Brandywine Realty Trust (BDN) 2014 Q4 法說會逐字稿

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust fourth quarter earnings conference call. (Operator Instructions)

Mr. Jerry Sweeney, President and CEO, you may begin your conference, sir.

Brandy, thank you. And thank you all very much for joining us in our year end 2014 earnings call, and good morning.

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 Dan Palazzo, our Vice President and Chief Accounting Officer.

Prior to beginning -- certain information discussed on our call may constitute forward-looking statements within the meanings 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 that we file with the SEC.

To move into our agenda -- as we normally do, we'll start with an overview of our three key business plan components -- operations, balance sheet and investments. George will then discuss our 2015 leasing and operating efforts and will then turn the call over to Tom to review our financial results.

We closed the year with a very solid leasing quarter that capped off an extremely strong 2014. These results have laid a solid foundation for continued strong performance in this current year.

When we look back at 2014 operationally, we exceeded many of our 2014 key targets -- spec revenue, retention, lease term, GAAP mark-to-market, and many of our other key business plan objectives. We wound up leasing of 4.4 million square feet during the year, one of our highest totals ever. And we had over 500,000 square feet of positive absorption for the year.

Brandywine's occupancy levels continued to outperform our markets, most notably Philadelphia CBD, in the Pennsylvania suburbs, in Northern Virginia, and Delaware, New Jersey and Richmond. We did end the year at 91.4% occupied and 93.3% leased. Those numbers are up 190 and 150 basis points respectively from our year-end 2013 levels.

GAAP mark-to-market for the year was 8.5%, exceeding our targeted range. And our retention rate for the quarter was 86% and wound up being just shy of 72% for the year, well above our original business plan forecast of 60%. Cash same-store was 4.5%, within our range. And our GAAP same-store number came in 50 basis points short of our target, primarily reflecting several intra-quarter occupancy slides.

Another high note for us during the year was our average lease term increased to 8.2 years, exceeding our 7.1-year business plan target by 15% and almost a 40% increase in lease term over our [2013] 5.9-year average. Our average run rate increase on leases executed during the year was over 2.5%, an improvement again over 2013.

During the fourth quarter, due to accelerated occupancy efforts, we had an anticipated higher run rate on capital that bought our overall CAD ratio for the year to 87%. That capital for the year did come in at $2.74 per square foot per lease year within our targeted range, albeit at the very high-end.

So looking back at 2014 -- our tactics of lengthening lease terms, reducing forward rollover, generating positive same-store growth and maintaining capital spend within our targeted range were all achieved.

Shifting to balance sheet -- it continues to be in strong shape with excellent liquidity. Net debt-to-gross asset measures slightly below 39%. We have no dollars outstanding on our unsecured line of credit, and we ended the year with $258 million of cash on hand. The financing activities that we did in the fourth quarter did reduce our average cost of debt below 5% and had a very good impact in terms of extending our average maturity curve from five to over seven years.

The combined equity and debt market activity during 2014 strengthened our balance sheet, increased our liquidity and positioned us for growth. And as reinforced on every call, creating capital capacity is our best strategy to both de-risk and accelerate our growth and is a key driver in our 2015 business plan.

In looking at investments -- we closed the year with $107 million of sales and $34 million under contract. In our press release and our supplemental, we do provide specifics on several transactions, on which we're happy to answer any questions you may have. And our development activity is also detailed on pages 12 through 14 of the supplemental.

Just two items of note -- FMC Tower is on schedule for delivery in July of 2016. That office leasing campaign has fully launched at this point. We have 250,000 square feet of space that we need to lease, with well over twice that amount already in active prospects. We're confident that as the steel rises out of the ground and the [building] becomes more definable on the skyline, we will replicate the leasing success we had with our other University City projects.

Our Encino Trace project in Austin is also on schedule for delivery midyear 2016. We have significant activity from new prospects as well as strong indications of further expansion by our anchor tenant. We do expect quantifiable progress on this project in the next 90 days, but the project remains on schedule and on budget.

Shifting attention to 2015 -- for 2015, we're increasing the bottom end of our guidance range. So our new range is $1.39 to $1.48, really driven by these key assumptions. We expect tenant activity levels to remain strong with ever-improving lease economics. Looking ahead -- we anticipate continued net absorption in the Philadelphia CBD, the Pennsylvania suburbs, Metropolitan DC operations, Richmond and Austin; with ongoing improvement in leasing and tour velocity.

We have made very good progress since our last call on our 2015 spec revenue plan that's already 78% executed. As a consequence, we're raising our spec revenue target almost 6%, from $31.9 million to $33.7 million, which is a fairly significant increase this early in the year with a solid percentage already completed.

