Brandywine Realty Trust (BDN) 2016 Q1 法說會逐字稿

Good morning. Welcome to the Brandywine Realty Trust first-quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Mr. Jerry Sweeney, President and CEO. Sir, you may begin.

Brittany, thank you very much. Good morning everyone and thank you for joining us for our first-quarter 2016 earnings call. On the call today with me are George Johnstone, our Executive Vice President of Operations; Tom Wirth, Executive Vice President and Chief Financial Officer; and Dan Palazzo, our Vice President and Chief Accounting Officer.

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

Okay, with that behind us to start as we normally do, we will give an overview of our three key business plan components, operations, balance sheet and investments, then open up for Q&A. I will first discuss the overview, George will then discuss our leasing and operating efforts and then he will turn it over to Tom to review our financial results.

We had an excellent start to 2016. During the first quarter, we made significant progress on our business plan and advancing our investment and balance sheet objectives. On the investment front, we have executed 90% of our $850 million disposition target. Our key 2016 dispositions have substantially completed our multiple year portfolio alignment strategy and going forward, it is really fine-tuning our submarket positions.

These transactions and others aggregated $1.12 billion of sales over the last four quarters at an average cap rate of 6.9% and these efforts achieved our goals of having stronger forward growth profile, reducing forward recurring capital spend, and achieving our intermediate-term balance sheet targets. And this quarter we have seen the impact of these efforts both in our operating performance and balance sheet metrics. Overall we believe excellent results that really to position the Company for future growth as an urban town center operator and developer.

On the operations front as the numbers indicate, we had a very strong start to the year. The press release and supplemental package noted a number of improvements to our operational targets that I will touch on in a few moments.

But as we look back on the quarter, we had a very successful leasing effort where we leased over 1.2 million square feet which is really in excess of our prior quarter and year-over-year, a nice increase as well.

We ended the quarter at 92.8% occupied and 94.1% leased which is up 250 and 80 basis points respectively from prior year levels. We had a bit of a dip over Q4 that George will give you some rationale on that.

Our mark to market for the quarter was a 13% on a GAAP basis and 3.4% on a cash basis both in excess of our targeted ranges. Our speculative revenue plan is 76% executed on a revenue basis and 67% from a square foot standpoint. Given this success, we are increasing our 2016 business plan spec revenue by $3.2 million and 41,000 square feet. So our revenue target is up 13% or $3.2 million since our initial 2016 business plan forecast.

Our GAAP and cash same-store numbers for the quarter were also in excess of our business plan range at 4.6% GAAP and 5.5% cash. Again for this metric as we noted in our press release, we are increasing our year-end targets on both a GAAP and cash basis 3% to 4% to 4% to 5% respectively.

Leasing capital for the quarter came in below our targets at $2.14 per square foot per lease year. Again well below our targeted range of $2.25, $2.75 per square feet per lease year.

For the quarter and looking forward for the remainder of 2016, our operating results are now clearly showing the benefit of our approach to lengthening lease terms, reducing forward rollover, generating positive same-store growth, strong mark to market and better portfolio positioning.

From a balance sheet standpoint, the recently executed dispositions have clearly accelerated our balance sheet strategy as evidenced by the following improvements in both our liquidity and leverage metrics. We have reduced our net debt to EBITDA from 7.1 at the end of 2015 to 6.4 times at quarter end 2016, first-quarter 2016. We reduced our net debt to total assets from 42.3% at year-end down to 36.7% at quarter end. We have reduced our weighted average cost of debt from 4.92% at year-end it down to 4.7% at quarter end.

We also utilized cash proceeds from the first quarter dispositions to pay off our 2016 bond amount of roughly $150 million at a 6% rate that was due April 1. We also refinanced $87 million of secured debt by extending the maturity by four years and lowering the rate from 7.6% down to slightly below 4%. After all these debt payoffs, we have a net cash balance of $258 million with our $423 million at quarter and less the $165 million for bond and interest payments and have a zero balance on our $600 million line of credit.

The remaining cash we have on our balance sheet will be used to fund FMC and other predevelopment costs in our development pipeline. We do anticipate ending 2016 with a cash balance between $100 million and $125 million.

To put those efforts in perspective, at the end of 2013, we had $2.6 billion of debt. Today with the recent bond repayments we are roughly $2 billion or almost a $550 million or 20% reduction over this two-year period. This was also achieved while significantly shifting the composition and growth profile of our operating and development platform.

As we mentioned before on previous calls, achieving our intermediate target of 6.5 times which was targeted for year-end 2017 has been accelerated and going forward we plan on maintaining our balance sheet discipline and certainly anticipate continued EBITDA improvement through both internal growth and development lease up as well as having a better run rate from a higher quality portfolio.

On the investment front as we mentioned in our press release, we had approximately $765 million of sales in the first quarter at an average cap rate of 7.2 on a GAAP basis and 7.15 on a cash basis. Further, as indicated we have raised our previously issued 2016 guidance range of $1.23 to $1.30 per share to $1.26 to $1.32 per share or a 2% increase at the midpoint primarily reflecting the improvement in our operating metrics most notably same-store, mark to market and the increase in spec revenue.

