Brandywine Realty Trust (BDN) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Brandywine Realty Trust fourth-quarter earnings conference call.

(Operator Instructions)

Thank you. It is now my pleasure to turn the conference call over to Mr. Jerry Sweeney, President and CEO, Brandywine Realty Trust. Sir, you may begin.

Raquel, thank you very much. Good morning, everyone, and thank you for participating in our fourth-quarter 2015 earnings call. We certainly appreciate everyone's patience over the last 24 hours, and look forward to providing this update.

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, Vice President and Chief Accounting Officer.

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

So to start off, I think on both the investment and the operations fronts, we had a very strong year-end close, and have started off 2016 with solid execution across the board. Our 2015 dispositions, the sale of the Cira Square and the Och Ziff transaction that closed yesterday, have substantially completed our multiple-year portfolio line and strategy.

They achieved our goals of having a stronger forward growth profile, reducing forward capital obligations, significantly increasing our overall liquidity, and achieving our intermediate-term balance sheet of targets. All in all, we believe excellent results that really do position our Company as an urban town center operator and developer.

The sale of Cira Square will close by mid-February and enable us to harvest a significant profit-generated 20%-plus internal rate of return, de-lever and create financial capacity. That sale, as we had previously announced, it was for $354 million, about $410 per square foot.

With the Och Ziff transaction, which closed yesterday, we contributed 100% of our owned inventory in Richmond, Virginia, remaining off Toll Road properties in Northern Virginia, and several New Jersey and Pennsylvania suburban assets to a partnership with Och Ziff Real Estate, where Brandywine will retain a 50% interest and serve as a managing member of the joint venture. We will also remain overall asset manager of the portfolio. And these elements are consistent with the previously executed strategy of reducing our exposure to non-core assets.

The upshot of these transaction is that we have sold or transferred over $1.14 billion of assets, or 7.4 million square feet, in the last five quarters at an average 7% cap rate. This was a very important objective to position our Company for better growth.

Operating fundamentals, as George will touch on, continued to perform exceptionally well. Our pipeline of forward-leasing is very strong, and our potential build-to-suit pipeline remains very robust. Even given that though, there is no question that the recent fraying in the equity and debt capital markets could give the overall real estate markets an overall pause.

As such, our perspective was to accelerate value harvesting as quickly as possible, to make sure the Company is in exceptionally strong financial and operating position, just in case market volatility impacts the pricing or availability of near-term liquidity. The incremental sales, Cira Square and the Och Ziff transaction accomplished those objectives. They significantly improved the Company's defensive posture, while achieving all the benefits of a more streamlined, higher-growth portfolio, supported by a much stronger balance sheet.

With that brief overview, we'll take a look at 2015 business plan results and look ahead at 2016. George will then discuss our 2016 leasing activity. And then Tom, of course, will review our fourth-quarter financial results. As I mentioned we are very pleased with 2015's performance. We achieved our operating goals and made significant progress on a variety of other fronts.

On the operational side, we exceeded our 2015 key targets, including spec revenue, retention, lease term, GAAP and cash mark-to-market. We leased over 4 million square feet during the year, consistent with leasing activity over the past few years.

We had over 270,000 square feet of positive absorption, and Brandywine occupancy levels continued to outperform the markets in which we do business. We ended the year at 93.5% occupied and 94.4% leased, up 210 and 110 basis points, respectively, from year-end 2014 levels.

Our GAAP mark-to-market was 13.4% for the quarter and 8.8% for the year, exceeding our targeted range. Our tenant retention rate for the quarter was 80.6% and 77% for the year, well-above our original business plan forecast of 64%. Our GAAP and cash same-store numbers for the year were within our business plan range at 3.6% GAAP and 3.4% cash.

Our average lease [duration] for the quarter was 9.1 years. For the year, it was 7.8 years, exceeding our original business plan of 7.5 years. Average annual rental increases on leases executed during the year was 2.5%, consistent with the past couple of years.

Leasing capital came in at $2.42 per square foot per year, well-within our targeted range. So the upshot is that our overall approach of lengthening lease terms, reducing forward rollover, generating positive same-store growth and maintaining capital spend within our targeted range, were all achieved during 2015.

Looking at our balance sheet, clearly the year-end reported numbers are superseded by the recent activity. And the recent activity, as I touched on, has significantly accelerated the execution of our balance sheet strategy. On a pro forma basis, our investment and financing transactions have resulted in the following benefits. They've reduced our 2015 year-end net debt to EBITDA of 7.1 down to about 6.4.

Given the related debt payoffs through the additional liquidity, that reduced our weighted average cost of debt down from 4.9% to 4.7%. They provide sufficient cash on hand to enable us to pay off the 2016 bonds of approximately $150 million due April 1, 2016. And after all the debt payoffs, will leave us with a net cash balance of $375 million, with zero balance on our $600 million line of credit.

The remaining cash will be used to fund our remaining obligations with FMC and the pre-development costs on our other development pipeline projects. We anticipate having a cash balance at the end of the year between $150 million and $175 million. Clearly a great result for the Company, and as indicated, positions the Company extremely well for whatever impact future volatility may have. As we mentioned before, achieving our intermediate objective of a 6.5 EBITDA target, which was targeted for year-end 2017, has been accelerated. And we would certainly expect continued EBITDA improvement through both internal growth and development lease-up, as well as reaping the benefits of a higher-quality portfolio.

