Brandywine Realty Trust (BDN) 2015 Q1 法說會逐字稿

Good morning, my name is Felicia and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust First-Quarter Earnings Conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions).

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

Felicia, thank you very much. Good morning everyone and thank you all for participating in our first-quarter 2015 earnings call.

On the call with me today 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 during this 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 SEC reports.

As we normally do, I'll start off with an overview of our three key business plan components, that is operations, balance sheet and investments. George will then discuss our 2015 leasing and operating progress. I will then turn the call over to Tom to review our financial results.

Looking back, we had an excellent first-quarter. We made solid progress towards meeting our business plan objectives and advancing our capital plan. Our operating metrics remain in line with our business plan targets. And we've encountered earlier success than we anticipated on our disposition plan.

The combination of stronger operating metrics was offset by earlier than anticipated disposition volume, so we are tightening our FFO guidance range to $1.40 to $1.46 per share.

In terms of operations, during the first quarter, we leased 889,000 square feet and commenced occupancy on 878,000 square feet. We had approximately 250,000 square feet of negative absorption, as we indicated in our last call, primarily due to the previously announced move-outs of TV Guide and Radnor and [Hewlett-Packard], and Emergent BioSolutions in Maryland.

We will note, however, that 184,000 square feet, or 74% of those move-outs, is already backfilled at a blended 4.9% positive cash and an 8.1% positive GAAP mark-to-market. So, very good results both in terms of timing and result in economics for our company on those roles.

Brandywine's occupancy levels continue to outperform our markets, most notably in the CBD of Philadelphia, University City, the Pennsylvania suburbs, northern Virginia and Richmond.

We did end the quarter at 90.3% occupied and 93.3% leased, right in line with our projections.

Now our GAAP mark-to-market was 3.6%. And while that's lower than our projected annual range, we already have executed leases commencing in subsequent quarters that allow us to maintain our 2015 business plan range of 6% to 8%.

Tenant retention for the quarter was 72.8%. And as we noted in our sup, given more visibility on forward expirations, we're increasing our year-end retention target to 75%, from the previous goal of 68%. So, a very good move on our retention target.

Our cash same-store number was 0.6%. Again, attributable to those three move-outs and below our targeted range of 2% to 4%. But subsequent lease executions will return us to our targeted range for the year.

Leasing capital came in at $1.42 per square foot per lease year. And while the composition of the deals in the first quarter resulted in a capital spend below our annual range, based on leases already executed and projected to commence, we're maintaining our annual range of $2.25 to $2.75 per square foot per lease year.

And as George will touch on, we accelerated some early 2016 renewal activity which will generate slightly more capital spend in 2015. And as a consequence, we have reset our CAD range to $0.82 to $0.92 per share.

We have also executed 88% of our spec revenue and 73% of our spec square footage targets for the years. And we will reach our year-end occupancy goals of 92% to 93% and a leasing goal range of 93.5% to 94.5%.

Finally, if you look at our sup, the other key operating metrics that we outline as key drivers of our business plan, goals remain very much on track.

In terms of our balance sheet, it continues to be in strong shape with excellent liquidity. Our net-debt to gross assets measures 38%. We have no outstanding balance on our $600 million unsecured line of credit and over $300 million of cash on hand.

Tom will bring you up to speed on the success of recasting our $600 million line of credit, as well as other projected financing activities for the balance of the year.

But fundamentally, our balance sheet objectives remain paramount and consistently lowering our leverage is a key component of our overall strategy.

On the investment front, we were very active during the quarter, and subsequent to quarter-end, closed on a number of transactions as outlined in our press release. We have closed on $93 million of dispositions, have an additional $51 million under firm contract with an eminent close, and closed also on $40 million of acquisitions.

On the disposition front, our business plan established $180 million 2015 sales target. We had programmed a vast majority of these dispositions to occur in the second half of the year. The investment market for our product type remains very strong and we're pleased to report that we anticipate achieving our $180 million target by June 30th.

The average rate on these sales, both announced and anticipated, will be 6.3% on a cash basis. This sales acceleration has created some targeted revenue loss for us, but fortunately, has been offset by the sale CAP rates staying well below our projected 8.5% and increased leasing activity which has enabled us to maintain our speculative revenue target while tightening our guidance range.

We continue to see good levels of interest on a number of properties we have on the market. Our objective remains to continue to reposition our portfolio to create a better earnings growth trajectory. Assets being sold include several properties in California; Richmond, Virginia; a complete exit from suburban Wilmington, Delaware; and our continued liquidation of assets in southern New Jersey.

On the acquisition front, we acquired $40 million and have a number of other transactions in the queue. Obviously, our willingness to proceed on future transactions will be based on the results of our due diligence and our view on market positioning and pricing.

The year-to-date acquisitions were outlined in our press release, but I'll touch on a couple of those. We did acquire 618 Market Street. This property is in close proximity to the Philadelphia Central Business District and well located in the Market East corridor.

The property houses a parking garage, totaling 330 spaces, and approximately 14,000 square feet of first-level retail space. The acquisition yield was approximately 7% and is positioned as a future development site pending the continued emergence of the Market East corridor.