Key assumptions in our plan for the balance of 2016 are we have increased our mark to market on a GAAP basis to 9% to 11% up from 7% to 9% and our cash mark to market to 1% to 3% which is an increase from 0% to 2%. Our same-store numbers have also been increased on a GAAP basis from 3% to 4% -- 2% to 3% to 4% from 2% to 4%. And our cash to 4% to 5% from 2% to 4%.

Our plan does not include any acquisitions and as stated earlier, we expect ending the year with $100 million to $125 million of cash on hand and plan on being in a cash positive position going forward. Including sales accomplished to date, we are maintaining our 2016 disposition guidance of $850 million and we anticipate future sales of $43 million in the second quarter and $43 million in the third quarter both at an average cap rate of 8%.

We currently have almost $300 million of properties on the market in Pennsylvania, New Jersey, Delaware and Virginia. These transactions and our operating performance in 2016 put us well on track to reduce our overall debt levels to our long-term target in the low 30% range and our EBITDA target to be 6 times or below.

Just a couple of quick notes on some development projects. 1919 is our joint venture with CalSTRS and LCOR in downtown Philadelphia. That project is on budget, it topped off in October of 2015. The office and retail components are now 100% leased and the 215 car parking garage just opened within the last month. The first units were delivered in March of 2016. We are already 23% leased with great velocity and substantial completion is on target to occur by the end of June.

Our renovation of 1900 Market is again substantially complete. The AmeriHealth Division of Independence Blue Cross moved into the first 113,000 square feet of their 228,000 square feet of occupancy. The project is currently 89% leased with a strong pipeline of transactions. We are projecting an investment base below $200 per square foot and a stabilized cash free and clear return of over 11%. So a very successful renovation project for us.

During the quarter, we also signed 110,000 square foot lease for a build to suit property in King of Prussia, Pennsylvania submarket. That is to a single tenant subject to a 12-year lease. Project completion is estimated for the second quarter of 2017. Total construction costs are estimated at $29.2 million and we anticipate a 9.5% projected cash yield on cost.

FMC continues on schedule. Curtainwall through the office component is done, tenant finish work is actively underway and running ahead of schedule. Residential core is rising. We anticipate office occupancy occurring on plan in the mid-summer as well as the residential units being available for occupancy early fall. On the office leasing front this quarter, we made excellent progress signing an additional 85,000 square feet of leases bringing us to 75% pre-leased. More importantly, behind that we continue to work with a very healthy pipeline of deals and anticipate certainly more leasing progress over the next several quarters. The residential component which is being marketed under the AKA Korman brand is gearing up for its launch with first occupancy scheduled for early fall.

In March we also announced that we were selected by Drexel University as the master developer of Schuylkill Yards and created a 20-year master developer option agreement composed of six phases on 14 acres that can accommodate 5.1 million square feet in a multiuse development including office, residential, research facilities and academic facilities as well. The development site as most of you know is located in University City adjacent to Amtrak's 30th Street Station and in close proximity to Cira Center and Cira Center South.

As a master developer, we will lead an experienced development team which right now includes the Gotham Organization on the residential front and Longfellow Real Estate Partners on the life science product line.

The deal is structured as a long-term option with definitive milestone dates that also provide us with significant structuring flexibility and the ability to bring in other development and financial partners.

Moving on to Evo and Cira Center South, concurrent with Harrison Street's acquisition of Campus Crest, we increased our ownership stake in Evo to 50% by investing an additional $12.8 million. We are currently in the process of refinancing this property whereby we expect to initially recover approximately $5 million of that additional investment and the loan will also incorporate an accordion feature that can provide an additional $6 million of proceeds over the next couple of years.

The project is currently just shy of 99% leased and is in excellent shape. The increase in our ownership stake was imputed pricing at cost and this incremental investment we felt completely aligned our interest with a great partner and increased our potential upside due to the entry-level pricing.

Finally, we continue to advance our planning and pre-development efforts on several development sites. Marketing and pre-leasing activities are underway but no definitive pre-leasing results to report at this time.

Our key objective remains growing cash flow and net asset value. The transactions we executed this year are a compelling step in the right direction and as we produce this quarter, we will be translating to improved operating results in 2016 and beyond.

We are maintaining our CAD range of $0.80 to $0.90 per share or about a 70% payout at the midpoint which is a very, very well covered dividend.

So from our perspective, the trendlines are extremely 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, increasing our average lease term and much more importantly, position the portfolio for better growth through our sales efforts.

At this point George will provide an overview of our operational performance as well as some color on remaining 2016 leasing activity and then turn it over to Tom for a review of our financial performance.

Thank you, Jerry. It was an extremely productive quarter. We have made continued progress on the business plan and have seen a number of operating metrics improve on our transitioning portfolio. Leasing activity remains robust in all of our markets. The pipeline excluding development properties stands at 2.2 million square feet with 884,000 square feet in current lease negotiations.

Turning to our three core markets, our 98% leased CBD Philadelphia portfolio outpaces the market by 810 basis points. Leasing spreads remain strong. We are projecting GAAP rent growth of 8.5% for 2016. The Greater Philadelphia region's overall outlook remains encouraging. Unemployment declined in the first quarter to 4.8%, down 100 basis points year over year. Positive absorption occurred for the fourth consecutive quarter and the city continues to see an influx of tenants from suburban locations.