As I mentioned, on the investment front, we've sold over $1.1 billion at an average cap rate of 7%, and during the year acquired $189 million, of which most represented the but out of our joint venture partner with IBM at the Broadmoor complex in Austin. In taking a look at the Och Ziff transaction, that did consist of a series of transactions with affiliates of Och Ziff Real Estate that resulted in conveying 58 properties containing an aggregate of 3.9 million square feet. The sales transaction valued at portfolio at $398 million or $101 per square foot, and about a mid-8% cap rate.

We -- wound-up as disclosed in the press release -- sold the fee interests, and an affiliate of Brandywine will retain a 50% interest in the leasehold venture that we're currently valuing at $26 million, which consists of equity of $15 million and pre-funded cash escrow balances of $11 million. Brandywine received approximately $353 million of net proceeds from this transaction, after costs. From an overall standpoint, though, the combination of Och Ziff and Cira Square will generate $707 million of cash proceeds. So a good result for the organization.

As indicated in the press release, we updated our previously issued 2016 guidance range to $1.23 to $1.30 per share, primarily reflecting the acceleration and the execution of our increased dispositions. Offset by stronger than originally anticipated operating performance that George will touch on.

Key assumptions in our plan for 2016 is that, including the Post Office and Och Ziff transaction, we are increasing our 2016 disposition guidance to $850 million, which is a $400 million increase over our original plan of $450 million. To be clear, after the execution of the Post Office transaction and Och Ziff, we are still anticipating an additional $80 million of dispositions occurring, with $40 million in the second quarter and $40 million in the third quarter, at an average cap rate of 8%.

On the operating front, we continue to make great progress. Spec revenue, as revised for the Och Ziff transaction, has been increased $4.6 million or 23%, and is already 55% executed. We have increased our mark-to-market on a GAAP basis to 7% to 9%, from 5% to 7%, and our cash from zero to 2%, from minus 1% to 1%.

Our financial metrics are much stronger. We are now targeting a year-end 2016 net debt to EBITDA of between 6.3 and 6.4, and a net debt to GAV of 38%. These transactions and our operating performance in 2016 put us well on the track to reduce our overall debt levels to our long-term target in the low 30% range, and our EBITDA target to be below 6 times or below in the next seven to eight quarters.

Some quick notes on development projects. Our joint venture with Toll Brothers, called the Parc at Plymouth Meeting, we delivered 100% of those units and are currently 76% leased. We expect a stabilized return of 7.7%, up from our original forecast of 7%.

Our 1919 joint venture with CalSTRS and LCOR in Center City, Philadelphia, that project is on budget and on schedule. We signed an additional lease, so the office and retail component is now 100% leased.

The building topped off in October on schedule. And the tower's facade window wall system is substantially complete. The first set of units are on schedule for delivery in March and April, and substantial completion is on target to occur by the end of June.

Our renovation of 1900 Market is substantially complete. The AmeriHealth division of Independence Blue Cross moved into the first 113,000 square feet of the targeted 228,000 square feet of occupancy. That project remains at 89% leased, with a strong pipeline of overall transactions. And as I touched on last quarter, we still are projecting an overall investment base below $200 per square foot, and a stabilized frame clear return of over 11%.

FMC Tower continues on budget and on schedule. Curtain wall through the entire office component is complete, with tenant finish work actively underway and running slightly ahead of schedule. The residential core is rising, and we anticipate office occupancy occurring on-plan mid-summer, as well as the residential units being available for occupancy in late summer or early fall.

On the office leasing front, we've made excellent progress since our last call, and anticipate shortly announcing a series of leases aggregating more than 100,000 square feet, which would bring our pre-leasing percentage to over 76%. Behind that, we continue to work with a very healthy pipeline, and anticipate more leasing progress prior to opening up our doors.

The residential component, which is being marketed under the AKA brand, is gearing up for its launch. Pre-marketing efforts have been very encouraging, and we expect to be able to have more information to report to you on the next call.

So our key objectives remain growing cash flow and net asset value. The transactions we executed are a significant and compelling step in the right direction, and will be translated into improved operating results in 2016 and beyond. Due to our increase in spec revenue, which has been driven by additional projected leasing, our 2016 CAD range was revised to $0.80 to $0.90, or about a 70% payout at the midpoint.

That is a reduction from our previous range of $0.85 to $0.90, but still a very well-covered dividend, and the incremental capital we're incurring is all good news, due to additional leasing. So from our perspective, the trend line remains very encouraging. And a narrowing of the gap between FFO and cash flow reflects our portfolio reaching stabilization, our accelerated early renewal program, continued control on capital, and much more importantly, the positioning the portfolio for better growth for our disposition efforts.

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

Thank you, Jerry. Another busy and productive quarter. We leased over 900,000 square feet of space during the quarter, and over 4 million square feet for the year. Leasing activity remains robust in all of our markets. The pipeline, excluding development projects, stands at 2.4 million square feet, with 625,000 square feet in lease negotiations.

We remain well-leased in CBD Philadelphia, outpacing the market by 710 basis points. We continue to see double-digit leasing spreads on a GAAP basis, and near double-digit on a cash basis. Capital has averaged $2.31 per square foot per lease-year, on a weighted average term in excess of seven years.

The greater Philadelphia region's overall outlook is encouraging. Unemployment declined in the fourth quarter to 5.4%, its lowest since 2008. Positive absorption occurred for the third consecutive quarter. And roughly 25% of the leasing activity during 2015 came from outside the market.

The Crescent markets continue to operate in a similar strong fashion, where we outpace market vacancy by 400 basis points. The strength of these markets continues to shift deal flow toward King of Prussia. Overall suburban Pennsylvania absorption for the year was in excess of 500,000 square feet, its highest level since 2007.

