Brandywine Realty Trust (BDN) 2014 Q3 法說會逐字稿

Good morning. My name is Dashonta and I will be your conference operator today. At this time I would like to welcome everyone to the Brandywine Realty Trust third quarter earnings 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 will now turn the conference over to Mr. Jerry Sweeney, President and CEO of Brandywine Realty Trust. Please go ahead, sir.

Dashonta, thank you very much. Good morning, everyone, and thank you for participating in our third 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 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 we normally do, we will start with an overview of our three key business plan components operations, balance sheet, and investments. We have also introduced 2015 guidance and will provide color on some key assumptions. George will discuss our leasing and operating efforts. And we will then turn the call over to Tom to review our financial results.

During the last 90 days we raised $835 million of combined debt and equity proceeds. We did that to position the Company for growth, strengthen our balance sheet, meet our near term balance sheet goals, and to increase liquidity in a period of increasing opportunities and ongoing macro volatility.

We believe creating capital capacity is one of the best strategies we can execute to both derisk the Company and provide capital to accelerate our growth. Raising this capital combined with continued improvement in our markets provides a strong foundation for us to accelerate external growth opportunities.

These capital raises accomplish several key objectives, reduced art debt to GAV to 37%, reduced our EBITDA multiple below our near term 6.5 times target, lengthened our debt maturity curve 46% or by 2.3 years, reduced our overall cost of debt to below 5%, significantly reduced the Company's exposure to any floating rate risk, and created a financial platform whereby any future equity raises will be driven solely by growth opportunities.

These balance sheet improvements, while muting near-term FFO, enable us to focus on growth while maintaining a strong balance sheet with ample liquidity. The leverage metrics for Brandywine are very much in line with our peers. Our FFO and CAD numbers per share are now leverage neutral or positive to our peer set, and our liquidity position now enables Brandywine supported by ongoing solid improvement in fundamentals and portfolio recycling to take advantage of future opportunities.

So, in looking at the third quarter we made excellent progress on our 2014 plan, we have a yearend occupancy level over 91% based upon leases already executed and scheduled for commencement. That was a key goal and our leasing and operating teams worked incredibly hard to make sure we were able to achieve this objective. Our leasing percentage at the end of the year will also be within our targeted range of 93% to 94%. Forgive the typo in my quote in the press release. We have also in our supplemental package reinforced our operating performance ranges for the year.

Most notably, GAAP mark-to-market will be at the top end of our target range. Our tenant retention rate is above our business plan projections. Our average lease term will be 14 months or 17% longer than our original expectations. Our cash and GAAP same-store numbers will be at the low end of their respective ranges primarily reflecting some intra-quarter occupancy slides on several tenets.

Also due to our early renewal program and several long-term leases, TI capital for the quarter ran above our projected averages but total leasing capital for the year will be in our range of $2.25 to $2.75 per square feet per lease year. Given these strong results and steady progression of our 2014 business plan we increased the bottom end and tighten our 2014 guidance to a range of $1.32 to $1.34 per share. In just looking at our balance sheet it is now in the best shape in many years and we are in a strong position with excellent liquidity and we also have no outstanding balance on our $600 million unsecured line of credit. After paying off $250 million of our 2015 and 2016 bank term debt we ended the quarter with $672 million of cash on hand.

We have already deployed $258 million of this balance to redeem our remaining 2015 and 2016 bonds, and $108 million related to our acquisition announcements in Austin, Texas. Factoring in sale proceeds we anticipate having approximately $360 million of cash on our balance sheet at year end 2014. During 2015 over $300 million will be deployed to fund our development pipeline and fund our net acquisition target and potentially fund other debt pay downs during the course of the year.

So the cash generated from our capital market activities have been used to reduce debt, extend maturities, eliminate our on balance sheet floating rate risk, reduce our cost of debt capital, fund our development pipeline, and creatively grow the quality and revenue base of our company. So all good objectives we are pleased to have accomplished.

In looking at investments for the balance of the year, our 2014 business plan of being a $150 million seller remains on target. We have closed $42.5 million and have another $38 million scheduled to close tomorrow both at an average cap rate of 8.4% and about $178 per square foot.

We also have over $300 million of assets in the market for sale or price discovery today. A number of those properties are in active negotiations or under agreement of sale. And we remain optimistic we will achieve our sales target by the end of 2014. Our press release and supplemental package provide specifics on a number of transactions, I will just really highlight two, we have formed a 50/50 partnership with LCOR and CalSTRS for a mixed-use development located at 20th and Market Streets in Philadelphia. This 29 story 455,000 square-foot tower will consist of residential, office, retail, and parking components. The project will be comprised of 321 luxury apartments with full concierge service and rooftop amenities. The office and commercial space of 24,000 square feet is 90% pre-leased to Independence, Blue Cross, and CVS and a 315 car structured parking facility will support the development but also offer parking to the public.

As part of our land monetization program we have contributed that land parcel to the "Venture" Brandywine will manage the retail and parking components of the project. The project is already closed on a $89 million secured financing at LIBOR+ 2.25%. Our total equity commitment is $30 million, of which our land value at $13 million represents 43% of the overall cash requirement.

We also announced 2 acquisitions in our joint venture in Austin. As you well know, Austin remains a primary targeted growth market and these investments establish our joint venture is one of the largest landlords in Austin, Texas. These properties are excellent additions to our suburban Austin portfolio and River Place, the larger of the two, is 81% occupied providing some additional upside for us as we stabilize that property at current market rental rates. The other development projects are outlined in the supplemental package as is our land monetization progress on page 16 of the sup.

In summary, the third quarter was a solid continuation of our business plan and builds a great foundation as we look forward to our 2015 plan. And we did introduce 2015 FFO guidance in a range of $1.38 to $1.48 per share achieving a midpoint FFO of 42% payout ratio. Highlights of the 2015 plan are continued improvement in occupancy and leasing levels, strong operating metrics, continued asset recycling, and continued investment in development and growth opportunities.