The Crescent markets continue to operate in a similar strong fashion where we are outpacing market vacancy by 400 basis points. The strength of these markets continues to shift deal flow towards King of Prussia. Overall first quarter suburban Pennsylvania absorption was 228,000 square feet, its highest first quarter level since 2005. GAAP leasing spreads in our Pennsylvania suburban portfolio are projected at 12%.

Turning to Metro DC, we posted our fourth consecutive quarter of positive absorption raising occupancy to 88%. Job growth remains strong in the first quarter as regional unemployment dropped 70 basis points to 4.2%. Employment growth is primarily driven by the technology, consulting and professional services sectors. Over the past 12 months, these sectors have accounted for roughly 85% of the overall office using job creation.

In Austin, strong demand has kept Austin's office market booming. Overall Austin Metro occupancy is 92%. First-quarter absorption totaled 443,000 square feet and marked the 21st straight quarter of positive absorption.

Our portfolio continues to perform well. Rents within our DRA joint venture are projected to increase 13% to 15% on a GAAP basis and 7% to 9% on a cash basis.

In terms of the updated 2016 business plan, our increased spec revenue target is 76% complete and the square footage component is 67% complete. The remaining plan is in great shape as 53% of the revenue still to be achieved comes from two renewals which are currently out for signature. One of these renewals is an early blend and extend with IBM in Austin. The early renewal of this 2017 expiration will reduce our overall rollover exposure in 2017 by 29% down to 9.9%.

During the quarter, IBM renewed its 200,000 square foot expiring lease and as projected, vacated a 144,000 square foot building on March 31. This building will be taken out of service in the second quarter, re-developed and then re-introduced to the marketplace.

Retention during the first quarter trailed our annual range due to two large move outs in the Pennsylvania suburbs. We exercised an early termination with a 90,000 square foot tenant in Malvern and subsequently leased and occupied during the quarter 77,000 square feet of that space.

Lockheed Martin vacated a 56,000 square foot flex building in King of Prussia during the quarter and we are currently in lease negotiations with a full building user to backfill this tenancy. These two along with another tenant vacate in Conshohocken account for the occupancy drop in the first quarter.

During the second quarter, eBay will vacate 100,000 square feet in King of Prussia. This unanticipated vacate will cause a drop in occupancy during the second quarter before rebounding in the second half of the year based on already executed and projected deals.

Our leasing teams have also remained focused on reducing forward rollover exposure. During 2017, approximately 2.2 million square feet or 13% of the portfolio is scheduled to expire. Five tenants including the aforementioned IBM account for 50% of that rollover. Discussions in the varying stages of negotiations are underway with each of these.

So to conclude, we are extremely pleased with the level of achievement to date on the business plan and the overall improvement in a number of our key operating metrics.

And at this point I will turn it over to Tom.

Thank you, George. Our first-quarter adjusted FFO totaled $55.3 million or $0.31 per diluted share. Some observations about the first quarter as Jerry mentioned, same-store NOI growth was 4.6% and 5.5% both excluding term fees and other income. We have had 20 consecutive quarters of increase in the GAAP metric and 16 for the cash metric.

GAAP G&A increased to 9.2, slightly above our previous 9.1 guidance. However, our first-quarter included unbudgeted severance costs totaling about $300,000. Our first-quarter G&A is normally higher than other quarters due to the higher weighting for equity award vesting.

FFO contribution from our unconsolidated joint ventures totaled $8.6 million, above our first-quarter projection by $2 million due to higher income from our recently formed joint venture with Och-Ziff, higher termination fees at Austin, and improved operations and our increased ownership in Evo.

As discussed in our prior call, we are reporting adjusted FFO excluding the early extinguishment of debt charges related to the Cira Square and Cira South Garage mortgages. Due to the material amount which was $0.38 a share, we believe the FFO will not be comparable to future and prior periods.

Our first-quarter CAD totaled to 35.3 or $0.20 per share representing a 75% payout. During the quarter, we incurred $12.1 million of revenue maintaining capital expenditures.

Looking at the second quarter of 2016, we think core operating income for the second quarter will approximate $72.5 million, a decrease from the first quarter primarily due to the sales activity in early February and including -- which included a partial quarter of that NOI. We anticipate our NOI from the core portfolio which excludes FMC to grow sequentially during the second half of 2016.

G&A for the second quarter will be $6.6 million and the full-year approximately $28.5 million. The projection for G&A for the 2016 will approximately be $1 million below the prior year and will have a lower annual run rate as we go into 2017.

Other income, we expect the second quarter to be about $0.5 million. Our full-year estimate is $2.8 million. Termination fees we expect to be $600,000 in the second quarter for a full-year estimate of $2.5 million.

On interest expense on April 1, as we mentioned, we paid off our 2016 bonds at par and our interest expense will decreased to approximately $20.5 million for the second quarter.

The reduced second quarter interest expense will also include a full quarter effect for the repayment of the Cira Square and Cira South Garage mortgages and our full-year interest expense should range between $86 million and $88 million.