Turning to Metro DC, we posted our third consecutive quarter of positive absorption, raising occupancy to 87%. Job growth was especially strong during 2015 in Washington Metro. Over 67,000 net jobs were added, which was the region's largest gain in a decade. Regional unemployment is 4.3%.

And for the third consecutive quarter, Northern Virginia, suburban Maryland and the District each recorded positive absorption. Flight to quality continues, as tenants focus on efficiency, amenities and access to transportation.

2015 was a record year for Austin office market, with 2.1 million square feet being absorbed, and 75% of that occurring in the northwest and southwest markets. Austin rents set new milestones during the fourth quarter, and the overall vacancy rate of 9.6 is the lowest since the dot-com bust of 2001. Our portfolio continues to perform well. Rents within our DRA joint venture are projected to increase 14% to 16% on a GAAP basis, and 7% to 9% on a cash basis.

In terms of the updated 2016 business plan, with the closing of the Och Ziff portfolio, our original leasing plan has been reduced by 769,000 square feet and $7.5 million. The remainder of the company, however, has generated an incremental 314,000 square feet of leasing, with $4.6 million of associated spec revenue. This results in an updated spec revenue target of $24.9 million from 1.8 million square feet of leasing.

That plan is currently 55% and 38% complete, from a revenue and square footage perspective. And these updates are all reflected on page 7 within the supplemental package. One deal of note from this incremental leasing activity is a program 200,000 square-foot renewal by IBM in Austin. This renewal represents one of two buildings expiring in 2016. We still expect the second building to be vacated and subsequently redeveloped.

The leasing spreads on this renewal have enabled us to raise our GAAP target by 200 basis points, to a new range of 7% to 9%. All of our other operating metrics have remained unchanged from previous guidance. Our leasing teams also remain focused on reducing forward rollover exposure -- for 2016, approximately 1.3 million square feet -- where 7% remains. Five tenancies account for nearly 50% of that roll, and we are in current negotiations with three of them, and have already backfilled one of the two known move-outs.

In 2017, approximately 2.4 million square feet or 14% expires. Again, there are five tenancies accounting for half of this space, the largest of which is IBM in Austin at 620,000 square feet, and Wells Fargo in California at 335,000 square feet.

So to conclude, we are excited about the activity levels in our market and our regional leasing teams' abilities to continue capturing market share. The 2016 business plan is off to a good start, and we look forward to our continued momentum in achieving its results. At this point, I'll turn it over to Tom.

Thank you, George. Our fourth-quarter FFO totaled $69 million or $0.39 per share. Some observations for the fourth quarter were that same-store fourth-quarter rates were 5% GAAP, 4.1% cash, both excluding net termination fees and other income. We have now had 18 consecutive positive quarters for GAAP, and 14 for the cash metric.

G&A increased to $7.9 million, $1.3 million above our guidance. That is primarily due to incurred capital markets activity of over $0.5 million, and higher-than-anticipated professional and personnel costs. Termination fees were $2.2 million, $1.2 million above our projections. As projected, FFO from our unconsolidated ventures totalled $8.1 million, above our budget. Was primarily due to some termination fees at Allstate.

Our fourth-quarter CAD totalled $23.1 million or $0.13 per diluted share, representing 115% payout. That number is below where we expected to be. We incurred about $30 million of revenue-maintaining capital, primarily due to some larger-than-anticipated tenants receiving their requested improvement allowances. In addition, we had $8.1 million or $0.04 a share of a one-time non-cash, new-market tax credit.

So for the year, our 2015 earnings included $20 million of non-cash tax credit income that will not be recognized on a go-forward basis in 2016 and beyond. For 2016, FFO -- in prior years we have taken the approach to report FFO under the NAREIT definition and highlight certain one-time capital market activities that are included in our reported FFO. In 2016, we are reporting our FFO without the costs associated with the retirement of the Cira Square and Garage mortgages, due to the material amount, approximately $0.38 per share of dilution that we believe will not result in our FFO being comparable to prior and future periods.

Looking at the first quarter of 2016, we note the following. Property level operating income will be about $80 million. G&A expense, consistent with prior years, our first quarter will be $9.1 million and the full -- which is always front-loaded -- and the full year will be approximately $29 million. Other income, we expect to be $0.5 million, with a full year of [$2.6 million]. Term fees, we expect $1 million in the first quarter, and a full-year estimate of $3.1 million.

Interest expense will be $25 million, which is below the prior incremental fourth quarter, due to the repayment of the Cira Square and Garage mortgages. FFO from our consolidated ventures should approximate $6.5 million, as the residential joint ventures of Plymouth and University continue to improve, offset by the Coppell sale of the joint venture with IBM.

General assumptions-making for the 2016 guidance includes $850 million of net sales -- those sales will be at the end of the second and third quarters -- and an 8% cap rate. We have no speculative acquisitions in our current pipeline. 177.4 of weighted average shares on FFO. We still have FMC generating between $8 million and $10 million of operating income commencing 3Q 2016.

Upon maturity, we will pay off the 2016 bonds for [$141.9 million], and that yield is currently at 6%. We'll do that at par, with cash on hand.

We have contemplated a refinancing of Two Logan. Currently, that mortgage is at 7.5%. We right now are contemplating refinancing that mortgage at roughly 4%. We may end up paying it off, however, and we're working on making that decision. But the model right now has it being refinanced.