George will provide additional operating color but the overall fundamental recovery in our markets remain very much on track. Our core markets of Philadelphia CBD, University City, the Crescent Markets, all remain on average 94% occupied and leased during the year with strong same-store performance.

The 2015 story for Brandywine from a leasing standpoint is really our ability to absorb space in Washington DC and southern New Jersey. We believe the assumptions we have built into our plan are conservative and readily achievable.

Our guidance for 2015 also incorporates $250 million of acquisitions with sales of $150 million. Portfolio recycling remains a key component of our business plan as we look to reinvest in higher growth markets and properties. Our acquisition efforts will be focused on our core markets of Washington, D.C.; Austin, Texas; Philadelphia CBD; University City and the Crescent markets. We believe there are fertile opportunities for us to add value and deploy capital and improve the overall growth profile of our portfolio but are also very mindful of our cost of capital and we have programmed these acquisitions to occur later in the year. We will remain a net seller in New Jersey, Delaware, Richmond, and California.

In looking at the 2015 plan in more detail our 2015 year and occupancy levels will range between 92% and 93% and our leasing will be between 93% and 94.5% maintaining that 150 basis point positive spread. We are forecasting a tenant retention rate of 64%. We expect GAAP mark-to-market on 2015 activity to range between 6.6% and 8%. We also expect a cash mark-to-market to be similar to our range in 2014 of down 1% to up 1%. Same-store numbers for next year will be in a GAAP range between 3% and 5% and a cash range between 2% and 4%.

The same-store numbers, and George will touch on this, are partially muted due to 260,000 square feet of very early 2015 expiration rollouts which have the effect of reducing our first-half occupancy levels to an average of 90%. As has been the case this year we expect a full recovery to our target levels in the third and the fourth quarter.

Capital costs will run well within our range of 10% to 15% target. We are about 12% in 2014. Another key positive in 2015 is that lease expirations are only 7.5% or 1.8 million square feet, which is the lowest level we have had in many years. So the portfolio is clearly approaching stabilization. While FFO growth is always an important consideration, another key beneficiary of our pre-leasing and operating performance during 2015 will be the notable increase in our CAD. By example we anticipate closing 2014 with a range of CAD in the $0.69 to $0.71 per share range.

Our targeted range for 2015 is $0.85 to $0.90 a share in CAD or about a 70% payout ratio. This 29% increase in cash available for distribution provides obviously more internally generated cash flow to fund our operations and opportunities and is really reflective in the portfolio reaching stabilization ,our accelerated early renewal program, better control on capital, and increases in our average lease term. So, 2015 will represent another successful year of investment activity as we continue to accelerate the transition to urban and town center portfolio concentrations. As noted in our release, we anticipate $150 million of sales and have assumed 8.5% cap rate and $250 million of acquisition activity at an assumed 7% cap rate.

As I mentioned earlier ,we assume that the acquisition activities occur later in the year. We also expect to recover additional value from our land monetization program as numerous partials are in the zoning and sales process.

To wrap up, our 2015 business plan represents a strong continuation of our drive towards growing Net Asset Value. Significant improvement in our operating platform, forward leasing momentum, consistently strong leasing activity gives us tremendous confidence that we will continue to generate solid NOI growth, strong same-store performance, and positive mark-to-market. At this point George will provide an overview of our third-quarter operation performance, some color on 2015 and then turn it over to Tom for review of the numbers.

Thank you, Jerry. It was an extremely busy quarter for our regional leasing teams with approximately 1.3 million square feet of lease signings. These leases ensure we achieve our year-end occupancy target of 91.3%.

As detailed on page four of the supplemental package we are 92.5% leased having over 862,000 square feet of executed forward leases. Of this, 722,000 square feet will take occupancy in the fourth quarter. The pipeline remains strong and weekly inspections throughout the portfolio continue to average around 220,000 square feet. This activity leaves us confident of being 93% to 94% leased by year end.

CBD Philadelphia, the Pennsylvania Crescent markets, and Austin, Texas continue to be our best performers. In CBD Philadelphia we're 96% leased with less than 5% rolling in each of the next 3 years. GAAP leasing spreads in Philadelphia have increased 30%. The Crescent markets are 97% leased while posting 9% GAAP rent growth. In Austin we are 96% leased and have raised rents 20%. Even Richmond, where just a few quarters ago there was concern about the pace of absorption we're now 93% leased.

The required leasing for the balance of the 2014 plan is nearly complete but not more notably is that the leasing achieved to date has yielded improved operating metrics. We have increased our spec revenue target by $20,000 to $44.2 million and are 99% complete on that increased target. Additional renewals and expansions have resulted in a 300 basis point increase in retention to 70%. Our GAAP leasing spreads for the year aided in the third quarter by two long-term renewals will come in at the top end of our range but will be lower in the fourth quarter that our year-to-date run rate of 12%. Cash leasing spreads have remained inside our negative 1% to positive 1% range and we continue to seek longer lease terms, control capital, and achieve annual lease escalators between 2% and 3%.

We have depicted the occupancy role forward for the year and the impact of our year-to-date investment activity on page six of the supplemental package. Now turning to the 2015 business plan, similar to 2014 page seven of the supplemental package contains a roll forward of our 2015 occupancy based on 3.3 million square feet of lease commencements and 918,000 square feet of projected move-outs, and 280,000 square feet of early terminations we will generate 120 basis points of absorption on our 91.3% year end 2014 occupancy to finish 2015 at the midpoint of our 92% to 93% occupancy range.

This plan will generate $31.9 million of spec revenue which is 55% complete. Exactly where we were this time a year ago. The drop in spec revenue from the past two years is due to the continued lease up of vacant space in CBD Philadelphia, the Pennsylvania suburbs, and Richmond. These three regions account for $11 million of the $12 million reduction.

Capital will again range between $2.25 and $2.75 per square foot per lease year on a 7.5 year weighted average lease term. Retention is projected to be 64% which as Jerry mentioned is adversely impacted by 3 large move outs earlier in the year. As a result we do expect occupancy to decline 150 basis points in the first quarter. These 3 large move outs total 260,000 square feet and account for 122 basis points of occupancy decline and 117 basis points of same-store NOI decline.