Brandywine is also the third largest owner of parking in Philadelphia and we believe we can significantly improve the garages' operation and yield during this transitional hold period.

We also acquired a site in the Capital Riverfront submarket of Washington, DC, that can accommodate a 271,000 square foot office building. That property is a future development site, is extremely well located within the submarket, and in close proximity to both the metro and submarket amenities.

We will be embarking on a design development process over the next year and begin the pre-marketing campaign. The building will not start without a significant pre-lease commitment.

And finally, we acquired a site in the central business district of Austin, Texas, for $2.6 million. That property is currently being operated as a surface parking lot and was acquired at approximately a 6% yield. We plan on proceeding through the design, development and approval process to construct an office building and a structured parking deck.

In a broader sense, our land modernization program continues to make progress. We have placed several parcels of ground under agreement of sale. The total amount of properties under agreement of sale, or in advanced negotiations, totals approximately $30 million. And we expect those closings to occur as our buyers obtain their targeted approvals.

And on our land and development program, there's several points I'd like to amplify for a moment. First, as you know, customer appetites and workplace cultures in our business continue to change. High efficiency, multi-modal access, amenity-rich, are the gating topics office companies face every day. In this environment to be successful, we need to be in a position to deliver first-class product that exceeds customer expectations and those our competitors can provide.

As such, our land activities are designed to anticipate that demand and position us for future growth. We are shifting out of land that won't position us for the future, i.e. those $30 million of sales at a profit, and investing in well located sites that improve out competitive advantage.

From a development and capital deployment standpoint, we will not start a project without significant pre-leasing and good visibility into the project's future pipeline.

We will continue to recycle economically and culturally non-competitive assets to provide a dependable funding source for our development spending. We will not create a development spend model based on leverage, but one rather based on matched funding.

The third point goes without saying, but I do want to amplify it, is that our primary development focus in the Company remains on completing the construction and lease up of FMC Tower, Encino Trace and our redevelopment project at 1900 Market Street in Philadelphia.

Until we harvest those growth opportunities, our investment in future developments will be strictly focused on planning and pre-marketing activities.

And speaking of those projects, the FMC Tower is on schedule for deliver in Q3 2016. Our active prospect list has increased since our last earnings call and is well over twice the amount of square footage we have available. Activity continues to pick up and we remain in advanced discussions with several key prospects.

We are very pleased at the level of response the project is receiving and as I indicated previously, we are confident that as the building becomes more definable on the skyline, we'll replicate our past leasing success in our University City projects.

The concrete core of the building is rising. It's currently at the 8th level with steel following closely behind at the 4th level. But from a construction and budget standpoint, the project remains on schedule.

The Encino Trace project in Austin continues on schedule as well. We're anticipating a mid-year 2015 delivery for the first building and an end of summer delivery for the second building. While we have no additional executed leases to report on this call, we are in advanced discussions with an anchor tenant and several other tenants for taking additional space.

Quick notes on several other projects. 4040 Wilson, our joint venture in northern Virginia, active marketing of that project continues. But no active leases are in negotiation. Evo, good progress on the University City housing project. We're 85% leased for the 2015 and 2016 academic year.

Our joint venture project with Toll Brothers, the park in Plymouth Meeting, Pennsylvania, we have about 40% of those units delivered. The project is very much on schedule. We're 57% leased on those delivered units, which is ahead of schedule and at higher than pro forma rates. 1919 Market is coming out of the ground on schedule, on budget and is in a position to begin our marketing campaign about a year from now.

At this point, George will provide an overview of our first-quarter operational performance.

Thank you, Jerry.

Activity levels around the Company remain strong. Weekly inspections during the quarter averaged 209,000 square feet, up 22% from last quarter and comparable to 2014 levels on an available square footage basis.

Our leasing pipeline, excluding development and redevelopment properties, totals 3.3 million square feet, including 619,000 square feet in active lease negotiations.

Looking specifically at our markets, in CBD Philadelphia, we're 98% leased, outperforming market vacancy by 700 basis points and have significantly reduced rollover risk for the next five years. The demand for Class A office space remains strong as tenants seek newer, amenity-rich product.

Access to labor from a growing pool of millennials living and working in the city continues to influence tenants to relocate and/or expand into the city. This tightening has allowed us to continue to push rents, lengthen lease terms and control capital.

In Austin, we're 96% leased. The Austin market remains extremely active posting its 17th consecutive quarter of positive absorption and seeing rents reach a new high.

Subsequent to the end of the quarter, we terminated a 103,000 square foot lease with a tenant at The Park. This event generated a termination fee in the first quarter which Tom will elaborate upon during his remarks. Our focus is on the backfill of The Park and the continued lease up at Encino which Jerry addressed in his comments.

At The Park, we're currently negotiating a lease for a 64,000 square foot tenant and hope to have this transaction completed shortly.

The Pennsylvania Crescent markets are 97% leased, also continue to perform well. The town center attributes of these properties continue to be the demand drivers for its office space. The limited amount of available inventory in the Crescent markets continues to push deals towards King of Prussia and other northern and western suburbs. Asking rents in the Pennsylvania suburbs have risen to their highest levels since 2009.