In addition on April 7, we refinanced the mortgage at Two Logan to a lower rate that will also benefit the majority of the second quarter.

FFO contribution from the unconsolidated joint ventures should approximate $8.5 million reflecting the full quarter effect of our joint venture with Och-Ziff Real Estate, partially offset by the first quarter Austin termination fees mentioned previously. We projected our joint ventures would contribute approximately $36 million for 2016. Management fee income should continue to approximate $20 million for the year.

Looking at our general plan assumptions, we are looking to do another $85 million of sales activity each evenly spread between the end of the second and third quarters at a blended 8% cap rate, 177 million of weighted average shares and FMC continuing to generate between $8 million and $10 million of operating income commencing 3Q 2016.

For our capital plan as we mentioned, CAD will remain in a range of $0.80 to $0.90 in our projections reflecting roughly $32 million of revenue maintaining CapEx for the balance of the year.

As we look at our primary uses for the balance of the year, about $170 million of development and redevelopment, $85 million of aggregate dividends, $20 million in JV capital investment, $30 million of revenue creating CapEx. We repaid the bonds beginning of the quarter and $4 million of mortgage amortization.

The primary sources will be cash flow after interest payments of about $130 million, speculative asset sales of another $85 million and $22 million of financings which will be Encino Trace 2 as well as mentioned, a refinancing of Evo, anticipated also -- that is going to happen in the second quarter.

Based on our capital plan, we expect our use of cash about $254 million from where we are now. That will adjust what we said previously. I think we will have $170 million of cash at the end of the year. We also project that our debt to EBITDA ratio will improve into the 6.3 to 6.4 range by the end of the year with GAV of approximately 37%.

I now turn the call back over to Jerry.

Great. Thank you, Tom, and thank you, George.

So to wrap up, 2016 is off to a really good start for us. We have excellent momentum as George touched on our operating platform, believe we are very well-positioned to continue to generate solid NOI growth, good same-store performance, everything we are seeing in the marketplace indicates that we will continue to have the positive mark to market that will both grow earnings and net asset value.

Our business plan themes very simply are to continue operational excellence, successfully execute our developments and maintain significant financial capacity.

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

(Operator Instructions). Craig Mailman, KeyBanc Capital Markets.

Just one quick clarification to start out. Tom, I think you just said the cash balance at the end of the year could be $170 million and I think Jerry said $100 million to $125 million. Did I mis-hear that?

It is $170 million. The break down I gave you was to the $170 million to take those pieces off of our current position.

Okay, perfect. And then just on Schuylkill Yards, can you guys just run through what your capital commitment may be there, how much could be competitive supply to Cira and then other office assets that you guys have in that part of Philly? And the breakdown of when you think any competitive office could come online versus the other tangential stuff of the project?

Sure, be happy to and I think we circulated and posted up to our website a pretty detailed description of everything we thought that Schuylkill Yards would outline as well as laid out page 14 of the supplemental package exactly what the overview is, the project description and the financial highlights.

I think right now the major focus is to get the site rezoned and approved for up to about 5.1 million square feet of total square footage. We anticipate trying to get that achieved by the end of 2016. We are obviously working with a lot of public officials and our planners to achieve that objective.

We do anticipate over the next 12 to 24 months that our total spend will be somewhere between $10 million to $15 million primarily in planning costs as well as creating some public space to really create the platform for future development.

The first building we have targeted really for some time in 2018 obviously we will be commencing marketing efforts for that. We do believe that the creation of the entire Cira neighborhood combined with Schuylkill Yards creates a very attractive platform for companies to consider locating to. So our marketing campaign will be directed really up and down the Acela Corridor to try and attract tenants who want to come into what we think will be a very special place in terms of its mixed-use component, access to mass transportation, affiliation with Drexel University and certainly in close proximity to the University of Pennsylvania.

So I think as we look at it we are really in kind of a 12 to 24 month planning predevelopment and creating some public space process that we anticipate will create a very viable platform for subsequent vertical development.

As we had disclosed, we have a residential partner on board as well as a life science partner. They will be very much part and parcel of our marketing campaign and the objective is to present this entire mixed-use innovation platform to tenants starting really in the middle part of the summer through the fall.

Thanks, Jerry. I saw page 14 and I saw that 52%, 2.6 million designated office that includes lab and academics space. I'm just trying to get at what you guys think you would more be the developer on versus your partners and could we assume a similar price per square foot to what you guys did at Cira?

I think certainly construction pricing, Craig, would be in the same level as what we have done at Cira and Cira South. We are certainly seeing an increase on construction pricing, we will see how long that stays in place. But certainly from an overall investment platform, I think that is a good assumption.

One of the very good attributes of this transaction is that it does provide us with a lot of flexibility in terms of bringing in both other development partners as well as institutional investors to help move this process forward.

We have a number of flexibility to some of the milestone dates certainly give us the capacity to respond to changing market conditions and we think the mixed-use nature of it being residential, lab, academic space as well as traditional office and loft office provides a pretty broad palette to the potential customer base where we think we can be very responsive to changes in cycles as we build this out.

Great, thanks.

