Brandywine Realty Trust (BDN) 2013 Q4 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 fourth-quarter earnings conference call.

(Operator Instructions)

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

Great. Thank you very much. Thank you all for participating in our year-end 2013 conference call, and good morning. On today's call with me are: George Johnstone, our Senior Vice President of Operations; Gabe Mainardi, our Chief Accounting Officer; Howard Sipzner, our Executive Vice President and Chief Financial Officer; and Tom Wirth, our Executive Vice President of Investments and Portfolio Management.

Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the Federal Securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports filed with the SEC.

As is our normal practice, we will start with an overview on our three key business plan components: that is operations, balance sheet and investments. George, Howard and Tom will then discuss our operating, financial, and investment activity in more detail.

The fourth quarter was a very good one. We continued improving occupancy and pre-leasing levels. We were very active on the investment front, with the announcement of the FMC Tower at Cira Centre South, the closing of our Austin, Texas JV with DRA Advisors, and the purchase of One and Two Commerce Square in Philadelphia, and several other transactions.

Our quarterly run rate came in shy of consensus for a variety of transactional and capital activity items that George and Howard will address. For 2013, our $1.38 was spot-on first-call consensus, reinforcing that the operating fundamentals of our Business continue to improve according to our business plan. And simply put, our markets continue their steady recovery, our portfolio is performing extremely well, and tenant demand drivers are increasingly evident.

Operationally, we exceeded most of our 2013 key targets, namely spec revenue, retention, lease term, leasing CapEx, and our mark-to-market on both a GAAP and cash basis. And we met all other key business plan targets.

We leased 4.6 million square feet during the year, one of our highest totals ever. All of our regional operations did a great job in aggressively outperforming our markets. We ended the year at 89.5% occupied and 91.8% leased. These numbers are 120 and 150 basis points, respectively, up from year-end 2012 levels, so excellent progress across the board.

Positive pricing dynamics continue in many of our markets, with strong performance continuing in several Pennsylvania Town Center locations, CBD Philadelphia, and Austin, Texas. Additionally, our Met DC and New Jersey operations continue on their path to recovery.

Quarterly retention for the fourth quarter was the highest of the year, at over 90%, and increased our overall 2013 retention rate to just north of 68%. We ended the year with an 8.1% GAAP rental mark-to-market, well above our 3% to 5% targeted range, thereby evidencing strong leasing activity and positive demand drivers in most of our markets.

On the cash side, while we had a negative mark-to-market of 6.9% during the fourth quarter, for the full year we still exceeded our business plan target. Capital costs also continue to moderate, and we are in a much better position at the end of 2013 than the end of 2012.

We averaged capital cost of $1.53 per square foot per lease year for the quarter. And for 2013, the full-year number was just north of $2, much better than our original business plan range of $2.25 to $2.75 per square foot. We anticipate we will continue to see declining capital costs as our portfolio reaches full occupancy and our markets continue to recover.

Our cash same-store number for the quarter was particularly strong. For the year, we had positive same-store growth on a GAAP basis of 3.5%, and 4.8% on a cash basis, establishing a very strong platform on which to execute our 2014 business plan.

In looking at our balance sheet, we are in excellent shape with strong liquidity. We have no outstanding balance on our $600-million unsecured line of credit, and we ended the year with $263 million of cash on hand.

Optimal deployment of this cash balance is continually being evaluated. It is clearly available for acquisition activity, funding our development pipeline and/or liability management. Continued occupancy gains and positive operating metrics, combined with our capital recycling program, will be major contributors in achieving our previously stated EBITDA leverage targets.

As outlined during our Commerce Square announcement, the assumption of the secured debt associated with that transaction temporarily increased our leverage, pending future recycling activity. However, our objective of getting long-term leverage below 6 times EBITDA and mid-30% debt to GAV remain the driving predicate of our business plan.

On the investment front, we sold almost $350 million of properties at an overall disposition cap rate of 7.1%. Also during the year, we acquired just shy of $300 million of operating properties at an average cap rate of 7% on a cash basis.

Our press release and supplemental package provide specifics on several recent transactions, including the Austin JV, the acquisition of One and Two Commerce, the acquisition of Four Points Centre and several adjoining land parcels, and the acquisition of the ground under our Cira Centre project in Philadelphia; all well-executed trades that advanced our business plan objectives.

Our development activity is also detailed in our press release, and on pages 10 through 12 of our supplemental package. All of those projects are on schedule and on budget. Solid progress is also being made on our land management program; we are on track to achieve our overall land monetization goals, as outlined on page 13 of our supplemental package.

In looking at 2014, we are affirming our guidance range of $1.40 to $1.49, driven by these key assumptions. We expect tenant activity levels to remain strong, with ever-improving lease economics. We've had very good success since our last call, and from a revenue standpoint, our 2014 leasing plan is already 76% executed.

2014 year-end occupancy levels will range between 91% and 92%, and our leasing percentage will be between 93% and 94%. We are also forecasting a 60% 2014 tenant retention rate. We expect a strong GAAP mark-to-market on 2014 leasing activity range of between 6% and 8%, and continued improvement in our cash releasing spreads.

We will have a continuation of strong same-store numbers, with a GAAP range between 3% and 5%, and a cash range between 4% and 6%. We anticipate capital costs will run well within our range of 10% to 15% target. Another key positive is that the remaining lease expirations are only 6.1%, or 1.5 million square feet, which is the lowest level we've had in many years.

The 2014 business plan will continue our path to achieve our interim debt to GAV of 40%, and an EBITDA multiple of 6.5 times, as we work towards that longer-term target I outlined of mid-30% debt to GAV and below 6 times EBITDA. Our 2014 plan does not reflect any additional debt or equity financing, nor does it reflect deploying our year-end cash balances into any growth opportunities.

We have $232.4 million of debt maturities in 2014, including $218 million of bonds maturing in November. The business plan contemplates simply paying these maturities off from existing cash and/or recycling proceeds.

