Brandywine Realty Trust (BDN) 2014 Q2 法說會逐字稿

Good morning. My name is April 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) Thank you.

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

April, thank you very much. Good morning, everyone, and thank you for participating in our second quarter 2014 earnings call.

On today's call with me are George Johnstone, our Executive Vice President of Operations; Tom Wirth, our Executive Vice President and Chief Financial Officer; and Gabe Mainardi, our Vice President and Chief Accounting Officer.

Prior to beginning, certain information discussed on 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, in fact, 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.

Okay. As we normally do, we'll start off with an overview of our three key business plan components, namely, operations, balance sheet, and investments. George will then discuss the status of our leasing and operating efforts, and we'll then turn the call over to Tom to review our financial results.

Since our last call, we've continued to make excellent progress on our 2014 business plan. Our market steady recovery continues. We are seeing tenants increasingly focused on the high-quality, efficient space we provide as their businesses grow and expand.

During the quarter, we achieved strong leasing and operating results and our development and redevelopment initiatives remain on track. So all in all, excellent business plan progression during the first half of the year.

For the quarter, we exceeded consensus FFO by a penny, primarily driven by anticipated core portfolio performance and a lease termination fee, given the steady progression. And Tom will walk through the details. We're moving up our bottom end of our guidance range by a penny to a range of $1.43 to $1.48 per share.

Looking at operations, operational performance remained strong and our 2014 plan, as in our press release, remains on target. Our pipeline of deals at the proposal stage stands at 2.7 million square feet, up 8% from the first quarter. For the quarter, we also leased over 1 million square feet of space, consistent with the very strong performance in the first quarter and reflective of the continued strength of our forward leasing pipeline.

Occupancy stood at 89.3% and preleasing at 91.7%. The leasing number is up 50 basis points quarter-over-quarter and our portfolio remains on track to achieve our year-end occupancy and leasing targets.

From a spec revenue standpoint, our business plan is 95% accomplished. It's also important to note that we have reduced our spec square footage component by 55% since our first quarter call on May 1. So truly significant progress in derisking our remaining year business plan.

We continue to lease a lot of space in Metro DC and other recovering markets. And we've also been successful in lengthening lease terms and achieving 2% to 3% annual rent bumps. As a result, for the year, our GAAP mark-to-market is trending towards the high end of our 6% to 8% range, while our cash target is trending towards the lower end of our range.

Leasing activity was strong, and as George will touch on, we made significant progress on our portfolio vacancies. In particular, in Maryland, as you know, we had a total rollover exposure of 216,000 square feet with Lockheed Martin.

Given other leasing activity, as well as the recently announced [CNSI] deal at 118,000 square feet, we've already absorbed 174,000 square feet or 80% of that total rollover exposure within months of Lockheed's departure. So really, a good job by our DC leasing team.

Excellent operating traction continues in our Pennsylvania Town Center markets, CBD Philadelphia, University City and Austin, Texas. We also noted a strong increase in our tenant retention ratio to almost 78% during the quarter. And as we moved last quarter, we increased our 2014 projection up to 67%.

Leasing costs for the quarter were up over the first quarter run rate, but still within our range of [225 to 275] per square foot per lease year. The quarterly increase was primarily driven by several leases in New Jersey that averaged close to $4 a square foot. Our run rate excluding those [4] was around $2.30, well within our target range.

We continue our positive trend with very strong same-store growth, and on a GAAP basis, reported 3.5% and 6.7% on a cash basis. So we continue to harvest the benefits of our strong leasing progress and improving rent spreads.

Given the demand drivers we're seeing in our marketplace and our ability to both extend lease terms and increase bumps, we continue to focus on forward derisking our portfolio by reducing rollover exposure in out years.

So for example in 2015, we have our rollover exposure down to 7.5% and less than 8% in 2016. So for both years, we have less than 2 million square feet rolling and will continue to make good progress on that through year-end 2014.

Now, looking at our balance sheet, we remain in a very strong position with excellent liquidity. We have no outstanding balance on our $600 million line of credit and we continue to have $235 million of cash on hand. As indicated on previous calls, our cash balances remain available to fund our development pipeline, acquisition activity and for debt paydowns.

And as we're seeing in the numbers, occupancy gains, positive operating trends and capital recycling remain major contributors to achieving our intermediate-term leverage targets of 6.5 times EBITDA and 40% debt to GAV. And our long-term leverage target of being below 6 times EBITDA and mid-30s debt to GAV.

As we reinforce on every call, achieving these benchmarks over time remain driving predicates of our business plan.

Certainly, given the favorable interest rate environment, we have been actively monitoring a variety of refinancing and liability management options. We continue to evaluate ways to both lengthen our maturity curve, reduce our weighted average cost of debt, increase the size of our unencumbered pool, all consistent with our overall leverage reduction targets.

Looking at investments, capital is clearly moving in the right direction and we're pleased with the increased amount of institutional money being focused on the office sector. Nationally, office sector sales are up significantly year-over-year. While the focus remains on primary markets, increased competition for deals is clearly driving institutional money to non-gateway markets looking for incrementally higher yields.

So the low cost of debt capital, significant amounts of equity looking to be deployed. The recovery in most of our real estate markets, we think all portend increased buying appetite for the parts of the portfolio that we are looking to sell.

Our business plan goal of being a $150 million net seller this year remains on target. We currently have over $80 million under contract. We are in advance contract negotiations (technical difficulty) we have under agreement and advanced negotiations or on the market that we'll be able to achieve our sales target by the end of the year.

The press release and the supplemental package provide specific on a number of our recent transactions and our development work. So I'll just touch on a few of those.

As noted last quarter, we acquired a 54-acre site in southwest Austin known as Encino Trace. That site is permitted to develop two four-story buildings totaling 320,000 square feet and a 1,375-car parking deck. The first building is 75% preleased to an anchor tenant and we commenced construction on that project at the end of the first quarter of 2014.

Based on the leasing pipeline activity that occurred after our announcement of that start, during the second quarter, we commenced construction on the second building totaling 161,000 square feet. Both buildings will be completed during the second quarter of 2015.

Our estimated costs are $87 million. We had about $19 million funded as of the end of the second quarter. The pipeline activity for the balance of the space remains very strong and we are targeting an 11% free and clear yield on cost.

Also in Austin, we did, during the second quarter, contribute our Four Points Centre, which consisted of two buildings aggregating just shy of 200,000 square feet into our joint venture with DRA Advisors.