2015 occupancy levels at year end will range between 92% and 93%. Leasing will be between 93% and 94.5%. We are also increasing our tenant retention rate from 64% to 68%. We expect GAAP mark-to-market to range between 6% to 8% and cash to be between negative 1% and 1% positive. We do expect continuation of our capital cost to be within the range of the 10% to 15% target, or $2.25 to $2.75 per square foot per lease year.

Another key positive entering the year was that our remaining lease expirations for 2015 are only 6.4%, or 1.5 million square feet, which is the lowest level we've had in many years. During 2014, we, through our early renewal program, renewed early about 600,000 square feet or reduced by 30% our 2015 rollover since January 2014.

Another key beneficiary of the improved fundamentals is the notable increase in CAD. A lot of our heavy lift on capital is behind us, and our targeted range for 2015 is a CAD number between $0.85 and $0.95 per share, which equates to about a 70% payout ratio. This 30% increase over 2014 is the most tangible result of our accelerated early renewal program, better control on capital, and increases to our average lease term.

In looking at investments for 2015, we'll deliver our Encino Trace project and are on schedule for construction, continuing a pace on the FMC Tower. We do expect continued progress in our land sales efforts as well as several additional land acquisitions.

On the disposition front -- our original business forecast to anticipate $150 million of sales -- we have increased that to $180 million to reflect the early 2015 sales activity. That number does not include our anticipated $36 million cash recovery on the contribution of our first building at Encino Trace to our joint venture.

So sales activity and cash recovery from contributions will provide almost $220 million of capital versus our $250 million aggregate acquisition targets. And certainly, given the low-interest-rate climate and the push of capital towards office space, our hope is to sell more than our current plan. In furtherance, we have almost $280 million of properties on the market, with $73 million in advance negotiations or in advance phase of the bid process.

Our overall objective remains reducing exposure to non-core assets, particularly California, New Jersey, Delaware and the ex-urban areas of the Pennsylvania suburbs. On the development front -- our primary mission, of course, is to make sure that our current developments become fully leased. But certainly, with acquisition pricing generally remaining near and above replacement cost in many markets, our continuing focus is on value-add building and land acquisitions. And on the development front, we're in the pre-marketing phases on several projects and are pursuing several build-to-suit opportunities.

As we announced before the end of the year, we have been awarded the development rights for the Campbell's Gateway project. Further to that, we have been selected as the fee developer for Subaru in the completion of their new US headquarters building. We anticipate that building commencing construction during the latter half of 2015 or early 2016.

So to wrap up -- 2014 was a great year, with a majority of our report card items accomplished or exceeded. 2015 is even more promising. By raising our spec revenue target, increasing the percentage completed, raising our retention target, reinforcing our operating metrics; our portfolio is in excellent and ever-improving shape. Liquidating noncore assets into an increasingly stronger investment market and delivering well-leased new product will accelerate our portfolio transition and improve both our growth prospects and market positioning for 2015.

So this year will be a drive towards a growing NAV. The forward leasing momentum we have in improving markets give us tremendous confidence that will generate solid NOI growth, strong same-store performance and positive mark-to-market.

At this point, George will provide an overview of our operational performance and more look ahead to 2015. And George will then turn it over to Tom to review our financial performance. George?

Thank you, Jerry.

It was an extremely busy quarter for our regional leasing and construction teams. We signed over 1 million square feet of leases and commenced approximately 1.2 million square feet, including over 800,000 square feet of new and expansion leases. As a result, we ended 2014 91.4% occupied, and occupancy has increased 310 basis points over the last two years. These efforts ensured our 2014 business plan metrics were achieved and have set the path for continued progression as we begin 2015.

Activity levels around the Company remained strong. Weekly inspections during the quarter averaged 170,000 square feet, comparable to 2013 levels, while down quarter over quarter as expected due to the holidays.

Our leasing pipeline totals 3.2 million square feet, including 565,000 square feet in active lease negotiations. Our CBD Philadelphia, Austin and Pennsylvania Crescent markets continue to perform extremely well. In CBD Philadelphia, we're 97% leased, outperforming market vacancy by 800 basis points; and have less than 5% rolling in each of the next three years.

The decline in vacancy in the Class A office sector has been driven by tenants taking the flight to quality, tenants relocating from outside the city, and continued office-to-apartment building conversions. This tightening has allowed us to continue to push rents. Leasing spreads are projected to increase 16% on a GAAP basis and 6% on a cash basis during 2015 in our CBD Philadelphia portfolio.