2014 on the investment front will be another year of successful activity of transitioning to urban and town center portfolio concentrations. We remain optimistic, and are continually evaluating on both the buy- and sell-side growth opportunities. As an underlying predicate, we assume we will be a $150 million net seller during the year, with most of those sales being modeled for the second half.

That being said, some additional observations. Our Business continues to change; highly-efficient, multi-modal, fully amenitized access properties are the focal point of our customer base. As such, as we think through our capital allocation strategy, it is based on delivering the highest quality, most efficient and best-managed inventory in all of our markets. We are seeing more tenants looking at higher-quality space, and being willing to pay premium for more efficient, collaborative work spaces.

We remain focused on growing the quality and locational advantage of our portfolio. During 2014, we expect additional investment activity in Washington, DC; Austin, Texas; Philadelphia CBD; and several of our town center markets. We will remain a net seller in New Jersey; Delaware; Richmond, Virginia; as well as continuing our liquidation efforts in California.

We expect to recover additional value from our land monetization program; in particular, several of our projects in a planning and rezoning phase should move closer to either a cash exit or a recapitalization during the course of the year. We have several projects in the pre-development stage. Our 2014 plan does not project any additional development starts, but that situation could change as financial partners are lined up and/or additional leasing occurs.

Our mixed-use project at 20th and Market Streets in downtown Philadelphia is contemplated to be retail, office, residential, with a 219-car garage. We have obtained final approvals, and commencement of that project is subject to execution of joint venture agreements, which could occur by the midpoint of the year.

The FMC Tower at Cira South will break ground mid-year, and is on target for delivery in 2016. We are well into the design development process, and have also begun evaluating several financial and joint venture alternatives.

Our Stock Exchange Building at 1900 Market Streets in downtown Philadelphia, the development -- redevelopment plan on that will commence in the next several months. We continue to expand the scope of that renovation plan to incorporate additional facade, entrance, lobby and mechanical system upgrades. And we anticipate having an overall investment base, including tenant finish, between $180 and $200 per square foot.

So, bottom line, we've taken a fairly conservative view on forecasting, being only a $150 million net seller. As opportunities present themselves during the course of the year, as they invariably will -- look what happened in 2013 -- we are in a great position to execute with minimal debt maturities, significant cash balances, solid existing co-investment vehicles, full availability on our line of credit, and a demonstrated ability to effectively recycle capital into higher-value assets.

So, to wrap up, 2014 will be a strong drive towards value creation, significant operating platform improvement, forward leasing momentum, strong leasing activity, all position us well to generate solid NOI growth, same strong same-store performance, and a positive mark-to-market.

At this point, George will provide an overview of our 2013 operational performance and a look ahead at 2014. George will then turn it over to Howard for a review of financial reporting activity, and then Howard will turn it over to Tom for a review of investment activities. George.

All right. Thank you, Jerry. 2013 was a tremendous leasing year for the Company. Our regional teams continue to source activity, expeditiously negotiate, and aggressively close deals. Our leasing successes have moved the portfolio closer to target occupancy levels, and our future lease renewal campaign has significantly reduced rollover risk.

Fundamentals continue to improve in all of our markets, but a few stand out. Our Pennsylvania Crescent markets of Radnor, Conshohocken, and Plymouth Meeting are 97.4% leased, with only 5% rollover remaining in 2014. Our CBD Philadelphia portfolio is currently 93.3% leased, with less than 2% rollover remaining in 2014, and only 8% in 2015.

Our Metro DC portfolio posted positive absorption of 318,000 square feet, to finish the year 87.6% occupied and 89% leased, a 760- and 350-basis-point improvement, respectively. Our New Jersey portfolio has seen a recent influx of activity that has us encouraged. Deals ranging from 10,000 to 60,000 square feet, which far exceed the more recent size range of deals in that market.

During the quarter, we commenced 924,000 square feet of leases, retained 90% of our expiring leases, and absorbed 344,000 square feet, or 120 basis points, of incremental occupancy. Forward leasing activity resulted in a 91.8% leased rate, and our 2014 and 2015 remaining lease expirations have been reduced to 6% and 9%, respectively. All in all, a very solid operating year, as we met or exceeded all of our original business plan metrics.

We are extremely pleased with the disciplined focus on controlling capital costs. Our $2.06 per square foot per lease year metric was one of our best. Worth noting in terms of CAD is that during 2013 we spent $14 million on four significant future year lease renewals, totaling 509,000 square feet. While certainty impacting 2013 CAD, this pre-spent capital will not impact 2014 CAD.

Now turning to the 2014 business plan. Based on activity achieved to date, and additional visibility we have on lease transactions since our last earnings call, we are raising our speculative revenue target by $1 million from $42 million to $43 million. This increase is entirely generated from our Metro DC region, and is associated with recently executed leases not contemplated at the time of our original business plan.

The overall spec revenue target of 76% achieved, and our leasing square footage of 3.5 million square feet is 50% achieved. This time last year, we were 66% achieved on revenue, and 45% on square footage.

Deal flow, pipeline, portfolio quality, and market dynamics have us optimistic about the balance of the plan. Additional visibility and clarity on lease transactions currently in the pipeline over the next quarter will allow us to further evaluate this target on our next earnings call. All of our other 2014 business plan metrics remain unchanged from their original targets.

And at this point, I'll turn it over to Howard.

George and Jerry, thank you. Core FFO for Q4 2013 totaled $49.6 million, or $0.31 per diluted share. Our core FFO pay-out ratio is 48.4% on the $0.15 distribution we paid in October 2013. Full-year 2000 (sic - see press release, "2013") core FFO totaled $214.8 million, or $1.38 per diluted share, and met analysts' consensus for the full year.

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 page 25. 2013 core FFO differs from NAREIT FFO by $4.4 million, while Q4 2013 core FFO and NAREIT FFO differ by $2.8 million.