400 Commerce in suburban Wilmington will be 100% vacant on January 1, 2015. This 154,000 square-foot building is assumed to be vacant all of next year causing a 66 basis point drop in occupancy and a 60 basis point decline on same-store NOI.

Research Office Center three in Rockville, Maryland will lose a 42,000 square foot tenant on January 31 of 2015. This space accounts for 18 basis points of occupancy and 16 basis points of same-store NOI decline. Radnor Corporate Center four is the third of the three, it will lose a 90,000 square foot tenant in March, 38 basis points on occupancy, and 51 basis points on same-store. We have already executed the 70,000 square-foot lease to backfill the majority of this space commencing in December 2015 at very favorable terms.

So, to conclude we are delighted with our performance during the quarter and our ability to achieve our 2014 business plan targets. This strong finish provides tremendous momentum as we head into 2015. And at this point I'll turn it over to Tom.

Thank you, George. As Jerry mentioned, the capital markets activity that we executed during the third quarter represents a significant step in improving our balance sheet and positioning us for future growth. Our common equity offering raised 335 million of net proceeds and we then executed on a series of liability management transactions which included the bond offering which had a blended rate of 4.33% and 12.5 years of term repaying our unsecured bonds maturing in 2014 and 2015. And then $250 million of bank term loans were also paid off maturing in 2015 and 2016 with a blended rate of 2.4%.

The results were that our debt to EBITDA declined 7.2% to 6.4 times, debt to gross assets declined 13% to 37%. Debt maturities increased to 7.3 years, an increase of 46% and our weighted average interest rate on our debt declined. These improved metrics give us improved liquidity to fund our current development pipeline of potential net external growth. Our third-quarter FFO totaled $62.7 million or $0.36 per diluted share. And that represented a 41.7% payout ratio based on our $0.15 distribution.

Some observations for the third quarter, same-store growth for the third quarter was 2.2% GAAP, 4.2% cash both excluding termination fees and other income. We have had 13 consecutive positive quarters of GAAP metrics and 9 of cash metrics. Our same-store portfolio margins remained relatively unchanged as compared to the second quarter.

Termination income totaled $1.4 million, a slight increase over guidance. G&A totaled 5.9 million which is basically in line as well as interest expense. FFO contribution from our unconsolidated joint ventures totaled 5.7 and was above our guidance from the second quarter primarily due to the acquisition of the crossings during the quarter.

Third-quarter results benefited from the annual amortization of the historical tax credit related to the Post Office totaling $11.9 million which will burn off completely during 2015. The third quarter was negatively impacted by $3.8 million of cost associated with the retirement of our term loans, swap termination, and the unsecured bonds that were tendered. Our third-quarter CAD totaled $34.3 million or $0.20 per diluted share and a 75% payout ratio during the quarter. We incurred $13.8 million of revenue creating capital expenditures.

As Jerry mentioned, based on the third quarter results we have increased the lower end of our FFO guidance to $1.32 to $1.34. In addition to the business plan assumptions outlined in the supplemental package we note the following, I think operating income for the fourth quarter will be slightly higher than the third-quarter, it will be benefited by the leasing that is taking place. But there will be a reduction from the offset of the sale of Campus Point which happened at the very end of the third-quarter as well as Valleybrooke which is being sold mid-point of October.

G&A and interest expense should approximate third-quarter, term fees are expected to decrease to about $1 million. Additional liability management costs from the make hole that we did on October 16 totaled $4.8 million in addition there will be accelerated amortization of additional costs. We will have 150 of sales, we achieved 106 to-date and we include the properties we will hit our sales target. Our weighted average shares has gone up to 182.3 and 169.5 for the fourth and full year and that is taking into account the equity offering on August 1.

Our annual FFO payout ratio will be 45.1. We currently project CAD to be between $0.69 and $0.71 reflecting fourth-quarter revenue maintaining of about $30 million which will give us a full year CAD payout ratio of 83.9%. Most of that CAD adjustment is due to the significant leasing activity that is taking place in the fourth quarter and will affect CAD in the fourth quarter.

Our capital plan for the balance of the year totals $435 million, the biggest component of that being the redemption of our remaining unsecured bonds that were tendered on October 16 and a majority of that -- as a result for the quarter we will be using about $308 million of cash on hand to fund both capital as well as fund that bond redemption. It should take our cash balance from $672 million down to about $364 million by the end of the year.

Switching to 2015 guidance, interest will range from 110 to 115 with anticipated refinancing of a mortgage in August of 2015 for approximately $88 million. That mortgage is secured by our properties in Tysons Corner. G&A will range between 26 million and 28 million.

Non-cash income related to the historical tax credit and a new one-time non-cash item, the new market tax credit, both associated with the Post Office project and the building of the garage will total approximately $19 million or $0.11 per share. Those will be recorded in the third and fourth quarter of 2015. Termination fee and other income will total $3 million and 3.5 respectively. Management and leasing development fees total $15 million. And deferred financing and financing obligation costs will be about $5.5 million. Looking at our capital plan for next year we projected 2015 CAD between $0.85 and $0.95, as Jerry mentioned, reflecting roughly $53 million of revenue maintaining capital at the midpoint of our guidance.

Uses of the cash, we have a $780 million capital plan. Speculative acquisitions will total 250 million. We plan on having about 280 million -- 270 million to $280 million of capital development primarily related to FMC completion of Encino Trace, 1 and 2 Commerce completing the lease up of that properties will be about $26 million. Dulles Corner $7 million. And $12 million for 1900 Market.

Aggregate of dividends will total about 116 million. We expect to have a capital contribution to our JV's of about 23 million, that is primarily going to be 4040 Wilson as we continue to finish the garage and 1919 Market which will commence and will be funding the balance of the capital before the loan which we have already closed begins to fund.

As I mentioned, $53 million of revenue maintaining CapEx. $35 million of revenue creating, and mortgage amortization of about $13 million.

Sources will be cash on hand as well as cash flow before financing, investing and dividends of $210 million and we will have speculative sales of $150 million and we will also have $36 million coming in as Encino Trace, our development down in Austin, will be contributed to our Austin joint venture in the middle of the year and that is expected to generate about $36 million of cash flow.