In northern Virginia, our redevelopment efforts in Dulles Corner have produced their expected outcome. Our toll road corridor properties are now 92% leased and we've seen rents move from the mid-20s to the upper 20s and now to the low 30s.

Our Metro DC region rollover exposure is now less than 8% per year through 2017. The overall condition of the region continues to improve and we remain encouraged by activity levels and our team's continued ability to get deals done.

Now turning to the 2015 business plan, during the quarter we did have that negative absorption which Jerry spoke about. In addition to the 184,000 square feet that we have re-let, we have another 27,000 square feet of that move-out in current lease negotiations.

Our progress on the business plan, along with our executed and contracted sales, have us projecting occupancy at the upper end of our range as we've depicted on page 6 of the supplemental package.

In terms of spec revenue, we've maintained our $33.7 million target despite losing $700,000 from the sale of Lake Merritt in Oakland. This decline was offset by an additional $700,000 of spec revenue generated from our Philadelphia CBD operation.

The spec revenue plan's 88% achieved, as compared to 89% this time last year, and the square footage needed to generate the plan is 73% complete, as compared to 65% this time last year.

We've maintained all of our ranges relative to mark-to-market, capital average lease term and same-store NOI growth. Focusing on same-store NOI growth for a moment, both the first and second quarters will perform below our ranges due to large move-outs that occurred in the second half of last year and remain unoccupied during the first half of this year, and the large move-outs that have occurred in the first quarter of 2015. As occupancy continues to grow during the latter half of the year, so will our same-store NOI.

On capital and CAD, we've executed 166,000 square feet of additional 2016 and beyond renewals which will accelerate its capital spend into 2015.

So, to conclude, we're delighted with our continued performance during the quarter and the continued progress on the 2015 business plan. And at this point, I'll turn it over to Tom.

Thank you, George.

Our fourth-quarter FFO totaled $58.5 million, or $0.32 per share, and our FFO pay-out ratio is 47% based on our current $0.15 dividend.

Some observations about the first quarter FFO results, same-store growth rates for the quarter were 2.2% GAAP and 0.6% cash, both excluding net termination fees and other income items.

We've now had 15 consecutive quarters for GAAP metric and 11 for cash metric in growth. Our same-store portfolio margins decreased as compared to the fourth quarter, as same-store occupancy decreased from 91.4% to 90.2%, which we forecasted.

Other income increased $1.9 million due to real estate tax refunds totaling $1 million and unanticipated investment income totaling $0.7 million.

G&A expense totaled $6.8 million, which came in higher than previous guidance. The increase is primarily due to higher than anticipated professional fees and accelerated compensation expense.

Interest expense totaled $28.2 million and was $1.3 million below the fourth quarter, primarily due to the completion of our liability management transactions in mid-October.

Interest income totaled $0.8 million, which was in line with projections. Our FFO contributions, among consolidated joint ventures, totaled $8.2 million, $1 million above the fourth quarter results. This increase is primarily due to our River Place acquisition which occurred in October and the termination fee we received from our Austin joint venture as it relates to a large tenant, SolarWinds, that left the park and we are backfilling that space.

Our fourth-quarter CAD totaled $39.5 million or $0.21 per diluted share and a 68% pay-out ratio. During the quarter, as a result of our significant leasing activity and occupancy, we incurred $12 million of revenue maintaining capital expenditures.

As Jerry mentioned, we have narrowed our FFO guidance to $1.40 to $1.46. Looking at the second quarter run rate, we note the following, our core operating income from the second quarter will be slightly below the first quarter results, primarily due to our increased disposition activity, which I think will affect the second quarter by about $1.7 million. This is partially offset by the higher NOI we will begin to receive from our improved occupancy.

G&A, consistent with 2014. The second quarter G&A expense will be significantly below the first quarter, decreasing to about $6.8 million.

Termination fees we expect to increase to $0.8 million for the second quarter, and based on known future terminations, a full year increase will go up to about $5 million.

Interest income will decrease to $0.3 million. The FFO contribution from our [unconsolidated] joint ventures should total approximately $6 million. The decrease from the first quarter is two-fold. One is the termination that we received, as well as the [then lost] occupancy from that tenant.

Of our $180 million sales, we've achieved $144 million to date of announced activity. $144 million of announced sales represents a very strong blended sales price of [$158] per square foot. And the blended CAP rates of 6.73% and 6.75% for cash and GAAP are well below our 8.5% guidance, demonstration of the strong markets and demand for our property in our markets and the quality of the portfolio.

As Jerry mentioned, we anticipate reaching that sales target by June 30th. Our weighted average share count for second-quarter will be 182.4 weighted average shares.

Our annual [AFFO] payout ratio is 42% based on the midpoint. And our quarter end net debt to EBITDA was 6.5%.

Looking at the 2015 capital plan, as Jerry highlighted, we have changed our CAD ratio bringing it down to [82% to 92%] from previous guidance, primarily due to early leasing that's bringing forward some expirations in future years that we're now spending that money this year.