Our supplemental package was further enhanced and expanded this quarter. The business plan and operating data has been moved up front; the financial data is grouped together beginning on page 21; and we have expanded the joint venture section beginning on page 35. We continue to welcome your feedback on these materials.

I'd like to make a few observations regarding our fourth-quarter and full-year results. Fourth-quarter FFO is high quality, with termination revenue, other income, management fees, interest income, financing obligation costs, and aggregate JV activity totaling just $6.1 million gross, or $4.4 million net after expenses. For 2013, these items total $25.5 million gross, and $19.7 million net, in line with our expectation for these categories.

Our same-store NOI growth rates for the fourth quarter are 3.1% GAAP and 6.2% cash, both excluding termination fees and other income items, and are 3.5% GAAP and 4.8% cash for full-year 2014 (sic - see press release, "2013"). We've now had 10 consecutive positive quarters for the GAAP metric, and 7 for the cash metric, and met our 2013 same-store NOI growth targets. Overall, fourth-quarter NOI was impacted slightly by the ultimate timing of the Commerce Square Four Points and Cira ground lease transactions.

Our fourth-quarter interest expense of $30.2 million was down $100,000 versus the third quarter, and down $2.9 million versus the fourth quarter a year ago, reflecting the beneficial impact of our ongoing capital market and liability management activities. 2013 interest expense of $121.9 million was right in line with our most recent expected range of $122 million to $123 million.

Our G&A at $7.3 million was high, but it included $1.3 million of transaction expenses whose exclusion for the core FFO calculation brings regular G&A down to $6 million and in line with our expectations. For the full-year 2013, G&A excluding transactional costs totaled $25.9 million, in line with our $26-million expectation.

Our equity income from JVs came in at a $93,000 loss versus $714,000 of income in Q3, and $1.5 million of income in Q2. The Q4 figure was impacted by the turning off of the Commerce Square 9.25% preferred return, which actually took place in August 2013, and by $433,000 of transaction expenses within the Austin JV, which we do add back for core FFO. The normal run rate for the Commerce Square preferred return would have been around $600,000 in a typical quarter. So, its turning off, which we anticipated in our numbers, but could not disclose, was material to the fourth-quarter results.

With $20 million of revenue maintaining capital expenditures in the fourth quarter, $4 million related to 2014 lease transactions, we achieved $0.15 of CAD per diluted share, and a 100% pay-out ratio; included in fourth-quarter CAD is also $4.3 million of building expenses on large items like chillers, roofs and parking lots. The 15 largest of these totaled $2.6 million, or over 60% of the total. For the full year, the $0.73 CAD per diluted share came in above our latest $0.66 to $0.70 estimated range, and provided an 82.2% pay-out ratio for the year.

With respect to balance sheet and financial metrics, I would echo the points Jerry made. Our 42.6% debt to GAV, 49.7% debt to total market cap, and 7.5 times debt-to-EBITDA ratio were all impacted by the assumption of the Commerce Square loans at quarter end. Excluding this debt for pro forma purposes, and 13 days of associated Commerce Square EBITDA, provides a debt-to-EBITDA figure of 6.8 times.

With respect to 2014 FFO guidance, we are affirming our previously given range of $1.40 to $1.49. In addition to the business plan assumptions on supplemental pages 5 and 6, please note the following: we have very moderate assumptions for gross other income at $23 million to $29 million. This figure is down from the $30 million to $35 million figure given in October due to higher depreciation and amortization on higher intangible assets at the Austin JV than previously assumed. Note the depreciation and amortization is added back for FFO. We will also have $18 million to $24 million net, and this will reflect a basket of termination revenues, other income, management revenues less management expenses if net, interest income, and JV income less the 3141 Fairview financing obligation expense.

For 2014, our G&A is projected at $25 million to $26 million, unchanged from the prior estimate. First-quarter 2014 will be higher at $7.5 million versus other quarters, as certain expenses are front-loaded. Interest expense is projected to be in a range of $127 million to $131 million, down from $130 million to $134 million previously, due to lower fair market value rates on the One and Two Commerce debt, and fourth-quarter debt redemptions and liability management.

The $150 million of sales reflect several targeted properties and a bucket of generic sales, at an assumed 8.5% cap rate. The lost income is $5.5 million in the model, or about 43%, reflecting a back-ended assumption. And we have no issuance assumed under our continuous equity program, and no note buyback or capital markets activity. For 2014, we are assuming 160.5 million weighted average shares for FFO, up slightly from 160.4 million previously.

We are projecting CAD per diluted share to be in a range of $0.70 to $0.80 versus our prior $0.65 to $0.75, now reflecting a range of $70 million to $80 million of revenue-maintaining capital expenditures, down slightly. Our plan provides $20 million to $25 million of free cash flow after dividends and recurring capital expenditures.

Looking at the 2014 capital plan, we have total uses of $560 million as follows: $13 million for mortgage amortization; $219 million for the unsecured note repayment; $75 million of revenue maintaining capital expenditures; $150 million of other capital expenditures and projects. These include $65 million of revenue-creating capital expenditures where the space was not previously leased in the last year; $63 million for a variety of projects and development starts, as Jerry outlined; and $22 million for various JV activities where we'll be funding small amounts of capital. And lastly, we will have $103 million of aggregate dividends, consisting of $96 million for common shares and about $7 million for preferred shares.

The sources for the $560 million are as follows: $190 million of cash flow before financings, investments and dividends, and after interest payments. We expect to receive $7 million on the repayment of an outstanding note receivable.

We are targeting $150 million of net sales, and to round it out, we will use $213 million of our available $263 million of cash at year-end 2013, reducing its balance to an estimated $50 million at the end of 2014. There's great symmetry in our capital plan, with our cash essentially covering our unsecured note payment, and our sales essentially covering our capital expenditures oriented towards growth activities.