With that I'll turn it back to Jerry.

Okay. Thank you, Tom, and thank you, George. To wrap up our prepared remarks third-quarter results were very strong consistent with our 2004 business plan and as both George and Tom outlined we feel as though 2014 while there is still some work to do is very much locked away.

The 2015 plan we are excited about, we certainly think though we have more work to do but the core themes running through the program are continued financial strength, a focus on NAV growth, taking advantage of solid fundamentals that we are seeing in many of our markets by being able to extend lease terms, increase annual rent bumps, and reduce capital and pursuing some very good value add opportunities including the completion of our development pipeline.

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

(Operator Instructions). Your first question comes from Brendan Maiorana, of Wells Fargo.

Thanks, good morning. George, I wanted to ask a little bit about the leasing plan for next year. I think Jerry mentioned where you guys are focused and where you probably need to get the most executions done is Metro DC and New Jersey and Delaware. So based on your plan for 2015 where are you expecting occupancy to end in each of those regions at the end of next year?

Our plan contemplates that Metro DC kind of gets somewhere between a range of 84% to 86%. We contemplate they'll be 83% occupied at the end of 2014. We are looking for roughly 200 basis points of improvement down there. New Jersey, Delaware will finish 2014 at 88 and again we have got about a 200 basis point assumption built into this 3.3 million square-foot leasing plan and occupancy plan.

Okay, I think the 400 Commerce building, I think that is the one where CSC is in which you guys highlighted I think on the last call. That one, as you mentioned, is going vacant on January 1. My recollection was that you guys were thinking about marketing that building but I presume that the sale of that building, whether it be empty or not, is not included in the leasing plan as we look for 2015 or the year-end target number overall for the Company of 92.5%?

Yes, Brendan, it's Jerry. We have that property is part of a small complex. We have that complex and that building on the market for sale. We have the building itself on the market for sale or lease, so we're going through the price discovery process on that. What we did for the leasing plan is that we basically assume that that property remained down all year. So, our operating metrics, particularly our same-store numbers, reflect that building remaining vacant all year. We do have a pipeline of potential transactions out there but certainly nothing that is advanced to the point where we felt comfortable identifying that as an uptick off of its January fully vacant level.

That is helpful. Last one quick for Tom, I appreciate all of the details on the capital plan. I didn't do all of the math right away but could you give an expected level of cash year end 2015?

We should be right around break even on cash, Brendan.

So a zero cash balance at the end of 2015?

Yes, zero cash.

Great thank you.

Your next question comes from Jordan Sadler with KeyBanc Capital.

Thanks, good morning. I guess following up on the last question and this guidance for 2015. The assumption is that all of the cash will be utilized to fund, and you went through it ,Tom, so that was helpful, a lot of it is development spend. I guess there is some pickup from capitalization of interest. I don't know if you have that number handy that is embedded in the guidance, but that number I am looking for. And then maybe just a little bit more color that you could offer on the non-cash item ticking up to $19 million. I guess in our number we had the 11 or so from the Post Office, the legacy historic tax credit, but this new market tax credit, if you'd just shed a little bit of light, for some reason I didn't have that in there.

Sure, the first answer is there is about 11.5 million of capitalized interest in the plan for next year based on the activity that is going to be rolling into there for CIP as well as what is going to occur next year in spending. The second part of your question is this new market tax credit is really related to the unwind of the structure we put in place which was to earn certain credits for the building and the rehab of the garage as well as the building -- the rehab of the IRS building. And in that process we received certain benefits. The one that we have been amortizing has been over the course of the period, the last one, which is this new market tax credit was deemed to be earned when there is a five-year anniversary from the start of construction. So that date is going to be late in 2015, the anniversary of that. So that is why the credit is going to be hitting in the fourth quarter. It has been something we have had in the 10-K in terms of this was coming due. But I haven't seen anyone that has had that into their numbers.

Is that a $0.05 number?

It is about $8 million, so, no, it is not 5. That is why we getting up to around 19, 18, I think it is $18 million of one-time items coming up in this year. That one will occur in the fourth quarter.

Okay, that is helpful. And then any insight that could be offered on the development leasing, Jerry. From your expectations and progress that you are seeing sort of across the spectrum and specifically I guess I am looking more at FMC in EVO.

Sure, Jordan. Let me touch on both of those. The project that we have underway down in Austin, Encino Trace, is a major anchor tenant has taken 75% of one building. We do anticipate them taking more space and a very good pipeline of activity for the remaining vacant space in that two building complex. That will really be delivered in mid to late summer of next year. I think we have a good anchor as well as expectations for expansion of that anchor and some good new tenant prospects are evaluating that building, which is, those buildings which are still under construction.

On FMC it is frankly off to a great start, the project is moving forward on pace and on schedule. You may remember from the last conference call from an office leasing standpoint we ramped up our leasing efforts right after Labor Day, and we're very pleased with the level of that activity. We're talking to a number of midsized and larger sized tenants who are looking at moving into University City from some suburban areas as well as some in market expansions. We are very pleased with this early level of activity. It is clearly a differentiated product as the city's first vertical neighborhood, as we have coined it. We have picked up a lot of draft off of the close proximity to the University of Pennsylvania and Drexel. And that area just continues to improve and we're really very optimistic that over the next couple of quarters we will be able to post some solid leasing activity.

The residential front in that project is again just kicking off. We do anticipate as we outlined before, I guess about 100 of those units will be fully furnished extended-stay concierge serviced units. We are partnering with the Korman Organization on that and the targeted users really corporations, Universities, the healthcare systems, and feedback there again is incredibly positive.

Just to kind of bowtie FMC on the financing front as we have indicated earlier last call we remain in the market evaluating financing partners. Our capital plan for 2015 assumes a full Brandywine development spend of a couple hundred million dollars. We do have discussions continuing with several parties. Those discussions have quite frankly progressed at a more moderate pace at our choosing, primarily driven by our desire to lock down our GMP which we did late last week, look for additional traction on the office and leasing front, which we think we would be able to get some very good activity, and then really having some detailed discussions with some of these partners on joint venturing the residential or the full project. We kind of expect those discussions on the financing front will take place over the next couple of quarters until we determine what the ultimate capital plan for the project is.