We're projecting $39 million of revenue maintaining CapEx for the nine months ended 12/31 and uses for the remaining nine months are $665 million. That represents speculative acquisitions totaling $235 million, with a timing of that happening later in 2015, and approximately $20 million for the identified closed second-quarter acquisitions and developments of 618 Market and 405 Colorado.

We have $208 million of development projects and acquisition capital, primarily for FMC and Encino Trace. $39 million of revenue creating CapEx, $87 million of aggregate dividends, $37 million of revenue creating CapEx, $20 million for the 25 M Street land acquisition, and $14 million of JV investment, primarily 1919, and $10 million of mortgage amortization.

Primary sources for capital is $209 million from our cash on hand, $140 million of cash flow, before financing, investing and dividends, $152 million in remaining asset sales, with 114 closed or under contract, $36 million from the contribution of Encino Trace into the Austin joint venture.

The capital results in us having an estimated line balance of about $30 million. The change in projected year-end liquidity from the prior quarter is primarily due to 25 M Street and some additional capital expenditures that we expect to have during the year.

As an update to our financing plan, we anticipate closing on a four year revolving credit facility during the second quarter. The revolver will remain at $600 million and will provide us with improved financial terms, flexibility and pricing.

Once closed, we then anticipate extending our seven year term loan during the second quarter or early third-quarter and believe pricing will also improve from the current terms.

I will turn it back over to Jerry.

Tom and George, thank you very much. That wraps up our prepared remarks. The first quarter results were strong and consistent with our business plan. And we continue to focus on executing all elements of the previous announced business plan in terms of leasing activity, financial activity, as well as capital activity.

With that, we're delighted to open up the floor for questions. And as we always do, we asked that in the interest of time, you limit yourself to one question and a follow up. Felicia, we can open the floor for questions.

(Operator Instructions).

Rich Anderson, Mizuho Securities.

First question, kind of bigger picture for Jerry. In the news the last couple days is whether or not Comcast and Time Warner Cable are going to come together. Do you have any opinion about that one way or another? And how much the Philadelphia market hinges in terms of its future prognosis on something happening there or not happening?

Rich, as the papers report, it's a situation in flux. I mean, certainly we think that there's a lot of good reasons for that merger to happen.

I think the impact on the Philadelphia market is unclear at this point given the fact that Comcast, before this transaction, was growing at a fairly significant clip and that certainly the expectation was that if transaction occurred, that would accelerate their recent expansion plans. But I don't think anybody really has any visibility into the long term impact.

But I think what we do know is that Comcast, as it performs today, was continuing with very solid growth records that was having a positive impact on the city of Philadelphia.

And then a follow up question maybe for George. The sublease space, as a percentage of the total, has been trending down over the past several quarters. Can you kind of comment on that? Do you see that as an ongoing trend? And how low has sublease space become in the history of the Company, for Brandywine?

I think in the near term we probably do see it trending down a little bit. I think a lot of larger blocks of space where companies went through some right sizing put a lot of sublease space on the market. But we've seen that start to come back. We've seen tenants actually have subleases expire and then reoccupy the space. But it does vary a little bit market to market.

We have seen, down in northern Virginia, there's been a little bit more submarket space come on the market down there, not necessarily in our portfolio.

But I think in terms of the low water mark for us, I'll probably have to get back to you offline on that. I'll try to have a number to give you.

Would you say this is kind of a reasonable kind of indicator of an improving health of the overall portfolio? Or is it just too choppy to kind of come to that type of conclusion?

I think we feel confident that that number is continuing to come down because our tenant base is just getting healthier.

John Guinee, Stifel Nicolaus.

Jerry, nice quarter. Tom, George, also. Critical sort of softball question for you, you look at your portfolio now, 39% CBD Philadelphia, 19% Radnor. And you still have this God awful, value office logo with a ribbon glass building from the late 70s. When are you going to change that?

We are actually looking at potentially changing the logo in the next couple quarters.

Then second, the tough part right now, and a lot of us probably never thought we'd be saying this, is that you have a tremendous amount of cash on hand and the buying environment is very, very difficult given that most of your competitors are borrowing 65%, 75%, 85% LTV off a floating rate. Where do you see the investment opportunities which you clearly need to get done to hit your guidance for 2015?

Good question. There's no question that the acquisition environment remains very challenging. To wit, the best evidence of that, if you're having a hard time buying in some markets, you sell. So, we've been really accelerating the pace of our dispositions, I think, with some fairly good success.

We do have a number of acquisition opportunities in our pipeline. Again, we typically tend to look for things where there's an opportunity for us to add some value to the process. And at this point, we've really kind of reassessed our entire pipeline and even, in anticipation of the call, have kind of held our guidance target where we think it will be at this point and see what the next really next quarter brings.

But we are actively looking in a number of the key markets that we've targeted for growth, really Austin, parts of Washington, DC, as well as the Crescent markets and CBD in Philadelphia.

And just the obvious question everybody has to ask is have you thought about a share buyback or increasing the dividend?

We certainly keep both of those topics on the agenda and I think as we've talked before about increasing the dividend, one of the real key highlights of the Company is that our CAD payout ratio continues to improve. And even with this reduction of $0.03 in our range, that's really driven exclusively by us being more aggressive and more successful on our 2016 early renewal program.