Lastly, on the account receivable side, we had $16.2 million of total reserves at 12/31/2013, down slightly from September 2013. This consists of $3.2 million of reserves on $20.6 million of operating receivables, or 15.6%, and $13 million on under $39.3 million of straight-line rent receivables, or 9.4%. In Q4 2013, our receivables and reserves were somewhat impacted by the removal of the Austin JV properties and the inclusion of the Commerce Square acquisition. Otherwise, activities were normal and as expected.

With that, I'll turn it over to Tom for some investment comments.

Thank you, Howard. The fourth quarter was an active one, and we closed our previously announced third-quarter activity. We far exceeded our 2013 goals, and look forward to exceeding our 2014 targets.

With the closing of our Austin joint venture and the fourth-quarter sale of two unoccupied buildings, we completed $348.6 million of dispositions in 2013, including $185.7 million of non-core suburban properties at a blended 7.5% cap rate.

Including Commerce Square, Four Points, and the acquisition of the Cira Centre during the fourth quarter, acquisitions totaled $351.6 million in 2013. The fourth-quarter and full-year investment activity reflects our strategy to increase our exposure to urban and town center markets. Looking forward to 2014, as Jerry mentioned, we have established a net disposition target of $150 million, and we are confident that we will meet and possibly exceed that target.

Looking at the investment market, during 2013, there was a great deal of capital chasing core assets in gateway markets, and we expect that that will continue into 2014. However, in early 2014, we are starting to see increased investor interest in well-located, well-leased assets in some of our suburban and secondary markets. And we expect that that will translate into increased investment activity.

With increased interest in suburban assets, we hope to find opportunities to accelerate our disposition program of non-core assets, possibly through -- currently, we have over 1 million square feet of non-core assets in the market at various stages of price discovery that could generate between $155 million to $165 million of net proceeds. As we've stated in the past, we will be disciplined in our approach in sales, and will only sell when our targeted returns have been achieved.

Several drivers leading to the increased activity. Capital: Looking for steady cash flow above those found in the CBD markets, as the CBD markets have seen continued low cap rates for core assets. Availability of secured debt with competitive banks, CMBS and insurance company financings available. We have now fixed 100% of our Austin debt, totaling $230.7 million at a blended cap rate of 3.39%. There's also availability of mezz debt and improved pricing that has allowed potential buyers to increase leverage and improve equity returns. There's also an improved outlook on some of the suburban office space, as occupancy levels continue to improve without significant new supply on the horizon.

Our 2014 investment plan does not include any acquisitions; however, we continue to believe in the long-term fundamentals of our targeted markets, and our plan remains to take advantage of any opportunities. We will continue to increase our exposure in Philadelphia; the surrounding Crescent markets; inside the Beltway, Metro DC; and Austin. We are currently evaluating opportunities within our core markets for both operating and development assets, and our acquisition pipeline for both marketed and unmarketed deals is strong.

Our underwriting reflects our deep knowledge of the market realities. However, we have very specific targeted investment areas, and have been very disciplined in our search for increased exposure in those targeted markets.

We will continue to be disciplined in our capital deployment, and when appropriate, we will look to use joint-venture capital to acquire certain assets. To the extent we are successful in our acquisition efforts, we will seek to accelerate our 2014 disposition activity to remain a net seller for the year.

With that, I'll turn it back over to Jerry.

Gentlemen, thank you. So, to wrap up our prepared comments, 2013 was extremely successful for Brandywine. Exceeding the majority of our business plan metrics, coupled with ever-improving markets, gives us tremendous confidence that that strong portfolio performance, solid balance sheet improvement, and an active ongoing evaluation of full range of investment choices will continue and further accelerate our earnings growth.

With that, we would be delighted to open the floor up for questions. We ask that in the interest of time, you limit yourself to one question and a follow-up. Thank you.

(Operator Instructions)

Your first question comes from the line of John Guinee with Stifel.

Great. Thank you, guys. Jerry, you guys are working very hard to reposition the portfolio into a more amenity-based urban-centric portfolio.

Can you talk through various submarkets in terms of where the tenant demand is clearly heading in that direction, where other markets where maybe the tenants aren't necessarily as urban and transit -- amenity-based and transit-oriented? Or is this something that you see across the board irregardless of markets where you do business?

Yes, John, great question, and certainly an active debate within our entire industry, certainly a key part of our capital allocation thought process. I think as a general matter, or general answer, and we're clearly seeing this in almost every single submarket we are in.

I mean, there's clearly a strong bias in a lot of the larger users of space, looking at the ability to access their properties or workplace environments of, a number of different ways besides automobile transportation. So access to rail, public transportation lines seems to be very, very key.

Another great driver we see is the surrounding neighborhood, call it the amenity program, where we are sitting here today, even though we're having some power difficulties in Radnor. It's a premiere location because you have high-end residential housing, multi-family rental and condominiums.

So a whole range of economic options on the living side, strong retail, hotels, mixed-use, access to two different train lines, as well as easy access to two interstate highways. They seem to be key drivers; much, much different than years ago where I think the horizontal development along different state highways was the primary driver.

So I think when we look at how we're looking at deploying capital going forward. Clearly, as Tom and his team work with George and the operating teams on where we think the best growth drivers are in our portfolio, it's clearly focused much more on larger-scale buildings that are part of mixed-use developments that have different ways of accessing those properties, and that really are very attractive locations and packages to both ends of the demographic spectrum for the workplace, whether they be older employees or younger up-and-comers.

As then a follow-up and as your Center City, Philadelphia portfolio, what percentage of that is -- what percentage is Center City, Philadelphia of your NOI now? And then what's the bull case and the bear case for getting a meaningful step in rents?

My recollection is that you're -- the A product that you own is getting in the low 30%s now and new construction is $400 a foot. At the same time, there's a lot of B product owned by people at Commonwealth in a market that can always compete on price. Can you talk about the yin-yang for a rent spike there?

