Brandywine Realty Trust (BDN) 2013 Q1 法說會逐字稿

Good morning. My name is Felicia and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust First Quarter Earnings Conference Call. (Operator Instructions). I will now turn the conference over to Mr. Jerry Sweeney, President and CEO. Mr. Sweeney, please begin.

Felicia, thank you very much. Good morning, everyone, and thank you all for participating in our First Quarter Earnings Call. With me today is George Johnstone, our Senior Vice President of Operations; Gabe Mainardi, our Vice President and Chief Accounting Officer; Howard Sipzner, our Executive Vice President and Chief Financial Officer, and Tom Wirth, our Executive Vice President of 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. So to start off our prepared comments, as is our normal practice, I'll provide an overview on three key business plan components of operations, balance sheet, and investments, as well as provide some color on some recent transactional activity.

George and Howard will then discuss our operating and financial results, and certainly Gabe and Tom are here to answer any questions on their areas. We've had a very active and productive first quarter. Operational performance was strong and the 2013 plan is on target. Our recent equity offering strengthened our balance sheet and created financial capacity, and our investment objectives are also very much on track.

Macro economic concerns remain at the forefront of [tenant] decision making processes, but during the quarter we continued to benefit from an ongoing flight to quality landlords and product. In looking at specific operating performance benchmarks, we had a strong leasing quarter. Activity through the portfolio averaged 268,000 square feet per week and our overall pipeline, that is traffic that has resulted in us issuing a proposal, stands at 2.9 million square feet, up slightly from our February call.

Positive pricing dynamics dominate several of our key markets with continued strong performance. In [Philadelphia CBD] and University City the Crescent markets of the Pennsylvania suburbs and Austin, Texas. Just as importantly, we saw higher levels of activity through our Richmond, Virginia, New Jersey, and metro DC portfolios, and George will provide additional color on that traffic.

Our mark to market run rate spreads very strong and we had our best performance since 2007. During the quarter, we experienced a 11% increase on our renewal rental rates, a 5.7% increase on new lease expansion rental rates, both of those on a GAAP basis. And on a cash basis we had a 3.4% combined growth rate. Capital costs remain moderate.

We averaged $2.21 per square foot per lease year for the first quarter, very much in line with our business plans with a resultant CAD payout ratio of 65.2%, our strongest in the past 11 quarters.

We also had positive same store growth rate on a GAAP basis of 3.4%, and 6.3% on a cash basis continuing to build on the leasing progress from prior quarters.

Looking ahead for 2013, we had 1.5 million square feet programmed to renew. We are already 80% executed on that renewal square footage and 93% on the spec revenue target associated with renewals.

Looking further ahead to 2014 and 2015, we have continued to reduce our remaining lease expirations where we now are at 1.9 million square feet or only 5% roll in 2014, and 2.5 million square feet or an 8.5% roll in 2015.

We have lease proposals out for much of this remaining rollover and continue to make significant progress. The only cloud on our strong operational performance was the anticipated impact of the Intel moveout in Austin. As a result of that move out, our retention rate during the quarter was 52.7%, with negative absorption of about 120,000 square feet, but as we've previously discussed, we have already re-leased about 90% of Intel's vacancy with occupancy scheduled for the next several quarters.

We remain confident we will be 90% occupied and 92% leased by year-end '13, and it's noted in the press release we're currently 87.6% and 90.8% preleased, an over 300 point positive leasing spread reflecting strong leasing momentum. In looking at our balance sheet, subsequent to quarter end we took advantage of favorable market conditions and raised approximately $182 million of net proceeds to the offering of 12.65 million shares.

This unplanned equity issuance accelerated our deleveraging program, improved our credit metrics and provided greater liquidity and financial flexibility. As a result of this offering, we're currently carrying cash balances of approximately $200 million. Those cash balances are currently invested in depository accounts with numerous banks. And our current financial plan, which Howard will elaborate on, contemplates maintaining these cash balances and does not reflect the impact of any accelerated debt paydowns or liability management efforts.

We will, of course, continue to evaluate all of our options. From a broader standpoint, reducing leverage levels below 40% and achieving a 6.5 times EBITDA by year-end 2014 is a core objective. On a pro forma basis, this recent equity offering contributed greatly to that goal achievement reducing our net debt to gross assets to approximately 40.7%, and our net debt to EBITDA to 6.7 times.

Longer term, the goal is to continue to run the company mid 30s leverage EBITDA multiple below six times. We are also very much on track with that objective. Continued occupancy gains and a corresponding net operating income growth rate, combined with our investment program, will put us in a great position to achieve these targets. So from a liquidity standpoint, the company has significant financial capacity and tremendous flexibility. Our next maturity is not until November of 2014.

So to wrap up the balance sheet discussion, our balance sheet progress continued and our objectives remain very much on track. On the investment side, like the balance sheet and operating components of our business plan, the investment program is progressing on schedule.

First quarter activity through the previously announced Princeton Pike sale and the sale of our joint venture in two Wilmington properties create an achievement of $139 million of sales or 63% of our $221 million disposition target. We also had a number of other small investment activities as outlined in our press release, including the final installment of our investment in the Thomas Properties venture at Commerce Square and the continued investment in our redevelopment project in West Germantown Pike.

We have also commenced development of a 18,000 square foot amenity based retail center as part of our Radnor Corporate Center complex. That objective is to provide additional services and restaurant options to the existing tenant base. That development is projected to cost $7.5 million and we'll deliver it by year-end 2013. It's currently two-thirds preleased.

We expect stabilization in the third quarter of 2014 at a 11% return on cost. As we discussed on previous calls, we're also proceeding with our Plymouth Meeting multifamily 50/50 joint venture with Toll Brothers. We expect to commence construction of that 398 unit complex later in the second quarter with completion targeted for the fourth quarter of 2015.

The Grove at Cira South, our joint venture with Campus Crest Communities and Harrison Street Real Estate Capital, is under construction. That is a 33 story, 850 bed housing project in the University City submarket of Philadelphia. Completion is targeted for that project in the third quarter of 2014.

