibility so you can readily track our activity in this area. Our goal remains either selling outright or effectively monetizing about 35% of that value. We did achieve $15 million of that during 2012 with the Toll Brothers joint venture at Plymouth Meeting.

Yesterday, we did announce another step with our Cira Centre South joint venture with Campus Crest and Harrison Street. Our 30% ownership stake puts Brandywine overall equity requirement at approximately $18 million, of which about 50% of that is coming from our land contribution. This project represents the next phase of our Cira South development. We expect a delivery date in Q3 of 2014, with an initial return on cost of 7% and a first full stabilized return of 8%.

In a broader sense, there's no question that markets change and tenant appetites evolve. Our internal review program is continually focused on ensuring that we realize optimal value for every single piece of real estate we own.

As part of that process, we've determined that two of our New Jersey assets have a higher value proposition by being converted to mixed-use developments. Both properties are older office products that are part of a larger local Brandywine business park with available land providing an opportunity for mixed-used development. Achieving the necessary rezoning to create this value will take between 12 to 24 months, and based on our economic and zoning analysis, both buildings have been removed from inventory. Both projects have a very low basis, enabling us to move in this direction and create significant upside through the entitlement process.

While these two projects are somewhat unique within our portfolio, it does reflect our recognition that obsolescence and market shifts can affect the ongoing value of certain of our assets. And we have identified these projects as re-entitlement properties on page 32 of our supplemental package.

At this point, George will provide an overview of 2012 operational performance and then turn it over to Howard for a view of our financial activity.

Thank you, Jerry.

We continue to see good levels of leasing activity from space inspections to pipeline to lease executions. In terms of pipeline, we saw an increase in the overall pipeline of 277,000 square feet during the quarter, resulting in a total pipeline of 2.8 million square feet, 646,000 square feet in active leasing negotiations, with the balance all [entertaining] a proposal.

During the quarter, we signed 993,000 square feet of leases, including 545,000 square feet of new and expansion leases and 448,000 square feet of renewals. This resulted in total lease signings for 2012 of 3.7 million square feet.

Tenant decision-making remains relatively unchanged. Leases executed in the fourth quarter averaged 94 days from initial inquiry to lease execution, as compared to 98 days in the third quarter and 103 days in the second quarter.

Lease commencements totaled 723,000 square feet, including 422,000 square feet of new leases, 248,000 square feet of renewal leases, and 53,000 square feet of tenant expansions. During the quarter, we also had 99,000 square feet of tenant moveouts upon expiration and 58,000 square feet of early terminations. Absorption for the quarter was 318,000 square feet, and we ended the year 88% occupied.

We also have 509,000 square feet of executed leases on space that was vacant at year-end, thus our 90% leased level. We're encouraged by the leased levels we were able to achieve in Richmond at 89%; New Jersey/Delaware at 88%; and metro DC at 86%. This level of achievement is a testament to our regional leasing teams.

Leasing spreads for the quarter were positive 2.8% on a GAAP basis and negative 4.1% on a cash basis. Leasing capital for the quarter was $2.10 per foot per year on a weighted average lease (technical difficulty) of six years. All other business plan operating metrics for 2012 were in line with expectations.

Turning now to 2013, we're maintaining all of our original business plan operating metrics. We've achieved $28.9 million, or 66%, of our $43.9 million spec revenue target. This compares to 33% achieved last quarter and 64% achieved this time last year. Of note, we are 71% achieved in metro DC versus 51% a year ago. And Richmond is 45% achieved versus 35% this time last year.

Occupancy will increase to 90% during 2013 from 1.6 million square feet of renewal leases, 2 million square feet of new and expansion leases, offset by 275,000 square feet of known and anticipated early terminations. These early terminations are a combination of lease rights being exercised by tenants and landlord-negotiated terminations to accommodate existing tenant growth. 79,000 square feet of this early termination space has already been re-leased.

We've executed 947,000 square feet of our 2013 renewals. Of the remaining 653,000 square feet remaining in the plan, the single largest lease is 45,000 square feet. Leasing spreads will range between 3% and 5% on a GAAP basis and negative 1.5% to positive 0.5% on a cash basis.

Leasing capital will range from $2.25 to $2.75 per square foot per lease year. Our CAD ratio in 2012 was 75% versus 105% in 2011. The continued focus by our regional leasing teams on controlling capital will enable this favorable trend to continue into 2013.

These leasing assumptions and trends will translate into same-store NOI growth between 3% and 5% on a GAAP basis and 4% to 6% on a cash basis, both excluding termination fees and other income.

Metro DC and New Jersey/Delaware will generate cash same-store growth in excess of the upper end of this range as a result of improved occupancy levels. Austin is generating double-digit cash same-store growth as a result of rent growth.

Our regional leasing teams are also focused on extending lease maturities. To date, we have executed early renewals on 486,000 square feet of our 2014 expirations, including our two largest, KPMG in Tysons and Drinker Biddle in Philadelphia.

To conclude, we remain encouraged by the level of activity in our various markets, the quality of our inventory, and the achievement thus far in our 2013 business plan.

At this point, I'll turn it over to Howard for the financial review.

George and Jerry, thank you.