Sure, George and I will tag team this. I think in terms of the rental rate trajectory, we do expect to continue to see what we have seen the last few years, which is that tenants, either from a net absorption standpoint, are relocating from B level inventory, are in fact willing to pay a premium for a better physical plan and a better neighborhood in which to locate their businesses.

We have clearly seen that growth rates occur at our Logan properties. We think the planned neighborhood improvements there will further accelerate that trajectory. The convergence of the movement west -- or movement east from University City and the movement west along Market Street, we think really positions our recent Commerce Square acquisition and our Stock Exchange Building very, very well.

We keep upgrading the level of renovations we're doing to 1900 Market and Stock Exchange because we really do anticipate, based upon some of the discussion we're having with tenants that, that building, from a physical plan standpoint, if we redevelop it the right way, can dramatically reposition that from a B quality asset into an A or A minus asset. We do think that will continue.

We think, frankly, the announcement of us, the -- constructing of FMC Tower and the investment that Comcast is making, along with Liberty, in the city of Philadelphia and their price points, will clearly -- both projects deliver a higher-quality platform to tenants to evaluate.

Look, I certainly fully expect that we'll see the same trend line in Philadelphia that a lot of other major metro areas see where tenants are willing to pay a premium to be in, LEED-Silver, LEED-Gold, highly efficient, column-free, high ceiling, bay floor plates with a full amenity package. George, in terms of revenue --

On the NOI contribution, John, when Commerce comes in for a full quarter of operations, I mean, CBD Philadelphia will be over 30% of the Company's revenue, so --.

Great. Thank you.

You're welcome.

And your next question comes from Brendan Maiorana with Wells Fargo.

George, it looks like you've got -- I think you've got a little over 1.2 million square feet of new leasing left to go. I think you did around 300,000 square feet, a little more than that in the quarter. Just wondering how you think the pace of new leasing is trending relative to your targets to meet the year-end leased rate number?

Can you provide an update on some of the big tenant move-outs that are likely over the next couple of quarters? I think you've got Travelers in Richmond, Lockheed and Northrop down in DC, and I think there might be one or two in Metro Philly.

Okay. Sure. Look, I think the remaining new square footage, of 1.2 million square feet is a little bit more back-ended in the year, but I think the pace of deals continues as we've programmed.

We were surprised on a full floor user down in northern Virginia who came to the market during the fourth quarter, and really had a quick time line. We were able to fully negotiate and commence that deal in the fourth quarter.

The preleasing that we have to start the year, certainly helps along that occupancy path for 2014. So, we feel confident about the remaining new leasing in the plan.

On the large move-outs, with Travelers down in Richmond. I mean, they moved out last week. On our last call, we had two 40,000 square foot prospects; neither one of those deals has come to fruition. They've both opted for a stay-put solution.

However, in the interim, we have identified three additional prospects, all ranging north of 25,000 square feet. So, looking to make, ideally, most of those deals. We've got half that square footage contemplated to come back into occupancy during the fourth quarter.

A little bit better news in northern Virginia with the Northrop space; that's 100,000 square feet that comes back at the end of June. We've got a capital program already underway to reintroduce the building to the marketplace, addressing the common areas, the lobbies, the restrooms, the signage around The Parc.

We've had a couple of very active tours and we've got one proposal out at this point on that. Shifting up the road into suburban Maryland with Lockheed, they moved out last week as well, out of 137,000 square feet. We've got prospects ranging from 6,000 square feet to 106,000 square feet.

We're coming down to the final strokes on a number of those deals; still some work to do, but we feel good about being able to backfill that space. We've already backfilled about 40,000 square feet of the 78,000 square feet Lockheed gave us back in 2013 in the adjacent building. We're looking for some continued good news out of the larger one.

Okay. Great. Just a follow-up question or a question for Tom, last one. The cap rates on One and Two Commerce and the ground lease at Cira, the cash numbers are significantly higher than the GAAP numbers. I was just wondering if you could provide some color as to why you would have higher cash cap rates than GAAP on those acquisitions?

Yes, Brian that was a mistake and we have since corrected it, so the GAAP number for Cira is a 9.7% versus 3.7% cash, and One and Two Commerce are switched to an 8.2% and a 6.8%. So same numbers, just switched.

Okay, just switched around. Got it. Okay, great. Thank you.

You caught it. Thank you.

And your next question comes from the line of Gabriel Hilmoe with UBS.

Hi, thanks. George, sticking with the spec revenue target, which you increased a little bit and you see this quarter. Now your 76% year plan. I guess where do you see potential for upside plan lie going forward as you move through 2014?

Well, look, I think the upside opportunities for us would be to land more of the backfill that I just alluded to in Richmond, northern Virginia and Maryland on those large move-outs. But we've also got some very good space in downtown Philadelphia in One and Two Logan, and good space at Commerce Square that -- not all of that is contemplated in the 2014 plan, as well. So I think, just looking at where the pockets of vacancy are, those are probably the ones I would point to first.

And then, as I mentioned in my opening commentary, even over in New Jersey, who is not very well achieved on their target as it stands today. I mean, that pipeline has shifted, dramatically from the 3,000 to 5,000 square foot range to a much larger tenant profile, which is a combination of tenants in our portfolio now who have expansion needs but also tenants in that market who are continuing to take that flight to quality and our portfolio is well poised for that, so.

Just to add to on George's observations, I think one of the things that we're encouraged with, and it's always a challenge when we increase a spec revenue target this early in the year. But I think when we sat down and went through the depth and the composition of the overall pipeline through the Company, and went through those in detail with our managing directors.

I mean, we are beginning to see, I think, some good things in terms of tenants activity at all different size levels that we really had not seen in the last several quarters. I mean, George touched on New Jersey. That's a marketplace that, our team has been doing a very effective job, doing leases, 10,000 square feet and below, and there's a good list of people well above that range who are actively engaged in looking for space.