And also as identified on page 32 of our supplemental package, several other elements of our land management program are progressing on track with the objective of achieving our overall land monetization goals. Accelerating growth through an active investment strategy also remains a core objective. Our focus remains on increasing our urban and town center concentrations. The sale of Princeton Pike evidenced that shift. As had been widely reported, more capital sources are aggressively focused on office space.

That appetite is clearly being driven by emerging visibility on the economy, a favorable rate environment, and relative yield comparisons. Our business plan contemplates an additional $82 million of sales occurring in the second half of this year at a cap rate of 8% to achieve our $221 million target. As is our practice, we have a number of projects on the market on a price discovery basis.

These projects are in Pennsylvania, New Jersey, California, and Texas. We are currently in the price discovery process on our wholly owned portfolio in Austin as has been reported in recent press publications. We like Austin. We have been successful there and have a very strong operating platform. We also believe the market is ripe for accelerated ownership consolidation.

So one of the avenues we are pursuing is forming a coinvestment growth vehicle that will enable us to both harvest current value and provide additional capital to expand our market platform. Since initiating this effort several weeks ago, we have received very strong institutional interest. We anticipate completing this marketing process over the next 60 days, and obtaining more visibility on both pricing and structure.

While our 2013 financial plan does not incorporate any acquisitions, we are continuing to source numerous potential acquisition opportunities. We currently have several transactions in the near term queue. For investment activity, and Tom can provide additional color in the Q&A, we have seen an increased number of properties coming on the market in several of our core markets during the last quarter.

So in summary, the first quarter was very strong. All of our first quarter business goals and objectives have been met, and the plan for the balance of the year is absolutely on schedule.

We continue to be encouraged by the high level leasing activity we're seeing through all of our submarkets and through our portfolio on balance, and at this point, George will provide an overview of our first quarter operational performance and he will then turn it over to Howard for a review of our financial activity. George?

Thank you, Jerry. From an overall standpoint, we continue to see recovery occurring in our markets. All of our markets experienced higher levels of year-over-year leasing activity, and absorption for the quarter was up in all markets with the exception of northern Virginia.

We are outperforming market vacancy in all but northern Virginia where we trail the market by a hundred basis points, but even there we have closed that gap by 1100 basis points since this time last year. Turning to our portfolio, specifically, we continue to see good levels of leasing activity,from space inspections to pipeline to lease executions.

In terms of lease executions, during the quarter, we signed 860,000 square feet of leases, including 350,000 square feet of new and expansion leases and 510,000 square feet of renewals. Tenant decision-making remains relatively unchanged as leases executed in the first quarter averaged 96 days from initial inquiry to lease execution as compared to 94 days in the fourth quarter of 2012 and 98 days in the third quarter of 2012.

Lease commencements totaled 692,000 square feet, including 262,000 square feet of new leases, 373,000 square feet of renewal leases and 57,000 square feet of tenant expansions. During the quarter, we also had 322,000 tenants -- 322,000 square feet of tenants move out upon expiration and 122,000 square feet of early terminations. Most notably, our percentage lease has increased 50 basis points from year-end to 90.8%.

We have 729,000 square feet of executed leases on space that was vacant at quarter end. We are encouraged by the lease levels we have achieved in Richmond at 90.3%, New Jersey, Delaware at 88.3% and metro D.C. at 85.5%.

We have maintained all of our original business plan operating metrics and remain confident in our ability to execute. We have achieved $37.4 million or 85% of our $43.9 million spec revenue target. This compares to 66% achieved last quarter, and 80% achieved this time last year.

Of note, we are 85% achieved in metro D.C. versus 61% a year ago, and Richmond is 69% achieved versus 57% this time last year.

Occupancy will increase to 90% by year-end 2013 from 1.5 million square feet of renewal leases, 1.9 million square feet of new and expansion leases, offset by 324,000 square feet of known and anticipated early terminations. A new occupancy roll forward table has been added to page 29 of our supplemental package.

We have already executed 1.2 million square feet of our 2013 renewals. Of the remaining 306,000 square feet of renewals in the plan, the single largest lease is 24,000 square feet. Finally, a few comments on some of our markets. We remain pleased with the level of activity in our Metro D.C. region.

Our regional traffic was up quarter-over- quarter and year-over-year. The regional pipeline totaled 615,000 square feet, including 145,000 square feet in active lease in negotiations. This pipeline includes three prospects in excess of 50,000 square feet.

During the first quarter, our Metro D.C. operation posted positive absorption of 31,000 square feet. Leasing spreads were 7.2% on a GAAP basis and negative 4.6% on a cash basis.

Leasing capital is $3.03 per square foot per year or 9.8% of rents, in line with our anticipated range for the Metro D.C. region and improved from 2012 levels.

Now shifting to Richmond. Activity levels have increased significantly during the quarter. We had 57 tours inspect 420,000 square feet. The regional pipeline totals 347,000 square feet and includes four prospects over 25,000 square feet. Successful conversion of this pipeline will also help solve the known 85,000 square foot moved out of travelers in January of 2014.

To conclude, we are pleased with the level of achievement to date on the business plan and remain encouraged by the level of activity in our various markets. The quality of our inventory and the ability of our regional teams to execute. At this time, I'll turn it over to Howard for the financial review.

Thank you, George and thank you, Jerry. For the first quarter of 2013, core FFO totaled $51.7 million or $0.35 per diluted share, and we beat the $0.34 analyst consensus by $0.01.

Our FFO payout ratio is 42.9% on the $0.15 distribution we paid in January 2013. Core FFO provides a better sense of our FFO run rate by eliminating transactional and capital market activities as noted in our supplemental package on page 14. Notably, for the first quarter of 2013, core FFO is essentially the same as NAREIT FFO.

I'd like to make a couple of additional observations regarding our first quarter results. Our first quarter FFO is high quality, with termination revenue, other income, management fees, interest income and aggregate JV activity totaling just $6.3 million gross or $4.9 million net after associated expenses, in line with our 2013 expectation for these categories.