In Austin, we're also 97% leased. The Austin market remains hot, where 1.6 million square feet of office space was absorbed during 2014 and overall market vacancy is 8.6%. Leasing spreads there continue to rise. We're estimating a 15% and 6% increase for GAAP and cash respectively during 2015. The Crescent markets at 97% are also well positioned for continued rent growth. GAAP and cash leasing spreads are expected to be 9% and 5% during 2015.

Town Center attributes continue to be demand drivers for office space in the Pennsylvania markets. The limited amount of available inventory in those Crescent markets has forced deals to King of Prussia and other northern and western suburbs.

In Northern Virginia, our redevelopment efforts in Dulles Corner are nearly complete. We've invested approximately $9 million or $17 per square foot into the common areas, restrooms, building amenities; along with the exterior lighting, landscaping and hard scape systems. This investment reenergized activity through the properties. And as a result, we've executed two 40,000- square foot leases. These leases will both commence in the third quarter.

We remain encouraged by activity levels, the qualitative and locational benefits of our properties, and the increase in tenant expansion activity within the northern Virginia and suburban Maryland markets. We expect our Metro DC region to generate a 300-basis point increase in occupancy during the year, while posting positive rent growth on both a GAAP and cash basis.

Our Richmond team did a great job in 2014, solving a large tenant move-out and improved occupancy there, at a 92.5%.

In turning to the 2015 business plan -- page 6 of the supplemental package contains a roll-forward of our 2015 occupancy projection. Based on 3.2 million square feet of lease commencements, 898,000 square feet of projected move-outs and 295,000 square feet of early terminations, we'll generate 110 basis points of absorption on our 91.4 year-end 2014 occupancy level, to finish 2015 at the midpoint of our 92% to 93% range. This plan, as Jerry mentioned, will now provide $33.7 million of spec revenue. While being 78% complete from a revenue perspective, we're also 58% done from a square footage perspective.

We've maintained all of our ranges relative to mark-to-market, capital and average lease term. Retention is projected to be up to 68% from our previously stated 64% level, but is adversely impacted by three large move-outs in the first quarter. These large move-outs account for 122 basis points of occupancy to decline during that first quarter.

At 400 Commerce in suburban Wilmington, that building became 100% vacant January first. The 154,000-square foot building continues to be marketed for sale and/or lease. Research Office Center III in Rockville, Maryland lost a 42,000-square-foot tenant on January 31st. We continue to see numerous prospects in our I-270 quarter properties and have two full-floor users entertaining proposals.

In Radnor, we've already released 78,000 square feet of the 87,000-square foot tenancy that we lost on January 31st. This new lease will commence in the fourth quarter at very favorable terms to the expiring tenant.

Focusing on capital for a moment -- as we've discussed previously, our continued efforts to reduce forward lease expirations accelerates the timing of our capital spend. This clearly impacts our near-term CAD, but it does provide a catalyst for continued CAD improvement in the future.

So to conclude -- we're very pleased with our performance during the fourth quarter, our strong finish to 2014, and the progress made to date on the 2015 business plan. And at this point, I'll turn it over to Tom.

Thank you, George.

As Jerry mentioned earlier, the capital markets activity we executed in the third and fourth quarters represents a significant step to improving our balance sheet and positioning us to execute on our business plan. Our fourth quarter FFO totaled $54.1 million or $0.30 per share diluted, and our FFO payout ratio is 50% based on our current $0.15 per quarter distribution. For the full year, and our FFO totaled $227 million or $1.34 per diluted share, and our FFO payout ratio is 45% based on our $0.60-per-share annual distribution.

Some observations regarding the fourth quarter results -- same-store rates for the fourth quarter are 2% GAAP and 1.4% cash, both excluding termination and other income items. We have had 14 consecutive positive quarters for GAAP and 10 for cash metric on that growth. Our same-store portfolio margins remain relatively unchanged compared to the third quarter.

Termination income totaled $1 million, in line with our guidance. G&A expense totaled $6.7 million, which came in higher than previous guidance primarily due to $300,000 of acquisition costs. Interest expense totaled $29.5 million and was $1 million below the third quarter due to completion of our liability management program in October.

Interest income increased $2.7, million primarily due to the repayment of interest on a fully reserved note totaling about $1.5 million of income and $700,000 of income from our short-term loan to the Austin joint venture related to our River Place acquisition in October.

Additionally, associated with the liability management, we made make-whole premiums that took place in October for those that weren't tendered in the third quarter. And that resulted in about $5.1 million of costs for those make-wholes.