Development activity is also detailed in our press release and on pages 11 through 13 of the supplemental. Just some notable highlights -- we did break ground during the second quarter on the FMC Tower at Cira Centre South. That project remains on schedule for a targeted midyear 2016 delivery.

The building incorporates an expanded amenity program, additional residential units, enhanced street engagement and public spaces. And the revised building will contain 635,000 square feet of office space, about 6,000 square feet of retail and 268 residential units. We continue to believe the total costs will anticipate about $385 million.

We have about 255,000 square feet of office space to lease. We recently launched our marketing campaign for the balance of this space and will really gear up our full efforts in the fall.

Pipeline activity looks very encouraging and we remain very enthusiastic about meeting our pro forma targets.

Of the 268 residential units, we anticipate about 100 will be extended-stay, fully furnished corporate suites, with the balance being market rate rental. We continue to explore, as we talked on the last call, a variety of financing avenues for this project that include potential joint venture financing for the entire project with a residential component, as well as source and construction financing. And we are still projecting the same baseline free and clear return of just north of 8%.

Our EVO project at Cira Centre South is on track for opening this academic year and the project remains on schedule and on budget. We anticipate the certificate of occupancy will be obtained very shortly with over 50 tenant move-ins scheduled started for August 1.

The project is currently 37.8% leased, with significant activity growing quickly. And as originally anticipated, we do expect the project to stabilize in the third quarter of 2015 at a projected free and clear return of 7.6%.

All of our other development projects are on track and on schedule. The land monetization plan, which is outlined on page 14 of our supp, remains very much on track.

And as a final point, the redevelopment program for 1900 Market Street is well underway. The range of renovations are entrance, lobby, mechanical system upgrades, as well as significant facade enhancements. That'll put our overall investment basis, we projected along between $180 to $200 per square foot. And we expect that renovation to be completed by the end of year 2015.

In summary, the second quarter was a real solid continuation of our 2014 business plan and really builds a great foundation for the Company looking ahead for the next several years.

At this point, George will take a look at our second quarter operational performance, and then Tom will touch on our financial results. George?

Thank you, Jerry. Our markets continue to demonstrate signs of recovery and our regional leasing teams continue to generate activity, expeditiously negotiate terms and execute lease transactions.

During the quarter, we signed over 1 million square feet of leases, which mitigates known move-outs, positions us to achieve business plan targets and reduces forward lease expiration exposure.

Inspections during the second quarter were up 14.7% over last quarter and up 9.8% year-over-year. We're outperforming market vacancy in all but one of our markets.

In CBD Philadelphia, we're 94.5% leased and well ahead of our future lease expirations, with less than 1% remaining in 2014 and sub-5% rollover for each year through 2017.

Leasing activity at Commerce Square remains strong, as those properties are now 90% leased, up 330 basis points from our acquisition in late December.

Our Pennsylvania suburban properties are 93.3% leased, with the Crescent markets at 97% and the western suburbs at 89%. Deal flow continues to gravitate towards King of Prussia due to the lack of available space in the Crescent markets.

Inspections in Metro DC region were up 10% on both a quarter-over-quarter and year-over-year basis. Our repositioning plans are underway in Dulles Corner and Northrop Grumman vacated their 100,000 square feet, as anticipated, on June 30. The building is already generating interest, as two prospects -- each in excess of 50,000 square feet -- are entertaining proposals.

Now turning to the specifics of the quarter, we commenced 587,000 square feet of leases. Of this amount, 167,000 square feet were expansions, our fifth consecutive quarter of expansion activity in excess of 100,000 square feet.

This leasing activity resulted in occupancy of 89.3%, but more importantly, a 91.7% leased percentage. All but 48,000 square feet of our 564,000 square feet of forward leasing will commence in the third and fourth quarters.

Commencement of our executed forward leasing, leasing the remainder of the new square footage in the business plan, offset by known tenant move-outs and early terminations, gets us to 91%. Additional conversion of pipeline beyond our remaining 364,000 square feet of planed activity places us within the 91% to 92% range.

Some additional color on other metrics that performed outside our annual range during the quarter. Leasing spreads were 2.6% on a GAAP basis and negative 7.4% on a cash basis. Both of these metrics were adversely impacted by the majority of our marked leasing coming from Metro DC, New Jersey and Richmond, where leasing spreads remained negative while the markets fully recover.

Our anticipated third quarter mark-to-market is in a range of 16% to 18% on a GAAP basis and 6% to 8% on a cash basis, driven by leases already executed, primarily Drinker Biddle in Philadelphia and KPMG in Tysons.

We continue to see favorable rent growth opportunities in CBD Philadelphia, the Crescent markets of Pennsylvania, and while not included in this reported metric, Austin, Texas. Additional tenant expansions that resulted in us raising our retention rate from 63% to a now annual plan of 67%.

Jerry provided an update on the backfill of Lockheed in Maryland. In terms of the Travelers space in Richmond, we're close to finalizing an LOI with a prospect to take all of the space. Their occupancy requirement is approximately 50% in 2014 and the balance in early 2015.

So in conclusion, another solid quarter with significant achievement on the business plan. And with that, I'll turn it over to Tom.

Thank you, George. As Jerry highlighted earlier, our second quarter FFO totaled $57.3 million or $0.36 per diluted share. Our FFO payout ratio was 41.7% based on our current $0.15 distribution.

Some observations regarding the second quarter FFO results. Same-store NOI growth for the second quarter was 3.5% GAAP and 6.7% cash, both excluding net termination fees and other income. We had 12 consecutive positive quarters of GAAP metrics and 8 for cash metrics.

Our same-store portfolio also experienced improved margins, as our second quarter profit margin, excluding termination fees, raised -- increased to 60.6% as compared to 58.3% in the first quarter and 60.4% in the second quarter of 2013.

Improvement in our margins came from operating expense decrease of approximately $5.8 million from the first quarter due to the weather-related operating costs of the same-store portfolio and Four Points Austin moving to the JV with Austin.

Termination income totaled $3.3 million, a $1.1 million increase from our first quarter guidance.

G&A expense totaled $6 million, which came in line with our previous guidance. The $2.2 million decrease from the first quarter is primarily due to the employee severance costs and transaction costs incurred in the first quarter of 2014.

Interest expense totaled $31.5 million, a decrease of $300,000 as compared to the first quarter. The decrease is primarily due to an increase in capitalized interest due to development activities.

FFO contribution from our unconsolidated joint ventures totaled [5-point] million (sic) and was slightly below our $5.5 million guidance.