Richmond, Virginia, which, again, is a marketplace where we have a great team in place. The market has been a little slower to recover than we would hope. They are beginning to see some larger scale deals that are real, decisions will be made and we think that our portfolio is pretty well-positioned. Our teams in the other operations, notably DC, continue to do a very effective job of really drumming up a lot of great support.

As George articulated, I mean, jumping on these transactions and getting them done in a very, very short period of time to take advantage of that window with that tenant. So I think it's just thematically across the Company, we're pretty pleased with the level of activity we've seen. Certainly the 76% leased achievement is well ahead of last year's pace. And to have that kind of activity level done this early in the year and have such good, strong underlying improvements to the lease economics, we feel really present a good opportunity for us to do well as 2014 unfolds.

Okay, and then just maybe a follow-up for you Jerry on that. Just on the comments you made on tenants looking for higher quality space and willing to pay up for that, can you talk a bit about how you're thinking about pushing rate versus occupancy within the markets given that dynamic?

You cut just a little bit but I think we -- in terms of pushing rates, I think you've seen us do that. I think you've seen -- and that's one of the reasons why the GAAP number this year was as good as it was versus our business plan. I think what we are being able to do is a first point of entry is with the activity, we're being able to push the annual escalators and reduce the free rent component.

So that's -- they're two huge drivers of that GAAP number. Cash number will traditionally lag that, but even there, after having the downward pressure in the fourth quarter, we still exceeded our 2013 target and our 2014 target on the cash side is in excess of our 2013 target.

The third piece to that that is a key piece of the equation is on the capital side. And I think across the board in every market, we're being able to take a much firmer stand, generally speaking, on how we're using capital in some of these new leases and certainly as far as our renewal tenants go.

So, the harbingers of dramatic improvement are there. Bigger annual rent steps, lower free rent concessions, ever-improving cash mark-to-market and lower capital costs, so we don't see anything, frankly, in any of our markets where we don't see that trend line continuing.

And remember, our mark-to-market numbers in 2013 were aided for three quarters of the year by a high rent growth market of Austin. Our 2014 numbers do not include Austin and we're literally at the same 8% upper end of the range on the GAAP side. So I think that actually demonstrates how the balance of the portfolio is improving.

Okay. Thank you.

And your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Thanks. I've got Craig Mailman with me, as well. I just wanted to touch on development. Obviously, you guys have had some success securing some projects, development, redevelopment and the pipeline is growing.

So I'm curious about the appetite for incremental development, what that would look like, where it would be, and then also trying to quantify overall spending for 2014 on development? Howard, it sounded like sales would cover the spending, but is $150 million the number? And then finally, as it relates to Cira South, what the plan is there in terms of financing, will that get joint ventured or resi partnered, et cetera? Thank you.

All good questions in that one question so we'll attack it from the same. On the --

It's all development, Jerry, it's all about the development. On topic, did you say one topic or one question?

There you go. On the development side, because you do raise a very good point. Look, we are seeing in a number of our markets an increasing list of tenants who are -- large-scale tenants who are looking for, or evaluating seriously, build-to-suit opportunities versus stay put opportunities. A lot of that is being driven by some of the points we touched on earlier relative to floor plate size, column spacing, window lines, amenity packages, et cetera.

So we have not planned any additional development in our 2014 program. I mentioned two potentials, both downtown Philadelphia, the Stock Exchange Building and 1919. But in addition to that, when we take a look at markets where there might be some additional development opportunities, certainly in Austin, Texas, where we now have formed a co-investment vehicle with DRA Advisors, there's clearly some large tenants moving in that marketplace.

There's a public/private partnership called Opportunity Austin down there that has done an incredibly effective job of marketing Austin to out-of-city companies to relocate and existing companies to expand. So we are pursuing a number of opportunities down there that might, as the year progresses, turn into development opportunities.

Generally speaking, though, the balance of our markets, whether it's the Pennsylvania Town Center, suburban locations, certainly the Metro DC marketplace, Richmond and south Jersey, we don't really see the prospect for much development there unless a couple of the build-to-suits that we're talking to would come across the finish line. But in those markets, quite frankly, in some of those markets, the gap between new development cost rents and existing stay put rents is still pretty wide.

In terms of -- so to project the capital spend, Howard laid out in the sourcing use what we project our full capital spend to be for both on balance sheet development and for our contributions to the JVs, like The Parc at Plymouth Meeting with Toll Brothers, although that equity is fully funded at this point. We have a construction loan in place to fund the remaining construction costs,

Our Evo project in downtown Philadelphia with Campus Crest and Harrison Street, the equity there, again, is funded pretty much and there's a construction loan in place that will cover the balance of those costs. So the equity portion of those larger spend projects is pretty well set.

On Cira South, we do plan, as I mentioned, breaking ground midyear. We're finalizing the design components of that project. We are -- in looking at that being a $340 million-plus project, I think we're certainly beginning to access and talk to other capital sources where we may decide that the most optimal result for Brandywine is to do that project in a joint venture format.

As you know, there's a residential component and an office component. When we announced the Tower upon the signing of the two leases, we did indicate as part of that announcement that we have a joint venture partner lined up for the residential component.

We're looking for an additional institutional partner to augment their capital contribution and in addition to that, just access in the general broader institutional capital market to really assess what the -- again, the most optimal capital structure for that project is. We would certainly expect to have a lot more clarity on that by the time we break ground in June.

Did that cover all your points, Jordan?

Yes, that was pretty good. I think Craig has got a quick one.

Yes, George, on the spec revenue increase in DC, I know you hit on a couple of the backfill opportunities there, but is it just those specific spaces? Or are you seeing a general improvement in the DC market here early in the year?