Core FFO totaled $48.2 million for the fourth quarter of 2012, or $0.33 per diluted share. Our core FFO payout ratio is 45.5% on the $0.15 distribution we paid in October 2012 to common shareholders. We derived fourth-quarter 2012 core FFO by adding back $27.1 million of capital market and transactional items to our $21.1 million NAREIT FFO calculation.

Core FFO provides a better sense of our FFO run rate by eliminating transactional activity. For comparison purposes, we have applied this methodology retroactively to each of the eight quarters and the full-year periods in our supplemental package on page 16.

I'd like to make the following observations regarding our fourth-quarter results. Our FFO is generally of a high quality with termination revenue, other income, management fees, interest income, and aggregate JV activity, including the direct financing obligation, totaling $7.1 million gross, or $5.7 million net, in line with our targeted 2012 quarterly run rate.

Our NOI and EBITDA margins at 60.5% and 63.2%, respectively, remain at or near their highest levels for these metrics all the way back to early 2009. Our same-store NOI growth rates were 4.7% GAAP and 4.5% cash, both excluding termination fees and other income items. We've now had six consecutive quarters of positive results for the GAAP metric and three for the cash. At 2.9% and 1.8% respectively for the full year, we met our upwardly-revised 2012 targets of 2.5% to 3% GAAP and 1.5% to 2.5% cash.

Fourth-quarter G&A increased to $7.2 million versus our $6 million run rate, due to $460,000 of transaction expenses included in the G&A line item and accelerated deferred comp costs and other adjustments from an officer departure.

Our fourth-quarter interest expense of $33.2 million ticked up a bit from $32.6 million in the third quarter, as we had a few brief periods where double debt was outstanding pending repayments. The capital market moves we made in the fourth quarter will have a beneficial impact on our 2013 interest costs, as we'll note later on.

And lastly, the $13.8 million of revenue maintaining for recurring capital expenditures, a moderate level, gave us $0.19 of CAD, or cash available for distribution, per diluted share at a 78.9% payout ratio.

With respect to balance sheet and financial metrics, I would emphasize the following points. Our debt to GAV at year-end of 45% and our debt to total market cap of 56.7%, and our 7.5 times debt to EBITDA ratio, are all somewhat above recent levels for these metrics due to fourth-quarter activity and will moderate during 2013 as we pay off additional debt and projects come online.

We continue to manage interest-rate risk with just $169 million of floating-rate debt. And we expect to have no outstanding balance on our $600 million unsecured revolving line of credit following the closing of the Princeton Pike sale later in the fourth quarter.

Lastly, we have no significant maturities until late 2014.

With respect to 2013 FFO guidance, we are increasing our prior range of $1.38 to $1.46 to now be in a range of $1.41 to $1.48. Setting aside the historic tax credit income of $0.08 that we will recognize once again in the third quarter of 2013, our quarterly FFO for 2013 should be in a range of $0.33 to $0.35 per diluted share.

In addition to the assumptions detailed on pages 30 to 31 of the supplemental package and noted by George, please observe the following. Gross other income in 2013 should be similar to 2012 levels at $20 million to $25 million, or $14 million to $19 million net, for a basket of other items such as termination revenues; other income; management revenues; less associated management expenses, if stated in a net fashion; interest income, which will be much lower in 2013; JV income; preferred return on our Thomas Properties Commerce Square joint venture; and 3141 Fairview financing obligation costs.

2013 G&A will remain unchanged at $24 million to $25 million, in line with the projections for 2012. Interest expense in 2013 will drop due to various capital market activities in the fourth quarter and should now be in a range of $122 million to $126 million, versus $126 million to $130 million previously guided.

Our preferred distributions should total $6.9 million on our Series E shares, reflecting the December 2012 optional redemption of our Series D shares.

Besides the Princeton Pike sale, we are programming additional sales of $100 million, or $221 million total, with the $100 million at an average 8% cap rate, somewhat back ended, resulting in a $2 million to $3 million impact or loss of NOI in 2013 from current NOI in place.

As I mentioned, the historic tax credit income of $11.9 million, or $0.08 per share, will be recognized in the third quarter of 2013. It is generally offset by about $0.01 of total associated incremental interest expense that occurs throughout 2013 in all of the quarters. The historic tax credit revenue is essentially non-cash, is excluded from our CAD calculations, represents the third occurrence of 20% of the net proceeds realized in connection with the 2008 historic tax credit financing, and, again, will be recognized in the third quarter of each year from 2011 through 2015.

We are assuming no issuance at this point under our continuous equity program, no additional note buyback or capital market activity. And we're programming weighted average shares for 2013 for FFO purposes of 146.7 million shares.

Our FFO payout ratio is projected to be 41.5% using our current quarterly distribution of $0.15, or $0.60 for the full year, on the midpoint of the $1.41 to $1.48 range.

And lastly, we are projecting cash available for distribution, or CAD, to be in a range of $0.79 to $0.87 per diluted share versus our prior projection of $0.75 to $0.85, reflecting $50 million to $60 million of revenue maintaining CapEx, lower than the prior estimate of $60 million to $70 million, reflecting moderating capital expenditures.