Our second quarter CAD totaled $28.4 million or $0.18 per diluted share and an 83.3% payout ratio.

During the quarter, we incurred $22.9 million of revenue, maintaining capital expenditures. 22% of the second quarter revenue maintaining capital spend related to future year leasing activity, with 5.1 related to early renewals from 2015 and later.

With respect to the quarter-end balance sheet and financial metrics, our EBITDA ratio improved to 6.9% as a result of improved operating results. And our debt to GAV was 42.8%.

We have $100 million of floating rate debt, no balance on the $600 million unsecured line of credit, and $235 million of cash with no maturities other than our 218.5 bond maturity in November later this year, which is fully covered by our liquidity plan.

As Jerry mentioned, based on the second quarter results, we've increased the lower end of our FFO range to $1.43 to $1.48. In addition to the business plan assumptions outlined in the supplemental package, we note the following:

Core property income for the third quarter will be slightly below the second quarter results due to slightly higher seasonal operating adjustments and the known move-out of Northrop Grumman. 2014 G&A for the balance of the year, the range is still $25 million to $26.5 million and will be evenly spread through the rest of the year.

Interest expense should continue to range at 125 to 127, with 3Q expense approximating the second quarter.

Termination fees we expect to decrease to about $1 million.

Third quarter management and leasing income should be slightly below the second quarter results due to lower leasing and development fees, while other income lines should also approximate second quarter results.

Joint ventures, the FFO contribution from the unconsolidated joint venture should increase from our second quarter number to roughly $5.5 million for the third quarter. We have $150 million of net sales. With the expectation of Four Points and the Dallas land to date, there have been no additional sales.

While we continually have properties in the market in various stages of price discovery, we continue to project generic sales with an assumed 8.5% cap rate. As per our previously existing plan, we anticipate a majority of those sales to occur in the fourth quarter.

Third quarter results will benefit from the continuing annual amortization of the historical tax credit related to the Post Office, which will be approximately $11.9 million. We have no planned issuance under our CEO Program, no note buyback or capital markets activity and $160.4 million weighted average shares for FFO in 2014 for the third quarter.

Annual FFO payout ratio is 41.2%. Even with the additional capital spend this year related to 2015 and beyond leasing activity, we continue to project CAD per diluted share to be in the range of $0.70 to $0.80, reflecting $40 million to $50 million of revenue-maintaining capital.

2014 capital, as we look at our liquidity for the balance of the year, for the balance of the 6 months, total uses for the remaining 6 months will total $470 million, comprised of $219 million for the unsecured note repayment; $75 million for the development projects, primarily FMC and Encino Trace, 1900 Market and the Cira Green; $51 million of aggregate dividends consisting of $48 million for the common shares; $3.5 million for the preferred shares; $25 million of projected JV investment activity, primarily 4040 Market; $45 million of revenue-maintaining CapEx; $45 million of revenue-creating CapEx; and $7 million of mortgage amortization.

Primary sources for the $470 million are $222 million of cash on hand; $95 million of cash flow before financing, investment and dividends and after interest; $150 million of asset sales, and $4 million from the repayment of a note receivable.

At this point, I will turn it back over to Jerry.

Great, Tom, thank you very much. Just one point to amend my earlier comments. I misspoke on the Encino Trace yield. As we've disclosed in our supplemental package, the free and clear yield on both of those projects is expected to be 8%.

So to wrap up our prepared comments -- and thank you, George and Tom -- second quarter results were very strong, consistent with our business plan. It was a fairly quiet quarter on the investment front. We have a lot of work underway, as I mentioned, on the sales front, as Tom alluded to. But we remain confident in the continued execution of our 2014 business and are continuing to plan ahead for 2015 and 2016.

So with that, we'd be -- we've wrapped up our prepared comments and we'd be delighted to open up the floor for questions. We do 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)

Jed Reagan, Green Street.

You've talked about being net sellers this year and achieving significant deleveraging over time. It's actually been pretty quiet so far, as far as [this addition]. Your development pipeline is growing and leverage metrics still remain elevated relative to the peer group.

So just wondering if you could talk a little bit about the timeline for making bigger strides on reaching some of those leverage and debt to EBITDA goals, and maybe how you hope to achieve that.

Thanks, Jed. In terms of the broader issue of capital raising, as you've alluded to -- and certainly, as we've stressed and repeated -- achieving our balance sheet goals is a real driving predicate of our business plan. We do believe that creating capital capacity is one of the best ways, really one of the best strategies, we can execute to both derisk our Company and provide capital to accelerate growth.

So we have been successful thus far in selling slower growth assets. And those asset sales, over the last couple of years, have really been our most effective source of raising capital. I think we're very encouraged by is that our markets continue to improve; even in some of more challenged markets, us reaching a point where we're almost at the stabilized occupancy levels for a number of those projects.

And with investment capital now finally really focusing on the office sector, and particularly at some of the non-gateway markets, we do feel we have an accelerated opportunity to continue our portfolio position, repositioning, improve our forward cash flow profile and raise capital. And we're clearly keeping all of our options open.

We do expect that we'll meet that intermediate-term goal of 6.5 times EBITDA and 40% hopefully sometime in the 2015 range. But clearly, the track that we're on to delever is key for us. And as we seek to take advantage of value-add or development opportunities, we clearly are evaluating all those in the construct of what we think our capital raising activities can be.

Then the long-term goal, is that a 2016 type of expectation or further than that, or how is it -- ?

The 2016, 2017 timeline. One of the benefits we have is with some of these development projects coming onboard. Frankly, Encino Trace is early as 2015; EVO generating some returns for us in 2015 and certainly, FMC coming on at 2016. We think there will be some extremely good value-added drivers to help us accelerate and achieve our leverage goals.

Okay, thanks. And on the student housing project that you [have], it seems like there's quite a bit of wood to chop there still on preleasing. Just wondering if the partnership is still feeling comfortable with the original leasing goals or if those need to be scaled back again? And specifically, is there any read-through yet on graduate student demand? I know that was a key aspect of it.

I think as we look at the project -- and we, in this case, being Harrison Street and Campus Crest and the Brandywine partnership -- mission-critical was the delivery of the project. The delivery is on time. It's on budget, which is quite a feat since we lost over 20 days due to weather during the winter. But the budget remained in place in a $160 million level. There's still some contingency dollars remaining.