On our capital plan, we project 2016 CAD of $0.80 to $0.90, reflecting about $37 million of revenue-maintaining capital. The decrease in CAD range is primarily due to additional leasing activity for several early terminations, and improved leasing targets. For 2016, looking at our capital plan, the main proceed sources will be $100 million of cash flow after interest, including the MPO and Garage of $180 million. $850 million of speculative sales.

And $15 million when we finance Encino Trace II, which is our joint venture project that we contributed in December to our DRA Austin joint venture. In terms of uses, we will have over $220 million of development pipeline, the majority of that being FMC. Aggregate dividends of $113 million.

We expect to spend about $28 million in our joint venture investments. Revenue-creating capital will be about $40 million. And we will repay the bonds for $150 million. And we have already paid off the Garage and IRS mortgages on January 14 of this year.

Based on the plan, as Jerry mentioned, cash will be between $150 million and $175 million. And we project our debt to EBITDA by the end of the year improving to 6.3% to 6.4%. In addition, our debt to GAV will approximate 37%. I one now turn the call back over to Jerry.

Tom and George, thank you very much. Just to quickly wrap up, I think we're very happy with the way 2015 closed out. And 2016 plan is really off to a very accelerated and excellent start. So we think all the activities thus far have really created a strong continuation of our drive towards growing asset value. The operating platform continues to improve, is more refined and much more focused on growth.

As George touched on, we have [consistent] forward-leasing momentum across the board in all of our markets. Our individual market out-performance continues. Our balance sheet is in incredibly good shape.

With all the debt pay-down, the pre-funding in place for our development pipeline, and looking at a large cash balance at the end of the year, with nothing drawing our line of credit, we think, really does position the Company well for whatever the market presents.

So with that, we'd be delighted to open up the floor for questions. As we always ask, in the interest of time, if you limit yourself to one question or thought, that would be very much appreciated. Thank you.

(Operator Instructions)

Your first question comes from the line of Gabriel Hilmoe with Evercore ISI.

Thanks. Jerry, just on the Och-Ziff transaction, just wondering if you can provide a little bit more color on how the venture piece came about? And maybe if there was an opportunity to fully fill out that portfolio? And then just maybe what kind of a longer-term plan is for the JV going forward?

Gabe, certainly. And look, that's a great question, certainly one that we spent a lot of time thinking through. I think as we assessed it, and certainly one of our overriding themes, was to harvest as much value out of our existing portfolio that we deemed to be non-core, as possible, as quickly as possible. To make sure that the balance sheet and the residual owned portfolio was the best it could be heading into kind of the mid- to late-stage point in the cycle.

When we took a look at our overall portfolio, including what wound up being contributed to the Och-Ziff transaction, you know, it's a large multi-state portfolio. Good assets, but in very illiquid markets. When you looked at it, over 85% of the transaction value was coming out of Richmond, off Toll Road in Virginia, and New Jersey -- so markets where there is a -- the opportunity to do larger transactions is fairly remote. So as we pulled together the portfolio, we were really focused on what was the best way for us to optimize value. And of course, when you put a lot of properties together that have a lot of tenants in a multi-market condition, smart real estate investors like Och-Ziff want to have some level of continued interest by the folks that know and own and have run those properties for a number of years.

So I think as we went through the algorithm, clearly a full exit would have been our preference, in order to achieve the pricing levels and the accelerated recovery of a lot of equity that we could use for other purposes, we realized that the best way to do that was to retain an ongoing interest in the portfolio. Certainly it's not as clean we would like, from a modeling standpoint. But from a real estate perspective, we thought it was a good decision, and it helped us achieve market pricing, accelerate the achievement of our strategic objectives of de-levering. And the structure, while complicated in some of its detail, did enable us to realize $353 million of cash proceeds, which, when you work through the math, was essentially 90% of full value today.

So as we look at the portfolio, we are a 50% partner in the leasehold. We had a smart real estate partner -- the folks at Och-Ziff Real Estate. It's a well-structured transaction, with significant cash escrows up in place to make sure this portfolio will be in an extremely strong competitive position going forward. Looking ahead, our perspective is that we think that we can, through our combined efforts, wring out some significant more value while Brandywine retains a very small economic stake in terms of dollars, but has some significant upside. We'll run this portfolio with a dedicated team, retain management on leasing. And certainly over the next three to five years, working with our partner Och-Ziff, focus on what the best exit strategy is.

But from our perspective, bottom line, it was an opportunity to significantly reduce our exposure to non-core, somewhat illiquid markets. And again, the overlay of that, with all the additional volatility in the market, we thought it was better to move quickly than to sell a lot of these properties individually. That enabled us to put money in the bank. And as you heard from George and Tom, it really does improve our operating metrics, and significantly improves our balance sheet.

So as we looked at it, it was a good blend of a transaction that accomplished our ability to harvest value, created an affiliation with a smart real estate partner, bring a lot of cash in the door to reduce our leverage levels. Totally bullet-proof the Company, from a cash proceeds standpoint, to fully fund our development pipeline, as well as maintain a very strong liquidity position. So when you run it through all of that business model, we thought that it was a good transaction to proceed with.

Okay. And then just a follow-up to that. I know you have a handful of other disposed programs for the rest of this year, and obviously you have been very busy. But when we think about getting into the end of 2016, is that's kind of -- after the sales are completed, is that the portfolio that you want going forward, and we shouldn't expect much more in the way of dispositions getting into 2017?