Our first quarter NOI and EBITDA margins at 60.2 percent and 64.2%, respectively, remain at or near their highest levels for these metrics all the way back to early 2009. Same store NOI growth rates for the first quarter were 3.4% on a GAAP basis and 6.3% on a cash basis both excluding termination fees and other income items.

We've now had seven consecutive positive quarters for the GAAP metric, and four for the cash metric and are maintaining our 2013 targets for same store NOI growth at 3% to 5% GAAP and 4% to 6% cash. First quarter interest expense of $30.9 million was down $2.3 million versus the fourth quarter, and down $3.2 million versus the first quarter a year ago, both reflecting the impact of our late fourth quarter 2012 capital market and liability management activities.

And with $13.3 million of revenue maintaining or recurring capital expenditures in the first quarter, we achieved a very strong $0.23 of cash available for distribution or CAD per diluted share, and a 65.2% associated payout ratio.

With respect to balance sheet and financial metrics, I'd like to emphasize the follows points. Our debt to GAV of 44.1%, our debt to total market capitalization of 50.7%, and our 7.2 times debt to EBITDA ratios, all improved sequentially from the fourth quarter of 2012.

And as Jerry noted, pro forma for the net proceeds from the April equity offering, these improved even further to 40.7% for GAV, 46.7% for total market capitalization and 6.7 times for debt to EBITDA.

We have just $100 million of floating rate debt, no outstanding balance on our $600 million unsecured revolving line of credit, over $200 million of cash reflecting the closing and the net proceeds of the April equity offering, and no maturities until November 2014. In fact, this maturity is effectively covered by our current and projected cash balances.

Now, turning to 2013 FFO guidance. We are revising our 2013 FFO per share guidance from $1.41 to $1.48 range, now to be a range of $1.35 to $1.42.

As the equity offering is effectively $0.08 dilutive for 2013, the revised guidance actually represents a $0.02 increase at the comparable midpoint due to continued execution of our 2013 business plan.

Excluding the historic tax credit income of approximately $0.08 per share that we will recognize in the third quarter of this year, our quarterly FFO for the remainder of 2013 should now be in a range of $0.31 to $0.33 per diluted share in each of the quarters.

In addition to the assumptions detailed on pages 29 to 30 of our supplemental package, please note the following; Gross other income in our plan remains unchanged 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 net, interest income, JV income, the preferred return on our commerce square investment and less the 31, 41, Fairview financing obligation expense.

Our 2013 G&A assumption also remains unchanged at $24 million to $25 million. We are now showing interest expense dropping in 2013 due to various capital market activities as outlined, and it should remain in a range of $122 million to $125 million for the full year. We expect the preferred distributions on our Series E shares to be $6.9 million as we've now eliminated all the other prior preferred share series.

Besides the completed Princeton Pike sale at $121 million and our $17.4 million share of the One and Three Christina's completed $87 million sale, we project additional sales of about $83 million or $221 million total with the remaining sales at average cap rate of about 8% and to be somewhat back ended resulting in about a $1.5 million to $2 million impact or loss of NOI throughout the balance of 2013. Tom can talk more about the sales and transaction market in his comments.

As I mentioned, the historic tax income of $11.9 million, or approximately $0.08 per share, will be recognized in the third quarter of 2013, and it's generally offset by about $0.01 per share of incremental income expense that occurs throughout 2013.

The historic tax credit revenue is essentially noncash, is excluded from our CAD calculations, it represents the third occurrence of each 20% slice of the net proceeds realized in connection with the 2008 historic tax credit financing on the Post Office Project, and is recognized in the third quarter of each year from 2011 through 2015. And lastly, we expect no issuance under our continuous equity program, and we're currently assuming no additional note buyback or capital market activities.

We're now modeling 155.8 million weighted average shares for FFO calculations in 2013 versus our prior assumption of 146.7 million shares.

Our FFO payout ratio is projected at 43.3%, representing a $0.60 distribution on the midpoint of our new $1.35 to $1.42 range.

We are projecting CAD to be in the range of $0.71 to $0.79 per diluted share versus the prior assumption of $0.79 to $0.87, reflecting now $45 million to $55 million of additional revenue-maintaining CapEx.

Our plan provides between $17 million and $30 million of free cash flow after dividends and recurring capital expenditures, and the adjustment in CAD reflects the additional shares from our equity issuance. Our 2013 capital plan is very clean with total 2013 remaining uses of $243 million. We see $8 million for mortgage amortization.

We're programming a total of $156 million of investment activity, incorporating $50 million of revenue maintaining CapEx at the midpoint of our range, $66 million of remaining revenue creating CapEx, and this category includes lease up of previously vacant space and new project lease up such as completing the 3 Logan Square project plus $40 million for a variety of other capital projects, such as completing the West Germantown project and, of course, the Campus Crest and Harrison Street joint venture investments.

We already spent $2 million earlier in April for a small 2015 note buyback. And lastly, we see $77 million of aggregate dividends, consisting of $72 million of common share distributions and $5 million for preferred shares. The April distributions have, of course, already been funded.

On the source side, we actually have $381 million of sources or $138 million more than we need. And these are $182 million already realized from the April equity issuance, $117 million of cash flow before financings, investments, and dividends and after interest payments. $82 million of additional sales proceeds reflecting our $221 million target and the sales completed to date.

The $138 million cash surplus will augment our $48 million cash balance at March 31, 2013, so that we now expect to end 2013 with a projected cash balance of $186 million, assuming no liability management at this time. And lastly, for accounts receivable activity in the first quarter, everything was on a regular or predictable basis with no major changes in any of our assumptions. With that, I'll turn it back to Jerry for some additional comments

Thank you, Howard. That really wraps up our prepared comments. Look, as we view it, we're very pleased with first quarter results. We certainly have more work to do for the balance of the year and certainly are planning ahead for 2014 and 2015.

But we believe that with the success we've had in the past will continue as we look at our business plan execution for the balance of 2013. And as George and Howard touched on, we certainly remain committed to meeting all of our operational goals, as well as our balance sheet management and investment, as well as this continued shift to urban and town center markets. With that, we'd be delighted to open up the floor for questions as we always do. We ask that in the interest of time you limit yourself to one question and a follow-up. Felicia?