We were fortunate to have some nice buys on hard costs and some interest savings during the development project timeline to be able to more than offset the acceleration costs due to the weather delays. So I think from that standpoint, we're feeling very good and again, the project will be open and tenants will start moving in really in the next couple of weeks.

In terms of the leasing, we're at 37%, a nice uptick from the last quarter. And all of this leasing, we need to be mindful of, is really being achieving without the prospects being able to walk through the building. So the Campus Crest team is doing a wonderful job of generating demand in the marketing (inaudible) without really even having the model units or the study halls or the concierge level completed until very, very recently.

But in terms of your question on mix, I think we're really pleased with the mix of students. It was designed primarily as graduate. Right now, we have about 57% or so of the student population of executed leases are coming from Drexel University, which is a good mix of graduates and undergraduates.

We have 33% are coming from Penn and they're graduate students. 95% of those are first-year grad students. So we think there's a good opportunity to build that brand.

We also have just shy of 10% of the population that's executed leases so far being young professionals, recent graduates. And Brandywine and Campus Crest are collaborating very nicely and doing cross-marketing to the Brandywine tenant base downtown. So we're picking up a number of young employees of our tenant base.

The other thing that's actually very good for us is the existing leasing pipeline. There are representatives from five other schools in the Philadelphia area, which really, I think, speaks well to the long-term value of this location and its close proximity to both University City academic centers, Center City cultural centers and the transportation hub.

The prospect list remains very strong. We have about 600 prospects coming online, and with the CO being achieved in the next week or so, the building being open for occupancy, people being able to come in and see the model units, we really do think that things will accelerate quite nicely.

The other point -- with this being a graduate project, with the exception of Wharton at Penn, which has an August 1 start date, most of the other graduate schools start in late August. And Drexel, for that matter, which runs on a trimester basis, their school year for both undergraduate and graduates doesn't really start until September 22.

So there's plenty of time, we think, to accelerate the leasing progression that's been made over the last couple of months. So I think we're feeling very good about where the project is. Certainly, coming in on time, on budget is very key. We still, when we analyze the pro forma, are still very much focused on the fact that by the third quarter of 2015, we'll be in a great shape to have the project stabilized.

And is the near-term goal of maybe getting to mid-80s? I think was an expectation for that there at one point. Does that still feel achievable or just having to see how the next month goes or -- ?

Jed, honestly, I think the pipeline of the 600-plus students and the diversity of that pipeline, I think gives us great comfort that we're going to make significant progress over the next, call it, 60 days. Whether the mid-80% was optimistic or not, we'll be able to look back at that point.

I think the team feels very strong that, given the existing prospect list, the diversity of that list, now that the model unit will be open, the study halls will be open. The building is stacked with furniture through the 27th floor, with a punch-list item on the lower floors. So the amenity package is pretty much in place.

We do think that the conversion ratio will pick up quite nicely. We are very pleased, frankly, with the level of exposure we're getting through Drexel University and through some of the other universities in close proximity to downtown.

Okay, great. Just last one for me, if I may, on the Austin development. It sounds like you felt comfortable moving forward on the second phase on a spec basis. Just curious what gave you that comfort level and what kind of preleasing you're seeing there. Do you think any of that activity could represent further [poaching] from your existing portfolio there?

Good question. I think what we did is once it became known in the market that we had signed a lead tenant and that tenant was taking 75% of the first building, we started to receive a lot of inquiries. The pipeline built very quickly of tenants ranging in size from 50,000 square feet to 100,000 square feet, who really liked that location in southwest Austin.

So that type of upsurge in activity, which there are a number of discussions still ongoing. These would be new tenants, so not coming out of our existing portfolio. We felt comfortable that with construction costs have been on the rise in Austin, with the siting of these two buildings, we could achieve some construction cost savings by proceeding on both at the same time.

Our expectation that some of these prospects would turn into future tenants, as well as the potential expansion of the anchor tenant in building one, that all went into the mix that had us form a conclusion that we were better off delivering both buildings around the same time.

Great, thank you very much.

Jamie Feldman, Bank of America.

Can you talk a little bit about your known move-outs between now and the end of 2015? Has anything changed since last quarter or what should we be looking for here?

No real changes, Jamie, from last quarter. Clearly, the largest, which occurred June 30, is Northrop Grumman. I think when you look at the disclosure we've got in the supplemental, and my commentary of moving in that forward leasing, it's already executed. That was evidenced on page 4 of the supplemental. The speculative leasing left in the plan, that's in the chart on page 5.

We've got about 470,000 square feet of known move-outs to really get us to that 91% occupancy at the end of the year. We've got a number of prospects in that 2.7 million square foot pipeline that we continue to work every day. That then puts us further up into our stated range of 91% to 92%.

What about if we look ahead to 2015?

2015 expirations?

Yes.

I think some of our larger ones in 2015, we've got 130,000 square feet with Computer Science Corporation in Delaware. We do know that that's going to be a move-out. That's a full building user. We already have that building in the market for potential disposition. Could go potentially to a user.

eBay, 93,000 square feet in King of Prussia, we feel good about them. We've got a 56,000 square foot law firm renewing down in Delaware. Those are probably the three biggest ones over that 50,000 square foot mark for next year.

Okay. And you think eBay is a renewal?

Yes.

Okay. Then can you talk about net effective rents? If you look across your markets, what are you seeing in terms of year-over-year growth ?

I think as I mentioned in my comments, we're clearly seeing an improvement in net effective rents in downtown Philadelphia and in the Crescent markets. We're pushing the base rates. We're maintaining, if not improving, operating expenses. Because those markets are so tightly occupied, we're controlling capital costs.

We're getting good annual escalations between 2.5% and 3% in those stronger markets. I think when we go around the horn, I think DC net effective rents haven't really changed all that much. I think the concession packages remain relatively unchanged.

New Jersey, Richmond, some of our smaller markets where we still have a few percentage points of occupancy to gain, we continue to have to roll down that cash rent. But again, I think Richmond traditionally has been a low-capital market. But we have had situations, like we had this quarter in New Jersey, where a few deals that met the occupancy needs just required closer to a $4 capital investment.

Okay. Then finally for me, what you guys seeing as the impact from this Grow New Jersey plan? We've heard a lot about it in the press and from brokers. Are you seeing the pendulum shift at all from Pennsylvania to New Jersey?

I think it's a powerful program the state has implemented. We'll see how it actually plays out. It's a fairly short duration through 2019, I think it is. It certainly does provide an incentive for some companies to locate into these targeted zones. And I think that was -- whether it's good public policy or not, New Jersey will need to debate it. We think it's a good economic development tool that they've implemented.