In terms of our capital plan for 2013, it's very clean with total 2013 uses of $299 million. That includes $11 million for mortgage amortization, $95 million for aggregate dividends on the common and preferred shares, and an allocation of $193 million for various capital and investment activities. These include $55 million of revenue-maintaining CapEx, at the midpoint of our range; $90 million for revenue-creating CapEx, lower than our prior estimate of $100 million, and that includes (technical difficulty) of a lease up of previously-vacant space, new project lease up, such as Three Logan Square, and other revenue-creating activities; plus $48 million for a variety of other capital projects, including finishing our 660 West Germantown Road development, a possible ground lease buyout, some funds to start one or two other small developments, funds for the Grove project in University City, funds for the Thomas Properties -- the group joint venture that was already funded in early January, and various other costs related to joint ventures.

We actually have sources of $405 million, or $106 million more than we need. And this reflects $184 million of cash flow before financing investments in dividends and after interest payments and the aforementioned $221 million of sales proceeds, reflecting the pending $121 million Princeton Pike sale and $100 million of additional sales.

We will use the $106 million surplus to pay down our $69 million credit facility balance at year-end 2012 and we expect to end 2013 with a $37 million cash balance.

Lastly, in terms of our account receivable and credit activity, we had $16.6 million of total reserves at December 31, 2012, versus $16 million at the end of the third quarter. Our reserves consist of $3.2 million on $16.4 million of operating receivables, or 19.5%, and $13.4 million on $135.5 million of straight-line rent receivables, or 9.9%. These levels are in line with prior activity and overall percentages.

In the fourth quarter of 2012, we had typical performance on receivables and reserves and no major credit issues.

And with that, I'll turn it back to Jerry for some additional comments.

Great. Thank you very much, Howard, and thank you as well, George.

To wrap up our prepared remarks, the fourth quarter and 2012 really were very successful. Our operating metrics improved, and we remain confident that our forward momentum will continue in 2013.

We remain committed to outperforming our markets through accelerated leasing efforts. We remain committed to our deleveraging goals and to our portfolio shift to urban and town center markets. Our operational teams, and we believe that approach will provide us with a continued competitive advantage and that advantage will continue to be reflected in our operating results and investment activities.

With that, we'd be delighted to open up the floor for questions. We ask, as we always do, that in the interest of time you limit yourself to one question and a follow-up. Thank you very much.

(Operator Instructions). Jamie Feldman, Bank of America Merrill Lynch.

(Technical difficulty) about your expected returns on some of your recent investment activity, whether it's the student housing development or the Toll Brothers JV or even some of these re-developments? Just what are you guys thinking these days and how should we be thinking about what you can put to work going forward?

Jamie, the first part of your question got cut off, but I think in terms of returns, we actually outlined the returns in the supplemental package on both the downtown Philadelphia asset, which we view as a development project, and that will provide a pretty good rate of return to us as we move forward through that redevelopment process, which we anticipate will take a couple of years.

I outlined the returns that we expect on the student housing project will be in that 7% to 8% range; 7% with the first year we open for occupancy and moving through the lease up, and then certainly stabilizing at the 8% and moving from there with annual rental rate bumps.

The Toll venture, which should commence construction by midyear, is very clearly in that range, as well.

The returns we do expect to get from the redevelopment project at Plymouth Meeting, 660, is in the low double digits. And as we look at some of these other redevelopment opportunities, we would expect that to be more the order of the day.

Okay, and then the follow-up, in terms of your disposition activity and just -- you made the comment that there's more capital interested in your (technical difficulty). Can you talk a little bit more about what you've seen in the last three months or so, what kind of pricing and what kind of assets you were looking for?

Yes, certainly. I'll pick up on that, and then Tom, please follow through.

Look, the relative yields on office space still remain relatively high, given other asset classes. I think the level of reverse inquiries we're getting, the discussions we're having with the investment brokers throughout our markets seem to indicate that that quest for yield, people are beginning to feel arguably a bit more comfortable with the economic outlook. And certainly the low interest rate environment is continuing to have people think about office investments as a bit of a proxy for the economic recovery.

So we've -- with the Princeton Pike transaction, which we launched right before the year ended, we had some very good activity on that. Pricing levels came in in line with what we thought we would realize. We have a number of other assets we're, as we always do, putting out in the marketplace for price discovery. And early signs on that are, again, very much in line with the cap rates that Howard talked about and I referred to as well.

But I mean, Tom, what are we seeing in some of these other markets?

Taking a look at Philadelphia CBD, besides our 1900 transaction, 2000 Market reportedly is being sold at about $169 a foot, a low 7% cap rate on a 95% pretty stabilized property.

The suburbs hasn't had much activity, but there has been more discussions of properties coming on the market and potentially trading this first half of 2013.

Looking at the metro DC market, we have seen, obviously, a slowdown that's continued since the last time we had our call, in terms of product coming to market, which has been slow and continues to be slow in the beginning of 2013. But the product that has been coming to market has received a lot of strong investor interest. And the pricing that we've seen on some of that product, whether it be a Class A trophy asset inside the Beltway trading below 6% and above replacement costs, shows that there is investment appetite for well located and CBD assets.