(Operator Instructions). Your first question comes from the line of Brendan Maiorana with Wells Fargo Securities

Thanks. Good morning.

Good morning.

Jerry and Tom, the assets on market Pennsylvania, New Jersey, California, Texas, can you give us a sense in sort of like broad dollars, roughly, how much that is, and then can you break it out between assets think are -- in just sort of broad dollar terms, nonstrategic, non-long-term holds versus assets that I think, as you're sort of indicating with Austin, that you want to maintain from a longer term presence via JV but maybe pricing now is compelling if that's what you are bringing it to market.

Brendan, Jerry. Good morning. The Austin portfolio is the bulk of what we have in the market in terms of dollars. And there have been published reports on that range from the high $200 million to the low $300 million range, so we'll see how that process plays its way through. And the rest of the assets are, you know, small portfolios, two or three building complexes, single building complexes, in both Pennsylvania, New Jersey, and Delaware, and the total aggregate value for those is probably about $100 million to $125 million.

One of the things we always do is we typically put a number of projects in the market, either based upon high level reverse inquiries or a broad based marketing effort, to really test and see where optimal pricing comes in based upon what we think the NPV and IRR of an [internal] hold is on that asset. So, we are very pleased, I think, generally with the level of activity we're seeing across the board on our offerings.

As I mentioned in my comments, we're clearly seeing increasing capital flows into the suburban office space from both midsize and large institutions. I think that's continuing to increase our level of encouragement on what we're seeing on some of these offerings. So every quarter, we always spin more assets into the marketplace. I would say of the 100, 125 that we have in the Pennsylvania, New Jersey, and California, they're clearly noncore assets and they there we're looking for a straight disposition.

Yes, so do you think, as we sort of talked in the past about the noncore portion of the portfolio, do you think that you accelerate the dispositions of those over the next several quarters because there's more capital interest? And if that's the case, you've got a lot of cash. You're expecting to end the year with $185 million to $190 million in cash, what -- where are the opportunities for reinvestment?

Okay. Well, Tom and I will talk to you. I'll take the first part. I think in terms on the disposition side, we made the decision of being fairly pragmatic and patient on liquidating what we deemed to be noncore holdings. We've continually touched the market on mid -- small to larger size portfolios in terms of testing the market for price acceptance. I think the great thing we've seen in the last couple quarters, and really accelerated in the first quarter this year is an increasing number of capital sources coming to the market, continued expectations of a benign rate environment with -- with significant re-emergence of the CMVS market, which is a higher loan to value and effectively priced. And more importantly, we're seeing more visibility on the leasing activity front at an asset level.

So the combination of continued progress on the operating front with those capital flows, I think really does present a pretty good opportunity for us to continue to move more of these properties in the market to test where we think things may be come -- where pricing may come out. So our goal for this year is pretty well set, Brendan, the $221..

That doesn't mean we will not exceed that, but we're reluctant to give specific targets beyond that only because to a great degree our ability to achieve a higher sales target is not necessarily a function of how much you put in the market but what we get back in terms of acceptable pricing. But I do think the convergence of all those factors does create a pretty positive landscape for us to be moving more of these noncore holdings into the market sooner rather than later. And then Tom can maybe give some color on where we see some acquisition opportunities

Sure. Brendan, as we look at the markets, looking at the Philadelphia CBD, it's been a slow but steady market. There's been several transactions brought to market recently, and there's been a couple recently closed at good pricing, so we see some opportunities there. The Philadelphia suburbs have improved. Office properties have been brought to market. We feel the market's still slow but it's recovering and it's probably a little better or more buoyant than last year. As we look at metro D.C., that's one of the areas we see a little more activity. Beginning of the year, we said it was very slow in our last call and that not much was coming to market.

Since that time, there's been an increased number of buildings on the market, some developments have also come to market. And inside the Beltway is pretty much where we're seeing that activity. And again, two recent sales are been announced inside the Beltway at some very strong pricing. So with that, we would expect, in addition to what we're seeing come to market now, we expect to see some more acquisitions come to market as we look out. We continue to see that pricing, while on a sort of a -- we look at it on an IRR basis, but on a cap rate basis the strength is there and on an IRR basis pricing is strong. I think we've seen more conservative outgrowth on rent growth in the DC area, so pricing on a relative basis is probably less than where it was last year as rent projections have come in.

We continue to look investments with Allstate. We've targeted some very key submarkets that we're looking at and we're beginning to see some activity pick up there. Another submarket is Austin. We see a lot of activity continue to grow. Technology oriented companies, the demographics are very strong. A couple new developments are commencing so that there's some potential new office space coming on market, but there continues to be very strong rent growth projected out and there continues to be net absorption in that market.

And as a result, we've seen a couple of transactions close both in the CBD and in the southwest totaling over $400 million, so there's definitely some activity and transactions occurring there. Richmond, with the exception of two downtown properties or opportunities, one's a property, one's a development, there's not much on the market there.

We don't know what will change as the year goes out. We look to be net sellers of some of our noncore pieces there. And in central and south Jersey, they remain relatively slow, but we have seen some activity pickup. And our Delaware joint venture is an example of where we're able to sell to a user and get that transaction done. So we've sold about $139 million but we do see some opportunities. Our pipeline of investments has grown both on marketed transactions and off marketed transactions

Great. Thank you.

Your next question comes from the line of George Auerbach with ISI Group.

Thanks. Good morning, guys.

Good morning, George.

Jerry on the (inaudible) the square footage leasing for the year, do you think renewals are well ahead of schedule? The new leasing is sort of split 50/50. What's been executed and what's remaining? Can you maybe give us some color on which markets are sort of left in the to be executed new leasing?

Sure. The George, we still have about 200,000 square feet of 997,000 square feet, you know, anticipated to come out of our metro D.C. region. We've got just shy of 100,000 square feet kind of coming out of New Jersey, Delaware. And then, really, the majority of it is still contemplated to come out of both the Pennsylvania suburbs and some additional square footage in Philadelphia CBD. That so again, I think we feel confident, based on the pipeline that even though we're only at the kind of 50% mark on square footage, there's still enough pipeline there to convert. Our conversion rates have consistently kind of been in that 40% range, and we do think there's actually maybe some opportunities for some regions to pick up for others if need be.