What we have typically seen is when one state announces programs like that, other states follow with similar types of programs. So to the extent that New Jersey starts to garner a lot of economic support through this plan, which is think is pretty well crafted, my expectation would be that major large companies looking to make locational decisions will certainly use that as a lever point over whether it's in New York or Pennsylvania or Delaware or Maryland, for that matter.

And then what we found is that ultimately, companies tend to make the locational decision that works best for their employee base, works best for their physical (sic) and marketing platform. And the public investment to achieve that tends to be not a secondary consideration, but not as prime as making the culture of the company work well and the employee base happy.

So I think it's an effective tool. I think it's still at the embryonic stage of implementation. We've seen a few things down here in the Philadelphia area where companies have moved into Camden, which is one of the targeted zones. The 76'ers moved their training facility over there certainly because of the significant tax incentives. Another company that's domiciled in Burlington County has relocated their headquarters down there.

So Jamie, it's a great question. I think again it's a well-crafted program. The breadth of its adoption by companies looking to make locational decisions, I think, still remains to be seen.

New York has some strong incentive programs to keep and attract companies. Pennsylvania, through its RCAP Program and tax-free zone, has a fairly compelling economic model as well. Delaware has historically been very aggressive and responsive in attracting companies.

So I think this program, at least in the tri-state area here, I think really put New Jersey back on the map relative to having effective economic development tools to get to the table to talk to companies who are looking at making locational choices.

Great, thank you very much for the color. I'm all set.

Michael Bilerman, Citi.

It's actually Manny Korchman here with Michael. If we can go back to EVO for a second, what do you foresee as the going-in 12-month yield from here compared to the 7.6% that you spoke about once stabilized?

Again, we have leasing to do, but I think that the current plan right now shows us holding that yield. For example, with some of the leasing that's been done thus far, there have been some very select concession packages put together in terms of either waiving application fees or incorporation a percentage of monthly rental abatement. Community fees are still being paid.

So our average effective monthly rent for what we've done thus far is still above our effective budgeted rate. So right now, even with the concessions that have been given -- albeit as minor as they've been -- we're still running ahead of our average monthly rate.

More importantly though, the competitive set that EVO is competing against for the graduate population still have rental rates in excess of ours. And they're wrapping in particularly the real high-quality competition in around 34th Street is running close to full occupancy.

So I think as we look at the pipeline of prospects -- as I touched on when Jed raised his question -- the diversity of that prospect list in terms of the graduate-undergraduate mix, the young professionals, the incorporation now of five additional schools who were having students look at it. We're still feeling that the next 60, 90 days are really critical for us to see how those numbers shake out.

But right now, based upon the pipeline, what we've done to date without the building being open, I think we're still looking at that mid-7% yield rate.

Manny Korchman Do you foresee having 90 days of runway, given the fact that, even in the case of Drexel, you're starting the school year September 22? I'm saying 60 days, but what does that extra 30 days once schools open, give you?

I think one of the positive dynamics that we've been seeing is that we're seeing an increasing number of young professionals look at this as a market-rate rental unit project. So we think that's created some additional momentum in the pipeline. And with the graduate schools, a lot of those students make decisions around this time of year as opposed to the undergraduates typically do standard housing.

So I think there is some runway there. Certainly, we wouldn't -- I don't think we'd have this pipeline of total prospects, again, dominated by Drexel and Penn, unless there was a real pressing need for these students, both graduate and undergraduate, to find a place to live.

Great. Then you spoke about a good pipeline at FMC. I was just wondering what kind of tenants you're seeing there?

Great question. We're now, with 250,000 square feet the least, and essentially a 2-year delivery time, I think what we're still focused on right now is some of the larger sized tenants who are domiciled in the surrounding counties, both in New Jersey, Pennsylvania and Delaware, who are beginning to send signals. They want to have a piece of their operation in downtown University City, Philadelphia.

So we are making a number of pitches to larger users who may, in fact, want to relocate to FMC Tower. But more to the point, we're looking -- consolidating or breaking off a piece of their operations for downtown. So we're still talking to some tenants ranging in the 100,000 square foot to 200,000 square foot range.

We're beginning to in-fill that with single-floor users who are in the 25,000 square foot range. And at this point really, finalizing all the marketing materials, having broker open houses, broker networking, making a lot of presentations to business organizations, to companies. So really using the balance of the summer to raise the profile of the project.

So people understand that it's a mid-2016 delivery, construction has started. Here's the amenity package. Here's the economic structure. Here's how the tax-free zone works in. And actually getting a very good response. This building, again, as we've talked about, will be a real driver of the skyline, a real brand identity. Its proximity to Penn, the Science Center Drexel University, the transportation. It all really does resonate with a lot of these prospects.

And a much different dynamic than we had when we started the original Cira Center building where it was still a bit of a pioneering location. So people were a little bit locational resistant. Now, the buyers tend to be very embracing of the location and excited about evaluating FMC Tower becoming home to at least part of their operations.

Very helpful, thank you.

Brendan Maiorana, Wells Fargo.

George, page 5, your 2014 leasing plan square feet, is that a lease plan or an occupancy plan?

That is an occupancy plan.

Okay. So can you help us just frame up getting -- occupancy, it seems like you're pretty well positioned to get to the midpoint of guidance, given that your leased rate is well above where your occupancy rate is. It feels like you're pretty well positioned there.

To get to the 93% to 94% in terms of the leased rate by the end of the year, can you help us understand new leasing that you expect to do, maybe move-outs, early move-outs, that are expected? And I gather from the amount of expirations, 500,000 square feet, it sounds like you probably think you're going to retain about 70% of those for the balance of the year.

I think how we generate that, our planned commencements for, call it, the first 3 to 4 months of 2015, based on the pipeline we have today, is really where that forward leasing will continue to come from. I think every new lease we start to sign over the late third and during the fourth quarter, that's all going to have a 2015 commencement to it.

So I think much the way we're sitting on 500,000 square feet of prelease today, we expect to just replenish that as we continue leasing during the course of the year. So we've got 50,000 square feet in that bucket as we sit here today, a couple of leases. But we have some spaces where we've got a known move-out in the third and fourth quarter.

We've already leased the space for a 2015 commencement, but it doesn't show as preleased because the space isn't currently vacant today. We've got about 100,000 square feet that sits in that category.

So I think it's conversion of the pipeline is really first and foremost as to how we get there.