FFO contribution from our unconsolidated joint ventures totaled $7.2 million. Was above our third quarter results primarily due to the Austin acquisitions in the third and fourth quarters. Our fourth quarter CAD totaled $19.7 million or $0.11 per diluted share and 136% payout ratio. During the quarter, as a result of our significant leasing activity and occupancy gains, we incurred $32.9 million of revenue-maintaining capital expenditures.

CAD for the year totaled $117 million or $0.69 per share and within our third quarter guidance. Our third quarter CAD guidance was $0.68 to $0.73. So consistent with our prior comments, we anticipated the fourth quarter CAD would be significantly below the previous quarters.

As Jerry mentioned, we've increased the lower end of our revised FFO guidance range to $1.39 to $1.48. Looking at the first quarter run rate, we note the following -- core properties operating income for the first quarter will be slightly above the previous quarter, primarily due to higher revenue associated with our significant fourth-quarter lease commencements, partially offset by the lower NOI due to the sale of our Atrium and Liberty View properties in New Jersey.

G&A expense consistent with a 2015 will be elevated roughly $8 million but will still be within the range of the annual number. Termination fees are expected to decrease to about $400,000, and interest income will now decrease down to a more normalized $700,000.

We have $180 million of net sales activity, of which we've achieved about a $28 million related to the sales of Atrium and Liberty View. And our weighted average share count should be 182.5 million shares for the first quarter and roughly for the full year.

Annual AFFO payout ratio at 41.6% for FFO, and our year-end EBITDA is at 6.7%. However, including the $88 million note repayments, which we had expected to occur in 2014, that ratio would've been 6.5% -- no, 6.5 times.

Looking at 2015 capital -- we project CAD to be at a range of $0.85 to $0.95, reflecting $49 million of revenue-maintaining capital at the midpoint of our guidance. Uses of our cash for this year, talking about our liquidity plan -- about a $757 million, comprised of speculative acquisitions of $250 million, $259 million of development projects, of which the larger ones are $190 million for FMC, $42 million for Encino Trace.

We have $116 million of aggregate dividends, $31 million of projected capital investment, primarily for 4040 and 1919 markets; $49 million of revenue-maintaining, as mentioned earlier; $39 million of revenue-creating, and $13 million of mortgage amortization.

Primary sources for that will be cash on hand -- we'll need about $246 million, $270 million of cash flow from financing investment in dividends, cash flow before those items, $180 million of sales, $36 million of the contribution of Encino Trace, $88 million of the short-term note, which we've already received; and the capital plan then results in us having somewhere around $10 million of cash left on our balance sheet at the end of the year.

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

Thank you, Tom. And George, thank you as well.

To wrap up our prepared remarks -- 2014 was an outstanding year for our company. Great execution on operations, investments and balance sheet management, with all trend lines moving in the right direction. 2015 is off to a strong start. And our hope is that we successfully execute our business plan. We'll continue to focus on financial strength, NAV growth, taking advantage of ever-improving fundamentals, and the pragmatic pursuit of select external growth opportunities.

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

Brandy?

(Operator Instructions) Emmanuel Korchman, Citi.

Just wondering -- with the increase in the speculative revenue targets and the execution rate to date -- if we look at the corresponding changes to your occupancy and same-store NOI growth numbers, there were no changes. Is that just conservatism, or is it just a shift within the range? Or is there something else going on?

Yes, I think we just feel confident that we're going to perform within the range. I think from an occupancy perspective, we continue to kind of just guide to the midpoint. I think obviously, with the weekly inspections, the pipeline and the achievement to date, we're certainly hopeful that we can get enough leasing done to kind of get to the upper end of those ranges. And kind of the same thing on both -- on the same-store growth as well.

Great.

And then, on the acquisition pipeline -- if we're to think about how much of that is going to be vacant or land or development products versus standing inventory, do you have a rough breakdown?

Yes, Manny, it's Jerry. At this point, we really don't. We're looking at a number of different opportunities. I mean, certainly we would expect that a good portion would be value-added existing assets. We are looking at a number of parcels of ground where we think there might be an opportunity to acquire future development capacity at a very good price. But we don't really have a full breakdown of that at this point.

Great. Thank you.

Thank you.

Jamie Feldman, Bank of America.

You guys had good occupancy and percent lease growth in Northern Virginia and the DC suburbs. Can you talk a little bit about what's going on there? I mean, I know our defense analysts are talking about the budget maybe being a help to contractors finally. And DC had a decent fourth quarter in terms of CBD leasing. So just kind of big picture of what's going on in that market, and how you guys are thinking about where we are in the cycle?