Great. That's helpful. And I guess just a follow-up, how should I read this table? If the targeted revenue for the year is $44 million, and the targeted square footage of leasing is 3.5 million that's about $12 a foot. Is that sort of an incremental revenue that you're hoping to pick up per foot or is that a total revenue figure?

Well, I mean it's all based on, you know, I mean the square footage is the total square footage. The revenue contribution, obviously, is dependent on what month it commences. So, you know, 10,000 square feet commencing in December is only going to generate one month of income for the --

Right. George, it's a pro rata revenue stream based upon the timing of actual occupancy not an average rental rate achieved on the tenancy.

Okay.

In Yes, you know, the pages on the supplemental that are more indicative of the rents we're currently getting would be more on page 25 of the supplemental, and then for leases that are already in the portfolio you get a sense of that on pages 26 and 27.

Great. Thank you.

You're welcome. Thank you.

Your next question comes from the line of Rich Anderson with BMO Capital Markets.

Good morning, everyone.

Good morning.

So maybe if our -- like doing the over/under on what could happen for the rest of the year, is this a reasonable outcome were you maybe beat the disposition number of $82 million for the rest of the year meaning that may be a little bit more diluted, but you also, beat also on the same store basis because you had a good -- good quarter this year, and the net of it is no impact to the prevailing guidance. Do you think that that's maybe a reasonable way that this year could unfold for you?

Well, Rich, it's Howard. I think you laid out two possible scenarios. But I think the third ingredient there is that if we exceed the disposition target, there's a reasonable expectation that we'll put some of that money to work in properties that Tom spoke of earlier. So we think more about that disposition figure as a net number. It may be reflective of no acquisitions and there may be a higher level of dispositions and some level of underlying acquisitions. So think about it as a net number and don't generally expect it to then jump one way or the other

Okay. That's very helpful. Thanks. Then on the Austin discussion point, can you just kind of frame your thought process there a little bit better for me? You're looking at a joint venture scenario with what you have and yet you're also in the market potentially looking for assets to buy. So what is it about -- is it an asset specific issue that you want to monetize and that you like the market? Can you just kind of frame the strategy a little bit more clearly, Austin for me?

Sure. I'd be happy to. It's always a challenge when the press reports get out and they're not entirely on point and they dovetail with the market [report], but here are our thoughts on Austin. It's clearly a solid market and a very strong performer for us. It has great demand drivers. It has one of the top job growth markets in the country. We have an excellent on-the-ground team that has worked diligently and produced great results through a real cyclical downturn over the last four years.

We are in a number one ownership position in that marketplace in terms of square footage in the suburban marketplace. It's also very a cyclical market as evidenced by its performance over the last 15 years. Rents have increased dramatically in the last 12 to 18 months. Clearly been a strong performer. A lot of that growth is still coming out of the shift east on the technology sector, which is always very cyclical, but we think Austin has a lot to offer. And our performance there, I think, reflects our ability to accomplish results through both our product quality and our management team.

The market ownership standpoint, though, is extraordinarily fragmented. After Thomas Properties dominant position downtown, our position out in the suburban counties, the next largest institution is or the next largest owner's institution that controls much less of half of our state. So after that the ownership's incredibly fragmented. As we've been bidding on properties, and certainly evidenced by our acquisition late last year of the two buildings at Lantana, it's become very clear that values have accelerated dramatically, cap rates have compressed, the bid lets for a lot of assets was amazingly institutional driven.

A lot of large institutions looking to get a foothold in Austin, and their inability to be successful in a specific trade, was not a result of their lack of desire to be in the market but more driven by their lack of confidence in being able to create a sizeable platform in the market. Brandywine has a great management team. We have a great market position with a very good performing portfolio, as well as a million square foot portfolio on a joint venture basis with -- with IBM.

So our approach has been to basically put the portfolio in that we solved all the Intel rollover on the market, test the market for pricing, see if we can create a coinvestment vehicle similar to what we created with Allstate in Washington, D.C. it's a very good risk adjusted way for us to expand our market platform, take advantage of the current compression of cap rates, hopefully harvest some significant value. But more importantly, create a very good coinvestment platform going forward with promote structure a good management team expansion, etc.

And see if we get some portfolio premium pricing. So Richard there's no assurance that anything will happen or the structural will be, but the objectives are really to optimize current value, see where that comes in from a pricing standpoint, obtain growth capital, and ultimately, through the combination of those two, significantly expand our marketing platform, and we'll know in the next 60 days how successful that effort is.

I guess I just don't under -- the other side as a buy -- also as a buyer in the market, I mean how -- how are you finding deals that pencil for you on the other side of the table?

Well, look, I mean certainly we've looked at everything that has come on the marketplace, and I think one of the drivers of our decision to enter the market on our portfolio was influenced by what we were seeing on the buy side. As I indicated, cap rate compressions have been very dramatic in the last several quarters, rental rates continue to rise. Rental rates in some submarkets are approaching replacement cost rents. So in looking at where pricing has gone, some of the demand drivers in the market, the bid list on properties, it all kind of created a picture where we thought it was worthwhile to test the market on what the portfolio premium, if any, we could achieve on our asset base.

Okay. And then if I could just one quick one, was that retention of 52 expected, and also was the negative net absorption expected for the quarter?

Yes. We knew it was rolling --

Because it was -- okay. Right. Uh-huh.

So those numbers were exactly in line with our plan.

Okay. That's what I thought. Okay. Thank you.

And your next question comes from the line of Josh Attie with Citi.

Thanks. Good morning. Just to follow up on Brandon's question on use of capital. When you think of $200 million of cash and also the money that you could get coming in from asset sales, do you think there's a greater probability that you use that to tender for some higher coupon bonds early or are you more inclined to put that money to work through acquisition?