Yes, that makes sense. What I was trying to understand is the mechanics operating getting to 93% to 94% leased by the end of the year from 91.7% today. And it seems like, if I'm just looking at what you did in the first half of the year in terms of new leasing, and then assuming early terminations remain comparable with where they were in the first half of the year and the back half of the year, maybe that's not a correct assumption.

It seems like there's an acceleration of new leasing that needs to happen in the back half of the year to get to the midpoint of that range, which is 180 basis points of net absorption. Is that a fair characterization of how we should we think about back-half of the year leasing?

Yes, in some ways, but I also think that our run rate of early terminations and move-outs -- we don't have the 137,000 square foot Lockheed and the 100,000 Northrop. We don't have the same level of those large known move-outs.

We've got the one in Delaware that I talked about earlier, but yes, I think it's really a combination of the known move-out early termination number, not necessary being as much as the run rate has been. And the fact that we do assume that these markets continue to recover and we're able to continue to capture the market share of the deals.

Okay, fair enough. And just for that year-end target, I think my understanding is that the 93% to 94% doesn't contemplate any kind of changes to the existing operating pool, right? So to the extent that you maybe acquired a highly vacant asset, that would depress that number. Or if you sold a high vacant asset, that would increase that number? There's none of that included in that 93% to 94% target, right?

No, those targets are based on the portfolio as it is constructed today. It doesn't factor in any dispositions, despite the fact that we have a lot of things in the market to sell. And it doesn't assume any acquisitions coming in.

Okay, great. Just a last one for clarification -- you mentioned two 50,000 square foot prospects for the Northrop space, which would backfill all of that. Can you give us a sense of if those are two prospects, maybe how many options those tenants have at your building and others in the market?

Yes, they've come down, I think, to a short list of probably 6 to 7, but they probably started with an opportunity list that was probably 3 three times that. So we think that the capital plans we have projected for that building really make it a differentiator in the market going forward, re-amenitizing it, putting in new [way finding] systems, lighting, landscaping, lavatories.

We really think that we're going to be able to offer something that is even more of a flight to quality than exists today. So we're keeping our fingers crossed with the prospects we have, but we have them early. And we're hoping to take the same success we had with the Lockheed space in Rockville and generate the same positive result here in Dulles.

Sure, okay, great. Thank you.

Craig Mailman, KeyBanc.

It's Jordan Sadler here with Craig. I have a quick one on coming back to the leverage question. Jerry, obviously, we've got quite a bit out for sale, but is the expectation for leverage overall to continue to decline? I know that's been the message. I'm just trying to think of it in the context of what's going on on the spend side versus how much has closed year-to-date and what's under contract year-to-date.

Yes, Jordan, a great question. Just to reinforce, the answer is clearly yes. We do expect to continue the deleveraging to move forward. Clearly, as we have taken advantage of what we thought were very good opportunities for us, like an FMC Tower or an Encino Trace. Or as George touched on, the reinvestment of money back into Dulles Corner or up in Rockville.

We look at that forward capital spend as an obligation we've created for ourselves to continue our deleveraging path by accelerating our asset sales. And when we looked at even the timing of when the spend for an FMC or the other projects comes on board, a lot of that spend is occurring in 2015 and 2016.

So we certainly look at our forward sales disposition plan or joint venture undertakings, that's all part of that algorithm of how we fully fund these commitments we've made, continue to invest money into our existing portfolio while we're moving along that deleveraging path.

That's why I say every quarter that meeting those deleveraging goals, those leveraged targets, they're a driving predicate of our business plan. So every time we evaluate something, we look at what we need to do in order to maintain that path towards lower levels of leverage and stronger coverages.

Obviously, the big piece of the spend is FMC. Any incremental thoughts you can provide surrounding how to finance that going forward, the joint venture potential?

Thanks for raising that. We have engaged a broker to help us vet through that equity marketplace on the joint venture side. We've had a very good response. We've had well over 20 investors who have spent a fair amount of time on the project looking at both the overall project and the residential component.

And we really would expect a game plan over the next 90 days on that, Jordan, as we touched on -- launched the marketing efforts for the remaining leasing, but also work with a number of these institutional equity sources on whether we can achieve the right level of structure that we're looking for.

There has been no shortage at all of commercial banks that put forth construction proposals. But I think before we move forward on construction financing, which we know is plentiful -- and we know we had a very good deal from a number of our good banking relationships -- we wanted to see how the joint venture discussions go and whether they wind up being successful. And if they're successful, are they successful on the overall project front or just on the residential front?

It's Craig here with Jordan. Just a follow-up to that -- any thoughts on using the ATM here to help match-fund some of the construction costs for some of these projects?

Certainly, as I alluded to earlier, when we look at the broader question of capital raising, certainly, joint ventures, sales, other methods of raising effectively priced capital for the Company are always part of our consideration.

Okay. Then just one last quick one on the same story. You guys are trending ahead on cash relative to the high end of guidance. Can you give us a sense of where you think the back half trends? Should we be thinking that you are going to be more mid-to-high end of that range for the balance of 2014?

Yes, I think we feel confident that the 4% to 6% range is ultimately where we end up. I think we probably see a little bit of dilution in the second half of the year just knowing that when you look at a tenancy like Northrop Grumman, that's 100,000 square feet, that 6 months of rental income goes away from that same-store pool. So again, I think we feel confident about the range, but I don't think we'll be performing at that same [6-2] run rate that we've had year-to-date.

Great, thank you.

Gabriel Hilmoe, ISI Group.

Jerry, just on the future development pipeline and what's currently in planning, in your opinion, what likely gets started in the near term beyond what's in process right now?

The next project really up on the queue is the development at 20th and Market Street in Philadelphia, which is in the process of having the approvals protected, the partnership documents with an institutional investor finalized and third-party financing put in place. So that could start, as I talked about on the last call, is sometime in the fall.

The other project really that's underway is the 4040 Wilson project, which is a joint venture with the Shooshan Companies. We did commit to finish that garage. That work will be done and funded by the end of this year.

We also have committed that we're not going to start that project without a significant free lease. So marketing up from that continue apace. There's some very good activity. Nothing's been inked or advanced to the point of any certainty.

So we'll continue to evaluate that and certainly, in consultation with our partner. If the level of preleasing is not achieved, then as we've indicated before that project, we'll just finish the garage and wait for the market to recover for a leasing prospect. So really those two items.