So, the capital spend rate that we have programmed appears to be very much in place. And I think we'll position the Company for looking at that dividend question in the not too distant future.

Brendan Maiorana, Wells Fargo Securities.

Jerry, I did want to spend a little time just asking about the balance sheet, or Tom. Maybe sort of from the opposite end of the way John was asking about it. But you guys have done a really nice job bringing leverage down. Debt to EBITDA is now 6.5 times. But you've got some spend on the development pipeline that is to come.

And you've done a nice job growing the NAV or focused on growing NAV over the past couple of years. But for a variety of reasons, I think your share price is now below NAV, so it'd be challenging to issue equity to grow.

Do you think about maybe just stopping the acquisitions that are out there? Because if you sort of run out the capital plan and you did the $250 million or $235 million of acquisitions, you could get to the point where the debt to EBITDA numbers could move higher, even if it were temporary, because you've got this development spend which would be on non-income producing assets for a little bit. So, how do you sort of think about managing the balance sheet in the environment with where the share price is?

Brendan, great series of questions in there. I think first and foremost, we are pleased with the progress we've made on the balance sheet. But as I think we articulate on every call and in every investor meeting, our targets remain below where we are today.

We do anticipate, as we talked about on our last call, that our EBITDA multiple will increase over the next several quarters, primarily until FMC comes on line and generates revenue and the Encino Trace project leases up and is ultimately contributed to our joint venture. So, we're aware of that sensitivity.

The stock price being where it is below NAV, and it was below NAV for a long period of time as we were retooling the balance sheet. And I think we've always used one of our best sources of capital and NAV accretion is by selling assets that we don't think will present great growth opportunities for us going forward.

And I think that's one of the reasons why we've been so aggressive in pushing the sales of some of these assets in the last couple quarters and we continue to do so.

So, I think from a balance sheet standpoint, I think one of the operating predicates is that we're not going to leverage up the balance sheet. We do think that now is a good time to continue to push our disposition program.

We will continue to ferret out opportunities to try and grow the NAV of the Company. And that's part of our business plan, but certainly to the extent that we don't find those opportunities that we think are valuable, from an NAV and from a growth standpoint, I don't think you'll see us proceeding with those.

Are those opportunities, is it more important to kind of protect the balance sheet and the ratios, as opposed to maybe finding, if you found a good acquisition opportunity that was out there, but that could be accretive to NAV, but it might hurt the balance sheet, would you be less willing to do that or unwilling to do that investment?

I think we've said that in the past. That's why we say on every call that a driving predicate of our company's business plan is continuing to lower leverage.

And just a quick one for Tom or George. So, the CAD reduction, I get it. I think you guys said that you're doing more early renewals or '16 renewals. But it looked like the spec leasing square footage was about unchanged in terms of leasing. And your TI dollars are kind of unchanged.

So, I was sort of unclear as to how the $0.03 reduction CAD would come about given that it looks like the leasing plan is sort of the same as it was before.

I think it has more to do, Brendan, with the '16 and beyond renewals coming into '15 than it does with '15 leasing capital from either a volume or a pricing perspective increasing.

Jamie Feldman, BofA Merrill Lynch.

I guess my first question is sticking with the sensitivity of guidance to acquisitions. Can you guys talk us through if you weren't able to execute on some of these acquisitions that are in the guidance what you think it would do to your range?

Our guidance range is predicated low end to high end on meeting our acquisition guidance or not meeting it. So, Tom, amplify if I'm wrong. But, I think the expectations we don't meet our guidance on acquisitions were the $1.40.

I think we're still looking at the low end of our guidance if we don't get those acquisitions done.

Focusing on Washington, DC and the land, just kind of bigger picture, Jerry, how are you thinking about expanding into the District itself? And then what competitive advantages you think you may have in what is already a very competitive development and office market?

I think from a competitive advantage standpoint, we have an operating team that's been in that marketplace for well over 20 years and has done a very good job continuing to build the Brandywine franchise. Very extensive broker relationships, political contacts, relationship with other development companies as evidenced by our transaction with the Shooshan Organization.

But even given that, I think you've seen us move very pragmatically over the last several years and make sure that we find the right spot opportunities. I think in this particular piece of ground that we acquired from the Akridge Companies, we felt that that submarket was poised for a higher level of growth than maybe some of the other submarkets in Washington.

We certainly felt that our targeted return levels [are] achievable return levels on the ground up development. We're [far in excess of] what we could buy, achieve from buying an earning asset.

So, I think from an infrastructure standpoint, I think we have a lot of confidence in our team down there. We also have confidence in our company's philosophy and capacity to work with other development companies to get the right result for our company. Again, as evidenced by the transaction of 4040.

And I guess a follow up on that, what's going to be different about operating in DC versus the suburbs? What do you think you'll need to change?

I'm sorry. I'm not sure I'm following, Jamie.

Just that, to be more active in the actual, within the District market, as opposed to northern Virginia.