No, we're actually seeing increased activity levels. We're pretty tight in Tysons but we are seeing the activity now shifting out into Dulles Corner itself. So, look, I think Mike Cooper, our Managing Director and his leasing teams, again, continue to source deals. But yes, we are starting to see, maybe, a quarter or two ago, the activity wasn't as plentiful out in Dulles Corner. We're now seeing it move further out the toll road.

Great. Thank you.

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

I don't know if you have this number, but the 8.1% GAAP mark-to-market for 2013, do you happen to have a mark-to-market number for the entire portfolio? Like if you were to reset rents today, what that total mark-to-market would be?

It's virtually flat, when you go across the entire spectrum of the Company, it averages flat. But, we do see that we have a mark-up situation in the Pennsylvania suburbs and downtown Philadelphia. And then we are in the rolldown scenario in most of our Metro DC portfolio and status quo in the smaller regions of New Jersey and Richmond.

Would you say that flat number is an improvement -- significant improvement over the past couple of years?

Yes, I would say so. I mean, we were probably 200 to 300 basis points of a rolldown and when you would have probably run that math two years ago.

Okay. And then my second question is, I think it was Tom that mentioned some interest from capital coming into some of these suburban secondary markets and yet your disposition cap rate target right now is 8.5% versus, I think you were doing something in the 7% range or low 7%s in 2013.

So is there a possibility that, that number could come in at 8.5% based on some of the observations you have seen lately?

Rich, look, we have, as a standard convention, for the last several years have modeled 8.5% in our financial model. In the last two years, we've come in under that. So the cap rate this year was, I think just a little around 7% -- 7.5%. So, yes, look I think our track record the last couple of years is we should be able to better that but I just think for modeling purposes we picked that 8.5% target number.

Okay. Fair enough. That's all I have. Thank you.

Thank you.

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

Thanks, good morning. Fourth-quarter earnings were below consensus and they seem to be at the low end of where your guidance was. I know there was some moving parts and you mentioned the Commerce Square preferred return turning off but it's been a little bit difficult for us to completely bridge the gap.

I guess it would be helpful, when you look at the core portfolio, was there any shortfall in occupancy even if it was just timing versus your internal expectations, just to give us a sense of how the portfolio is performing, heading into 2014 and the achievability of guidance?

Yes, look I think when we laid out that 90% occupancy target, kind of pre-Austin, pre-Commerce, I mean, we came in right at that number. We guided from that 90% number down to 89.3%. We got a 10 basis point pick-up out of Commerce Square, it came online a little bit better occupied than we had originally thought when we were going through due diligence.

A lease commenced in December that we had programmed for early 2014. And then we got a 10 basis point pick-up from the acquisition of Four Points, and so that's how 89.3% turned into 89.5%. So I think from an occupancy perspective, I think we're right where we thought we would be. We've identified the early termination events that we know of and we've laid out the leasing plan to backfill that.

Because, versus your -- what your guidance was, it seemed like it was at the low end. Was there any operational item that missed or didn't come through?

Well, I mean, I think, we had a little bit of, I guess potential, excess snow removal expense in December. About half of that, a little bit more than half of that gets reimbursed but, so a little bit of maybe leakage there but not a huge number. We had a tenant eviction that led to some straightline rent write-off, that was maybe $200,000, but there was no one catastrophic or that was the culprit, from an operational perspective.

I guess maybe it's -- it's Michael Bilerman speaking, and if your guidance was $0.31 to $0.35, you get $0.31, something must have changed in that, and why won't those items roll forward in 2014, right? Because you've kept your guidance for 2014, so why isn't it possible to break out why you hit the low end and why it has zero impact to your view of 2014?

Yes, Michael, it's Howard. I mean, we typically don't give quarterly guidance because things move around, either transactions or leases, even intra-quarter. When you get to the fourth quarter, you've implicitly given fourth-quarter guidance because it's all that's left.

We left the $0.04 range. You could argue maybe it should have been $0.03 or even $0.02 but that's not terribly different from what other companies do at that time of the year, nor what we would normally do at that time of the year. We do create the possibility of different things happening at different times.

Even the Commerce Square transactions, had they somehow moved up earlier, they had a pretty significant, even daily impact in terms of the NOI adjustment in the transaction. Remember running in the backdrop of that was the turnoff of the preferred return so there was a double swing going on there.

Looking ahead to 2014, the business plan is off to a very good start. The range, which we normally give early by the way; most companies don't give a range back in October. We're pretty pleased with the fact that we do that.

We're happy that it has held up and as the quarters roll forward and leases surprise up or down or transactions occur, we've got a lot of cash on the balance sheet that we could deploy, we will have the opportunity to fine-tune that.

But at this point leaving a $0.09 range with the full year to go feels good. We are comfortable with that range and that's why we affirmed it. So -- and we could talk offline about your assumptions, how they may be higher or lower, but ultimately --

I'm not looking at our assumptions. I'm just saying if the Street was at $0.33 for the quarter and you provided a range of $0.31 to $0.35 and you hit $0.31, is there anything within a $0.04 delta, right, that's on a quarterly basis, a $0.04 delta on a quarterly basis is $0.16 annually, okay, from the low end to the high end.

So all we're just trying to figure out, is there anything that we should be knowledgeable about in the fourth quarter that happened that would somehow depress heading into 2014 or not?

Well, look, I would suggest you look back at your 2013 model. You were one of several companies that had a $0.02 higher figure in the fourth quarter than would have been necessary to meet the full-year guidance. (multiple speakers)

Howard, hold on a second. We are -- the Street was at $0.33, we were at $0.33. I'm looking at an individual quarter basis because you start mixing and matching a difference between Core FFO, Headline FFO, Reported FFO. Everyone has different FFO.

What we do know is you provided guidance in the fourth quarter of $0.31 to $0.35 and you reported $0.31 and the Street was at $0.33. Full-year numbers shouldn't matter.

Look, I'm struggling with the math, as well. We hit the full-year consensus of $1.38; we had $1.07 for the first nine months. The missing piece is $0.31.