Again, I think it's a good question. As we looked at it, the combination of what we did in 2015 and this large transaction with Och-Ziff Real Estate, really substantially completes our repositioning strategy. So I think from here on out, it is fine-tuning, and just taking advantage of where we see spot opportunities to make money. As we look at it, we are completely exiting from a wholly owned portfolio in Richmond, we have completely exited all of the off Toll Road properties in Northern Virginia. We have our remaining exposure in New Jersey down to, frankly, to a handful of buildings. And our Pennsylvania suburban portfolio, we still have a few more properties to move out the door, but substantially, the platform is in place. So clearly, we think that positions us pretty well going forward.

Okay, thank you. I appreciate it, Jerry.

You're welcome.

Your next question comes from the line of James Feldman with Bank of America Merrill Lynch. Your line is open, sir.

Thank you, and good morning. Sticking with the Och-Ziff transaction, can you talk more about your longer-term thoughts on the JV assets? What's your thought about an eventual exit, and how long do you think it might take?

Well, look, certainly I think from both Och-Ziff's perspective and Brandywine's, we are in this to make money and to harvest additional value. I think the financing structure that was put into place looks at this thing -- a two- to five-year hold period. The transaction is structured to provide the partnership the opportunity to do individual or smaller portfolio sales during the process, as market conditions warrant.

So I think as we look it, it's a three- to five-year window. We think that there is some good upside in the portfolio going forward. And we think that, frankly, the math for us works well, given the fact that we've harvested so much cash up front. While we retain a 50% interest in the leasehold, as we walk through -- our actual cash equity is below that. So with the combination of the flexibility that was built into the initial transaction, I think Brandywine and Och-Ziff's immediate focus on now getting value created and realized, as well as our transitional role as a manager, will create generate some additional fee income. So we view this as a bridge to ultimate exit, as does our partner at Och-Ziff.

And then just my follow-up question. George mentioned the five tenancies comprising most of the -- half of the roll in 2016 and 2017. Can you give more color on those specific leases?

Sure. In looking at what we have remaining to accomplish in 2016, the IBM transaction that I mentioned in Austin is roughly 200,000 square feet. We have got a tenancy in King of Prussia for 100,000 square feet that we are in negotiations with right now. We have got a GSA tenant in both suburban Maryland and in Radnor that we're in negotiations with. We have had one already move out, but we have re-let that space through a Comcast expansion at Two Logan Square in Philadelphia. And so really the only known move-out was a 57,000 square-footer by Lockheed Martin in King of Prussia. That was a $7 triple-net industrial building that the team is working on backfilling.

In 2017 -- I mentioned the two big ones, IBM and Wells Fargo. And then beyond that, our next three largest, a tenancy at Cira Centre for roughly 90,000 square feet -- leases are out to that tenant right now. We have one known move-out in Newtown Square in the Pennsylvania suburbs for a 50,000 square-foot tenancy. And then a 50,000 square-footer in Radnor that we're trading proposals with right now. So really, when you look at it, five tenancies in each year. And really those are the only ones that are above that 50,000 square-foot line. So we feel good about the work we have accomplished thus far. Then, of what is remaining, we feel good about where we stand in current dialogue with those tenants.

Okay, thank you.

Sure, thank you.

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

Great, thank you. Nice job. A lot of hard work here. Can you just help us on a few basic things? If you look at your guidance, is it flat-lining or trending down a little bit? We would expect it to trend down, but give us a little help on that, quarter by quarter. Second, your pro forma NOI by major regions -- CBD, suburban Philadelphia Tollway, Austin -- once all these assets are sold. And then third, how does all of this affect the dividend in 2016?

John, this is Tom. I will take the first part of the question on just the guidance. As we look at the guidance, it's going to trend up as the year goes on, for two reasons. One is going to be, there will be some continued lease-up, so the operating platform in the same-store group will increase as the year goes on, steadily, but then we will also bring on FMC. So as we go through the second half of the year, as we've mentioned, we are bringing in about $8 million to $10 million of revenue, more back-weighted to the fourth quarter than the third quarter. There will be a continued progression of operating income on the whole portfolio. And then having FMC kick in during the second half of the year, with more of it weighted to the fourth quarter -- from an operations standpoint.

From a G&A standpoint, it will trend down, as I mentioned. $9.1 million will then trend down as the year goes on, to $29 million, and that is mainly due to the way some of our deferred comp is recognized. And then interest expense, while it's $25 million for the quarter, will trend down closer to $90 million as the year goes on, based on the interest expense we had being paying off in this first quarter.

John, it's George. In terms of NOI contribution, because both the IRS building and the Och-Ziff buildings were categorized as held for sale, our regional overview on page 9 and kind of the pie chart NOI schedules on page 12 are already post the IRS and Och-Ziff. So when you look at NOI, including our JVs -- CBD Philadelphia now at 33%, the Crescent market is at 21%, Austin at 11%. And as Tom mentioned, with FMC coming online, continued lease-up at Encino Trace, you will start to see a higher contribution level coming out of CBD and Austin.

And I think, John, the last part, in terms of the dividend, I think the numbers look solid -- the Board certainly evaluates that every quarter. One of the key issues they were focused on, and appropriately so, was working through the final parts of our repositioning sales strategy, getting down to the core same-store structure and see how that would perform. And certainly with the capacity of these recent transactions to really accelerate the debt pay-downs and dramatically improve both our balance sheet and our forward liquidity position. As well as all the great work our operating teams do on managing forward capital costs -- particularly those that are revenue-maintaining -- we certainly think we have a well-covered dividend today. And my expectation is that the Board will continue to look at that every quarter. I will say, having gotten these last pieces done in the last 60 days, I think, does create a very easy exercise for them to evaluate how the Company is going to look over the next couple of years, as they evaluate where our dividend growth should be.