I think in terms of what we've been doing is actually spending a lot of time in the District looking at a lot of opportunities. So, I think that will continue.

I think in your chair you don't see the evidence of all that work and mining effort because we haven't really gotten transactions across the table, primarily due to pricing and what we thought the forward growth rates were.

But I think you'll see us continue to be very aggressive in both operating within the broker network, the political network and the code-development network in Washington, DC and the District itself.

Gabriel Hilmoe, Evercore ISI.

Jerry, just on 1900 Market, it sounds like Blue Cross may be consolidating some space and taking a few floors there. I know Cozen has a move-out this year, but can you just talk about the timing of the Blue Cross lease and when it comes in given the redevelopment that's going on there?

I sure can. We do not really have a practice of announcing transactions until they're actually completed and coordinated with our customers. So, the press release was a bit premature, both in terms of timing and content.

What I can tell you is that Independence Blue Cross and Brandywine are in very constructive advanced discussions on trying to create a fairly large base of operations for Independence Blue Cross in the building which sits across from their headquarters building.

That transaction is well advanced and would expect that if successful we'll be making a joint announcement in the next 30 to 45 days.

Just one more, just on 4040 Wilson, with the garage essentially done, can you talk about the pipeline of activity there? Just given George's comments on [Nova] feeling a little bit better. I know there aren't any serious deals out right now, but how deep do you think the potential demand is for that site?

The demand is, I hate to say it's almost a revolving door. But there seems to be an ongoing level of prospects that come through the property. The secret sauce is getting someone to really advance their discussions and tours and romancing to the point they actually get a lease done.

But even as of yesterday, our team met with a fairly large prospect. So, there's good ongoing activity. I think the challenge that John Shooshan and his team and our team face is finding the right tenant, the right size, kick the building off at our pro forma rent.

So, I think we continue to be pleased with the work our partnership is doing in terms of sourcing activity, but I would say it's fair to say the partnership is a bit frustrated that it takes so long to get to decision points with the number of tenants.

So, activity pleased, getting across the finish line, I think there's a level of frustration, but that's mitigated a bit by the continual adding into the queue other prospects.

Craig Mailman, KeyBanc Capital Markets.

Jerry, I was hoping you could talk a little bit more about FMC Tower and the leasing there. Last quarter, it sounded like maybe we could get something signed by this quarter. Just curious, have any of the prospects fallen out that maybe you thought would hit this quarter? Or is it just taking longer to negotiate?

I think more the latter. I think we continue to see some very good constructive conversations, negotiations with folks in the pipeline. The same thing for Encino Trace. We certainly recognize that as we go into these earnings calls we want to make as many big leasing announcements as possible. Unfortunately, we don't always control when tenants want to sign leases.

But I would say that, Craig, for both FMC Tower and Encino Trace, we have a number of very good prospects. We are pleased with the level we're seeing. We're pleased with the content of those conversations. But it's always hard to say we'll have something done by next Tuesday.

In Encino Trace, we're very confident we'll be getting some more things done in the very near term. With FMC, some of these tenants are larger in scale. They take just longer to make decisions. And I think on FMC, as we've articulated from the very beginning, that building is of such a scale that the real opportunity, I think, comes when tenants can actually start to see the building really start to rise. We can actually start to do some construction tours. That really accelerates the discussion.

But, we are very happy with the level of activity we're seeing on both buildings, as well as on 1900. So, we're mindful of the fact that we need to get those transactions across the finish line. We know that they tend to be big bellwether events for our company and for people who follow our company. So, there is an ongoing sense of urgency to get some leases actually executed.

And then, in the past you've talked about FMC as a potential joint venture candidate. You guys go out and buy some projects for the backfill, the development pipeline for future projects. Is that still on the table as a potential transaction?

I think everything's still on the table. I think we're right now focused on improving our value proposition by finalizing the residential program as well as getting some more office leasing done.

But certainly in this type of capital marketplace, I think, at least we are, I can't speak for every company, but we should keep a lot of options on the table. There's a lot of capital looking for very high quality investments.

So, we're not saying that we will do a JV on that project by any stretch, but we continue to entertain possibilities. And our leverage position, from a negotiating standpoint, on discussions with FMC, particularly on the residential side, seem to be getting better as we get closer to the delivery timeline.

Just on the projects you guys kind of bought this quarter, where are you guys on the entitlement process, in Philly and Austin? How long is that going to take?

We anticipate probably about a year to get entitlements perfected. We do not need a zoning change on either one of those sites. So, the entitlement process really is fairly streamlined. And really just a matter of us finalizing what we want to build there.

Which was, frankly, a very key part of how we underwrote those assets. I mean, both assets are income producing for the company today. And really represent land acquisitions with existing parking on them or generating income.

On the 618 Market Street project, that's a CMX-5 zoning so it can do a fairly high density development. We underwrote that acquisition really on a land price per FAR foot. Very similar to what we did down at the Colorado acquisition in Austin, Texas.

So, probably about a year to go through the approval process. But again, zoning is in place for both of those sites consistent with what we want to do. It's a matter of us going through the design development process to finalize our approach on what we want to build.