Jamie Feldman, Bank of America Merrill Lynch.

Thank you, good morning. So I guess sticking with the project, can you talk a little bit more about the actual timing of spend and what is realistic and how we should be modeling it?

I'm sorry, Jamie, on Schuylkill Yards?

Yes, correct.

Okay, I think certainly for 2016 and 2017 I think we are focusing on that $10 million to $15 million investment, probably one third of that this year and the balance in 2017. And then 2018, the level of spend there is really going to be a function of our pre-marketing efforts and the timing thereof.

Okay. And then switching gears to FMC, can you talk about the leases you signed and then more color on the pipeline?

I think that we signed a number of leases, one of which involved the relocation of one of our existing tenants who needed some additional expansion space and then a nice mix of tenants both from outside the Philadelphia suburban marketplace that have come into the city.

The pipeline right now I think we are down to 125,000 to 150,000 square feet. The pipeline ranges from a couple of multiple floor users down to tenants in the 5,000 to 10,000 square foot range. So we have already broken down one floor for a multitenant basis. We are really targeting two, potentially three more and we think that plays very well into where we are in the development cycle because a lot of those tenants have much shorter delivery time requirements.

So it is a very good mix of tenants in the region, a couple of tenants from outside the region, a couple of tenants who need expansion space within our existing portfolio where we have other backfill opportunities. So I think now that the building is really rising vertically and presenting itself, we are very pleased with the level of response that we are getting to it.

Okay. Do you expect you will have it fully leased by the time you finish construction?

Well, we are hoping we make a lot more progress in the next couple of quarters sure.

Okay, all right. Thank you.

Manny Korchman, Citi.

Good morning, guys. Jerry, you had mentioned I think $300 million of potential or marketable sales activity right now. What would be the chance that you sell all of that instead of just sort of the $85 million that you guys pointed out specifically?

I guess not strong enough where we changed our basic assumptions. So we kept the $85 million in place, Manny. I think we have a number of properties in the market certainly in that $300 million to give you a range, we have some properties that are as low as $5 million to $10 million in value up to $40 million of value. So they are all going through price discovery. We have a couple of properties that are under agreement hopefully completing due diligence that give us a high level of comfort that we will make our Q2 assumptions. And I think the rest we will just have to wait and see what the market delivers.

I think with the broker network we have in place and everything out there, it is too early I think honestly to handicap the level of success we will have beyond the business plan assumptions.

Certainly as we have done in the past, if we are able to get good pricing and good execution, I think as I mentioned even on last quarter's call, we are biased to the upside on that number to complete the market or submarket positioning.

Great and if we just follow up on new tenants or new entrants into the Philly market, what is sort of is the bio of that type of tenancy? You mentioned looking up and down the Amtrak corridor to find tenants that would be interested in both FMC and Schuylkill Yards. Just help us think about who might want to be in a project like that?

Philadelphia benefited last year, we had almost 25% of the absorption in the city came from outside the city. And George, you can help me out here but I think there is a whole range of different users, financial service companies, engineering companies coming in from outside the area or companies that were in the region that were consolidating offices downtown. I mean certainly one of the really I think beneficial trendlines we are seeing is that a number of large companies in the region are giving significant thought to moving a portion of their operations into the city. And I think that is really driven by the dramatic increase the city has had in the residential population, the accessibility to labor, use of the mass transportation system. So I think as we look at it, we think we will be able to identify a number of larger companies who again are kind of mid-Atlantic-based who our looking for having an urban pod as part of their overall physical space.

Thanks, Jerry.

Michael Lewis, SunTrust.

My first question is for Jerry or George. Is this the strongest you have ever seen the Philadelphia office market? Given how people feel about some of the Gateway markets either being later in the cycle or like DC kind of bouncing along the bottom of the cycle, where do you kind of put Philly in that clock as far as what inning we are in?

Look, I think Philadelphia is in the process of being repriced and rediscovered. I think we are very pleased as I mentioned this with Jamie on the number of tenants who historically would not have looked at a CBD or University City location who are really having that as a part of their to do list as they evaluate sites.

We also think we are going to see continued expansion of some of the anchor institutions whether it is the expansion by the University City economic engines like Drexel and Penn and CHOP, but there's also some other large institutions that are growing their footprint. For example in Independence Blue Cross who moved 228,000 square feet of employees into downtown Philadelphia.

So we do think that the vibrancy the city has had over the last half a dozen years continues to build so we really do look at Philadelphia in the ascendancy in terms of generating long-term demand. We are seeing that reflected in the pricing of residential projects where retail rents have been going, certainly from an office standpoint, as George articulated very, very good mark to market combined with a dearth of available space.

So I think from an operating standpoint we feel as though Philadelphia still has a lot more room to run. I think when we took a look at the investment front quite candidly, we are seeing a lot of good things there. There is a number of properties on the market, a couple of trades that have recently happened. There was a $40 million trade in University City that went off at well over $200 a square foot in the low 6% cap rate range, a number of other properties being marketed downtown from an office standpoint. If they are kind of A or A- properties the expectation is that they will be pricing well into the mid- to upper $200 per square foot and cap rates into the mid to low sixes.