Is there a need for a special in 2016 because of the EPS, I noticed, in your guidance?

John, at this point we don't expect to do a special dividend.

Okay, thank you. Good job.

Thank you.

Your next question comes from the line of Mitch Germain with JMP Securities.

Good morning.

Good morning.

Any change in posture from your tenants, or leases taking longer to complete?

No, I think our average number of days to close is relatively unchanged from where it has been in the past. I think we do continue to see tenants who are up for renewal coming out earlier to kind of have some discussions, but in terms of day-to-day, back-and-forth -- no real change.

Great. And George, I think you reconciled how the spec revenue increased for this year, the $4 million. Can you just go over that one more time, please?

Yes, sure. Our original spec revenue target was $27.8 million. Roughly $7.5 million of that was inside of what is now the Och-Ziff venture. And then since our last business plan update in October, we've generated an incremental $4.6 million of spec revenue. So our revised target, as we sit here today, is at $24.9 million.

I understand the math, but what drove that $4.6 million?

The $4.6 million -- and you kind of see it in the regional chart on page 7 as well. But $3.5 million of that is this now [assumed] renewal coming out of Austin. And then we had about a $0.5 million pick-up in CBD Philadelphia, and then some incremental pick-up in the Pennsylvania suburbs.

Thank you.

Yes.

Your next question comes from the line of Manny Korchman with Citi.

Good morning, guys. Jerry, when you went over your debt-to-EBITDA statistics earlier, can you just make sure that we understand how you're thinking about the large debt pieces being put on the Och-Ziff JV? Is that included in the ratios that you spoke about?

Manny, it is, yes.

Great. And then in terms of the JV, are there any put provisions? Are there buys or sells?

Well, there is normal governance provisions there that would be [optimum] in terms of how we make decisions, so it is a shared decision control. There's going-forward governance objectives that include buy-sells at certain points in time.

George, just given sort of the increased speculative revenues, and also selling off this portfolio, I was a little surprised that the same-store expectations for 2016 didn't move. Is that just a shift within the range, or is there something else that's causing the same-store guidance to not change from your initial?

Two things. One, it is a little bit of a shift inside of the range, but then the Broadmoor portfolio is not same-store. So the spec revenue pick-up coming out of Austin doesn't translate to same-store, because those properties were acquired during the course of the year in 2015.

One more for you, George. The concessions seem to be pretty high compared to your run rate in Q4. Is that just an anomaly, or is that something we should expect going forward?

The concession, or the TI, and the mark-to-market in the fourth quarter of 2015 was really dramatically skewed by one deal in particular. We had a 57,000 square-foot 15-year renewal with a law firm in Wilmington, Delaware, that had a little bit of a higher level of capital contribution. And because it had been such a long-standing vacancy and kind of where that market is today in terms of rental rate, had a 22% roll down in cash mark-to-market. So that deal really did skew our fourth-quarter metrics. All that being said, with the other deals that we did, we still did outperform our GAAP mark-to-market target for the year, coming in higher than our previously guided 8% high end of the range.

Great, thanks guys.

Your next question comes from the line of Craig Mailman with Keybanc Capital Markets.

Hey, guys, just to follow-up on Manny's last question about the leasing costs there. If you pulled out the law firm, what would the leasing costs on a per-square-foot per-year basis look like, and what would your cash rent spreads have been?

The spread would have been flat for the quarter on those renewals. Instead of the reported negative 7%, we would have been flat. The capital for the full year would have been $2.31 instead of the $2.42.

Right, but it's just for the quarter. So the 3.95 would have been what? And that 4.2 on a cash basis would have been what? It just seems like the last three quarters, you guys are still within your range of leasing costs, but it's kind of been ticking up a little bit each quarter. And we are seeing a commensurate increase in cash rents. So I was just curious on kind of a net-effective basis, if you're still -- if rent spreads still look as good?

They do. I don't have every one of those metrics with that one deal excluded, so I will follow-up with you on that. But yes, that really was kind of an anomaly for the quarter, was that 15-year deal with a large tenancy.

Yes, and Craig -- Jerry. A point to add on to that. As we look at the overall portfolio performance, there are a number of markets that we are in that are very strong. We have Center City, Philadelphia, University City, Radnor, a handful of others, Austin, where we are actually seeing an ability to either compress the capital we need to offer to tenants as part of our leasing package, or getting a commensurate increase in term, or stronger annual rent bumps, to compensate for those existing levels of capital.

The other thing, and we talked about it on the last call, is that a lot of our absorption right now is coming out of what we view to be the markets that still remain very competitive, particularly the Washington, DC corridor. So we're really going to push there to accelerate absorption. And those concession packages, while they remain constant, the overall activity coming out of those markets tends to be a pretty fair share of our overall leasing activity.

So that may be skewing those numbers a little bit above our normal run rate. But I think we are very pleased with what we are seeing in some of our markets where we have a solid platform. The markets are doing very well of having a really good trade-off on effective rents. Between being able to increase nominal rents, getting better annual rent bumps, lengthening the terms, and either holding our capital costs stable or actually reducing those, from both an absolute and dollars-per-square-foot per-year standpoint.

Okay. Just separately, pro forma -- all these transactions leverage is kind of in that low- to mid-6 times range. Just curious on your thoughts, if you're 12 months out here, you'd mentioned maybe some pre-development spending. I know you have some other projects you could start. Are you kind of committed to staying in that range? Or could we see that tick higher again in 2017, if better investment opportunities rear their head?

