Brandywine Realty Trust (BDN) 2013 Q2 法說會逐字稿

Good morning. My name is Latange and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

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

Latange, thank you and thank all of you for participating in our second-quarter earnings call, and good morning. On today's call with me are 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.

Certain information discussed on 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 the 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.

Okay, to move into our conference call, first I'll provide an overview on our three key business plan components of operations, balance sheet, and investments. And then George and Howard will discuss our operating and financial results in more detail.

The second quarter represented a solid continuation of our business plan execution. The quarter was somewhat quiet on big announcements, but extremely solid in daily execution. Operational performance remained strong and our 2013 plan is on target. Our leasing NOI growth progress reflects continued recovery of our office markets and our portfolio continues to benefit from an ongoing flight to quality landlords and quality product.

Volatility has certainly increased since our last call, driven by the change in monetary policy and its corresponding impact on interest rates. Despite this news, tenant activity levels remain strong and tenant decision making remains timely.

From an overall standpoint, our operating performance is playing out as we anticipated and we are reconfirming our previously stated goals. Overall we are generating strong NOI growth, reducing our forward rollover exposure, experiencing good leasing capital cost stability, all of which result in solid portfolio value appreciation and continued improvement in our CAD payout ratio.

2013 operational goals, which George will explore in more detail, remain intact, with year-end occupancy projected at 90%, year-end leasing percent at 92%, cash same-store growth rates between 4% and 6%, a targeted 62% retention rate, and minimum GAAP mark to market on new leases of 5%.

In looking at specific key metrics and benchmarks, we had a 9.1% increase in our renewal rates marked to market and a 13.2% positive spread on new leases and expansion [rental] rates, both on a GAAP basis. And they were well in excess of our targets.

Capital costs remain moderate. We are very pleased with our ongoing control of capital expenditures as we absorb space. For the quarter we averaged $2.29 per square foot per lease year, well in line with our business plan, and posted another strong CAD payout ratio of 79%. For the first six months our CAD payout ratio was 71.4%, below our forecasted 80%. And we've had 6 consecutive quarters with a CAD payout ratio below that 80% target.

We also had strong same-store growth of 3.4% on a GAAP basis and 4.4% on a cash basis, in line with our plan and reflective of the growth inherent from our leasing performance over the past several years.

Our NOI progression continues. The markets are clearly in recovery and we expect to see continued strong NOI growth.

In looking at 2014 and '15, our remaining lease expirations have been reduced to 7.5% in 2014 and 9.7% in '15. So forward de-risking continues and we are also pushing for larger annual rental rate increases and have been successful in moving that average range from 1% to 1.5% to a range of 2% to 2.5%.

Retention for the quarter was 66.2% with positive absorption. And, as George will talk in more detail, we currently stand at 88% occupied and 91% preleased, a 300 basis point spread, which reflects the positive forward leasing momentum we have through the portfolio.

Turning to our balance sheet, very straightforward. As previously discussed, we raised $182 million in net proceeds through selling 12.6 million shares during the quarter. That offering had not been contemplated at the beginning of the year, but the proceeds from this equity issuance accelerated deleveraging, improved credit metrics, and certainly provided excellent liquidity and financial flexibility.

We have no outstanding balance on our $600 million unsecured line of credit and had over $200 million of cash and cash equivalents on hand at the end of the quarter. Our cash balances remain invested in depository accounts with numerous banks. The valuation of the optimal use of this cash is ongoing.

Our current FFO projections do not reflect the impact of any accelerated debt paydowns or liability management efforts, nor do they reflect the impact of any potential targeted acquisition activity.

Reducing leverage levels below 40% and achieving a 6.5 times EBITDA by year end 2014 remains a core element of our business plan. The equity issuance and continued strong portfolio performance contributed greatly to the achievement of that goal. At the end of the second quarter our net debt to gross assets approximated 40.8% and our net debt to EBITDA was 6.8 times.

The long-term goal is also very much on track. That goal is mid-30% leverage and an EBITDA multiple below 6 times. We remain convinced that continued occupancy gains combined with our capital recycling program will insure that we achieve those results. So in summary, balance sheet objective very straight forward. All of our objectives are very much on track.

On the investment front, similar to the balance sheet and operating components of our plan, the investment program is on target. With sales closed this quarter, we have sold approximately $177 million, or met 80% of our full-year $221 million 2013 target.

As disclosed in our press release, and further amplified on page 7 of our supplemental package, during the quarter we bought out the ground lease underlying Three Logan Square. You may recall, this is a 1,029,000 square foot Class A tower located in Philadelphia CBD. We paid approximately $20 per FAR foot for this acquisition and also reallocated some deferred purchase costs incurred in 2010, resulting in a total balance sheet amount of $25.1 million. That project is currently 91.2% leased and 83% occupied at the quarter end. And all of our objectives are also on line for that project.

We also exchanged during the quarter our 35% ownership stake in one joint venture property in Conshohocken, Two Tower Bridge, for our partner's 37% interest in another, Six Tower Bridge. The financial gains attendant to these transactions are also outlined on page 7 of the supplemental package. But, in essence, this was an opportunity for us to simplify our ownership structure in our Conshohocken assets and create a value-add, wholly-owned opportunity with our acquisition of Six Tower Bridge, which is currently only 73% occupied.

On other fronts, our redevelopment efforts at 660 West Germantown Pike continue. We are in advanced discussions with several tenants and expect that property to be fully occupied over the next several quarters.

200 Radnor Chester Road, an 18,000 square foot amenity retail center in our Radnor complex is under construction. We expect delivery in the fourth quarter this year. It's currently 66.5% preleased with strong follow-on leasing activity. We expect our yield on cost to be in the 11% range.