Well, look -- Jamie, It's George. We clearly have seen kind of a continued uptick in activity. We've seen a nice uptick in tenant expansions taking place down there. And we really have seen kind of that flight to quality. And I really think -- our recent successes in Dulles Corner, I think, are really -- kudos to our local team for kind of seeing the need to invest in those buildings. We got almost immediate dividends in just the level of broker tours, tenant inspections; and benefited this quarter by signing those two leases, similarly to what we saw up in the I-270 corridor last year.

So I think our toll road properties are positioned well. We continue to be able to offer tenants the amenity packages they're looking for, the signage packages they're looking for. But it's still a very competitive market. But I think our team has done a great job in just kind of cutting to the chase and getting deals negotiated quickly.

Yes, and I'd just add on to that, it's been very encouraging the last couple quarters with the activity we've had. But also, in general, the feedback seems to be that tenant psychology has begun to change a bit, and that after years of rightsizing, a lot of small and midsize tenants are beginning to grow again. There is certainly the expectation that they'll be a lot more awarded in terms of government contracts.

And there is -- as we're saying, the Class A or higher-quality product clearly is outperforming the B and the C. So we're fortunate we're very well positioned with very good assets, as George alluded to, where we felt we had to refurbish a well-located asset; we put money in there.

But if you take a look statistically, that market remains a bit of two worlds, where you're seeing the newly built or the higher-quality renovated properties located in close proximity to a good amenity base, a Class A location, access to transit; significantly outperforming buildings that are 25 years or older, having been renovated, no capital improvements, limited amenities.

And that's really where we're focused on, which is trying to improve our buildings, make sure that we add to our leasing and marketing teams, which we've done. And even though, as George touched on, the market remains competitive, we do think that the refurbishments we've done and the marketing positioning we've done really has been one of the major reasons for significant -- really good performance in 2014 and, I think, a pretty high percentage of 2015 already being done, with some upside remaining.

So when you think about the leasing pipeline you guys mentioned, and compare it to maybe this time last year, how does that market feel different now?

Well, I think the pipeline in Northern Virginia specifically is significantly higher than it probably was this time last year. But I think that there's more tenants in that pipeline that have more clarity on their own business and their ability to make a decision. So I think we had some prospects in the pipeline this time a year ago who were kind of out looking for space but just weren't sure what they could or couldn't do. I think now we're finding that the tenants that are coming out -- they know what they need, and they're able to kind of make a quick decision.

Okay. Thank you.

Thank you.

Michael Lewis, SunTrust.

For Jerry or Tom -- you guys issued equity each of the last couple of years. And I know it wasn't in the original plan last year. It doesn't appear that you need any this year, certainly. But I was wondering if there was any scenario out there where you thought that might be a possibility, or if it's just highly unlikely.

No, look, I would never say anything is highly unlikely. The reality here is we've been on a path to grow NAV. And one of our objectives, obviously, is to have our public currency or stock price reflect that NAV value.

We're entering a market where we think there are increasing opportunities to create forward growth for the Company. We also have, as I've mentioned on every call and we've talked about, a key driving business plan [predicate is] that we need to continue to improve our balance sheet.

So certainly from our perspective, with our sales program -- and as I touched on, our expectation is that we'll try and accelerate some of those sales efforts to provide some additional liquidity -- we think we have a number of great opportunities to internally generate funds for growth. But clearly, we would never preclude the fact that we would continue to strengthen our balance sheet, whether on an absolute basis or to facilitate some other growth opportunities.

Thanks.

And just one other last one -- CBRE is projecting 5% market rent growth in Philly this year and almost 7% in 2016 and 2017. So it seems like some of your developments are maybe in the right window there. I know your portfolio is basically full of the CBD. But is this kind of -- would that outlook be better growth than you had expected? And how does that kind of relate to your original development [on the radar]?

Yes, good question, Michael.

Look, we certainly believe that Philadelphia's recovery will continue to accelerate. And we're seeing -- and that's part of the national demographic shift towards urban cores. Philadelphia has done a marvelous job in the last decade of really expanding its downtown residential base, and that [corollary] expansion of retail, cultural institutions, et cetera. So it's really, we think, a very good prescription for continued growth.

From our perspective, we certainly looked at that when we commenced construction of FMC Tower. It's good to have a building that's 60% preleased. But as I mentioned on my comments, we still have 250,000 square feet to lease. So we have a good pipeline of prospects for that.