I think we are committed to staying on the path of what we have talked about in terms of debt-to-GAV and -EBITDA. And I think as we look at our platform going forward, certainly that is our objective, and that is our firm commitment. We have a number of properties, you are right, in the pre-development pipeline. We want to make sure we take advantage of those. But we're also going to be delivering FMC in the next couple of quarters. And as Tom touched on, we'll have some good leasing occupancy going forward on that, as well as the residential side. So the FMC will drop off being a drain on EBITDA, to being an additive to EBITDA, within the next couple of quarters. That's a big enough transaction for us, where we are convinced that will be a nice driver of this push to continue de-leveraging from our operating performance. And that will create some opportunity for us to look at other opportunities, if in fact they are there.

Okay, thank you.

Your next question comes from the line of Jed Reagan from Green Street Advisors.

Good morning, guys. Maybe just following on to that question, can you talk a little bit about how the shadow development pipeline is looking? And are you getting any nibbles on the pre- leasing front from some of those projects?

We are. We actually have a couple of pending discussions -- we have negotiations underway on a couple of projects within our system that would be essentially fully, or substantially at least, building starts, primarily in the suburban markets, on some of our development land. We continue to ferret out more and more opportunities within CBD and University City, Philadelphia. And our portfolio in Austin, which includes some land holdings, is having some good traction as well.

We continue to see, Jed, this movement by companies to higher-quality, more efficient, better-located mass transportation-served products. And certainly as labor markets continue to tighten, even the numbers -- we're not there today. With unemployment being pretty much where it is, office space is now becoming once again an attractive cultural component of how companies position themselves to both their existing and new employee base. So the idea of being in a LEED-certified, high-quality, flexible, floor-plate building, I think, continues to be a good draw for a lot of companies. Not for everybody. But certainly we want to position ourselves with our existing inventory and some of our development sites to be able to capture both segments of that market.

Sure. Are any of those negotiations ones that might hit this year, and something you could kick off this year, do you think?

There might be one or two, but again, these are smaller-scale buildings. I hesitate to commit to anything that's not signed, so we'll be cautious for right now. But we have some good activity on a couple of our sites in suburban Philadelphia, that we think maybe one of those could be a start this year.

Okay. And I know you've got a pretty good slug of taxable gains from the Cira Square sale. Just wondering if we should be on the look-out for some 1031 activity to come from that? And maybe order of magnitude, what kind of sizing that could be?

Jed, it's Tom. Right now, the way we've structured for taxes, we don't expect a special dividend. If there were some sales that were smaller and had large gains, we would consider if there was a 1031, either into a development land piece that we may look at, or even to a development spend. So there are some opportunities to maybe 1031. We do have one asset that, if we did want to sell this year, would be 1031. But mainly, no taxable reason to have to do that.

Okay, just last one quickly for me, if I may. Can you talk about how the pricing for the Och-Ziff portfolio sale fared relative to your initial expectations? And how much buyer interest there was in the assets, to the extent the deal was broadly marketed? And then just quickly, if you can talk about how that 8.5% cap rate for the portfolio broke down between Northern Virginia and some of the other markets?

Sure, I'll answer it the best I can. I think when we looked at it, we were pleased with the overall pricing. I think when we break down the markets, we were pleased with the pricing in Richmond. Which again, Richmond included our office product and our remaining warehouse flex product down there, so I think the pricing there was very good. The Meetinghouse Business Center and Plymouth Meeting, again, that's one-story and two-story office products, so I think we were happy with how the pricing came out there. I think where we came in a bit below what we thought would have been in the off Toll Road, Northern Virginia. Pretty much in line, otherwise, in Pennsylvania and New Jersey. So we think it was a fairly priced deal in terms of where the market was.

In terms of the marketing campaign, we talked to a number of different sources, and so it was a good competition for the deal. As the deal progressed over a number of months, I think it is fair to say that there was some impact that came into play because of the tremendous volatility in the marketplace. But there still was a competitive set until we finalized our negotiations with Och-Ziff. So I think we're pretty pleased with the marketing of it, how it came about, the tension it creates to optimize what we thought was real full-value pricing.

When you are doing these mid- to late-cycle deals, and there is a fraying of the debt markets and there's equity volatility, and it's a complicated structure. We kept our eye on the target, which was to reduce our concentration in those markets, to generate significant liquidity, position the Company for further growth. And recognizing full well that we did not want to be in a position where we're trying to market this portfolio in pieces over the next several quarters. Because we just didn't have a lot of visibility, nor does anybody, into where the markets will go. But we definitely focused on getting cash in the door today, creating a structure that works for us to create future profitability with, again, we think a smart, professional partner, with high integrity. And we move forward from there.

Did you see some buyers kind of backing out of the tent towards the end of the process, or maybe moderating their expectations?

Well, I think it's a function of where the debt markets are too. And there's no question that the CMBS debt market has had a lot of volatility, with spreads gapping. So that clearly has an impact on pricing. I don't want to be specific, but there certainly are some folks we were talking to that had some concern over where the debt markets were going. Which is frankly one of the reasons why we think this deal, from both Och-Ziff and Brandywine's standpoint, is well-structured to make sure that we can continue to outperform the markets.

Great. Thanks so much for the color.

You're welcome.

Your next question comes from the line of Rich Anderson with Mizuho Securities.

I'll be brief, I think. The mid-8% cap rate that you mentioned on Och-Ziff, does that take into account the fees you're going to earn?

Rich, it does not. It is point-of-sale pricing, and that is how we looked at it. We did not factor in the fee revenue going forward, which is on market-rate terms. Well frankly, I have a dedicated team focused on this portfolio, to service it and to make sure that we asset-manage it very well. So from an executive-level diversion standpoint, it will be minimum. We'll have great operating people running the portfolio for us.