Construction on the Grove at Cira South also continues. You may recall that is a 33-story 850-bed housing tower located in the University City submarket of Philadelphia. We are developing that in a joint venture with Campus Crest Communities and Harrison Street Real Estate Advisors. We expect completion in the third quarter of 2014 with a total projected cost of about $158.5 million. Those costs have been funded, or will be funded, from an executed $97.8 million construction loan and the partners' combined $60.7 million pro rata equity contributions. As we discussed on the last call, we had satisfied $8.5 million or 30% of our equity share via our contribution to the venture of our underlying ground lease which underlies the project.

We also expect to break ground shortly on the construction of our 398 unit multifamily project in Plymouth Meeting, Pennsylvania which we are developing with Toll Brothers.

Looking at our land program on a more broad basis, solid progress is being made on our land monetization program and we are on track to achieve our overall land monetization goals as we've outlined on page 34 of our supplemental package.

On the disposition front, we completed four separate property sales aggregating $34.5 million in proceeds. Those properties that we sold are listed on page 7 of the supp and range from a vacant 28,000 square foot building in Malvern, Pennsylvania to a 99% occupied building in Rancho Bernardo, California. It's important to note we continue selling our California assets as leasing activity creates value. And over the last several years we have sold properties at an average price per square foot of $237 and a combined cap rate of just about 6%. We have six properties remaining in California and would expect that sale process to continue as value is created.

NOI growth through our investment strategy remains an important objective of our recycling efforts and our redeployment focus remains on increasing our urban and town center concentrations. As we normally do, we have a number of properties on the market on a price discovery basis and are confident of meeting or exceeding our $221 million annual sale goal. The properties in price discovery are located in Pennsylvania, New Jersey, Maryland, California and in Austin, Texas.

Speaking of Austin, as we announced last quarter, we embarked on an auction process for our wholly-owned Austin portfolio. We believed then that, given the strength of the Austin market, the significant leasing progress we made, increased investor appetite, that the market would be receptive to our offering of a high quality growth platform. Our presumption was correct. We received a significant number of institutional-quality bids, both for an outright sale and to form a co-investment growth vehicle to both harvest current value and provide additional capital to expand our market platform.

Press reports are a bit premature, as they sometimes are. We are not committed to proceed on any particular transaction. The general framework we are working on is a 50/50 ownership structure utilizing the secured debt markets to fund a portion of the recapitalization, an attractive fee structure to Brandywine and a significant going-forward equity commitment from both partners to ensure execution of our growth objectives in that market. This structure preserves a significant future profit position for Brandywine and harvests value at a time of rapidly accelerating rents at a cost of capital lower than our public market pricing. It also provides significant capacity for us to grow our platform in this market while mitigating our risk at a time when this market is also transitioning from the investment to the development phase of the real estate cycle.

This transaction, if consummated, would generate significant additional cash balances. If it does close, we expect it to be a fourth-quarter event. Between now and then we will continue to grow our companywide and Austin acquisition pipeline with the objective of recycling some of this capital to further improve our growth profile of our core market concentrations. We'll also look at utilizing a portion of this cash to further strengthen our balance sheet through accelerated debt paydowns or other liability management initiatives.

The impact of this transaction is not reflected in our current FFO guidance. But, given the timing, the impact on 2013 FFO is de minimus and the impact in 2014 will obviously be a function of our use of proceeds.

So, in summary, the second quarter was very strong. All of our 2013 business goals and objectives have been met for the first half of the year and our plan for the balance of the year is very much on track. We continue to be encouraged by the high level of leasing activity throughout our portfolio, our NOI growth rates, the experiencing positive mark to market, and effectively controlling our capital costs.

At this point, George will provide an overview of our second-quarter operational performance and then turn it over to Howard for a review of financial activity. George?

Thank you, Jerry.

From an overall standpoint, we continue to see recovery occurring in our markets and, more importantly, within our portfolio. All of our markets, with the exception of Delaware, experienced higher levels of year-over-year leasing activity. We are outperforming market vacancy in all of our markets except suburban Maryland where we trail the market due to the recent move-out of Lockheed Martin.

We continue to generate good levels of leasing activity, from space inspections to pipeline to lease executions. In terms of lease executions during the quarter, we signed 1,010,000 square feet of leases, including 457,000 square feet of new and expansion leases and 553,000 square feet of renewals. These lease executions include not only the recently announced Pepper Hamilton lease at Two Logan in Philadelphia, but 180,000 square feet of new deals in metro DC and two of our largest 2014 lease expirations in Pennsylvania totaling 132,000 square feet.

Tenant decision-making remains relatively unchanged, as leases executed in the second quarter averaged 90 days from initial inquiry to lease execution as compared to 96 days in the first quarter and 94 days in the fourth quarter of 2012. Lease commencements totaled 895,000 square feet, including 316,000 square feet of new leases, 434,000 square feet of renewal leases, and 145,000 square feet of tenant expansions.

During the quarter we had 347,000 square feet of tenant move-outs upon expiration and 94,000 of early terminations.

Our percentage leased has increased an additional 10 basis points from last quarter to 90.9%. We have 692,000 square feet of executed leases on space that was vacant at quarter end. We're delighted with the 90% lease level we have achieved in our New Jersey/Delaware region. This is their highest leased level since 2008.