In addition to that, we have a property that we are wrapping up renovation on, at 20th and Market Streets in Philadelphia, the 1900 Market Street building. We have a major rollover of that coming up that was a tenant whose lease expires at the end of 2015. The renovation plan on that project will be completed by the third quarter. And we have a very good list of prospects for that as well for occupancy in 2016 and 2017.

So we've tried to, number one in Philadelphia, accelerate renewals that we could on our existing inventory to help de-risk the portfolio. And as part of that, as George touched on, have gotten on very -- have achieved very good mark-to-market and very long lease terms. That kind of de-risks the existing platform.

That positioned us well to be aggressive in both leasing of FMC Tower and 20th and Market Street. But also with the additional headwinds we've seen come into -- or tailwinds we've seen come into the city, relative to the companies now moving back into the city -- we think that further accelerates our ability to be successful in those developments.

Great. Thank you.

Ian Weissman, Credit Suisse.

Jerry, now that you're about 90% leased in Northern Virginia -- in the past, you've been -- you haven't been shy to say that you're willing to trade lease terms and CapEx for occupancy, just to drive that number up. Now that you're sitting at 90%, do you think you'll be a bit more aggressive and holding for rent at this point?

In certain buildings, yes. In other buildings, I think we'll still be aggressive. I think we always do follow kind of the mantra of lease and don't repent. We have extremely solid leasing and marketing folks in our DC operation. One of their major objectives is to really assess on a real-time basis where they think the inflection points are on lease negotiations.

But thematically, Ian, you're on point, which is -- a lot of our bias the last couple years was to really plug holes, and to be aggressive in doing that to kind of stabilize that portfolio.

The team down there did a very nice job. We still have more wood to chop. So we will remain on an aggressive posture. But certainly, given some of the accelerated activity we've seen on 270, with the success we've had on dealing with that large Lockheed vacation, with the great success the team has had thus far on the repositioning of Dulles Corner, it has given us the ability in those locations to start to push asking rents as we're going through that leasing cycle.

So that has worked out exactly as we hoped it would. And we would anticipate that the rest of 2015 will have great result in those locations.

But look, generally you have a market where there's still an oversupply of space. A lot of that is B quality. But that B quality space still does create a drag on the ability to really push rents as much as we would like across the board.

That's right.

And just my follow-up question -- you ended the quarter, I think, with about $250 million in cash. I think last quarterly call, you said you thought you'd end 2015 with essentially a zero cash balance. Given what we know about your net acquisition plans for the year and other capital needs, just kind of walk me through how you're getting to a zero cash balance by year end. Are there going to be some early refi's from 2016?

Ian, this is (multiple speakers) Tom.

I think that -- we ended the cash -- the reason we entered the end of this year a little lower on our cash balance is because we thought the note receivable, the $88 million that we had put out there for River Place, would've been refinanced by the end of the year. That didn't take place. It took place in January of this year. So that was one reason. The other reason is our sales target was lower, partially due to that $28 million that then rolled into January also adding cash after year end. So our cash balance was below where we thought it would be. But it's really due to timing of when the proceeds came in between December and January.

When you look at our 2015 capital plan -- I think last quarter we thought we'd be sort of breakeven with no cash. As I outlined, I think will probably be between $0 million and $10 million. So we'll still be kind of in that range, maybe a little better than where we thought.

A lot of that cash is coming -- two of the big uses that you mentioned -- one is the speculative acquisitions, which is $250 million. But then also, we have $259 million of development projects, which -- again, two of the larger ones are FMC at $190 million and Encino Trace at $42 million, along with a few other projects, such as 1900 that Jerry mentioned. So those are some of the bigger uses of cash that are going to cause our balance to get closer to zero by the end of the year.

All right. Thank you very much.

Jed Reagan, Green Street Advisors.

On the disposition guidance increase, just wondering if that's a signal that the pricing you're finding in the market for some of those assets is coming in better than what you might've expected several months ago. And maybe just how would you characterize the depth of the buyer pool and financing available for sort of these lower-quality noncore assets these days?

We are definitely seeing a better pool of buyers out there, unquestionably. And as a result, we are moving more things in the market. The properties that we have in negotiation or through the bid process -- we're pleased with the pricing that we seem to be achieving.

So we, as I mentioned, are hopeful we can exceed even the revised higher target. But the higher target, going from $150 million-$180 million, really reflects the slide of a sale we are anticipating at the end of 2014 into 2015.

But there's no question, in terms of answering your broader question there -- we see better bid lists, or deeper bid lists, better pricing, easier access to better financing. So we think that the investment climate for these types of product is stronger now than it was a couple quarters ago.