So we think Philadelphia's future and their growth is different than their past cycle and I think that is really being driven by we think some very strong economic underpinnings that I think create a situation where we really do as I said think Philadelphia is being repriced. And as there gets to be a little bit of a fray in some of the Gateway markets, we are certainly seeing a broader and deeper investor base looking at particularly University City and the CBD on both the office and the residential side.

Thanks. That is great. And my second question kind of big picture. I think investors have probably been happy to see you sell Richmond and stuff in Jersey and Delaware. You are dominant in Philly. I am curious what do you think of Brandywine's competitive positioning in DC and Austin? And if you think further out a few years or several years, how should your capital be deployed? Do you think you should diversify more into those markets or kind of retrench into Philly which like you said is kind of transforming.

It is a great question. I think the way we assess it, we certainly think that we have over the last couple of years created a good competitive advantage in the Austin market place. We are a top landlord there, have a tremendous staff in place, have a good financial partner in some of the existing properties, have moved forward with I think a wonderful transaction on the Broadmoor campus with IBM. We bought them out last year and now with them staying on as a tenant that gives us some significant redevelopment and development opportunities.

So when we look at all of the tools that create a very competitive platform, we certainly think Austin is at or approaching the same kind of competency levels we have here in Philadelphia.

We like the durability of the Washington DC market. We think the combination of Austin's vitality, Washington DC's durability and the room to grow in that market combined with Philadelphia's stability provide a very effective investment platform for the Company.

Clearly as we look at DC, it is a broader much more competitive marketplace. We have a great team in place there. As I have indicated on previous calls, we do expect to be a net seller of some of our existing properties there short term but certainly looking for an opportunity to grow our footprint inside the Beltway and inside the District.

Certainly, look, the market will determine whether we can achieve those goals. I think that remains a strategic objective. We are going to be very careful how we execute that and evaluate alternatives but we certainly would see the Company over the next few years continue to grow our presence in Austin.

This past quarter I think through the sale of Cira Square demonstrated that we are certainly very keen on understanding market timing in terms of harvesting value so we hold a fairly big asset in Philadelphia, we bought a wonderful price per square foot great rate of return and realized a 25% rate of return on our invested capital.

And I think we will look at Philadelphia the same way going forward. Certainly from the perspective if the Philadelphia investment market continues to perform as well as some of the stats indicate, Brandywine is sitting here with an average investment base in our CBD portfolio in the trophy class space of just slightly more than $200 per square foot. So we think we are in a very, very good position to both run the portfolio and generate growth but also potentially sell components that might generate great returns for our shareholders.

Great, thank you.

Anthony Paolone, JPMorgan.

Thanks and good morning. First, on IBM Austin, if I recall I think the range was they could re-up as is with their space or you guys could undertake pretty big redevelopment plans across that whole asset. Where does it look like it is going to shake out in terms of dollars that you guys need to put out to get everything done there?

We are still evaluating that. I think one of the changes since we wound up doing the transaction with IBM as a co-owner and bought out their interest was that we really did anticipate that they were going to be vacating more space. So we have ramped up a master development program and have a great team on board and are looking at redesigning the entire campus.

Clearly with IBM's decision to stay in the majority of these space and certainly knowing that their occupancy levels, their utilization rate is very, very high, we started to shift our attention primarily to the front part of this site which is fronts on Burnet is just directly across the street from The Domain and we are actually going through a planning process there now, Tony, that will quantify for us both the amount of square feet that can be built there but also the use of that.

We certainly think that a portion of that front site are very good retail as well as residential uses which we will certainly look to sell those off more partner with a quality player. And then we are really assessing the level of office demand that we would see at that location.

What is interesting is with the building that IBM gave back that we have plans to renovate and are pricing that up now. We have already started to see some pretty good activity. So we will see how extensive that renovation plan needs to be based upon the current pipeline of prospects we have.

I know that is not really a quantifiable answer for you but I think we have a couple of big moving pieces that certainly as we advance further in the year we think we will be in a good position to outline a much more definitive timeline as well as a set of numbers that people can look to.

Okay, thanks. And then just as I think through again the asset sales that you have got teed up but then also sort of a little bit of capital that is being committed now to Schuylkill Yards and maybe some redevelopment in IBM and build to suit you announced, like how much more runway do think you have to start projects before you think about either more sales or other sources of equity?

Look, I think certainly as I mentioned before and certainly from the Board and management's perspective and we really do look at maintaining the balance sheet discipline as a predicate of everything we do.

So even when we look at our sales program for the balance of the year first of all, we are doing what we typically do which is put a lot more properties out there than we've targeted to sell. We think number one, that gives us a much higher visibility on what is happening in the investment marketplace. Number two, eliminates the pressure from us as a seller since every buyer out there knows that every REIT is trying to sell a lot of properties. So we want to make sure that we can remain a price taker as opposed to a forced seller.

But look, I think frankly as we've said over the last couple of years our best source of capital is by recycling assets and I think we demonstrated that discipline over the last several quarters by the volume that we sold and by the mix of what we sold. And I think we certainly anticipate that being a driver of our business plan going forward.

Okay, thank you, guys.

Steve Sakwa, Evercore ISI.