Look, we're keeping all of our options open right now. And between Tom's efforts and Howard's effort, they're spending a lot of time accessing their various points of the market, whether on the debt side or acquisition side. My guess is we'll probably do a combination of both things. I mean we do have the objective of continuing to strengthen the balance sheet. Clearly, the current rate environment today in our experience in the fourth quarter on tendering for bonds is that it's a good strategy, but as rates have continued to compress assets spreads it gets to be an increasingly tough mathematical exercise. So, we have several avenues.

One is to simply retain the cash and use that to deploy into direct acquisitions. We can pay down some of the bank term loans or pieces thereof. We could look at make wholes on near term bonds and tender for bonds, and certainly as the acquisition pipeline continues to build, that will be a key element in our thinking as well.

Okay. Thanks. And how should we think about the progression of occupancy over the remainder of the year? You know, you ended the quarter a little under 88%, so you have 200 basis points of growth the next three quarters. It sounds like you have a lot of leases having commenced but you also probably have some vacates. What should we expect in terms of the progression of the commencements and occupancy growth over the next three quarters? Is it going to be relatively even or are there loves we should be aware of?

I think as has been -- what we've outlined before is we would expect a lot of that actual occupancy growth to occur in the second half of the year. I think as we're looking at the run rate now, Josh, we have you know the thing we're really focused on and feel very good about the first quarter is this increasing spread between our leasing and our occupancy levels. And really our leasing targets really are paramount to what -- that's what creates the forward momentum on all the operating metrics. But we would expect the next quarter occupancy we'd be very much in the same range where we are now with accelerating beyond that in the third and fourth quarter, and certainly are very happy where we stand today at 90.8% lease with a big pipeline of deals, a lot of those deals with four commencements.

And then also when you look at the leasing pipeline, it sounds like the spreads should get better because the spread -- cash spread guidance is four to six. You were three and a half in the first quarter, so should we expect that the spreads are also going to improve in the next few quarters.

Yeah. With I think they will continue to kind of be, you know, within that bandwidth, you know, some quarters, I think, just depending on the timing of the deal, the market of the deal. But I think overall, again, another reason why we held both the same story NOI growth and the mark to market targets is, you know, everything is progressing as expected.

Okay. Thanks. And then just lastly, could you -- would you be able to tell us the cap rate on the Delaware office sale?

Yeah. I mean the cap rate on the Delaware office sale is about $140 a square foot. The cap rate is -- we almost look as almost an irrelevant consideration only from this standpoint. The tenant had -- who occupied pretty much the entire complex had near term lease expirations, so for us it was a binary outcome. The rental rate they were paying was well above existing market by a significant factor, so I think Howard touched on the income that we would lose as part of the sale.

But I think from our standpoint, being a 20% owner, and we contributed this property to a venture a number of years ago and harvested a great amount of value at that point on our venture with MacQuarie, went through two other successive partners. And I think our partners felt that now is a good time to sell as opposed facing that binary outcome. We were good partners and we thought that was a sage decision. And we wound up selling it to the tenant who really had an objective of owning the real estate as opposed to leasing it

Okay. I mean could you tell us, just recognizing that the current income would go down, can you tell us just what the cap rate was on the current level of income?

It was in the low double digits.

Okay. Thank you very much.

And your next question comes from the line of Jordan Sadler with Keybanc,

Thanks. Good morning. Just wanted to dig in a little bit on the acquisition front to maybe hear a little bit about the nature of sort of what you would be targeting in terms of acquisitions. Would it be most of or much of the investment we've seen so far has been opportunistic or development oriented. Should we expect to see more of that or are there also core-type opportunities?

Great question, Jordan. The -- and again, Tom (inaudible) I think when we look at the existing pipeline today, it's really -- it's a combination of those two itemsI mean, I think the -- you know, we do like value added acquisitions where we can bring some leasing and some construction and marketing skills to bear. We do think they create the best value per square foot and the best growth opportunities. Particularly where they augment existing strong submarket positions, so we're essentially, by buying these properties, preempting another competitor, providing expansion or relocation opportunities for our existing tenant base in both the building that we acquire and our existing stock and creating a better platform for us. Very similar to what we did with 660 Germantown Pike, and what we've done with or plan to do with the 1900 Market Street building in Philadelphia.

So that's a key piece of what we're looking at. The second element really is when we look at our expansion into the overall inside the Beltway D.C. marketplace. You know, that's really a venture with Allstate. The target levels there tend to be more core, core plus versus true value add. To the extent that we saw real value add opportunities, we certainly pursue those. To the extent we thought they made good alliance to our existing portfolio and provided good forward growth, but in D.C. the primary focus has been on core and core plus.

You know, the New Jersey market, the Delaware market, we've really viewed those as really more net selling positions over the next several years for a variety of reasons including what we think the inherent demand drivers are. And we shift down to Austin. We have looked at both land acquisitions there, value add acquisitions, as well as core and core plus. So it's across the board there, so the objective there is given our existing market platform and our objective to expand that, we're looking at various submarkets to see how we can augment our existing tenant flow.

These days what do you think cap rates look like for core, core plus in the Beltway area?

Well, we -- cap rates -- again, depends on the building and where it is in its process. So I think we look more of it on an IRR basis, and as we look at those core, core plus, we're trying to look -- it can be IRR's as we look as a projected basis over a five year hold or more, we are seeing the IRRs in the mid 7s, going into mid 8s for the products we're looking and five Beltway. Those are our targeted returns while cap rate is something important we do look for yield. And we will be assessing that as we look. We are really an IRR driven reviewer of those properties.

A and on the other side, what do you see in Austin? Similar?

Austin's a little higher. I would say cap rates going in have been that pretty good. They've been pretty aggressive. But I think same thing. You can see IRRs kind of in maybe a little higher maybe eight to nine. Again, it depends on the property and which market it is. I think those are a little dichotomy in some of those markets. Especially in the northwest you can see those being a little higher, because that is the area where if there's going to be growth in building you may see that, so I think there's a little bit of a higher cap rate for IRR in the northwest but just slightly higher.

Last one quickly would just be on liability management. Howard, just kind of curious, you know, we've seen you take down and accelerate some of, you know, the redemption of some of the notes in the past, opportunistically, to maybe take term when it's good to take term. Maybe sort of expand on some of your thoughts of where we are in the cycle now come and how you may look to capitalize on that.