Our original business plan metrics remain intact and we're confident in our ability to fully execute them. We've achieved $42.1 million, or 96%, of our $43.9 million spec revenue target. This compares to 85% achieved last quarter and 87% achieved this time last year. Based on activity executed to date and conversion of the existing pipeline, we have increased the spec revenue contribution from the Pennsylvania suburbs, Philadelphia CBD, and New Jersey/Delaware. Conversely, we have lowered the level of spec revenue anticipated from our Richmond operation. I will elaborate more on that region in a moment.

Occupancy will increase to 90% by year end, from 1.6 million square feet of renewal leases, 1.9 million square feet of new and expansion leases, offset by 360,000 square feet of known and anticipated early terminations. As detailed on page 6 of our supplemental package, we have 611,000 square feet of new leasing still to be executed. 60% of this activity will come from our Pennsylvania, Philadelphia CBD and New Jersey/Delaware operations.

We've already executed 1,398,000 square feet of our 2013 renewals. The remaining 170,000 square feet of renewals in the plan are all in active lease negotiations.

We continue to press forward on reducing our 2014 and 2015 lease expirations. In Philadelphia CBD, with the renewals of both Drinker Biddle and Pepper Hamilton, we have eliminated 474,000 square feet of risk from the portfolio. These deals were 15 and 13 years, respectively, resulted in an 11% space reduction, yielded a 15.7% markup in GAAP rent, and required tenant improvements of $3.20 per square foot per lease year.

We continue to demonstrate a strong discipline towards capital cost control, as this quarter capital is $2.29 per square foot per lease year and for the year is $2.26, down 13% from our 2012 and 2011 levels. Tenant concession requests remain relatively unchanged from previous quarters.

Our leasing spreads on a GAAP basis have been performing favorably to our original plan. And, as a result, we increased our range of 3% to 5% to a new range of 5% to 7%.

Same-store NOI growth continues to perform in line with plan. And with the levels of forward leasing already achieved, creates a similar range going forward.

Finally, a few comments on some of our markets. We remain pleased with the level of activity in our Metro DC region. Our regional traffic was again up quarter over quarter and we continue to see tenants making a flight-to-quality move to our Toll Road properties. During the second quarter our Met DC operation posted positive absorption of 19,000 square feet -- 100,000 square feet of absorption in Northern Virginia, offset by the known move out of Lockheed Martin in Maryland.

We've increased our occupancy in Northern Virginia 400 basis points this year and increased the region's leased percentage to 86.6%. Regional leasing spreads were 10.8% on a GAAP basis and negative 3.4% on a cash basis.

Now, shifting to Richmond, this region, which accounts for approximately 6% of the Company's NOI, saw an increase in tours quarter over quarter, but we have not executed leases at the pace originally projected, which is the reason for this region's spec revenue target adjustment that I mentioned earlier. Based on the regional pipeline and timing of our remaining assumptions, we do not feel that there is any additional risk in the regional business plan for Richmond. We're still negotiating with three tenants to backfill the 85,000 square foot move out of Travelers in January of 2014.

And, to conclude, we're on track and target and pleased with our business plan execution and strong level of activity in our various markets. Our regional teams' ability to execute, coupled with the quality of our inventory, will enable us to fully accomplish the 2013 plan and pave the way for continued improvement in our operating metrics in 2014.

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

Thank you, George, and thank you, Jerry.

Core FFO totaled $50.2 million for the second quarter of 2013, or $0.32 per diluted share. And we met the $0.32 analyst consensus. Our core FFO payout ratio is 46.9% on the $0.15 distribution we paid in April 2013. Core FFO provides a better sense of our FFO run rate by eliminating transactional and capital markets activity, as noted in our supplemental package on the bottom of page 18.

We derive second-quarter 2013 core FFO by adding back $1.4 million of capital market and transactional items to our $48.8 million NAREIT FFO. For Q2 2013, core FFO is $0.01 greater than NAREIT FFO.

Couple of observations regarding our second-quarters results. Our FFO is very high quality, with termination revenue, other income, management fees, interest income, and aggregate JV activity totaling just $6.7 million gross, or $5.3 million net, in line with our 2013 expectation for these categories.

Our Q2 NOI and EBITDA margins at 60.5% and 62.6%, respectively, remain at or near the highest levels for these metrics all the way back to early 2009. Same-store NOI growth rates for the second quarter were 3.4% GAAP and 4.4% cash, both excluding termination fees and other income. We've now had 8 consecutive positive quarters for the GAAP metric and 5 consecutive positive quarters for the cash metric, and are on track for our 2013 same-store NOI growth targets.

Second-quarter interest expense of $30.4 million was down $500,000 versus the first quarter and down $2.6 million versus the second quarter a year ago, reflecting the beneficial impact of our late fourth quarter 2012 capital market and liability management activities and overall deleveraging.

Our G&A, at $7.3 million, came in a bit higher than our typical $6.5 million run rate, due to about $300,000 of transaction expenses and accelerated recognition in the second quarter of deferred long-term compensation costs due to various individuals achieving certain age and tenure milestones. As a result, third- and fourth-quarter levels will adjust downward from the pro rata figures.

We had two different gain recognitions on account of the Tower Bridge asset exchange. These are both ignored for FFO and CAD purposes. And with $14.4 million of revenue-maintaining capital expenditures in the second quarter, we achieved a better than expected $0.19 of CAD per diluted share and a 78.9% payout ratio.

With respect to the balance sheet and financial metrics, I would emphasize the following. Our debt to GAV of 40.8%, our debt to total market cap of 48.9%, and 6.8 times debt to EBITDA ratios, all showed dramatic improvement from first quarter 2013 on account of the April equity offering. These are our best levels for these metrics going back at least 8 years.