I don't know why you would need $0.33 on top of $1.07 to get to your number of $1.38, but I don't know the inner workings of your model. I know for us the numbers worked and we're very happy with the full-year results. (multiple speakers)

I'm sorry. To get to the core of your question, we're -- let me be very direct, we are not aware of anything from an operational or from a reporting standpoint that would give us any cause for concern over us meeting the guidance for 2014 that we just affirmed.

And your next question comes from the line of Jed Reagan with Green Street Advisors.

Hi, guys. Maybe drilling in on the land that you have in the planning and zoning phase today across multiple sites, if you could just provide a little more detail about your plans for those sites? Maybe how you would think about outright sales of that land versus JV development?

I'd certainly be happy to and let me just flip to the page. The -- look, our preference is always to sell for cash if we can achieve the highest value for that. We have sold a number of parcels. We have a number of parcels under agreement or in due diligence now and our expectation is some of those parcels could close as early as mid year of 2014.

We have a number of parcels that we have under agreement that are subject to rezoning, so in other words, we are letting our potential buyer take the property for rezoning because they have concluded that they are better suited from an infrastructure standpoint to do that. So those agreements of sale tend to be basically option agreements, where when they get their approvals in place, they would then close on the property.

Certainly, we take a look at some of our larger land parcels, I mean, the Walnut Street Tower, the FMC Tower, we're still currently covering in land. We have a basis there, that will go into development when that project starts. Our Metroplex sites at Plymouth Meeting, Pennsylvania, we're doing some additional site planning work there with the anticipating of maybe creating more of a mixed-use development if that is successful.

My guess is we would sell off a partial of that to another use as opposed to joint venturing it. Same thing with our Swedesford Road and Two -- in Chester County, Pennsylvania, and Two Christina land in Wilmington, Delaware. So it's a little bit of a different answer based upon each piece of property, but certainly this year, we would expect that 1919 and FMC Tower would go into development.

And that we would have a number of parcels of land, really in New Jersey, Texas and Virginia that we would anticipate selling some time in the first half of the year.

Okay. That's helpful. Thanks.

And just curious how conversations are going for the remaining office space available at FMC Tower and then preleasing at the Ballston development? Then on the Ballston project, can you just remind us how much preleasing you want to move forward there?

Sure. We are -- we have informally launched the marketing plan for FMC Tower. We have, frankly, really anticipate that kicking off full gear in June when the design, development, the marketing materials, the video, all that information has fully pulled together.

In the interim, though, we are certainly handling a lot of inquiries from tenants who, we think some of those have some really good traction. You may recall that we have about 225,000 square feet of spec space there. So certainly a fairly small component in terms of where we think the risk profile is.

So I would say that really the second half of 2014 would be really the full launch of the marketing plan for that project. I would expect that probably between now and then, we will be able to get a few of the smaller leases; we are talking to single floor tenants across the table. So we feel really good about how that development has been queued up and, frankly, how well it's been received in the marketplace.

So that's all tracking along very nicely. And the Ballston development, which is a joint venture with John Shooshan and his Company. They continue -- I say they -- we and they continue collectively marketing the project for significant prelease.

We haven't really established a range of preleasing but certainly got to be in that 30% to 50%-plus range. And that would really depend upon length of lease stacking in the building, overall economics, et cetera. But, that market is very competitive; there's a number of existing buildings that are in the competitive set.

There's a couple of buildings that are near to being announced as construction starts. So I think the initial predicate that we went into that joint venture with still remains true. It's a great piece of property, incredibly well located, right next to where there's going to be a major mall redevelopment.

It's part of a mixed-use project. John and his company are extremely well-positioned and connected in that marketplace. And that between John and Brandywine and our outside advisers, we will aggressively present that project to the tenants in the market. If we wind up getting one, we will make a decision to go and if not, we will continue our pre-marketing efforts.

Okay. Great. Thank you.

You're welcome.

And your next question comes from the line of Mitch Germain with CMP -- JMP, I'm sorry.

Good morning.

Good morning.

Jerry, I think you mentioned tenants paying a premium for collaborative space. I'm curious, has that changed the manner in which your marketing space available for a lease?

Well, I think it's not so much in a matter of how we market it, but certainly, we have a very good team of space planners that work on -- for our Company. They do an incredibly effective job of pre-thinking how we can lay out space for tenants.

So as part of our pre-screening process, our leasing agents get a really clear sense of what the qualitative drivers are of the tenant decision-making process. We clearly get in front of that and really show them how our floor plate, or the floor plates in the buildings are looking at can accommodate what their ultimate collaborative or cultural objectives are in that space.

It really does vary by tenant; a number of tenants, migrating very much to bench technology but in pods with a fairly wide amount of square feet between those pods with either conference centers, gaming rooms, collaborative space, whatever it might be.

So for us, it's a great experience because tenants are still trying to think through what they want their space to look like. I mean, there's tremendously diverging points of view on open versus closed space offices and anywhere along that continuum.

So we're going through the planning process right now with a number of large tenants who are going through that very thought process now, what's the best mix of open versus close, what's the best mix of bench versus cubicle, use of glass versus fixed walls. So it's -- I think what we wind up doing, Mitch, to answer your question directly is, we tend to really get very well educated on how flexible the floor plates of each of our buildings can be.

We model out a range of space planning options so we're actually able to educate, persuade the tenant prospect on how our building meets their needs the best. So it's part of broadening out everyone's perspective on what office space should look like and what it should be used for.

Thanks.

And at this time, there are no further questions. I would like the hand the conference back over to Mr. Sweeny for any closing remarks.

I don't have closing remarks, but thank you very much for your time and attention. We appreciate it and we look forward to providing a future update on our progress in the next quarterly call. Thank you very much.

Thank you. This concludes the Brandywine Realty Trust fourth-quarter earnings conference call. You may now disconnect.