Looking at Austin, that has been also a market where we've seen a lot of activity this year and expect to see more in 2013. Cap rates on a lot of the product we're looking at going in, the ones that have traded have been 7% or below in most cases, very few above that.

And then, a little activity in Richmond and central -- and Delaware. We will monitor those markets, but they have remained quiet.

I think part of that activity that we may see picked up also is on the lending side. As Jerry mentioned, the lending is strong. I think also CMBS lending has come back and become more competitive with the life companies, and that leads to more interest as the buyers are able to pick up better financing.

Okay, great. Thank you.

Josh Attie, Citi.

On the two properties that were reclassified as re-entitlements, that increased core occupancy by about 50 to 60 basis points. My first question is, was that move contemplated in your original occupancy forecasts, both for year-end 2012 and also for 2013?

Yes, it was.

And when we see the core portfolio today, do you anticipate any other reclassifications to get to 90% by the end of 2013?

We actually don't. I mean, these were the properties we went through a long, thoughtful process with, and really, they're somewhat unique in the sense that they're a part of the business parks that have adjoining landholders, as I touched on, so it really does create the opportunity for stepping even beyond an adaptive reuse and going into a new entitlement process.

So we're continually looking at these types of properties and taking a look at where we can create the best value. But as of right now, we certainly don't anticipate any more of those re-classifications occurring in 2013.

And can you talk a little bit more about your long-term plans for those? Once they get re-entitled, do you plan to redevelop them on your own balance sheet? Do you plan to sell the properties with the new entitlements?

Yes, I think probably to be determined what the ultimate outcome will be, but the lowest probability is us developing them ourselves.

I think the process we've started with, as evidenced by the Toll JV or the Campus Crest JV, is -- from our perspective, there's a lot of talented companies out there that can provide great counsel to us, and capital, to move these projects through their ultimate value creation cycle.

To the extent, as certainly we've talked at our investor meeting and calls since then, our preference always remains to, on these non-strategically located assets, to typically sell out and realize full land fair-market value.

So our expectation is that we will use our local reputation and political contacts to start the zoning process and the re-entitlement path. During that process, we will certainly talk to companies who are experts in retail or multi-family development. And our hope would be that we would either wind up disposing of those assets at fair value or creating a venture structure that recognizes that fair value contribution and provides a different path to creating the value.

Okay, thanks. And on acquisitions, you reduced the acquisition guidance to zero from [75]. What were some of the reasons for that? Is it that you'd rather use your balance sheet capacity for other things? Or is it a lack of opportunities that you're seeing in the market?

No, I think it's -- and Howard and I will tag team on it, so I think we've always looked at our plan as being what our net selling position was. And I think when we were looking at last quarter, we outlined kind of $100 million of net sales.

What really happened was more in the disposition side. As Tom alluded to, we're starting to see more activity, so we thought we had a window to increase our disposition target. From an acquisition standpoint, look, there will certainly be a number of things we will look at during the course of the year, but our primary focus remains the portfolio recycling, as well as continued balance sheet improvement.

Yes, Josh, I don't think there is any change in underlying numbers or assumptions. Previously in October, we had $100 million of net dispositions, which we structured as $175 million of sales and $75 million of acquisitions. There was no impact either way from that combined assumption in the model, so it was truly $100 million net.

And in developing the assumptions for the balance of the year, we felt it was simply cleaner to eliminate that grossing up factor. So we're going to go from this point forward with the $121 million that is pending and a pure $100 million net. I think as Jerry said in his comments, if it turns out that there are acquisitions, they will in all likelihood be match-funded with yet additional sales activity to maintain, from this point forward, that incremental $100 million net on top of the $121 million already executed.

Okay, thank you.

John Guinee, Stifel Nicolaus.

(Technical difficulty) Jerry. Your land summary and strategy is by far the best disclosure in the industry, so congratulations.

A couple of things. First, walk through the balance-sheet strategy. What you're doing, Howard, is you're paying $20 million in hard dollars to tender for $150 million of bonds. That's about $0.14 a share, which I'm assuming doesn't get accounted for in your CAD number. And the net-net is about $0.03 a share in decreased interest expense and $0.03 a share in increased FFO. Is a five-year payback appropriate for that sort of transaction?

Well, John, good question, good observation.

When we looked at the decision in December to do that early unsecured financing, pay off some of the debt, accelerate costs, take some hard costs, it really was an assessment of what we might be doing in the future and where rates might be. Because under certain constructs, we could have waited until as late as the end of 2014 or early 2015 to actually undertake a financing, given our other resources.

But we looked at the amount of financing we need to do from 2014 on and we felt it prudent to begin to pull some of that forward, lock in these low rates. And this is a decision that we will only know in hindsight if it economically made sense by where rates would have been had we waited until those later dates.

With the jump in treasuries right out of the box in January, we certainly feel good about what we did. And be that as it may, it really reflects more risk mitigation than a pure economic decision. The view of the Company is wherever possible to take risk off the table, be that maintaining an overly fixed-rate posture or, in this case, lengthening maturities by about a half a year, on average.

So, don't only look to the economics. We think they will play out in the end. There's certainly a component of risk management at play here, as well.