You had also asked about our other development which is a joint venture at Cira South with EVO and that project has picked up some additional leasing since the last call, so just below 50% leased. From our perspective it really comes down to the quality of the real estate, its presentation, its location and I think in all of those fronts we are very pleased.

The lease up thus far given the delivery date which was scheduled for late in the leasing cycle, we have always anticipated it would take a couple of years to fully stabilize. I guess in retrospect it would have been nice if the building had started a few months earlier and delivered in time for the spring cycle.

But based upon feedback we are confident the project is being well received. The current leasing, which I mentioned is right below 50%, while really not in line with some of our initial expectations that the partnership had, it does represent a pretty good out of the gate performance for a property that wasn't really able to show renters any units until very late August. We like the fact that it continues to appeal to both Penn and Drexel students which is a new dynamic in the University City Marketplace, but also has attracted students from other area universities given its location at the regional transportation hub. So we are monitoring that, the property management leasing teams are focused, they are engaged, they're doing a great job, they are enthusiastic. So we have expectations that the two-year lease upcycle for this project will remain valid, it is just we have more work to do in the second year.

I will ask one follow-up on that and then hop off. What do you think happened between the second quarter call where you seemed a bit more optimistic about September leasing potentially, August, September leasing, and where we are today?

A lot of the prospects that came through during that time period had already made commitments or had leases rolling at off cycles so they still remain in our prospect list. But I think it really was a function of people not being able to get into the building to actually walk through the units, look at the amenity floor, and touch and feel the project as much as we hoped. But we did have a nice pickup in September but again, fell short of what the original expectations were. I think as we view it we have built a very solid base, there's a very broad-based marketing campaign underway to appeal to young professionals and we have a pretty growing pipeline of that would be off cycle leasing activity. I think that is probably the honest answer, Jordan.

All right, thank you.

Our next question comes from the line of Rich Anderson with Mizuho Security.

Thanks, good morning. Just turning to Austin, I am wondering what do you think the long-term size ceiling is in your investment in that market? Considering the Legacy IBM joint venture and what you have done to date from an acquisition standpoint, how big do you think it can get in Austin?

Hi Rich, we really haven't set an upper target and I don't think that is wise to do. I think we want to evaluate opportunities as they present themselves. Certainly the million square foot joint venture that we have with IBM remains, I think, a fairly fertile ground for additional upside for the Company. That part does include some additional acreage where some additional building can take place. IBM is in the process of really assessing their long-term needs. And that location for IBM remains a very valuable employment center that tends to generate a high level of patents, actually second only to what they generate out of their headquarters in Armonk.

I think we see that marketplace being sought after by a lot more investors so it is becoming more into the common vernacular that people want to enter Austin. So we're clearly being as cautious as we can and pragmatic as we can on assessing opportunities and really very much focusing on asset trading levels that remain well below replacement cost for well located assets with upside in the rent roles as evidenced by these two recent acquisitions that were [$220] per square foot and below, so well below replacement cost. A number of other assets in that market have traded well above those levels and they really don't fit for us. We do see that market transitioning a little bit more to development given where the demand drivers are both in the southwest, the northwest, and downtown. I think the developments have been announced there including ours have had a very high level of leasing activity and pre-leasing success.

So, we still have capital to deploy under our existing venture with DRA as we talked early on when we announce this transaction that is a typical buy sell provision. We would look at that as an intermediate transitional financial structure for us in that marketplace. And then we certainly always have the opportunity to do things for our own account in that market as well.

Okay. And then the follow-up unrelated. There is a story that I read at some point between last quarter and today about the elevated level of office sale activity in Philadelphia number getting to 1.4 billion in the first half of this year. I'm curious if you are seeing any ramifications of that in terms of pricing in Philly and how that might be influencing your buy sell decision in your home market?

Great question and actually there has been a notable increase in assets going on the market and frankly some buyers who have historically haven't bought in Philadelphia buying into the marketplace. I think stepping back I think that is really a function I think of how well Philadelphia has been doing. I say that in the broadest sense, not just in terms of office, but with the in migration of residential population, some modification to existing tax laws that have made it more attractive for companies to locate into Philadelphia, an expansion of the retail base, continued strengthening and viability to the high-end residential market as well as to the young professional residential market. I think all of those issues are really creating a dynamic where a number of tenants who traditionally would have looked a bit askew at relocating to Philadelphia are now looking at that as a very viable place in which to do business in terms of attracting and retaining high-quality labor base.

During this past quarter we were able to relocate a company from the New Jersey marketplace into Center City Philadelphia into one of our buildings. They moved their headquarters in, we have a number of other tenants prospects in the queue who are looking at either moving the bulk or portions of their otherwise suburban Tri-State marketplace operations into Center City or University City. So I think people are beginning to see some predictability, some visibility to the demand drivers. I think frankly I have a number of folks who have owned real estate in the city view this as a very good time to put properties on the market given the compression of yields in New York and Washington. Philadelphia is traditionally traded between 150 to 200 basis points spread over some of those real gateway markets. So buyers who are looking for a bit better yield with some existing stability have been moving into the marketplace.

Some of the comps have been a building in University City traded for about $324 a square foot at a sub 7 cap rate. That was a building that was built in the early 1970s. A couple of other older buildings in the city that were built in the 70s as well are expected to trade in the $180 square foot plus range and cap rates in the high sixes to high sevens cap rate range. We think those comps, quite frankly, Rich, compare very favorably to our investment base and our much higher quality asset base.

We are monitoring all of that activity very closely, as you know from our investment strategy in the past we don't really look to buy into some of the B inventory class in the city but view that as a good feeder system for our asset base. So we monitor it, we certainly underwrite a lot of properties that come for sale in both CBD and University City. But I think it is very encouraging that there are so many new buyers who are focused on the city and that focus is not just relative yield but also increasing visibility as I mentioned on some demand drivers.