And would you say that those trends would apply to some of your more core locations as well? I mean, maybe just any general comments about cap rate trends you've observed over the past several months in your markets?

Certainly. Look, I mean -- when we take a look at kind of the Roundtable of our markets, we've seen continued cap rate compression in a number of the Pennsylvania suburbs, even a slight downtick in cap rates in New Jersey and Delaware from where they were last year. Certainly has been a fairly robust investment market in Philadelphia CBD, with cap rates on B quality properties breaking below 7%.

So I think the expectation of these markets continue to perform well, with the prospect for at least generally more possibly biased economic growth. And lower rates are really pushing a lot of people into these products.

Okay, great.

And just last one for me -- any updates on the progress at 4040 Wilson? And then also at EVO, you said that lease-up progress is kind of coming along as you expected?

Yes. Well, first of all for 4040, we wound up executing exactly the plan that we'd outlined before, which was we were in the premarketing phases for 4040. To compress the delivery time on the building, the partnership went ahead and invested money to complete the below-grade garage. That will be completed very shortly. But we have not signed up an anchor tenant. And we do not plan on proceeding with the vertical construction of the office space until we sign a significant tenant.

Our partner and our leasing team are working with a number of prospects. But until something is actually inked, we don't plan on moving forward.

EVO, we're actually very pleasantly surprised. The team is reenergized and is very much focused on accelerating activity kind of into the 2015-2016 academic year. That's over 50% already done. The renewal rates have been much higher than average. Marketing platform is working very well. So we've been pretty pleased in the last quarter with how that product is getting a much higher local franchise between University of Pennsylvania graduate students and directional students. So we have expectations that -- or the plans we had laid out in terms of this [stage] lease-up of that property will come to fruition as we entered the 2015-2016 academic year.

Okay. Great, thank you.

Thank you.

Brendan Maiorana, Wells Fargo.

George, very good leasing activity net absorption in the quarter. It appeared like your net lease economics deteriorated a little bit in this quarter relative to where it's been in the recent past. But you still have kind of the same outlook for net to economics for 2015. So was there something that drove both the CapEx per square foot per year higher and the rent spreads lower in Q4 that you don't expect to occur as we go out into 2015?

Yes, good observation.

Look, two big deals in the fourth quarter -- one was the CNSI deal in Rockville, Maryland to backfill Lockheed-Martin. The other was the Commonwealth of Virginia deal in Richmond that backfilled Travelers. So roughly 200,000 square feet, at a little bit higher capital per foot per lease year, but 11-year deals. So you won't see that recurring capital occur for quite some time.

And kind of the same dynamic on mark-to-market during the quarter from those two transactions, as both Travelers and Lockheed had been in those buildings for a long time and had kind of gone through many years of 2% to 3% annual rent bumps that obviously those markets just didn't sustain.

We do kind of feel confident that everything kind of gets back. I mean, if you look at that $340 million -- absent those two deals, would've been $272 million for the quarter.

Okay. That's very helpful color.

Either for Tom or Jerry -- you've got the $250 million of acquisitions that are included in there. You mentioned that maybe you're going to pick up your disposition target because -- or activity because pricing is good. How are the acquisitions shaping up, given that it's a pretty challenged pricing? Seems to be challenged in a lot of markets, given that it's moved up pretty nicely.

And maybe for Tom, can you remind us -- where are the acquisitions slated to come in and the impact that they would have -- and the impact that they're having on your guidance from an FFO perspective?

We will tag-team it.

Brendan, on the acquisition front -- look, there's certainly some markets where pricing is well above replacement cost. Yield compression, cap rate compression, is well beyond our threshold. And in those marks, I think you're seeing us focus more on seeing if we can effectively create a forward-development pipeline that would position us for growth in the out years.

In a number of other markets, there are still what we view as value-add opportunities, very similar to what we've done in the past with this 1900 or 660 Germantown pipe, where we could find properties that, either for tenant rollover reasons, physical plan issues, financing concerns, really are at a point where they need some additional lift.

And we are evaluating a number of those. The primary ones -- we're looking at those -- are kind of in the Philadelphia, Pennsylvania suburban area. And we would expect that some of those acquisitions would come our way. We're also looking at some acquisitions in other markets that would fit the criteria of value-add, where we can just deliver a higher-than-normal rate of return and have an investment base below replacement cost.

So when we set that target, we knew the acquisition climate was challenging. But we also know that we have a pretty good pipeline of smaller deals -- $25 million or $50 million type of transactions that we think might have the right ingredients for us to proceed.