Thanks, good morning. Jerry, I was just wondering if you comment a little bit about the buyer pool on the assets that you are trying to sell and just how they think about financing, any issues within the CMBS market? Just trying to get a sense for if the buyer pool has thinned out or if return expectations have changed over the last three to six months?

It is a great question, Steve, and I think everyone is trying to get a high level of clarity and visibility on that. I am sure other companies may have a different perspective but certainly we will share with you what we are seeing.

We are seeing in some of the assets that we are trying to sell, we are seeing a slightly shorter bid list and we are seeing bids come in more subject to financing than being locked down at the time they submit their bid. Clearly we are hearing that there is rumblings within the CMBS market that for call it commodity type product financing and the terms of those financings are getting a little bit more difficult. But for us what we've looked at really is the buyer pool kind of remains local syndicators. We have a couple of smaller institutions that are bidding on a couple of our larger properties and they would typically do bank or life insurance financing and that seems to be working pretty well at this point.

But so many of our properties have just really gone in the market that the level of price discovery I can share with you is really premature to find out whether there has been a change in cap rates. We certainly know that economic growth expectations have moderated. We know that a lot of folks feel as though we are a bit long in the economic cycle. So whether that translates into high risk premiums on certain assets from our standpoint really remains to be seen.

I think if you look at lot of the broker data for the first quarter, you've seen kind of a flattening of pricing in certain product types. We are certainly seeing very healthy demand for core assets and certainly as I indicated earlier, I know some folks are selling assets in CBD Philadelphia where there is very strong bid lists.

I think from our perspective we are certainly seeing some pause but nothing at this point that has meant that pause is more than that. We will probably have more visibility on that at the end of the second quarter.

Okay, thanks. And then just secondly with the Evo purchase, has the long-term strategy around your ownership changed going to 50% now or is this something that you still might monetize down the road or is this kind of a long-term keeper now with this 50% ownership level?

Good question. Thanks for asking. I didn't touch on that. No change at all in our long-term strategy. I think our partner, Harrison Street and Brandywine, we are going through a refinancing cycle right now and the expectation is that within the next three to five years we will monetize that probably the shorter end of that curve.

Okay, thank you.

John Guinee, Stifel.

I've got a third of a question for each of you three. First, George, the Lockheed Martin move out reminded me that you guys have a lot of experience with defense contractors as tenants. Can you talk about any trends or thought process you think of the defense contractor as a tenant in this day and age?

Second, for Tom, you mentioned I think $2.14 per square foot per lease year for leasing costs and I wasn't sure whether that was included revenue creating CapEx or was just revenue maintaining CapEx?

And then for Jerry, when are you going to update your very dated corporate logo?

This is George. I will go first. On the defense contractor side, I mean clearly we have taken our allocation of pain over the years from the likes of Lockheed, etc. So I think with those type companies going forward, it is just being careful about structure of the deal. I think the largest one that we have left in the portfolio is Northrop Grumman based on today's utilization of the space we do feel good about. That is the 12-31-17 expiration but I think oftentimes these defense contractors want a lot of early outs and aren't necessarily always willing to pay a penalty for some of those. So I think it really comes down to lease structure and then kind of understanding what alternatives may be in the marketplace.

And the $2.14 was revenue maintaining only for the quarter.

Also to add to that, John, that is a cash number. So $2.14 is what we did on leases that we signed during the quarter. That doesn't necessarily translate into what we are putting into the quarterly cash flow that you are seeing. It will be down the road.

Okay.

And John, soon.

Thanks.

Jed Reagan, Green Street Advisors.

Just to clarify on the IBM situation in Austin, so have they fully committed to a renewal on their 2017 expirations or is that still an ongoing conversation and I guess what percent of that space is still in doubt I guess?

Yes, the 2017 expiration they have committed. The document is in their hands for execution and it is for the 600,000 square feet that expires in 2017. They did give us back 144,000 square feet that they vacated on March 31 and that is the building we plan on taking out of service in the second quarter and repositioning and as Jerry mentioned on an earlier question, we have had a number of prospects already taking a look at that building.

Okay. Order of magnitude sort of if you can remind us of the expected mark to market on that renewal?

Yes, the mark to markets there are extremely favorable, they are close to 25% on a cash basis and 30% on a GAAP basis.

Okay, so that is something we could look for in the coming months it sounds like?

Yes.

This came up earlier but if you can just give an update on the Allstate JV in DC, how much dry powder is left to deploy in that venture and is the venture looking to buy or sell assets this year?

It is Jerry. There is really not any dry powder left in that venture and one of the properties that we have on the market in Metro DC is one of the joint venture projects that we have with Allstate out at Fairview Park.

Okay, great. Thank you.

Rich Anderson, Mizuho Securities.

Good morning and great quarter and call. Jerry, in the interest of derisking the enterprise which is basically what the movement is here if you could use one phrase, I am curious where you stand on development as a percentage of the assets with FMC? You are in a double-digit territory in terms of your leverage to development. I'm wondering long-term if you think you could see kind of a run rate being somewhat below that in the interest again of derisking the platform?