We have just $100 million of floating rate debt, no outstanding balance on our $600 million unsecured revolving credit facility, $216 million of cash, and no maturities until $232 million of unsecured debt comes due in November 2014. This maturity is effectively covered by our current and projected cash balances.

With respect to 2013 FFO guidance, we are revising our 2013 figures from $1.35 to $1.42 to a new range of $1.36 to $1.41 per diluted share. Excluding the $0.01 of transaction and capital market costs, our core FFO is projected to be $1.37 to $1.42, an increase of $0.02 at the bottom of the range and of $0.01 at the midpoint.

With six-month core FFO of $0.67 on hand, we need $0.70 to $0.75 for the balance of the year to hit our guidance range. Excluding the historic tax credit income of $0.08, which we will recognize in the third quarter of 2013, we then need a net amount of $0.62 to $0.67 for the balance of the year. Thus, our Q3 and Q4 quarterly FFO, excluding the historic tax credit income, should be in a range of $0.31 to $0.33 per diluted share.

In addition to the business plan assumptions on pages 5 to 7 of the supplemental package and outlined by Jerry and George, please note the following. Gross other income for our business plan remains unchanged at $20 million to $25 million for the full year, or $14 million to $19 million net. This reflects a basket of other items, such as termination revenues, other income, management revenues, less management expenses if net, interest income, JV income, and preferred return on the Thomas Properties Group Commerce Square joint venture, less the 3141 Fairview financing obligation expense.

Our 2013 G&A is now modeled at $25 million to $26 million versus $24 million to $25 million previously. Q3, and especially Q4, will be lower than the pro rata figures, as expenses are now frontloaded. Overall, G&A is up due to transaction expenses, several minor items, and the treatment of long-term compensation awards, the last of which is noncash and is added back in our CAD calculation.

We now see interest expense dropping in 2013 to remain in a range of $121 million to $124 million, down $1 million on each end from the prior expectation, as continued liability management and low debt levels work in our favor.

We expect another $44 million of sales activity beyond the $176.6 million of completed sales to hit our $221 million target. These additional sales have been modeled at an 8% cap rate, very comfortably, and are somewhat back-ended, resulting in a $750,000 to $1 million loss of NOI from our 2013 operations. Tom will elaborate further on the sales market in his comments.

The historic tax credit income amount of $11.9 million, or a little bit under $0.08 per share, in the third quarter of 2013 is offset by about $0.01 per share of total associated incremental interest expense that occurs throughout 2013. The historic tax credit revenue is essentially noncash, is excluded from our CAD calculations, represents the third occurrence of each 20% portion of the net proceeds realized in connection with the 2008 historic tax credit financing on the Cira post office project and will be recognized in the third quarter of each year from 2011 through 2015.

We assume no further issuance under our continuous equity program and no additional note buyback or capital markets activity. We are now modeling 156.2 million weighted average shares for FFO in 2013, up nominally from 155.8 million previously. Our FFO payout ratio is projected at 43% based on an expected $0.60 full-year distribution on the midpoint of our $1.37 to $1.42 range.

Our 2013 capital plan for the balance of 2013 is very simple, with remaining uses of $150 million. We see $5 million for remaining mortgage amortization. We've allocated $94 million for investment activity. That incorporates $40 million of revenue maintaining capital expenditures and $54 million of remaining revenue creating and other CapEx projects, including the expenditures on 600 West Germantown, the Radnor Chester project, the Grove project, and additional funding for the Commerce Square joint venture. And, lastly, we have $51 million of aggregate dividends from July on. The July distributions, of course, have already been funded.

The funds for this $150 million will come from $44 million of additional sales proceeds; $88 million of cash flow before financings, investments, and dividends, and after interest expenses; and $18 million of cash on hand. The $18 million cash usage will reduce our June 30 $216 million cash balance to $198 million at year end.

And, lastly, with respect to account receivables, we had normal activity in the second quarter and ended with total reserves at June 30 of $17 million.

With that, I'll turn it back to Jerry for additional comments.

Great. Thank you, Howard, and thank you, George.

To wrap up our prepared remarks, the second-quarter results were strong and, as you've heard both George and Howard amplify, very consistent with our business plan and all three core components of our objectives. We're confident in the continued execution of this plan and are very much planning ahead for our early renewal program for 2014 and '15.

That success that we've had this year will be continued in subsequent years and will be driven by our continued market outperformance and presenting a high quality portfolio to our customer base. We remain committed to our growth and deleveraging goals and our portfolio shift to urban and town center markets.

With that, we'd be delighted to open the floor up 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.

(Operator Instructions) Josh Attie; Citi.

Jerry, could you talk about the investment landscape? You have $200 million or so of cash today and you could probably pull out $150 million to $250 million from Austin. What's being contemplated for reinvestment and should we think about the Austin proceeds as effectively funding your future growth in that market?

Great question, Josh. And, Tom, I'll ask you to kind of give an overview of what we're seeing across the board.

Sure. Josh, looking at the markets, CBD Philadelphia continues to be steady. We see some investment activity that we're taking a look at, and pricing has been somewhat strong. Looking at the suburbs, we have seen a little more activity in the suburban markets, with some sales occurring and we see some product coming to market. As you know, we were able to get two small sales done to [users] and we see some other things coming to market in the next several months.

Looking at Metro DC, as I mentioned last quarter, there's been an increased number of office buildings and developments brought to market, primarily inside the Beltway and pricing remains strong. We expect that the pricing will remain strong for the well-located assets inside the Beltway. Outside the Beltway it's been a little less activity, but [reaction] has continued to be strong in terms of sales and investment activity for development.