Tom, you want to talk about how they're timing in?

Yes. Brendan, we have the timing, basically in the second, third quarters, backended in those quarters. So the amount of income that's coming off them is going to be fairly small in 2Q, and then obviously a little more in 3Q and 4Q, totaling a few cents per share. And we expect to come off of those this year; that's in our guidance.

All right. Thank you for the color.

Thank you.

Craig Mailman, KeyBanc Capital Markets.

Maybe just quickly, can you reconcile the increase in spec revenue versus kind of the unchanged assumption on lease economics, and kind of the roll-forward you guys have? I know you sold some assets, so it came down. But net-net, you have a little bit more on the termination side. Can you kind of just run through that quickly?

Yes, Craig, sure. It's George.

Look, the spec revenue change really is being driven by the deals we've executed to date, as I had mentioned in an answer earlier. I mean, we're kind of -- that page 6 roll-forward -- we're kind of purposely guiding that to the midpoint of our range. We know that certain properties may be disposed of during the course of the year. I mean, the two buildings we sold in New Jersey had somewhere between 10 and 20 basis points of impact on occupancy.

So we're kind of trying to just keep that inside the range. And we're doing the same thing, quite frankly, on same-store NOI growth. So I think, depending on what we sell and the timing of that, that could impact those ranges. And then, obviously continued conversion of the pipeline that we feel confident about at this point would certainly drive us towards the upper end of those ranges.

That's helpful.

And then, turning to FMC, Jerry -- it sounds like you have some good activity there. And just following kind of Liberty's lease-up [to] the balance of Comcast, with that tenant -- can you just talk about, as you look at your pipeline, maybe how much of that was looking at both assets? And so maybe now you have a little bit more leverage?

And I guess, to an earlier question about potential rent growth in Philly, what are you guys seeing on that particular asset relative to kind of underwriting?

A couple points. One is -- the tenants that we're talking to and have entered our pipeline in the last quarter really weren't actively looking at Comcast's new building. I think there was a general expectation in the market -- whether it's an expectation or a hope, if it came to fruition, was that Comcast would take all that space. So I don't think it was an issue of that space being actively marketed to third-party tenants, until there was some more clarity on what Comcast's intentions were.

So the tenants that we've been bringing to our pipeline are really evaluating either moving into the city from the suburbs or expanding from some city locations and FMC Tower. And certainly, look, given the uplifting rents in the existing stock in the city, not just at the trophy level but also at the A and B level, it certainly has made our value proposition to tenants for FMC Tower even more attractive.

And if I can slip in another quick one -- can you just remind us -- the agreement in Camden with Campbell Soup -- are you guys just going to collect fees on developments there? Or would you guys actually do build-to-suits that you would keep on-balance sheet?

Yes. The transaction we have with Campbell's is that we've been designated as a master developer. And we have an option to take down land as we identify development opportunities. The model we're working on is very much the model we've been able to achieve with Subaru, which is that when that option land is taken down from Campbell's, it will be done to Subaru; Subaru will become the land owner and the owner of the building. So in that case, we really are a fee developer in that complex.

And that seems to be, given the Economic Development Act in New Jersey and how those tax credits are determined -- there seems to be a real bias on the part of the company, the tenant, to become the owner. So we would certainly anticipate that our current business plan of being a fee developer will be the predominant type of activity that we have there.

Great, thanks.

You're welcome.

Mitch Germain, JMP Securities.

Just, Jerry, further on that topic -- so we should see an increase in fee revenue associated with Campbell's and Subaru next year. Is that the way you think about it?

Yes, that is correct, Mitch. I mean, right now, given the somewhat uncertainty of when that construction will actually commence, whether it's late 2015 or early 2016, our current plan does not include any fee revenue from anything related to the Gateway project.

Great.

And then, I think, George, you mentioned 3 million or so square feet in the pipeline. If you could break that out between what's operating and development?

That is all operating. Yes (multiple speakers).

It's all operating?

All operating, yes.

Great. Thanks, guys.

Thank you, Mitch.

Gabriel Hilmoe, Evercore ISI.

Quick ones -- Tom, on the term loan refinancing expected for this year, what's the timing expected for that?

Well, we basically think we're going to refinance our line of credit and our term loan sometime in the first half of this year.

Okay. And then, do you have a number for your expectation for capitalized interest for 2015?

Capitalized interest for this year will be about $11 million.

All right, great. Thank you.

And there are no further questions at this time.

Great.

Thank you all very much for participating, and we look forward to updating you on our first quarter activity on our earnings call in late April. Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.