And as I mentioned, a key construct of what we're doing there is making sure that we do, in fact, lock away FMC, Encino Trace, 1900, and other leasing exposure through the Company, so we take a very balanced approach to taking on additional leasing [risks] for new developments.

You said you guys have some stuff in the acquisition pipeline. How much of that pipeline is projects like this that may be thrown off a current yield, but are more kind of land plays for future development versus longer term core holdings?

I don't have a percentage for you, Craig. But these are solid types of acquisitions for us where we can create a future growth opportunity while we're getting some income producing revenue from it.

We're certainly looking primarily for value-add acquisitions where through leasing and minor renovations we can move forward. But certainly wouldn't preclude us from being opportunistic in how we look at other acquisitions, whether it be earning sites like 618 and Colorado or other land acquisitions.

Jed Reagan, Green Street Advisors.

With the success you've had so far this year on the disposition program, just wondering if you're considering increasing your target goals there beyond the $180 million guidance? And then on the pricing execution, it sounds like that's come in a little bit better than expected. Was that driven mostly by the Oakland sale? I'm just curious if you had a CAP rate you could quote on that.

Jed, we have not raised our disposition target as of this call. I'm not precluding that we would not do that on our next call. But right now, we have, as I mentioned, a number of transactions that we closed, some under near-term agreements, some under negotiations.

So, right now, we're really focused on getting all of the transactions that we have a high degree of visibility on done by the end of the second quarter. At that point, we'll take a look as to whether it's time to reload.

We had a number of assets in the pool, of which Lake Merritt was the largest, that had CAP rates in the 5% to 5.5% range, which I think was a key driver in pulling down our blended sale proceeds, blended CAP rate on sale proceeds.

On the recent land acquisitions, just wondering if those are development opportunities you're kind of thinking about as potentials for this cycle or if you're really banking more for the next cycle. And then how much density do you think you can achieve specifically at the Philly CBD and Austin projects?

I think given, maybe follow up on Craig's observation, I mean the zoning's in place for these. We'll commence the design development process and have these projects in a position where we are ready to really aggressively market them, probably in the next 12 to 18 months.

So, I sure hope it's this cycle. But I think from a risk assessment standpoint, we certainly, given their existing uses, we've hedged our bets by making sure that we have earning assets.

In terms of the Philadelphia acquisition, we could essentially do 600,000 square feet plus mixed use, but again, we have not defined exactly what that is. We really bought that asset, it's well located. It really is a very critical piece of real estate in what we hope will be a continued emergence to the Market East corridor, which is primarily retail and amenity-based.

You saw the announcement via our local team at PREIT, as well as (inaudible) on the fashion outlet center at The Gallery, which is going to be close to a $570 million retail development along Market Street. There are a few other retail-based projects underway.

So, Market East has a real opportunity to become a very viable contributing neighborhood to the continued success of Philadelphia. This asset sits right at a key intersection there. So, we basically bought a garage. We'll run it, we'll improve operations. We know we have the zoning in place. So, we'll be very opportunistic both in terms of timing, of what we want to do there, as well as its ultimate use.

And then just really quick, on Austin, how much density is possible there, you think?

Well, we think there we can do a couple 100,000 square feet. That office sizing will be predicated really upon the amount of structured parking we want to build. So, we're going through that assessment process right now.

And then just a last one, quickly, on DC are you guys seeing any traction on net effective rents? It does sound like activity is picking up. But are lease economics improving at all or is it still too early for that?

I think one of the things, and George touched on it, and I know we've had a lot of discussions over the quarters on this, I mean, we made a conscious decision to invest a fair amount of money into our Dulles Corner development.

What we saw on that was that positioning that product as a new product in the marketplace we were able to effectively move rents from the mid- 20s to the low 30s, with very much on pro forma concession packaging and capital dollars allocated to each deal.

So, in our mind, that was a clear example of our management team's acumen in kind of getting ahead of the vacancy curve there, using that period of time to invest money in the property, and really dramatically change the NOI growth trajectory of that property versus the marketplace. And we, frankly, saw the same exact thing over in our Rockville Officer Center over in the Maryland 270 corridor.

Not very different than, frankly, I think you'll see, Jed, the results on the 1900 Market Street. So, clearly, I think as we go through the buy or sell decision, when I say buy I mean in terms of invest, in our existing asset base, we very carefully look at what we think the incremental return boost would be on any asset that we are considering selling or repositioning.

And to the extent that we don't believe we can get a very effective growth in rents out of a repositioning strategy, we tend to sell that asset. That's how I viewed earlier as a non-economic and non-cultural growth generators for us.

Michael Lewis, SunTrust.

Most of mine have been answered, so I'm just going to ask one. And it's about managing development risk and exposure. So, you bought a few sites recently and assuming you do have demand and can go ahead with those this cycle, what's kind of your appetite for how a big a pipeline you're comfortable with, whether it's in terms of how many balls you can juggle at one time? Or kind of managing risk in terms of percentage of gross asset value or any other way that you look at it?

Michael, I thought I tried to touch on that earlier, but let me be clear. Where we are right now, which is the leasing activity at FMC, delivering Encino Trace leased, and locking away substantially the leasing exposure at 1900 Market. That's pretty much our appetite in terms of risk-based speculative leasing and development projects right now.