Five years from now Philly is 30% now of your portfolio, is it greater or lesser than that 5 years from now?

I think we have expectations and we will continue to focus a lot of our growth in Washington DC and the other core markets. So we would expect that it may move up a little bit but not much more I think we have opportunities to cull inventory, optimize profitability and stay very much focused on executing our business plan in the city.

Great, thank you.

You're welcome.

Your next question is from Emmanuel Korchman with Citi.

Good morning, guys, thanks. If we look at your disposition plan for both this year and next year you said you had $300 million of assets sort of out on the market at let's call 100 and change of that, or I guess 50 million of that has identified to be sold. Then you have got another 150 in the plan for next year but you said that is going to close at the end of the year. So are we looking at two different pools of assets and if so what is the difference between the two pools?

Good observation. I think the comment that we were making frankly on the later in the year I may not have been precisely clear is the acquisitions we had modeled into our plan for the mid to latter part of the year. I think on the disposition front certainly we think there could be a rollover of some of the projects that we are currently marketing into the first half of 2015. So there could be asset sales occurring in 2015 as well as closing out 2014 that were in that pool. In addition to that we always take a quarterly review of all of our assets and are always hanging more assets into the marketplace to kind of catch pricing. We are frankly encouraged by the amount of capital seeking some of these suburban assets obviously because of the higher yield that they are able to achieve. And you know, notably one of the assets we anticipate closing tomorrow will be sold to an institutional investor, which traditionally an asset of that level would have been focused more on a private development company with third-party capital but we are actually seeing middle sized institutional investors now entering the fray for bidding on suburban properties. So I guess to answer your question precisely there could be some overlap between what we are marketing today, closing in 2014 and 2015, but then we would certainly anticipate that as the year progresses we will identify either through the leasing effort or through comparable sales or through user activity other assets that we will target for sale and execute in the second half of the year.

Great. And then just to clarify on that acquisitions, those are all standing property acquisitions and then any development sites or land would be separate of that?

That is correct, yes.

Thanks, guys.

Your next question comes from John Guinee with Stifel.

Great, thank you very much. Hey, very very nice quarter, congratulations. George and Jerry I am looking at your leasing activity core portfolio and basically you have now had almost two years of plus positive on cash and over 10% GAAP. Can you sort of drill down and tell us how you're getting there and will that continue? And maybe a good idea would be to run through some numbers in as much detail as you feel comfortable on 90,000 square feet rolling out at Radnor, 70,000 feet already rolled in and what are the basic economics about a deal like that?

John, it is Jerry. Thank you. I will start off and then, George, you and I tag team.

Sure, yep.

I guess from an overview standpoint, John, we have been fortunate with some of the execution success but I think we sat down a few years ago and looked at our average lease term being 4 to 5 years. The markets being fairly soft, concession packets increasing, and I think we all kind of looked at ourselves and said jeez we are really working these properties almost as hamster wheels and we're not making a lot of progress. So what are the key ingredients that we can focus on to create a better growth trend line going forward. It really revolved around being aggressive on disposing of assets that we felt that we could never achieve a net present value higher than stock pricing, number 1 and I think that is one of the reasons why we have called out so many properties. I think in some of these submarkets that have remained weak and will probably remain somewhat weak for the next few years not even factoring in that weakness being driven by functional obsolescence.

Then we looked at the rest of our portfolio and said look, we need to lengthen lease terms, we need to focus very hard on getting annual rent bumps that are more than 0% to 1% and we need to invest in physical plants to make sure that we are providing an attractive platform that tenants will want to lease space and call their corporate home.

So I think the big change as we look back in retrospect is kind of really calling out the percentage and reducing the percentage of our inventory that was in what we call these hamster wheel markets and then more importantly honing in on assets where we think we can really improve NPV through leasing strategy and capital investment. I think that is one of the things, when we look at our business plan, I have to tell you, having our average lease term in 2014 be greater than 8 years is a sea change from where this company was 5 years ago. Having a capital run rate of 10% to 15% of rent is a sea change from where we were. We certainly hope that that track record will continue, certainly we think the portfolio today, John, is much better suited to continue that trend line than the portfolio we had 5 years ago. Certainly always risk in our business but from our perspective we have really tried to lay out a path that provides consistent same-store growth, constant capital predictability and a clear platform to creating value every time we sign up a tenant lease. George, maybe share some of the observations on specific markets?

Yes, I think, John, as Jerry mentioned the tightening of vacancy in a lot of these markets has allowed us to obviously push rent and then by pushing term and getting these higher annual bumps is clearly helping on the GAAP mark-to-market side of things. The third quarter this year benefited really from two large renewals, one was in downtown Philadelphia where a large law firm at our Logan Square complex renewed and the other was down in Tysons where we did a large renewal with an accounting firm. The Radnor deal that I alluded to, again, that was a tenet that was in place when we bought that Radnor portfolio years ago. Finally rolling out of the portfolio. The mark-to-market on that is going to be a positive 25% on a cash basis and 29% on a GAAP basis. We really have just seen a lot of these markets, our ability to push rate, push terms, control capital really starting to impact the numbers for us.

Great. And then the second question, would your Board ever be so bold as to think about moving the dividend, Jerry?

Well, I cannot speak for the Board and certainly don't want to predict anything but I will tell you the strong increase in CAD year-over-year which Tom and I touched on as well as the portfolio kind of reaching the low to mid 90s occupancy levels, the balance sheet strengthening we did certainly winds up at presenting an attractive alternative for the Board to consider later this year. We have always targeted having a CAD run rate lower than 80% or 85% and it will be well below that in 2015 and if our business plan execution is hopefully as successful in 2015 as it was in 2014 it is certainly a very fertile area for the board to explore.

Great. Thank you.

Your next question comes from Jed Reagan with Green Street Advisors.

Good morning, guys. I am just wondering if you guys have been pretty busy on external growth lately and are looking at being net acquires in 2015, I am just wondering if you can talk a little bit more about that strategy given that your stock is still trading at a pretty significant discount and you have a stated goal to leverage the balance sheet overtime. I guess one question if the cost of capital weren't to improve meaningfully next year would you reevaluate those net acquisition plans for the latter part of the year?