We continue to be pretty conservative looking at the pricing in terms of rent growth. It's been fairly much of a pause in terms of people expecting any kind of significant rent growth over the next couple of years. And we've targeted certain markets, primarily inside the Beltway that we're going to be looking to do investment.

Looking at the Austin market, there is a lot of liquidity there. We've seen quite a few trades take place relative to the size of that market, as it continues to show strong absorption and strong demographics. We will be looking at properties that are trading in that market. We continue to look and underwrite properties in that market. And we would expect that if we do look at a joint venture, if that does happen we would be looking for a strong platform to then grow in that market. And certainly we'll be targeting certain returns and certain product types in our core submarkets that we want to attack.

Looking at Richmond, it's been fairly slow, significantly steady. We see some activity in the Northwest market, not very much in the Southwest market. We will be looking at investment opportunities but over the long term we'll probably be a net seller in that market.

South Jersey, fairly slow, not many trades. We continue to look at that market as something we will reduce our exposure in over time.

As Jerry mentioned, we have sold properties in Pennsylvania and California to bring our sales total up to $177 million, and we'll look to continue to find opportunities to sell.

And acquisition pipeline is pretty strong. We see some off market and on market transactions that we continue to pursue. And, again, any acquisitions would then be offset to still reach our target of $221 million of sales.

Great, Tom, thanks. And, Josh, to put a finer point on it as well, look, I mean, our focus is to build that acquisition pipeline, as Tom touched on. It's strong. It's pretty diverse. Our focus remains on value add. The urban markets we certainly are spending a considerable amount of time targeting some of the those inside-the-Beltway markets in DC to see where we can have moments of opportunity given the macro overlay in that market in terms of slower tenant demand.

Certainly CBD Philadelphia, University City, remain investment targets. And I think your supposition is correct in that if we are successful in doing a venture in Austin, that structure would contemplate a significant equity commitment on our behalf as well as our partner. So certainly a significant portion of the cash we would realize from that sale we would expect to deploy back in that market consistent with our goal of remaining one of that market's top landlords.

In the supplemental there's a property -- smaller properties, in New Jersey. It was classified as reentitlement. And then there was another one taken out of service. And I know you've talked probably about at least one of those before. But can you just remind us what's going on with those assets and if those represent areas of future capital spend?

Certainly. We have two properties. One is our Main Street property over in Voorhees, which consists of an older building as well as some surplus land, as part of a town center. We are going through the entitlement process to rezone that full residential, at which point in time if we're successful in that undertaking we would either sell or joint venture that future development.

The situation in our Gibbsboro, New Jersey property is very much the same. That is part of a current office and mixed use development where Brandywine controls a lot of the office space. This property in particular is located within that development grouping, such that it's really primarily more of a residential or retail site. So we're going through the entitlement process there to achieve all those final entitlements as well.

Thank you.

Jordan Sadler; KeyBanc Capital Markets.

Wanted to just circle back to the leverage target. I think you said by year end, and you've said this pretty consistently, 6.5 times debt to EBITDA. You were at 6.8 this quarter. Longer term you want to be below 6 times. Given the leverage target, is the continued delevering embedded or reflected in guidance? I'm calculating essentially you'd basically need to reduce debt, without any diminishment in EBITDA, by about $100 million to hit the year-end target.

Hey, Jordan, remember, the year-end target for 6.5 times is a 2014 year-end target, just so we're on --

Okay.

It's not a 2013 target.

Okay.

To your broader question, though, certainly as we look at our investment program, the operational traction we're getting through the portfolio, what properties to buy and sell, certainly the tracking of the debt capital markets from a liability management standpoint, all of those things are knitted together with the objective of achieving that goal, if not surpassing it, by the end of 2014.

Okay. Now, just to follow up on Austin, you talked about opportunity to sort of realize some of the gains there at a cost of capital that was below what you could realize in the public market. I'm interested in that. But also, separately, should we assume or anticipate that there will be some downtime related to raising that capital? Or are there additional opportunities teed up for that joint venture?

Just to be clear, your question is if we do the joint venture would there be a lag time to reinvest some of those proceeds.

Right.

There very well could be. I think, as Tom touched on, the pipeline of activity, both on a value-add and a core-plus basis in Austin, is pretty good. I mean, there's certainly a lot of things on the market. But, I mean, look, as we're developing our financial plan looking ahead at 2014, there could be a lag time in reinvesting some of those proceeds, because we're certainly going to be driven by investing those proceeds wisely as opposed to simply putting the money back out the door.

But, look, I think as we look at the prospect of generating that liquidity in that marketplace, it met all of our goals. It was kind of interesting; as we went to the marketplace, we really did see great investor demand. They liked the assets. It was also interesting to see how investors juxtaposed future growth expectations in that market. It seems like everybody wants to grow in Austin. So the fact that we had a good, solid platform, that we had a very strong management team, and we had the capacity to grow, that clearly became part of the attractiveness in the institutional demand, because most institutions want to grow in that market as well. And the idea of being able to do that with a knowledge invested and incented partner we think created some real premium to the pricing, as evidenced by the fact that the pricing we were realizing to sell the portfolio was comparable to what we were seeing on the price to joint venture it.

Okay. That's helpful. Thank you.

Michael Knott; Green Street Advisors.

Curious if you're seeing any impact on cap rates or investor demand, just broadly, from the rising interest rates or whether it's been sort of a nonfactor.

Tom and I will tag team that, Mike. From what we've seen, there really has not been any real impact. Whether it's too early to call or if people are still waiting to see where things shake out remains to be seen. But as we're pinging the secured debt market on some of these different transactions -- Tom, why don't you share what we're seeing out there?