Sure, Jordan. You know, definitely some near term notes that we're focused on. 14s,15s, 16s are all in the window so to speak. On a number of those, the remaining holders are hold-to-maturity accounts; really the only way to get some of that debt back might be make holds. That's quite expensive. We also have the -- a small portion of swapped bank term loans and some floating rate bank term loans. Those are much more flexible.

And as we assess the different possibilities, we, as Jerry says, we could do nothing because letting interest rates ride for the time being has been the right strategy and we're relatively insulated from rising rates. We could just use some cash to do a variety of activities, amongst those different baskets. And I guess the third scenario is we take our cash and we use that with perhaps new issuance to do an even bigger cleanup. But again, that comes back to the question of where you think rates are going and is it advantageous to go into the market early from an issuance standpoint. And these are all great choices to have.

What's your bias? I mean it seems to me in the past that you kind of thought it's good to take term now a little bit, and I'm just kind of curious what your thought process is on that now. Let it ride is more of a view you guys are espousing?

Yeah. Look it's a three headed coin, equally balanced, so depending which way it lands, there's really no tremendously compelling outcome there unless you start to get a little creative with your future rate assumptions. The one other wild card in all of this is it's no secret that all of our financial and operating management has been towards getting a ratings upgrade moving from BAA 3, AAA B minus, to the next level up, to have even better, cheaper access to capital. So as we think about the possible timing of that activity, given our recent equity raise and the portfolio improvement, that factors into our thinking as well, because the issuances we'll be doing will be governed by that rating. So that's a qualitative aspect of the strategy that we try to integrate as well

Okay. That's helpful. Thanks, guys.

Your next question comes from the line of Michael Knott with Green Street Advisors.

I'm here with Michael. Now that you've found your share price high enough to issue equity, does that cause the capital signal start to change your stand towards being a net seller and maybe make you want to be more aggressive acquisitions rise?

Great question. But I think the driving predicates for us remain the same. I think when we looked at our -- our disposition program, it was really driven by a couple drivers. One was that, you know, we are in this process, and I think doing fairly well in terms of really significant upgrade of the portfolio, and a big shift of the portfolio to what we think will be much higher growth assets going forward. You know, the best evidence of that, I think we talked about in the last call, was the shift of 30% of our revenues a number of years ago in New Jersey down to about 5%. So there is -- there is that strategic real estate fundamental predicate that really continues to drive our disposition plans. The second driver of that was, obviously, which I still remain convinced of, our best source of capital is to internally recycle that capital.

And our best source of proceeds, even with the stock pricing moving in the right direction, our best source of proceeds I'm convinced remains selling out a slower growth assets or assets that don't fit our long-term strategic or tactical plans and using that capital to recycle into higher growth assets. We're seeing an emergence of some build-to-suit opportunities. We have, as you know, some good developments under way. We've acquired some good value added acquisitions. That's a much better value add strategy for us to achieve our goals of really being the preeminent town centered, urban focused company in our marketplaces.

Okay. Thanks. And sort of a related question, your suburban Philly Pennsylvania portfolio is now about 50% Crescent market and 50% non-Crescent in terms of square footage. Of the -- call it 3 million square feet outside the Crescent markets today, can you peg how much of that is noncore at this point?

Well, the next biggest submarket outside the Crescent markets is in the King of Prussia Northern 202 corridor, which is at the bulk of what's outside the Crescent markets. Anything not in those markets are clearly noncore. We have a number of those projects now in the market down in southern on Southern 202. We sold out of Exton and we still have one building there to sell. We have some properties up in Bluebell, which we view as noncore.

But I think over time, you'll see us move out of those markets. The market that we're continuing to track very carefully is that King of Prussia Northern 202. That market has typically been the second market to recover after the Crescent markets get incredibly tight. We now have occupancy levels, not just for anyone, but market wide in Conshohocken and Radnor Plymouth Meeting, well above 90%. You're seeing demonstrated consistent rent growth in those markets, a number of tenants are now focusing on -- on King of Prussia.

So we would expect to see pretty strong performance out of King of Prussia over the next -- over the next four to eight quarters, and that will determine what we think the ultimate value proposition is for those markets. But right now the focus is on the Southern 202, (inaudible) Great Valley, Blue Bell, Exton markets to liquidate our positions there over the next couple of years.

Okay. Great and just a last one, a quick housekeeping item that -- do you have what the quarterly retention rate would be without the Intel moveout? Offhand?

I'll try and calculate that.

No worries. We can -- I can do it on this end.

Okay. Great. Thank you very much.

Thank you.

Your next question comes from the line of Mich Germain with JMP.

Good morning, guys.

Good morning, Mitch.

Thoughts on the dividend as you move to, you know, more of a stabilized, you know, occupancy in the portfolio?

Well, the -- I think we talked about that some previous calls. The -- we like the fact that we're retaining cash today. It's a good part of our business plan. The CAD ratio this quarter was very strong. I think, as Howard outlined, we're expecting a pretty good CAD payout ratio for the balance of 2013. I think as the board contemplates a dividend policy, we're very focused on making sure that we have extraordinarily good visibility on our forward rollover and retention rates. That's one of the reasons, obviously, we spent a lot of time on our 14 and 15 rollovers about 24 months in advance of that. We have very clear visibility on our capital run rate, so we can with high degree of certainty project out what our CAD cash flow will be.

The -- you know, we had set the program we wanted to have our CAD payout ratio consistently below 80 percent. But frankly, Mitch, the lower the better for us. So we don't have any current plans to increase the dividend, but I will tell you the trend lines are very encouraging. Certainly, the board is very focused on what those trend lines are. We review it every quarter with them. And I do think that as the portfolio continues to perform, we meet our occupancy and preleasing goals. If capital costs continue to maintain their current run rate in the 225 to 2785 range that certainly is something on the radar screen over the next year or so.

And it seems like you guys are in the early innings of this coinvestment vehicle you're out marketing. Is this going to be regional specific and you guys expect to maintain a minority, or maybe a 50% interest. Any color around that at this point?