Great. And as a follow-up question, George, if you think about the generic Fairfax County or Montgomery County 1980s product, of which there is hundreds of million feet in the markets combined, what is the going rate right now for that kind of product in terms of gross rents, net rent, TI package, what it takes to fill up that space in this day and age?

Yes, I think that product -- you're probably looking low to mid $20s, full service, with a $8 operating expense and somewhere in that $3 to $4 per lease year on capital.

Great. Thank you very much.

Evan Smith, Cantor Fitzgerald.

Just hoping, Howard, you could give a little bit more detail on the lease terminations, the assumptions that are in the other income that you detailed, if there's anything that's lumpy in there, big moveouts that are expected through the rest of the year.

There are some known moveouts. Some of them will generate fees, some will not.

We generally have approached that component, along with others, in creating a bucket. There are a number of items that are somewhat out of our control, namely other income items where there are various fees paid and termination revenue. So we lump that together with JV activity, management income, and we create a range of $20 million to $25 million gross. And that's been a very good approach for us the past couple of years.

But we haven't had certainty around any of the single numbers, but the group of five or six relatively smaller categories tends to come in in that range.

So I would recommend you treat those as a bucket, as we do, and that way we don't get tied down to a single number on a single component which ultimately can be pretty small.

Okay, and then over to the 1900 Market redevelopment plans, if you could just give some details on how far below market those rents are today. And also, I believe there is some vacant retail space in there. Is there any kind of near-term lease up plans and near-term value add before the 2015 redevelopment gets wrapped up?

Look, great question. I think when we bought the property, we really underwrote it with no real additional leasing activity until 2015.

And I think the known moveout in the market of the major tenant in that building, it was a law firm, really created an opportunity for us to buy at a very good price, particularly given the fact that we're a cash buyer and a building like that is very difficult to finance. So we were able to buy it for around $75 a square foot.

The redevelopment plan we are working on. We anticipate rolling it out in the next quarter to the marketplace. It will encompass a high level of interior renovations to the lobby atrium, exterior facade improvements, a reconfiguration of the existing lobby areas on both the east side and the west side of the building, renovations to the mechanical systems, lavatory upgrades, as well as a number of other both structural and aesthetic improvements that we think have a chance to move this building from the rental rate levels in the low 20s to the very high 20s, and then create a very good free and clear return to us when it goes through the redevelopment process.

We certainly, at this point, are not really leasing actively any of the space, subject to the finalization of the renovation plan. And we would expect that to continue for the foreseeable future, until we roll out the plan and then we will react to what market conditions present.

Great, thank you.

Michael Knott, Green Street Advisors.

Jerry, can you give us an update on your view of the sequestration impact on your holdings in DC?

And then maybe, George, can you just update us on your defense contractor exposure in the DC region?

Sure, Michael, happy to. And look, it's interesting. We were just down there last week, having a number of conversations on the impact of sequestration.

I think the takeaway points that I had was that I'm not sure anyone really exactly knows. Some folks project it to be an Armageddon if it happens; other folks, that it won't really be that meaningful at all.

So our view on it is we're very defensive on it in terms of making sure that we stay in very close touch with our tenants, to make sure that we understand what they are thinking and how their thinking impacts their space plan requirements.

But overall, certainly it's hard to anticipate it being anything less than negative. The question is, how negative will it be? That was actually one of the reasons why starting Q3 last year, our DC teams really ratcheted up our efforts to pre-lease as much as our square footage as possible, just because there's this big unknown.

That was fairly successful from a standpoint we were able to move up our pre-leasing percentage at the end of the year to 86%. And we have a good pipeline of deals right now. And frankly, Michael, the name of the game is to get as many of those across the finish line as soon as we can, knowing full well that some of those prospects we're talking to will be in a holding pattern until we see what happens on March 1.

But George, maybe you can give some insight into some of the tenants (multiple speakers)

Yes, I think in terms of our largest, clearly it's Lockheed Martin in our Maryland portfolio.

As we announced previously, they did extend 137,000 square feet from 2013 into 2014, and they're still going through their thought process on what they ultimately do with that space long term. They will be giving us back to 78,000 square feet in Maryland, as we had previously discussed, on May 31.

We have executed a five-year renewal with Lockheed Martin on 158,000 square feet in King of Prussia, Pennsylvania. So that takes really what was our second largest open renewal off the table.

We've got a 46,000-square-foot lease over at Mount Laurel, New Jersey, with Lockheed that we're currently in negotiations with.

I think -- we have signed three 30,000-square-foot leases in the last 45 days down in northern Virginia with government contracting companies. I think we're starting to see a little bit of the smaller contractors who have what they feel to be a secure contract are executing deals. Those deals were seven, 10, and 12 years, respectively. I think the larger ones, the Lockheed, the Northrop Grummans of the world, are going to continue to analyze existing lease obligations in owned facility and most likely continue to require some flexibility in terms of early termination rights.

Okay. And then, Jerry, on the student housing development, I certainly can appreciate the intention to deploy your land bank, but how do you guys think about how you can build student housing products since you've never done it before? I'm just curious how you get comfortable with that.

And then, also, did you say the yield is going to be 8%?

We expect the return going in, as the project is leasing up, to be about 7% and the first stabilized year to be approximately 8%, correct.