One point that George did touch on, which is worth amplifying, is there are a number of other opportunities we have within our own portfolio where we plan on launching redevelopment efforts. Again, certainly not on the scale of the 20th and Market Street, but $10 million to $15 million capital plans, like we're doing at Dulles Corner or done at Rockville.

There's a few office parks in the southeast part of Pennsylvania that we think we have an opportunity to reposition. So other than those, I think that's pretty much where we are.

Okay. Then maybe one for George -- on your comments on some of the recent tenant expansions, has that been specific to certain markets? Or are you seeing that in different areas of the portfolio?

We're seeing it throughout the portfolio. I would say that we've seen certainly more of it in Pennsylvania and in downtown Philadelphia. Now, part of that is obviously because that's such a large part of the Company. But we have seen even some northern Virginia and Maryland tenants going through the same thing.

And even over in New Jersey, we had one tenant who exercised an 18,000 square foot renewal and then also grew by an additional 15,000 square feet as part of the process, so all over. I think as markets recover, companies feel better about their own internal business plans. We're starting to see some of that expansion activity that had gone away for a while during 2012 and 2013.

All right, thanks. Appreciate it.

Rich Anderson, Mizuho.

So Jerry, could you describe for me what your reaction would be if there was a meaningful increase in interest rates in 2015 beyond what maybe would be expected by the market? How do you think you would react in terms of your strategy from a deleveraging standpoint?

If there was a measurable increase in interest rates?

Yes. Do you think you would be fast-tracking things or do you think you would just toe the line and stick with what the original plan is in terms of timing?

I think as I mentioned in my comments, and Tom touched on, I think we continue to look currently at what to do with some of the debt we currently have on our balance sheet. We look at the ability today with treasuries being below 2.5%, with credit spreads being fairly stable and the demand drivers and I think the debt capital markets.

We're certainly actively evaluating if there's an opportunity for us with our cash balances to certainly reduce our level of leverage and then term out some of our more intermediate-term maturities. So that we can reduce our weighted average cost of debt.

So I think certainly, anybody who runs any business is very mindful of what the adverse impact of rising interest rates are, which is one of the reasons why, even with rates being as low as they are and have been, we carry a very low level of floating rate debt.

Okay.

So we like to focus on trying to grow rents, not control interest rate costs. So our path to delever is, as we've talked, is immutable. And as part of that, we look at what's the best debt structures for us to have relative to achieving that goal.

I was thinking of rates and an impact on disposition capital rates. I looked at the 2016, 2017 target for the long term. The leverage level seemed extended to me.

Yes, it's a fair point on the impact on cap rates. Certainly, cap rates, even today, as [well] as they're still trading at a pretty big spread from historical standards over the baseline treasury. So I think there's a lot of speculation. If rates move up a bit, there will be enough cushion to absorb short-term rate moves without impacting cap rates. And certainly, layering into that, of course, is what is our rates rising as part of an economic expansion.

So are we able to see rents growing as part of that economic expansion to more offset that? So it is a complicated metric, but I think from our perspective, the best way to ensure that we're optimizing our derisking is lower leverage. Lock in as long-term as we can to this historical low interest rate environment and keep leasing office space.

Great. And then my follow up to George -- you are talking a lot about early leasing and tackling 2015 and 2016. But do you think there are any markets where you want to -- I assume there are -- you want to let it ride a little bit and not leave some money on the table. If you're having market rent increases, you don't necessarily want to lease too soon and leave some money on the table. Can you comment and where, if you're doing that, anyplace in the portfolio?

I think the overall strategy has been to try to get those lease expirations extended. I think any perceived money left on the table, I'm not sure outweighs the potential risk of losing that tenant.

I also think that talking to the tenant now can sometimes result in a lower capital equation on extending that. Where if we let it ride for 2 more years, then potentially, the space looks more old, more tired and then they want a little bit more money on the natural expiration.

And to add onto that because it's a big part of our operating discussions. One of the key issues that we're very happy with is we've really been able to move these annual rent bumps into the 2% to 3% range, and in many of our markets, 2.5% to 3%.

So as we assess the opportunity costs, if we're able to achieve those kind of annual rent bumps, lengthen the lease terms, really derisk our portfolio, it's a much better economic tradeoff for us, particularly given lower capital costs than waiting for the market to bump 4%. The market may or may not bump 4%. And it certainly will always have 8% to 15% annual rollover. We can capture that upside on a more risk-adjusted basis.

But at least from my standpoint, I'm a very firm believer -- as I know the rest of our operating team is -- when the markets' psychology is such that tenants expect rents to rise, it's a very good time to accelerate forward rollover risk, bring it to today. They have an incentive to do it. They're more focused on controlling their longer term costs versus extricating a lot of capital.

And it makes for a very good equation for us to both stabilize the existing portfolio and enable us to be opportunistic in other areas that can create great value for us. The Three Logan example is a great one for us in this Company where the reason we were able to buy a 50% value-add building was because we were 94% leased with very little near-term rollover in CBD Philadelphia.

So that enabled us to make a bet that turned out to be very successful with the 660 Plymouth rehab, where we bought a completely empty building in our Plymouth Meeting market. And have turned that into a low double-digit return by rehabbing that and leasing it up because our existing portfolio was very stable.

So I don't think we leave that much on the table. And my guess is what we would leave on the table is more than offset by lower capital or concession costs to get the lease extension done.

Great. And just a quick one -- on the Austin JV, what is the end game there? Are there any buy-sell rates for either parties?

There are. Our partner there, on a 50-50 basis, DRA Advisors, is a very good quality group that we have a great relationship with through some other dealings over the years. We put 5-year debt financing on the portfolio. Both DRA and Brandywine are aligned with the opportunity to optimize value.

So there are buy-sells in place to the extent that one party doesn't [actually] see the right moment of optimization. And it's pretty standard fare. If they want to sell and we don't want to sell, we have a right to buy them out. If they want -- the converse is also very true. So pretty simple, straightforward, clean structures.

Got it. Thank you.

Mitch Germain, JMP Securities.

Jerry, where's the availability in the FMC Tower?

The availability is mid-bank, Mitch. We have University of Pennsylvania taking the bottom 4 floors and FMC stacking down from the top 10 floors. So we have floors 5 through 15 or 14 available.

Got you, got you. And your asset sales, you mentioned 80 under contract, 300 in place. Geographically, maybe if you could just provide some context, what markets you are more focused on [paring]?

Sure. On what's under contract or close to it, we have one complex in southeast Pennsylvania and the other project is in northern Virginia.