Yes, Mike. We have seen that while the 10-year has moved up and -- but the rates we're seeing, still a lot of people are looking at good leverage in the sort of 60% plus or minus range. You're still getting quotes that are going to be below 4% for good quality assets. We had heard when rates started to move that we may see some changing in the pricing. But right now, in terms of what we've looked at, we're still seeing strong demand from the banks as well as the life companies. So nothing yet has really hit the markets in terms of expectations on where people are underwriting their debt levels.

Anecdotally, interestingly, just in a couple of conversations we've begun to hear that some investors are looking to accelerate their investment activities in anticipation of a potential higher movement in rates, so where the number of reverse inquiries on some trades has increased over the last 30 or 45 days.

But I think, Michael, honestly it's simply too early to call. I think people are still waiting to see what happens with long-term rates, what the impact on spread compression is, as you well know, what the drivers of that economic data set is.

So we're just focused on meeting our sales goals, remaining very much focused on capital deployment and obviously monitoring both the public debt markets as well as the private debt markets.

Okay. And then on the operating side, how long do you think it's going to take for Richmond to sort of catch up to some of your other markets? And then on the DC side, any real signs of improvement there? Or is there potential for maybe more political spats over debt ceiling and all that later this year to impact leasing outlook there in DC?

Well, look, on Richmond we have the benefit in that market of a very strong team and very good quality product. Despite the fact, as George mentioned, us revising down our projections for this year, what we have seen is an acceleration of leasing activity. So we've seen more tenants in the market of various sizes. We've seen a good pipeline of activity on backfilling the Travelers space, which is expiring early next year. So just as we saw New Jersey get back to 90% lease target, we certainly have expectations that sometime next year we'll get Richmond back to those levels as well.

Again, we kind of really focus on number of people that come through the portfolio, the prospect list, competing space. And we seem to think that, particularly in Southwest Richmond, that that market has tended to lag in the recovery based upon what happens in the Northwest. The Northwest has been surprisingly strong the last year or so. And I think that's really one of the drivers why we're seeing more activity in the Southwest.

In Washington there's always the potential for more hubris, some more dislocation. We're not incisive enough to prognosticate that to a fare thee well, so what we really do is we work very closely with our leasing teams, our operating heads, to make sure that we take advantage of every single opportunity we see in that market. As George touched on, we've had a very strong first half of the year. We were able to move up our year-end leasing targets. The economics that we're seeing on the transactions have been very much in line with plan.

So there's clearly, even in that market, a big differentiation between how certain submarkets are performing. But overall we feel pretty pleased with how we've done, knowing full well that the message is still to get transactions done today in the event that something unforeseen on the political or economic front further complicates the tenant demand drivers in that marketplace.

Thank you.

Brendan Maiorana; Wells Fargo.

Jerry or George, you guys have shown very good occupancy and leased rates in the closer-in Crescent submarkets -- Radnor, Plymouth Meeting, Conshohocken. I was a little surprised to see that the occupancy and leased rate dipped in the western suburbs, in the King of Prussia, Berlin, and the 202. And it wasn't that much in the quarter, but do you think that the tightness in those Crescent markets is driving increased demand and forward occupancy and leased rate in those western suburbs and this quarter was just a bit of an anomaly?

George and I will tag team this, but historically -- and I think we've talked about this on previous calls -- there is no question that as these Crescent markets tighten, and they are very tight, you see a real spillover effect into the Turnpike markets, particularly King of Prussia, northern 202. So the level of activity we're seeing, the diversity of that demand -- a lot of it's price driven, where the people can't afford to be in the -- or don't want to pay the rent to be in the Crescent markets. Very solid, very strong and we would expect that trend line to continue. George, maybe you could address the dip this quarter?

Yes. Brendan, I'm actually just looking. I mean, we're 87.9% leased in the non-Crescent markets. We were 86.7% leased at the end of March. So clearly we are seeing pipeline spillover more now than ever. I think anybody that kind of wants that Radnor address, there just isn't any square footage available. And we're seeing a little bit of chair shuffling going on in that King of Prussia market. And, again, I think our properties, kind of from Berwyn up through King of Prussia proper bode well to accommodate that.

Some of the move-outs we had this quarter were tenants that we did need to move out of our Maschellmac complex, which was the deal we announced last quarter. They're going to take 90,000 square feet beyond what they currently lease, which is about the same. So we've had to start to move some of those tenants around, some within the portfolio, but a few that left the portfolio.

Yes, George, so just a follow up. So if you're at sort of 86% or 87% leased in the western submarkets today, where do you think you can bring that number as you look out over the next maybe 12 or 18 months?

We still think that 12 to 18 months that we can kind of get that portfolio back to 90% -- it's operated at those levels and beyond previously -- especially given the fact that the Crescents have tightened so much. So, again, I think for us we'll continue to kind of move out some of the slower growth product that we have in those markets. You kind of saw some of that with the totally empty building we sold this quarter. And the ones that we retained, we feel good about long term.

And a couple of other drivers in that market that we think will also accelerate both economics and absorption -- within King of Prussia itself there's been a business improvement district formed, which is staffed and funded. We're a key driver; one of our executives chairs that. And that's really focused on kind of improving the overall King of Prussia neighborhood to more effectively integrate the office, streetscapes, retail, residential and mall components. And as part of that there's also some major transportation initiatives underway, both in terms of light rail access and increased accessibility off the Pennsylvania Turnpike. So we think that over time that will create a real resurgence of demand for the King of Prussia proper market.