But I think to the broader question, Michael, I think the core of your observation is exactly why we structured the transaction as we did, and I think that's why it was a benefit to Campus Crest as well. There was extensive market research done by Campus Crest relative to the depth of the demand for both graduate and undergraduate student housing options in the University City section of Philadelphia, as well as throughout the Philadelphia marketplace. And there's clearly very strong demand for that type of product.

I think Brandywine's role in the venture, in addition to being a 30% equity partner, again of which about half of that equity contribution was our land value, is handling the vertical development, which we know very well. We know the general contracting market, the trade market, the approval process in Philadelphia. And us building that type of superstructure is something we've done in the past, having a very solid team that will execute that flawlessly.

And then our partner, Campus Crest, was really very much involved in the design of the product, making sure it fit the demand as they know it, as we anticipate it for University City students. And then, they will pick up on the fixturing of the building and clearly be the driver on the marketing and management side of the business.

So I think as we assess the market demand, the NOI characteristics, the absorption pace, I think the blending of the skill sets with us on the construction side, us with the relationship side, was a very nice complement to the talent that Campus Crest can bring to the table in terms of the making the project a financial and operational success.

Just real quick, are there any promotes to anyone? And then, do you expect to be in this long term or do you expect to sell your stake once it's monetized?

There is a co-promote structure for both Campus Crest and Brandywine, which is pari passu, based upon delivering certain returns, given that we have a 40% partner who is an investor, as opposed to an operator, with Harrison Street.

The expectation we have here, Michael, is honestly the same as we have with the other venture we have on the residential side. This is not part of our long-term core business. This is an opportunity for us to make money on the land we have and move that into a development platform sooner rather than later; use that, as well as what value we bring to the table through the development process, to create value; and then we will see what happens. But both of these partnerships have buy-sell provisions and it remains to be seen what happens to those once the projects reach stabilization.

Thank you.

George Auerbach, ISI Group.

Jerry or George, you had a pretty successful quarter in some of your spec revenue targets. I guess the question is, when you laid out those targets at the start of the year and now that you are 71% complete in DC and you are 66% complete overall, how much of those, of what you've done so far, was lay-ups as opposed to more competitive deals where it could have gone either way? And how much of the remaining 30% or so of those targets do you think is pretty competitive and up in the air?

We'll tag team this, George. It's a great question. And I guess the way we look at it, to continue the lay-up analogy, there were probably some lay-ups in there, but there were also some three-point shots. So it worked out pretty well to our benefit.

But look, there's no question, when you take a look at the cycle of how production is in our business, that the ones that are the higher probability are the ones that you generally execute sooner, which is why we're always very focused on that forward leasing pipeline. And I think when we assess the 66% done this year, particularly at some of the submarket analysis George touched on relative to the year-over-year significant outperformance at this stage of the year in Washington and New Jersey and in Richmond, we feel very good about those targets.

But as we start to think through our financial plan, we also very much drill down and take a look at the traffic through those spaces, the number of specific prospects identified for each leasing assumption. And George, maybe you can share what some of those stats look like.

I think, George, when you look at 66% achieved on the revenue, but I'm not sure how many lay-ups are left on the new leasing.

We've got 33% of the new leasing square footage done. So really, I think the message to the regional leasing teams is make every deal. And we've got that 2.7 million-square-foot pipeline; 600,000-plus in active lease negotiations, so I guess sticking with our basketball analogy, maybe those are the lay-ups.

We've got some work to continue to do. But when I look at DC, we've got 277,000 square feet of remaining open new leasing. We've got 27,000 square feet of that in negotiations; 122,000 square feet of that with an active proposal in hand; and we've got 146,000 square feet of prospects who are still in the touring and (technical difficulty) similar type numbers in Richmond, where we've got 216,000 of open assumptions, 137,000 square feet with proposals, and 115,000 in inspection.

So good levels of pipeline, continued good levels of traffic, so really I think if we can continue to do our job of converting inspections into proposals, converting 40% of those proposals into sign leases, that we achieve this business plan. And having gone through the regional meetings just in the past two weeks, we feel very good about where we are. We recognize there's work still to be done, but we feel confident in our teams' ability to get it done.

That's really helpful, thanks. And just as a follow-up, you guys have done a nice job on the capital costs in leasing. You spent $2.60 a foot per year the last couple of years. One, have you been surprised that those costs haven't ticked up a little bit, given the leasing environment? And two, do you think that $2.60 a foot per year is a good number going forward?

Look, we certainly, as we looked at the financial plan and reviewed all of the leasing information coming up from the field, a key part of that when our team, the regional and the corporate team, review our leasing pipeline, we're focused on where rental rates are, concession package, and capital costs as a percentage of revenue. So every single deal we review and issue a proposal on, we know where that capital projection would be.

So I think we feel pretty comfortable staying in that 10% to 15% of revenue range for capital costs.

One of the things that we are frankly hoping to see over the next couple of years is that as our portfolio gets up to that 92% leased and occupied level over the next few years, we are going to wind up having a higher preponderance of renewal deals versus new lease transactions. It tends to be the new lease transactions that create the higher level of capital costs.