I'm sorry, Jed, if our cost of capital improve next year?

If the cost of capital did not improve over time would that cause you to reevaluate those net acquisition plans?

I think certainly. Even as I mentioned in the comments we are very mindful of our costs to capital. I think as evidence of that certainly when we looked at situations of trying to balance evaluating what we think are really good growth opportunities versus our balance sheet objectives we have always outlined that a driving predicate of our business plan is continued balance sheet improvement. I think this year in our 2015 guidance for the first time in a number of years we have actually announced that we plan on being acquisitive. We're seeing a good pipeline of deals. Again, the primary determining factor there will be where our cost to capital is, what other uses of our precious capital are, and whether we are afforded with those. I think we look at our guidance for 2015 having sequenced in the acquisitions towards the kind of second, third, and fourth-quarter that gives us the ability to see how our cost of capital responds to overall macro conditions and hopefully our relative improvement within our peer set in terms of more leverage neutral or even leverage positive FFO and CAD metrics so maybe we can close that historical discount that has existed on the FFO and CAD multiple basis for the Company.

Yes, I think we are very focused on that, I think the approach we have taken in the last couple of years has really been focused on improving the balance sheet, creating that capital capacity, and I think we want to try and do a signal as part of our plan for 2015 that we do see opportunities, we do see the potential to grow the NAV of the Company through external growth in addition to all the hard work we're doing on the leasing and property management and margin improvement side of our business and see how that works its way through. I think we look at the acquisitions and dispositions for 2015 they're almost neutral in terms of their timing on FFO. So the bottom line is we will remain very focused on where our relative cost to capital is and what the right capital structure is to do any external growth opportunities.

Are those growth plans actually dependent on the cost of capital improving? I mean, if you are where you are today, let's say come the middle of the year, do you revisit those plans altogether if you haven't seen that sort of improvement that you are anticipating?

Well, it is a fair question and I think that I would answer it by saying that we always look at where the market is, of where we expect it to go and I think have been consistent in adjusting our plans based upon where that is. But I don't want to be an absolutist and say that as of this date we would change a certain plan, it really depends on what the future holds.

Okay. And then also just on 2015 releasing spread guidance, it looks like that guidance has been flat overall and pretty much holding steady with this year. Just wondering how we should think about that and given your comment that you guys are looking to push rates in some markets, I guess is the rent growth traction not coming together the way you might have hoped or is that not a fair read through?

I think it is more where the leasing is going to come from. I mean the fact that Philadelphia and the Crescent markets being 94.5% average occupancy the opportunity to lease more space in those markets where we're getting the more favorable mark-to-market metric are fewer in 2015. As Jerry mentioned most of our leasing and absorption for next year is still coming out of Metro DC and New Jersey where cash rents are still in a rolldown situation.

Okay. That make sense. And just a last one for me, on the EVO project does the mid 7% expected yield there still seem realistic? I noticed that it wasn't in the disclosure this time. But as you kind of look out to the eventual stabilization of that project is that still a realistic goal do you think?

I think we still are looking for a return on stabilization in the range that we outlined before. We look at the long-term forecast for this project, it is still generating a good rate of return to the Company and certainly a good equity multiple that we would expect to receive greater than two times what our investment. I think it is challenging right now because there's still not a lot of visibility on leasing up between the 50% and the 85% or 90%. But the pipeline seems good and certainly we haven't really revisited what those overall assumptions would be until we have the more visibility on where some of this near-term lease up goes.

Okay. Great, thanks so much.

Your next question comes from Nick Yulico with UBS

Thanks, I was hoping you could talk a little bit more about the Camden New Jersey development and explain exactly what sort of plan there and what your partnership state looks like in that project?

Sure, happy to. We were designated as the developer by Campbell's a few weeks ago and it is for their gateway development site which is adjacent to their corporate headquarters and research facility in Camden, New Jersey. It is about a 13-acre site that is immediately adjacent not only to Campbell's but also to two train lines that provide multimodal access to the site. In being designated as the developer we are the sole developer so we would be the owner of the sites. We have essentially entered into a five-year option agreement to acquire parts of that site or the entire site at a fixed price that modulates based upon ultimate density. We would anticipate taking down those sites once we found a build to suit opportunity that justified us making that investment. One of the public policy items that was instrumental in us pursuing this opportunity was that New Jersey passed a Garden State Growth Zone Act which provides tremendous incentives for companies to locate into certain targeted zones. Camden is the only city in southern New Jersey offering those benefits and they frankly have already begun to reap the value of that through the relocation of a couple notable companies into Camden proper. For us it is a master planning exercise, a marketing exercise, we will be investing some money in the master planning and marketing. But from a business standpoint, as I mentioned it provides the option not the obligation to acquire those. It really does fit into our wheelhouse and our strategic plan of developing multimodal office and mixed-use town center developments that are served by mass transportation. The real game changer, quite candidly, was the recently enacted economic opportunity program that provides significant incentives for companies who are willing to locate into selected areas in the state including Camden to promote job retention, job growth, and spur private capital investment. From our perspective it gives us a competitive advantage to pursue non- Brandywine tenants. That location, its mass transportation access as well as public policy may very well create a very attractive footprint for companies to locate there.

All right, thanks, guys.

Thank you.

Your next question comes from Michael Lewis with SunTrust Robinson.

Good morning. The New York Times had an article on Monday about where college grads are moving and Philly was highlighted as one of the most impacted by a large number of young college grads moving into the city. That is not happening in the suburbs. So my question is what is kind of the driver in the suburbs where you have been able to achieve high occupancy? And then is there any concern of your CBD portfolio cannibalizing what you have been able to achieve further out?