And then looking at northern 202, I mean, frankly, one of the overhangs in that market the last couple of years has been the projected relocation out of that market by a major pharmaceutical company. That pharmaceutical company was planning on doing a large build-to-suit in another submarket and vacating 300,000-plus square feet in the 202 corridor. Now, that company announced last -- not sure if it was last quarter or early this quarter -- that they do not plan on proceeding with that and they will be staying where they are. They may give back a little bit of space, but from an overall standpoint, that's a big positive for the northern 202/King of Prussia market because there won't be that significant amount of space to backfill.

Okay, great. Thank you.

John Guinee; Stifel Nicolaus.

Another great quarter. Congratulations. A few questions; not sure to whom these are directed, but -- and I'll just rattle them off. First, who pray tell, is actually hitting tenure and age milestones?

Second, the JLL guys in DC just sent something out called -- informing us on the Public Building Savings and Reform Act of 2013, which is changing and tightening the rules for GSA leasing, freeze the footprint, et cetera. Are you guys involved in that at all and does George have any comments?

And then third, probably for your CFO there, your payout ratio is pretty low. The sign of a good company is the ability to dependably raise the dividend. Can you talk about your 2014 dividend thoughts?

Okay, great. Let's try and take those in order, even though that's a blatant violation of our one question per interviewer. We have a deferred comp plan that -- obviously a big part of the executives' compensation is stock-based compensation that vests over a period of time. We have a program in place that once executives reach a certain age and a certain tenure that the vesting period for those is shortened based upon their ability to effectively retire and move on.

The freeze-your-footprint initiative is something that we have spent a lot of time on. Certainly Mike Cooper, who heads up our DC operation, is very much involved with that. We obviously track that. That's part of our thinking on the DC marketplace. And certainly as Tom and his team work with Mike Cooper to assess different opportunities in that marketplace, we're very mindful of the impact on overall absorption and activity levels to that initiative.

Certainly interesting to look at that initiative compared to some of the recent press reports on the length of the training programs that some federal employees are undertaking to make sure they know how to work within the freeze-your-footprint initiative and how they can actually work in more of a mobile or less permanent workstation environment. So we'll see how all that works its way through. But other than that, John, that's certainly macro event that we track very carefully relative to the impact on overall demand drivers in the DC marketplace.

I think the last question was on dividends. Just touch on that real fast. At the current point -- we have had a number of quarters of below 80% CAD payout ratio. This question comes up I think on almost every call. I think that's a decision that the Board will start to think through in 2014 once they get a sense of our forward rollover exposure as a company, our ability to generate continued same-store NOI growth rates. Certainly the level of capital stability we've had for the last year or so bodes very well for continuing to keep that payout ratio low. But there's been no decision made, John, on what we'll do with our 2014 dividend.

Thank you, guys.

Rich Anderson; BMO Capital Markets.

I'll try to keep the components of my questions a little bit shorter than my friend John over there.

So for Austin, you talked about some of the -- 50/50 JV is what you're kind of visualizing and fees and all that sort of stuff. But what about the exit? What kind of negotiations are going on as it relates to how the joint venture could unwind? I took note of your comment, Jerry, that you said there's still good rent growth that you want to participate in, but that won't last forever. Can you envision the end game being you actually fully selling out of Austin? Or how do you envision the end game of the joint venture?

Great questions, Rich. Let me amplify a couple of the comments earlier. It's always a challenge when you look at selling or recapitalizing an asset base that you really like or is a market that we're optimistic about, particularly where you have a very good operating team. And as we've talked on calls in the past, we evaluated Austin over the last several years. The primary objective was really to stabilize that asset base. We were fortunate enough to be able to do it and certainly benefited from a significant recovery in the marketplace, particularly in the Southwest.

So as we were kind of assessing what to do, trade out or grow, we really focused on a couple of key issues. We saw investment values escalating rapidly over the last 12 months and we really did want to price test what the investor marketplace was telling us relative to intrinsic value.

As we touched on, we saw great investor demand. It was really very well timed, I think, and well received offering. The investors liked the assets. They liked the growth potential with Brandywine and with the market itself. We did, as we always do on these offerings, go out and say, "Give us a price to sell and give us a price to JV." And I think as we started to evaluate the direct comparability to those pricing levels it became clear that we should stay in that marketplace given our current position and given where we think that market will go. And it did give us the ability at the pricing levels we were able to achieve to recoup capital well below our public market cost of capital.

So it was a great arbitrage opportunity that we could use to grow other asset bases and redeploy and strengthen the balance sheet. And it also provided a great opportunity for us to co-invest an acquirer, get a good fee structure, pursue development value-added opportunities and also, we can't forget, to continue servicing and being an effective partner on our million square foot Broadmoor complex in Northwest Austin with IBM.

So I think as we look at a potential exit certainly the venture that we would pull together would have appropriate buy/sell mechanisms. The financial investors that we're involved with in discussions have targeted time horizons of 5 to 7 years. So at some point that venture would ultimately unwind.

But we did view it as a good long-term growth opportunity for us in a market that has solid fundamentals. It's also a market, though, that is very cyclical and one that typically, at least since 1990, has introduced about 900,000 square feet of development a year. There's been a hiatus in new development for the last couple years. But in tracking that market I'm sure you're aware there's about 1.2 million square feet of new development also under construction. So as we saw that that market was becoming more of a must-have for investors, we were fortunate to line up a good auction process that we think created some value for us.

So with all that being said, I think we'll do as we always do. We preserve our optionality going forward.

Okay.