So I think for right now, we're pleased with what we saw in 2012. Certainly like having a 70% to 80% CAD payout ratio versus where we were in 2011. And we're certainly forecasting, as Howard outlined, something in that range again for 2013.

So, we do expect those capital costs to stay moderate, to stay in that range. And that's certainly what the pipeline seems to indicate at this point.

George, it's Howard. One other item to add is I think one of the things that changes the posture going forward is the relatively lower level of lease rollover we're facing for the balance of this year and going into the next couple of years.

Whereas historically we'd be facing 3 million to 3.5 million square feet a year, almost at any point in time we're looking at sub-2 million-square-foot levels generally for the next couple of years. And that is going to mean that as the production continues, more of it is going to go to creating occupancy than back-filling space we lose, doubled by the fact that, as Jerry said, as it gets more occupied, retention naturally goes up anyway.

So those are two very strong support features -- lower rollover, increasing occupancy leading to higher retention -- that hopefully will accelerate the recovery to the low to mid-90% level.

Great. Thank you.

Jordan Sadler, KeyBanc Capital Markets.

I wanted to just go over the Cira South development. I know this is an exciting opportunity for you guys, the joint venture. Can you maybe just discuss the competitive set and how you thought of it, given American Campus's Chestnut Square development of, I think, 865 beds a couple of blocks away at what seems to be a significantly lower basis? How you think those will compete?

Sure, happy to. A couple of key distinctions. One is the project that we're involved in is a much different type of project. The ACC project is certainly very well executed and it's geared exclusively to Drexel undergraduates. Different type of unit design, different type of unit, different amenity package.

Our project -- where we saw the real window of opportunity was particularly on the graduate side. You basically have, between the two primary universities in that section of the city, about 50,000 students, of which about 17,000 are graduate students. There is a pressing need in University City for graduate student housing.

What we did in the design thought process on this project is really geared the project to both graduate students and an upscale option for undergraduate students. This project will have bed-bath parity. So for every single bedroom, there is a bathroom. We have a pretty high mix of studios, one- and two-bedroom units, that are geared primarily to, again, students looking for a higher level of privacy and quality. There is a complete amenity package in here with a full-service fitness center, a rooftop pool. It really is -- there will be a mixed-use component on the bottom with retail and conferencing and studying facilities.

So the price point that we are targeting here and the market we are targeting is different than some of the other options in University City. We have certainly worked closely with the universities in University City, but some other schools outside of University City, to assess the overall market demand. So I think the market (multiple speakers)

Basically, you don't think -- you think sucking up 1,800 units or 1,700 units in August of 2014 won't be a problem?

Well, the project at Drexel that ACC is doing is coming online a full year ahead of our project.

The school is requiring new incoming students to live in campus-sponsored housing, so that will be a pretty good demand driver for the absorption of that space.

But certainly one of the things you can't lose sight of is the depth of the student population, both full-time and part-time, in that area. The objective of all the universities in that part of the city is to try and create as much high quality on- or near-campus student living options and move as many students as they can out of the adjoining neighborhoods.

So I think as we assess the existing student population, the location of a lot of the existing graduate students who are living outside University City, the chance to bring them into University City, and the access to transportation and the quality of this product design, we think we will be in very good shape.

Okay. And you said 7% going to an 8%. Is it expected to be a 7% upon completion in the first semester, if you will, and the last quarter of the year going into an 8% in the full-year 2015? How are you thinking about that? Because typically, these things open, when they're new construction, in our experience, the majority of them open pretty well leased.

Yes, look, the expectation on this, and again, the opening is targeted for September 2014, is that that 7% number is going to be operative for 2014 and 2015. And we expect the fully stabilized rate of return to come into the 2016 year, in 2016.

With the difference being an increase in rents (multiple speakers)

Increase in rents, but also an increase in occupancy. I think we're fairly conservative on how we expect to bring this project to market.

Okay, thank you.

Mitch Germain, JMP.

Jerry, maybe just some more details on Princeton. Was that fully marketed? How many bidders? Anything you can share with us, please?

Sure, I'm happy to. It was a fully-marketed project, or undertaking. We received some pretty good interest.

Certainly, it wasn't some of the bid-list depth that Tom had referred to that you see sometimes in Washington, DC, but there were a number of bidders. I'd say there was half a dozen or so of really qualified bidders who were looking for some of those characteristics we referred to earlier in terms of yield and price per square foot.

We honed those half a dozen or so real quality bidders down to two to create a pretty tight auction. That gave the buyers, both potential buyers, a chance to line up their financing sources so we knew we'd have a bow-tie deal when we signed the agreement. And that is exactly what happened.

I think -- the pricing, Mitch, we achieved there was very much in line with what we had anticipated, so we are very pleased that the execution.

And then, I think George referenced 990,000 of lease signings in the quarter. I think, A, Jerry, maybe you can just share with us the decision not to send it out in a press release ahead of time. And then, B, how much of that is for 2013 versus beyond?

Well, George will pick up the detail on the 2013 and beyond.

I think on the press release front, we had followed a practice of issuing a quarterly press release. And we thought that was very important in terms of signaling the market we were making very good progress on each of our quarterly leasing targets.