Do you have a number of the incremental fee generated off of that portfolio?

About $1 million.

A year?

Yes, I'm sorry, a year. (laughter)

It could be $1 million a day, who knows? And then for the [80 million] remaining to sell, is that coming out of California, or where does that come from?

We have one remaining property in California that we are in the throes of some negotiations with a tenant out there. When that's consummated, that property will be actively marketed. The other areas we are targeting, disposing of our remaining assets from a marketing standpoint, in New Jersey, Delaware -- they are the primary markets at this point, Rich.

Okay, good enough, thanks.

Thank you.

Your final question comes from the line of Bill Crow with Raymond James.

Good morning.

Good morning.

Jerry, two questions. You referenced the mid- to late-cycle environment a couple of times. How does that change your thought process on development going forward?

Well, I think it changes our perspective across the board. It clearly drives our operating teams to make sure that we create as stable a platform as possible and address our forward-rollover exposure. From a financial standpoint, it is clearly reflected in our drive to build as strong a balance sheet with as much liquidity as possible. And from a development perspective going forward, I think as we look at it, a key driver for us is taking a look at maintaining optionality.

If you take a look at some of our existing developments, we have some specific development sites that we think are good opportunities for near- or intermediate-term starts -- we are going to require a very heavy level of pre-leasing there. The Knights Crossing development in Camden is a well-structured transaction with Campbell Soup, that is essentially a rolling option to take that land down.

One of the things we haven't delved into on the calls yet, but the one thing that the transaction in Austin gave us at Broadmoor was a very good longer-term development opportunity at a very effective basis per land-foot, that gives us the ability to market those properties. And again, that would be subject to heavy pre-leasing.

Anytime that you are entering this point in the cycle, I think, our focus was to solidify the operating platform, get it to where we want it to be, make sure we have plenty of liquidity. And this immutable drive towards lower leverage and stronger coverages remains in place. And certainly looking ahead, Bill, as we evaluate development opportunities, it's going to be cautious but opportunistic. If we're going to be getting involved in a multi-phased development, we're going to be looking for optionality to respond to the market, look for an advantageous cost basis, and look for very strong results from a marketing campaign, relative to pre-leasing.

Great, thanks. The final question for me is, you talked about the debt market changes over the course of the negotiation for the Och-Ziff deal, maybe some of the other competitors dropping out. How close did you get to just saying we are better off keeping this portfolio?

Not that close. Because we felt the pricing was always within the range of being fair. Look, we always want to sell for more, people want to buy for less. So it was an artful negotiation, which I think solidified the perspective of the partners. But certainly when there's external events that come into play, like the debt markets, that certainly objectively creates the need for discussions -- and I think as we went through this process. And Bill, not just this transaction, but the other sales transactions, where there is leverage involved -- that is becoming a more increasing part of the discussion. Which, from our perspective, knowing that we had a fairly valued deal, only amplified our desire to get this transaction done.

Okay, thank you.

You're welcome.

Gentlemen, we do have a follow-up question from Manny Korchman with Citi.

Hey, it's Michael Bilerman. How are you, Jerry?

Hey, how are you dong, Michael?

Great. I just wanted to make sure just on the cap rates, you're quoting 8.5%. I assume that's on the almost $400 value. So $34 million of -- is that cash NOI or GAAP NOI that the portfolio would've produced? And is it a backwards-looking NOI or a forward-looking NOI?

It is current-quarter NOI, what's in place.

And it's cash.

And it's cash, I'm sorry, yes.

And then the way to think about in terms of dilution from your perspective, 350 of cash, it's sort of, call it a mid-9s sort of cost of capital, per se, from an accretion-dilution standpoint. And I assume that would just be offset by the $1 million of fee income you'd get. I assume that's a profit, not the net. And then are you picking anything up from an FFO perspective, from your sort of highly leveraged stake in the leasehold?

Michael, this is Tom. We will pick of our share of the FFO. But yes, after ground lease, it's going to be after the debt service. So the FFO that we are going to pick up off it is there. It's not very significant for this year. I believe it's $0.03 or $0.04 maybe. But that's our incremental piece after all those costs, yes.

So $0.03 or $0.04 -- that is actually pretty meaningful from a -- is it real cash, or is it you're picking up a --?

That cap rate off of that cost base is meaningful. We've programmed a lot of capital, as you know. When we look at the cost basis of our investment basis, quite a bit of cash was put into the deal to cover capital. So there will be cash flow off the property.

And you will actually get a distribution? Or it has to stay in the -- I'm just trying to think about your FFO recognition of $0.03 to $0.04 from your leveraged leasehold position versus are you actually going to get a distribution out of this joint venture, in terms of is it hitting FFO? AFFO?

We will get cash distributions, yes. I don't know that I would say the cash distribution equals the FFO. But it's like all of our joint ventures. Sometimes we are taking distributions above the FFO, sometimes they are below, if there is capital needs at the property level. But no, the projections off of this property group will be distributions.

Right. So effectively, you sell -- you're effectively selling at, let's call it, a 9.5 cash versus the monies that you received, the 350, and then you'll pick up $0.03 to $0.04 of accretion on your remaining levered investment?

Yes.

Okay, got it, thank you.

Yes.

This concludes the question-and answer-session. I would now like to turn the call over to Mr. Jerry Sweeney for any closing remarks.

Great. Thank you all for joining us, and we look forward to updating you on our activities in the next quarterly conference call. Thank you.

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