So, that's why a number of these other projects fit in very nicely to that philosophy because they really won't be ready to be deployed until we have already harvested the growth opportunities out of those three primary projects.

So, we don't view ourselves doing a significant capital allocation to development, unless we tend to the existing exposure we have, and when we deploy money to future development, we have significant levels of pre-leasing and a lot of visibility on the subsequent pipeline behind that anchor tenancy on new projects.

Michael Bilerman, Citigroup.

Manny Korchman's on the phone with me as well.

Jerry, I wanted to follow up on John Guinee's great question on the logo. And in the sense as you're thinking about changing the logo in terms of who the Company is and defining who the Company is today, and as you think about your valuation and where the stock is, I'm just curious as you go through that exercise, how much time you're spending in terms of a strategic review about what the Company should be?

And had you give thought about, we've seen a lot of REIT spin-offs and mergers and sales, I guess, help me through whether there's any sort of discussion at all about a broader strategic look at the entity as you're changing the logo?

I think the board is always reviewing strategically where the Company wants to go and that's been a key predicate of how we've been really shifting the last several years into a much more town center and urban-based company. So, that really came out of strategic review of what we want the Company's growth profile to be going forward.

In a broader sense than that, we're always constantly evaluating what's happening in the capital markets. We certainly track everything that's going on from a capital market perspective. Very mindful of the competitive capital marketing initiatives both in the public and private space.

So, I would just tell you very clearly that this company is always looking at down the road where we want to be, how we want to constitute ourselves, what we want our growth drivers to be. And using that, always viewing that within the framework of what we think our overall capital market conditions are.

If you thought there was two Brandywines within the entity, what percentage would sort of the urban, that you'd want to hold, versus the other piece, whether it be suburban, pieces of suburban, that you think could be weighing down your multiple or your CAP rate disproportionately relative to you core urban type of portfolio?

Certainly we have targeted, we get almost 70% of revenues today from urban and town center markets. And I think as you see us taking a look at our capital deployment approach, you're seeing much more dollars focused in those core areas.

As a corollary, I think you've seen a tremendous decrease in our exposure to a number of markets that, we want to be careful because we're trying to sell assets in markets. They're markets that aren't, they're not dying on the vine, but they're markets from Brandywine's perspective, don't necessarily generate the velocity of growth that we're really looking for, or the capacity to have the highest quality product going forward that meets today's and tomorrow's demand for tenants.

So, you've seen us exit very clearly a strategy where we've significantly reduced our exposure to New Jersey down from a high of 25% or 30% seven or eight years ago to now where it's well down below 4%.

One of the sales that was part of our commentary earlier today is the complete exit from suburban Wilmington, Delaware. We completed a spin-out of assets where we think we harvested full value in California.

So, we are very much focused on getting our portfolio to have a growth trajectory and a composition that the capital marketplace will view as much more valuable. And then the capital marketplace will decide what the best approach for us to take in terms of optimizing value to our shareholders is.

But do you sense any urgency to act in the near term? Again, as you go through this change of what your company looks like, do you feel like there's an urgency to potentially do something more strategically to advance those goals versus sort of just waiting it out and get where you're [trading]?

There's always a sense of urgency I think, whenever you're involved in an operating business. So, from my perspective, without urgency, there's a sense of complacency. And we certainly don't have any complacency.

I think one of the reasons we've really accelerated the dispositions this year are the fact that we view the market now as being incredibly ripe for buying a lot of properties we want to sell, both fueled by the wall of equity capital, the amount of money that's been raised in both PE and funds, as well as those equity investments being augmented by very low interest rates and ample bank financings.

So, I think that sense of urgency's incumbent upon any management team to make sure they take advantage of market windows. And that's exactly what we're hoping to do here through our disposition program.

If we look at the CAP rate success versus expectations, what do you think was the driver of such a big spread between where you thought sales would happen and they did? Was it a mix of buyers? Was it a mix of assets? Was it just conservative or faulty planning on your part?

Conservative and faulty aren't necessarily the same. But I think as we've always indicated, we build our financial model based on an 8.5% disposition in CAP rate. I think as the market has seen for the last couple of years, we have delivered our sales below that CAP rate. I don't recall the exact number last year, but we were probably 100 basis points inside of our targeted disposition rate of 8.5%.

So, I think the great success we've had thus far was really driven by the specific assets that buyers wanted to buy. So, we had a number of properties, that I indicated to an earlier question, that were in the, CAP rates were in the 5% to 10% plus range that kind of skewed down the overall CAP rate.

Going forward, we're going to be maintaining our 8.5% CAP rate assumption. I consider that conservative, not faulty. And we'll see what the market brings in all those different dispositions.

And there are no further questions at this time. I'd like to hand the conference over to Mr. Sweeney for any closing remarks.

Thank you very much for participating in this quarter's call. And we appreciate all the questions and the engagement. And we look forward to our second-quarter call later this year. Thank you very much.

Thank you. And this concludes today's conference call. You may now disconnect.