I think the demand drivers in the suburban counties, and it is a good observation, and one of the reasons why we have been very aggressive in refining our suburban concentrations. In the Crescent markets, for example, that is driven by demand for office space is driven by proximity to high-end executive housing, good interstate road system, good school systems, a mixed-use community where people tend to want to work. The suburban marketplace, Michael, has never really been that much impacted by student populations or their tangential benefits of what they do in the suburbs. I think that demand dynamic stays in pretty good shape. I do think though in our suburban markets we are focusing our strategy on markets where they really have our office product as part of mixed-use community whether it is Radnor, Conshohocken, Plymouth Meeting. A much different demand driver than out in Malvern where, for example, we are selling our Valleybrooke project. A good project, only car served, we just don't see the lift in that submarket as we frankly would see in a Radnor, which is why when we go through our capital deployment program we would rather sell there verses buy. There has not yet been any evidence, and I don't think there will be, of a cannibalization of inventory. The demand drivers in Philadelphia I think are a bit different. Certainly University City is benefiting from a nice immigration of young professionals as well as a continued expansion of the student-base, particularly at Drexel University.

Thanks. One more quick one, my second question was going to be about acquisitions since you hadn't guided to any acquisitions recently but I think you hit that. The flipside of that coin would be if you did decide to tackle the balance sheet a little bit more what is the next debt that you could get at, or the most attractive debt that you could get at, what would be on your to-do list for the balance sheet?

I think, and Tom please weigh in, we have really done a very good job of really reducing near-term rollovers. I think we have a piece of secured debt coming due on one of our northern Virginia properties during the year that certainly is an opportunity for us to pay down that debt and add that to our unencumbered pool. Certainly as 2015 continues to tick away, certainly looking at our 2016 bonds could be an attractive next step for us.

Thanks.

I would agree, the '16 bonds when we first took a look at the offering we did this year, Michael, the make wholes were pretty significant, 6% money and so we looked at that and said let's hold off on those and see how the capital plan progresses on the development pipeline and the financing of that. As we get into 2015 if there is more clarity to that and rates stay where they are and our capital plan is moving along we could start to look at 2016 prematurely also as a possible use of cash.

Great thank you.

You have a follow-up from Brendan Maiorana with Wells Fargo.

Thanks. I just wanted to follow-up on the guidance and the strategy in the guidance as just mentioned. You guys hadn't historically put the acquisitions in there. Why do that this time around just given that if you decide to be -- if you decide to use capital or if maybe attractive acquisitions don't show up does that hurt if you don't deploy 250 million of acquisitions, even if it is late in the year, how much does that hurt your guidance numbers? I would guess it would probably be like $0.02 or $0.03 but I'm just wondering for some color there.

Hi, Brendan, it's Tom. I think how it affects guidance we have left a wide range, which we have done for a number of things including when the capital may go out the door or come in the door from either acquisitions or dispositions, things are back ended, we only feel it is a few cents, $0.02 to $0.03 maybe in terms of the timing. We did build it in towards the back end and certainly again as we will edit, as Jerry mentioned, we will revisit that continuously and update you on that as the quarters go out. But we did think that where we are on the capital side that there were opportunities to put that out and might as well signal that there are some acquisition opportunities as we look at our markets.

Okay, fair enough. Second and last question, Tom. You guys give great disclosure on kind of the capital plan, it is very helpful. I was interested, you have 53 million of revenue maintaining CapEx, that is down from 75 that was in your guidance last year. So that is coming down. And that seems it is down a little bit more in percentage terms than the amount of leasing volume that you want to do, but it is somewhat commensurate with the drop in leasing volume. But the non-revenue maintaining CapEx, that number went down to 35 million from 75 million. So are you guys at the point now where that non-revenue maintaining portion of the business, that level of CapEx should be lower and is 35 a good run rate for the next few years? Do you think that number can go down even more?

I will answer it and George can chime in. One thing we did do, Brendan, when I highlighted the projects that we are considering, sort of development and acquisition as I did mention I have split out for 2015 we have decided to split out the one and two commerce capital costs. Because as we usually do we keep the capital costs for those projects as a place holder saying we bought it at a certain price, for example 1 and 2 commerce at 175. We told you we would stabilize it at 200 a foot when all of the capital is spent. That capital is still being spent because we go on a cash basis, so certain leases that are being done to get those two buildings up to stabilization of 95%, which we think we will be close to by the end of 2015. The capital that is being spent I have kind of spiked that out because of that acquisition, those cost of 20 million, which I put into my total number of close to 300 million, 280 for next year.

So putting that aside, we think that the 35 million is a lower number because of the amount of lease up we have been able to do in the vacant space and therefore when you take a look at how much capital is being spent on the renewals and new we are seeing much less capital being needed to get the building up into the stabilization rate we are expecting. Looking out beyond next year and the 35 million, I will turn to George on what he thinks there, we haven't really spent a lot of time on that projection going out.

Yes, Brendan, I think one of the other things that is really coming into play is the fact that we have gotten out in front of so many of these future expirations that some of our revenue maintaining spend and revenue creating, for that matter, spend in 2014 is because we have already started to renew 2015 and 2016 lease expirations. So the brokerage commission being paid today versus being paid in a subsequent year. I think that revenue creating number just has to come down as we continue to absorb space. Our definition, which I think is kind of the industry standard, is if the space has been down for 12 consecutive months then it kind of flips into that create bucket. But if you lease it after 11 months then it is in maintain and a two-month slide you are into the create. But I think as we continue to reduce rollover risk and get the portfolio up to that 93 or 94 level, in general total capital just needs to come down, and will.

Yes, that is helpful. Because it seems like relating back to the dividend question and the leverage question, the past couple of years because the revenue creating CapEx has been pretty high even though you have been in a CAD coverage positive on the dividend from a true free cash flow perspective, the number hasn't been positive but it seems like as long as that revenue maintaining number comes down then you should get into that position which obviously helps your leverage and then would make it much more comfortable to boost the dividend. It seems like you're going in the right direction.

We are.

All right, thanks.

Thank you.

At this time there are no further questions. I will turn the call back over to Mr. Sweeney for closing remarks.

Great. Thank you all very much for participating in the call and we look forward to updating you on our activities on our next quarterly call. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's Brandywine Realty Trust third quarter earnings call. You may disconnect.