I think that the -- what we learned through that process, though, Mitch, is that it was a bit confusing to a number of people who read it in terms of the characterization of some of the leasing activity. So this quarter, we did not do it, and don't anticipate doing it going forward. And we'll really use these earnings calls as a chance to bring folks up to speed on our quarterly leasing activity.

Yes, Mitch, as far as the breakdown, the total was 993,000. 130,000 square feet of that was signed and commenced in the fourth quarter of 2012, 614,000 square feet of that will commence in 2013, and 249,000 square feet of it will commence beyond 2013.

Thank you.

You're welcome.

Thank you.

Brendan Maiorana, Wells Fargo.

So first question, just wanted to talk to Howard about CapEx. You were mentioning this a little bit earlier, but the numbers moved down a little bit, which is good. It looks like you've got about $40 million, I guess, is revenue-enhancing CapEx related to leasing.

And as we think about occupancy moving up roughly 200 basis points in the quarter -- I mean, in the year -- and that I think you're likely to do a similar amount in the next couple of years to get to your stabilized level, is that a level of CapEx, revenue-enhancing CapEx, that we should assume over the next three years?

I think the expectation, even as we saw just sequentially in the two quarters, is that it is going down. It's going down for a variety of reasons, one of which is a lot of our leasing activity, the additional retention pulls space forward. That plays into the lower rollover theme.

And as that future hill gets smaller, or occupancy climbs, there's going to be less, what I'll call, primary, brand-new leasing where we might have to do ceiling work and more significant work in the space. A greater amount of retention, where in many cases the existing improvements are used as is or minimally cleaned up, that leads to lower capital.

And lastly, and probably most importantly, as occupancy increases, the negotiating dynamic shifts more to the landlord than to the tenant, where it's been the last three or five years.

So that, probably more than anything else, will change the dynamic of how leases are done. We'll get more term. We'll be able to spread the cost. The dollars per square foot per year will go down, and that's probably ultimately the more important metric than the absolute dollars. And we don't mind spending a large amount of dollars if we get the right lease structure, credit, and duration in the lease.

So there is a definite interplay between all of those, which is why -- I mean, we talk about the overall dollars for a capital plan, but it's much more important, in terms of performance, the percentage metrics that George talked about and the dollars per square foot per year. That's where you're going to see the improvement.

Okay. And is any of that what I think is around $40 million of revenue-enhancing CapEx, I guess, is that all -- is any of that related to development or redevelopment, or that's all in that separate bucket?

Well, I think the $40 million number you are talking about, I said was $48 million on the call. And that is a variety of project and specific transaction-related costs.

For example, the $5.9 million we disclosed that we've funded into the Thomas joint venture, that already is part of that amount. Finishing up the 660 West Germantown project, that is in that bucket. Dollars, we'll need to probably advance in The Grove joint venture with Campus Crest. We've already funded some by contributing land, so no real dollars, but certainly a contribution. That's in there.

So that encompasses more known projects. The general CapEx allowance for revenue creating is related to the overall leasing activity, not the completion of projects. So we make that distinction for discussion purposes.

Yes, right. I think there was sort of two $40 million -- because it was $90 million total budget, $48 million was development and redevelopment, and the remainder would be -- I guess I said $40 million, but it is $42 million in that, so.

Okay. My second question was for Tom. The deal in Austin, I know it's relatively small, but $2.30, $2.35 a square foot for -- [toura] fills up seems like it's a little high relative to replacement costs. And I would imagine that rents for that product and in that location, which is a few miles further southwest of where -- further out in Austin of where your existing stuff is, probably garners a lower rent level than your existing product. So can you just talk about the play there and what it means for Austin longer term?

Sure. Looking at that property, one, it's a good quality product, very well located near the AMD campus and some other technology companies.

The cost per foot, I mean, we've looked -- we've been doing some pricing of developments in that area and in the Southwest. And when you look at the Southwest, it's a higher barrier to entry market. So we were looking -- we look at about $35 per foot for land down there for that type of a site. We're a little north of [$250] a foot. So while it's not tremendously below replacement cost, it is below what we're seeing on real pricing that we're seeing down there now.

Separately on the rent, I would agree that the rents down there are slightly below, but we're going in on this rent at just about $16.50, so we are below what we even say the discounted rents would be in that part of the Southwest.

We have a good, steady tenant that has their corporate headquarters, so in addition, their fitout is quite a bit higher and the infrastructure they put into the space is quite a bit better than your standard. So for all those reasons, we thought it was a good opportunity to buy and with a good long-term credit tenant.

And it's $16.50. What do you think market rents are for that product?

I think they are probably upper teens. It's more like $19 in that market.

Okay. And I think the AMD campus is -- I'm not sure if it is under contract. I think it's on the market. Is that something that is or was of interest to Brandywine?

We took a look at it just to see it. But no, it really wasn't of interest. It is a great campus, but it is a campus where we already think they are going to be putting some of that space subleased, difficult to multi-tenant. Beautiful campus, though. It's a great set of properties.

Okay, thank you.

There are no further questions at this time. Gentlemen, do you have any closing remarks?

The only closing remark is to thank everyone for their participation, and we look forward to updating you on our business plan activities on our next quarterly call. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect at this time.