Well, I think we would expect it to be our investment vehicle for Austin, Texas. The ownership stake we maintain will be purely a function of pricing and structure. I think the Allstate venture that we have is a 50/50 venture. We have defined rights. Allstate's a great partner for us in terms of co-underwriting and response time and reacting to market offerings. We're looking for those same elements in our new partner. But the actual ownership stake we keep, the promote structure, all of that will be a function of point of entry pricing, as well as the amount of capital that the partner is willing to commit.

Thanks.

You are welcome.

Your next question is a follow-up from the line of Brendan Maiorana from Wells Fargo Advisers.

Thanks. George, sorry if I missed this but the 729 square feet of signed, not yet commenced leases, how much of those are expected to commence in 2013?

556,000.

Okay. Great. As far And then this is probably for Howard, but for whoever, same store, it was benefited this quarter from a significant -- significantly lower straight line rent adjustment. It was probably about 250 basis points so you guys were significantly higher on same store straight line but as I look at that straight line adjustment last year, it went down pretty nicely in the second quarter and then continued to get lower in the third and fourth quarter quarters. Is it going to become challenging to sort of keep same store at the high end of guidance given that you get less benefit of cash rents currently versus last year?

Yes. I mean we're currently programming for 2013, some slight declines quarter-to-quarter in the straight line rents. So once you line that up with what we had in 2012, it could continue to be favorable, and candidly that's why the same store growth rate for the full year for cash is 100 basis points higher than for GAAP. We're going to benefit from, generally speaking, declining noncash revenue. So that's in the plan

Howard, if I sort of read your comments correctly and think about where you guys were in the quarter, you were above the high end of your range by a little bit, but about the high end of your same store range. And if you expect that cash rents continue to get better in 2013, do you feel like you're likely to trend at the high end of kind of the guidance range even though you kept it the same?

One can only hope but it's too early to tell.

All right.

There will be a lot of timing factors and last minute details on deals and just too early to tell. That's why there's a range

All right. Fair enough. Thanks.

And your next question comes from the line of Bill Crow with Raymond James & Associates.

Good morning, guys.

Good morning, Bill.

Two questions. Jerry, with the investment with Toll Brothers, with Campus Crest, the retail development, complimentary retail development, you announced, what is your interest level in continuing to invest outside of your core office properties within those core markets of Philly and DC and those areas?

Bill, on the re-- I'll take the last case first. On the retail piece, this is a piece of ground that we owned, literally the front door to Radnor Financial Center. And the retail size is just a 18,000 square foot amenity-based one-story retail building. So that's very site specific. And very complimentary to our existing tenant base, and it was not of a sufficient scale that we thought we need to joint venture with the development company and other residential -- or retail development company.

On the Toll and the Campus Crest venture, remember, the driver there was existing land holdings and it's monetizing or contributing, or whatever term you want to apply to, it to create a near-term value driver for us. So, you know, I think one of the things that we're very mindful of is the market shift and where we thought a piece of ground could be developed for office that there may be a higher and better use for it today. We do have a number of other pieces ground where we've gone through the rezoning process and we're marketing those pieces of ground for outright sale. We don't think they add a lot to our existing land holdings or existing office tenant space. But there is clearly a movement towards mixed use communities; live, work and play environments; mass transit served and that's clearly where this company is going.

So we would anticipate that as some of these larger scale opportunities present themselves, that we would be in a position to venture with other high quality organizations to create value for us as we deploy existing land holdings or land holdings in close proximity to a key asset base of ours

Great. Second question, on the coinvestment strategy for Austin, I'm not sure how much you'll say about this, but this essentially eliminates what has been much speculated upon, an asset trade with Parkway.

Well, I'm not sure there's been a lot of speculation that's reached our desk, but maybe -- maybe in other worlds. We have been approached over the last couple years by a number of companies that have assets in Philadelphia who may have other operations outside of Philadelphia with a concept of a swap. We are always open to those discussions. We've done swaps in the past and they've been very effective for us. I don't think anything's precluded under any scenario.

There are a number of other public companies and big private firms that own assets in some of our core growth markets that we continue to have dialogue with them on a number of fronts, but, you know, for any type of trade to work it has to work for both parties, and I think as we look at our asset base in Austin, there's some tremendous growth opportunities there. And we thought in our best interest, the thing was to create as broad based a marketing campaign as possible to get a clear indication we thought value was.

Okay. Great. Thank you.

And your next question comes from the line of Rich Anderson with BMO Capital Markets

Bill asked a good question, so I'm going to follow up on that one. Is it possible that your partner in Austin could be another REIT, and if so, would you be willing to, you know, allow them to be more on the operating side and you on the financial side, or do you want to maintain control of those assets through your coinvestment strategy?

That's another good question. Look, I think from our standpoint -- and I don't mean to be coy, but please respect that we are in the marketing process. We've yet to receive bids. Our objectives are really clear. It's to take advantage of real strong market pricing, optimize current value and create a coinvestment vehicle to significantly consolidate fragmented ownership in that market. We like that market. It's got great demand drivers. We do have a local team.

Our approach in terms of management and partnership arrangement has always been flexible, as always been geared toward creating the best result. Certainly, that's evidenced by what we've done with Toll Brothers or Campus Crest and Harrison. I mean we sit down at the table and try to figure out what works best to create the best value in the most efficient manner,and that often involves a division of responsibilities, different skill sets being brought to the table. So, we are completely open to what the market presents back to us not just on Austin, but in a lot of our other undertakings, as well.

I just think that markets are dynamic enough. No one company has all the answers. There are tremendous other talented people out there at other companies, and we look forward to getting in bids on Austin and some of the other things on the table to see what creates the best financial picture and profitability for Brandywine.

Excellent. Thanks, Jerry.

And there are no further questions at this time. Mr. Sweeney, are there any closing remarks?

The only closing remark is to thank everyone for their participation in the call. We look forward to continued execution during 2013 and updating you on the next call through on the second quarter. Thank you very much.

Thank you. This concludes Brandywine Realty Trust's First Quarter Earnings Conference Called. You may now disconnect.