Great, thank you.

Jed Reagan, Green Street.

It looks like there was an asset in the Radnor market that traded recently at a pretty big number. I'm just wondering if you looked at that opportunity and what kind of look-through you think that might suggest for your portfolio? And more broadly, if you're seeing cap rates move materially in your markets these days or if that's holding steady?

The asset you're referring to is in Radnor. It is not sold; it's only out for bid right now. We are looking at it. Whether we make a bid or not depends on how we work through our due diligence. It's an older building, but in a great location in Radnor.

I think the pricing expectations are that it would be somewhere in the $150 per square foot, which we think really dovetails very nicely in terms of the value we've created here in our Radnor marketplace. And the cap rate, my guess is it will be somewhere in the mid-6% to 7% range, but again, I don't have any particular visibility on that, just market hearsay. And it's a single building, not a complex. It has its own rent roll characteristics versus what we have here. So I'd have to see where pricing worked out to see how much look-through there could be.

I think certainly, from a market vacancy standpoint, from a reinforcement of the expected sale price per square foot, I think it really does point to the fact that Radnor has really become the preeminent market in southeast Pennsylvania.

Okay, great. Then just broader cap rate trends in your markets?

I think we're still seeing either stabilized cap rates or a push-down for lower cap rates. I think we do look at some of these transactions and are very pleased with some of the trading ranges on some of these assets that we're trying to sell, which is why we put more things back in the marketplace.

So there clearly is a search for yield. The office sector, for better or worse -- worse if you're in it; better if you're not -- is there's still an ability for an investor to get a higher yield in office than they can in some of the other sectors. So that is, I think, accelerating the push of capital towards our sector.

The benign interest rate environment and even the anecdotal metrics on economic recovery are all playing very well into what we think continued upward ticks in value for a lot of our product.

Okay, great. Just a last one for me -- I think I heard George say that the cash releasing spreads for the year may be trending towards the lower end of guidance. Just thinking if that's an indicator of broader rent growth trends coming in lower than expectations in your core markets or if that's more one-off softness in select markets or buildings?

I think the point that sometimes gets lost when you look at a macro number for Brandywine is if you take a look at the markets where we're working very hard to absorb space. They are the marketplaces that are -- been a bit lagging in their recovery pace. So we're still rolling off in those markets, peak rental rates from 2007, 2008, etc.

So we do expect a negative cash mark-to-market in those markets. I think as we continue to absorb space, we see that trend continuing. But we're also very encouraged, Jed, by there's a very positive mark-to-market that we're seeing in a couple of our existing stronger markets. And frankly, the pace at which we think that negative spread will disappear even in some of our challenged markets.

Okay, great. Thank you.

Brendan Maiorana, Wells Fargo.

George, probably for you -- so one of the other REITs mentioned that they weren't seeing as much pickup in occupancy as they had expected in what would be your other suburban markets, non-Crescent markets in the PA suburbs.

It looked like your leased rate went down in that area this quarter. Are you seeing any softness in the non-Crescent markets? I think you mentioned that you actually thought things in King of Prussia were getting a little bit better.

Our pipeline, anybody who comes into the pipeline interested in Radnor, Conshohocken, even parts of Plymouth Meeting, opportunities don't necessarily exist. And we get them on the King of Prussia tour. So we've been able to do a number of transactions out there.

We've got that portfolio at 89% right now, but we've actually even seen some Radnor tenants who, upon lease expiration, are starting to entertain that as a lower cost alternative. So we've got a couple of pipeline deals where some people are actually looking to maybe go a little bit further out into King of Prussia.

So we've got a couple of troubled vacancies out there, but we've got a couple of business parks that have done very well. We went through a deal earlier this year with a company at our Maschellmac Complex who not only extended their lease for 10 years but doubled their size out in King of Prussia.

(Inaudible) that, Brendan. You take a look at our portfolio and compare that to some of our -- some other companies with their submarkets. We are, by design, not in a number of submarkets. As you move further out into Chester County, we literally have very little.

We've sold our assets in Exton. We've continued to lighten our load in the southern Route 202 corridor. We exited Horsham a number of years ago. We've exited Fort Washington. We have very little exposure in Bluebell. Most of our (inaudible) is on Plymouth Meeting.

So we really embarked on a path a few years ago to make sure that our southeast Pennsylvania exposure was really limited to four core markets in Newtown Square, Radnor, Conshohocken, Plymouth Meeting, with the add-on of King of Prussia, which we knew would be a beneficiary of the tightening in those marketplaces.

Okay. That's helpful. Then just last one -- I'm not sure if this is Tom or Jerry or George -- but consistently over the past couple of years, you have been in the revenue-maintaining CapEx in that $70 million to $80 million range. Then the revenue enhancing CapEx has been roughly comparable, $70 million to $80 million. The back half of the year, the same relationship, $45 million in each bucket.

As you move the portfolio to 91% to 92% occupied by the end of this year, 93% to 94% leased, should we start to see that the revenue enhancing driving the occupancy of that bucket of CapEx go down?

Yes.

Do you think that's something that happens in 2015 or is 2015 still a lease-up year and maybe it's a 2016 (multiple speakers) --

We haven't given any visibility on 2015 at this point, but I think if you take a look at what we're doing from an operating standpoint -- and George and Tom (inaudible) -- we are really reaching out into our 2015 and 2016 maturity curves to try and get those rollovers addressed today.

In fact, I think, Tom, as you had mentioned, over 20% of our capital costs this quarter related to tenants whose leases aren't kicking in until 2015. So thematically when we're looking at the Company, it's all about, for us, getting the portfolio back to historical occupancy levels and we still have work to do there. That's what we all spend most of our time on.

As we get there, we want to focus on really derisking our forward rollover exposure because that is a major point of success in the office business. We can move our overall retention levels back to that 75% to 85% -- 80% range we were at for years. That really portends a much lower level of capital investment, particularly with a portfolio like we have today, Brendan, that's much better positioned than the one we had 5 or 6 years ago.

Yes.

So we do expect that we'll be able to be in a position to have very good growth in our cash flow because of all of this investment we're making into our properties today.

Yes, that should help your leverage and all the things that you talked about earlier. Okay. All right. Thanks for the time.

There are no further questions at this time.

Great. Thank you all for joining in for the call. We look forward to updating you on our business plan activities in the fall. So enjoy the rest of the summer. Thank you.

This concludes today's Brandywine Realty Trust second quarter earnings call. You may now disconnect.