I think the capital structure here will be very effective over the next few years in terms of growing the platform. But one of the things we have seen about Austin is as it's become very high on a lot of investors' must-have list, extremely hard for them to aggregate a platform of any size in that market. So we certainly think during the [hold] period while we're generating additional value for the Company, as we build that platform that will, in fact, become more of a value-add proposition just in terms of its size and breadth in addition to the intrinsic asset value.

So we think preserve that optionality, structure the venture the way that we anticipate. Again, if it happens, positions us extremely well short term in terms of generating a very low-cost recovery of capital for us, as well as positioning us well for future growth.

Excellent. Thanks for that color. And so there was a price for an outright sale and just no one hit that price in your mind at this point. Is that correct?

The spread between the outright sale offers we received and the offers from really high quality institutions to JV and to commit equity capital going forward was literally on top of each other.

Oh, okay. Interesting. Then my second follow-up question, on the ground lease acquisition under Three Logan, what's the return there? Besides just kind of cleaning up a ground lease situation, is there a longer-term play there, investment opportunity, by owning the land now?

There's no question. We're still projecting that property to be in that $200-a-square-foot-plus overall investment range. And we expect to get kind of the original projected 9% to 10% return on costs when that project stabilizes. I mean, the project right now is I think about 80-some-percent occupied. But even the full-year numbers don't reflect the value of that because we had Janney, who was really coming in, I guess, George, almost this month --

September.

-- in September. So as we looked at buying out the ground lease, the yield on the ground lease buyout is relatively low because there really was no payments due on that ground lease until 2022. You may recall that that was kind of structured up front as a no-load ground lease.

But there's no question, Rich, from an investment standpoint, controlling the fee in addition to -- and eliminating the leasehold -- clearly can create a lower cap rate scenario for us on reversion. So we felt -- we looked at eliminating the complication of the ground lease, taking away the forward 2022 risk of the ground lease reset, controlling that fee, certainly simplified the ownership structure but also we think created some significant premium than we had before to what the reversionary cap rate there would be.

Understood. Thanks very much.

George Auerbach; ISI Group.

Just two quick ones. First, to follow up on Michael's question, are there any signs of net absorption in your Northern Virginia submarkets? Or is most of the activity still stealing market share from B buildings and B submarkets?

Yes, I would categorize it today, George, as still kind of just grabbing market share.

Thanks. And then, Jerry, is there any potential to mine the JV portfolio for acquisition opportunities? Or as you think about external growth are you more focused on Northern Virginia, DC, and Austin?

George, good question. As evidenced by what we did this past quarter with our partnership interest at two of the Tower Bridge projects, we are always looking at whether there is a moment-in-time opportunity to both simplify those structures and create a real wholly-owned value-add opportunity for us.

For example, on the Tower Bridge project, that was an excellent opportunity for us to acquire a wholly-owned, 100% interest there and then create the value upside of 73% occupied property. So we always look at every one of those ventures to find out where there might be an opportunity to improve our relative position.

But certainly as we look going forward, in two markets that we have higher growth aspirations in, the DC market we thought, again, from a cost of capital standpoint, size of market, competition on both the capital and the financing side in DC, that we were best served by partnering up with a great quality institution like Allstate. And we kind of view Austin being the same way, given where existing asset pricing has gone to, the specter of new development, and our expectation of trying to grow a dominant market position in Austin.

Great. Thank you.

Final question; Michael Knott; Green Street Advisors.

This is Jed Reagan here with Michael. Just a couple follow-ups. First, any thoughts on whether Brandywine will remain a net seller as you look out to '14?

It's something that we're contemplating relative to thinking through our 2014 plan. I mean, as we look at the progress made the last 24 months, we've had a very strong recovery in our existing portfolio. Through the well timed equity issuance we have created some additional capacity to accelerate our deleveraging goals with the substantial remaining sales for the year as well as the potential Austin JV.

But more importantly, we didn't talk about some of the other properties we have on the market. There are a number of other properties on the market as well. It's hard to say if we will be a net seller. We certainly are beginning to evaluate going back to a growth mode through value-add acquisitions, adding in infill market locations. We have some pending developments underway right now.

But I think we'll be formulating that over the next couple of months to see which way we go. I mean, we're certainly seeing some good acquisition opportunities, whether something as small as 660 in Plymouth or the Three Logan transaction. And we're continually looking for ways to create forward growth profile in the Company.

Okay, great. And just any updates on the 1919 Market or Cira South development projects in terms of timing and potential partner selection? And then any update on how Cira South is doing in terms of preleasing?

Certainly. 1919 Market, as we've outlined over a year ago, the expectation is that we would start the development of that project by the end of this year. We are in advanced discussions with two high quality partners on structuring a transaction that would recover significant land value for us and provide a framework for going forward. You may recall, Jed, we are also a partner in that project now with Independence Blue Cross. So there's a partner in that transaction already.

So we are on track for that start. Certainly as we move forward to that point we'll provide a lot more color on financial structure, land value recovery, expected returns and, more importantly, the partner selection and our economic stake.

Cira South, which the remaining piece of that is our Walnut Street Tower. That is programmed to be office and residential. We do have, and have had, an anchor lease signed with the University of Pennsylvania for a little bit more than 100,000 square feet. We have some very good prospects in the near-term queue ranging from single-floor tenants to larger. And we'll see how that plays out over the next couple quarters.

And we have also seen a very high level of interest from institutions about taking over, co-investing, in the residential component of that project, so good progress on that front as well. That is certainly something we'd love to see move into development as soon as we line up the right economics and partnership structure.

Okay. Great. Thank you.

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

Only closing remark is to thank all of you for participating in this call. And we look forward to updating you on our next quarterly call in the fall. Thank you very much.

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