We would definitely expect to have our development run rate be below where we are right now. Right now we are still completing 1919, FMC is under completion, we just rolled off Encino Trace. So we certainly would expect that a couple of things.

One, the run rate would be lower. Number two, we are going to be very cautious on proceeding with any new developments. I think this smaller transaction we announced in King of Prussia and the Subaru Training Center I think reflect kind of our philosophical approach which is we want as much pre-leasing as possible with as much certainty of deliver as we can get.

Certainly as I alluded to earlier, we are in an environment where construction prices continue to rise so having a clearly defined pre-developed building that we are through design and development and we get good pricing on it is important which is why we are doing some of this pre-development work upfront so we can kind of quantify the cost side of the equation so we know exactly what our marketing platform needs to be.

And then certainly we do believe in the perspective a lot of our customers that they are looking for better space in better locations which is why we spent so much time last year kind of re-shifting our land-based to be in a great position to receive some of that demand. But very clearly from our perspective in terms of assessing risk, assessing where we are in the cycle, assessing and controlling construction costs, we are really looking very much at properties that are pre-leased with good sponsorship.

Great. Thanks for that. And then maybe a question for George. You mentioned some of the lease terminations in Malvern and Lockheed and eBay in the second quarter. I guess eBay was a surprise. Were the other two in your original guidance? And the reason why I am asking is trying to get a sense of where occupancy will move on a quarterly basis. You reiterated your full-year target of 93% to 94% but I would assume there was maybe some more volatility in the number with those events and maybe that they reason also why you have maintained your CAD guidance even though you raised your FFO guidance?

Yes, great question. The eBay move out did come as a surprise. That really is going to be our large move out for the second quarter and that really is going to be kind of the negative absorption we anticipate for the second quarter. And then based on all of the leases that we have already signed, we are well-positioned for that to then rebound in the second half of the year. As I mentioned in my commentary, we will see a drop, 60 to 70 basis points in (multiple speakers).

Okay, I missed that. And also the leasing costs related to those vacancies, the reason behind CAD staying unchanged? You came in lower than your target for capital costs. I am just wondering what the upside potential is on your CAD guidance?

Rich, it is Tom. On the CAD guidance, we leave it within the range unless we see a clear reason that we are going to significantly go below the range or go above the range. So it is still within the range. But that said, some of the upside that we have talked about and the increase to the revenue create for example assuming that for example IBM stays and does an extension, that will not necessarily be an immediate cash increase. It will be an increase to the blended extend of that lease. So it really wouldn't have a huge impact on cash and there will be a little more capital cost probably with some of the leasing but we are still within the range and it would take a pretty good-sized move for us to change that.

Okay, perfect. Thank you.

Jamie Feldman, Bank of America Merrill Lynch.

Thanks. I was hoping you could talk a little bit more about operating conditions in Northern Virginia and kind of where you think we are in the cycle and prospects for a stronger recovery or it will be kind of neutral from here?

Look, I think we are feeling good about our portfolio along the toll road. We as you saw last year invested some capital dollars in our Dulles Corner properties and those are starting to lease up and the buildings that we renovated in particular have leased up. I think the large move outs I think which really were kind of the bogies that we suffered over the years, those are all kind of behind us I think.

So from an overall activity level, I think we are pleased with kind of activity levels, how our portfolio is positioned. I do think however though when you kind of look at cash mark to market given the long tenure of some of those tenancies and the decline in overall we are so kind of in that negative cash mark to market phase. So I think we still have some additional work to do to see overall cash rental rates continue to climb back to earlier levels.

And then what about just simply tenant demand?

Again I think activity levels -- inspections are good, I mean proposals are being issued. We have seen a number of expansions even within our own portfolio. Two of the tenants that we put in the 2411 Dulles Corner after those capital renovations have already expanded with us. So again, and they are not defense contractor oriented companies so more kind of professional service, consulting, technology consulting type companies.

Just to add onto that, we have had the benefit of as George mentioned, the properties we have left on the toll road are very good and we very well maintain them. We put a lot of money into them. Look, the activity levels are steady to improving, economics are lagging behind. I think we were very happy to have moved out of our off toll road properties even to the point we are trying to sell the Fairview assets within the Allstate venture. But we are still taking price which is different than we are seeing in the other marketplaces.

Visibility seems that that is going to change. Certainly there is a lot of good fundamentals that are driving that. There are overall good activities in Tyson's last quarter as well as spot parts of the toll road. But it is still a market that is in the recovery phase. We clearly think it has bottomed. I think it is recovering but it can't recover fast enough for any of us so I think we are all focused on absorbing the space we can on the best terms we can, getting that portfolio back above 90% moving forward.

And then finally for Tom, how should we think about some of your unsecured maturities this year and next year?

The maturities we have for 2016 debt maturities, I think at this point we have now completed those. The 2016 bonds were paid off with cash. We just refinanced basically outstanding balance to Logan so for 2016 we are done. For 2017, we do have a $300 million maturity at 5.7%. We will monitor the market right now on where we think we could refinance that or if we increased sales, we could look to not refinance the whole amount.

The other thing we have is the preferred stock which comes due well it becomes open to redemption at par in 2017. I think you will see us use some of our ending cash proceeds to repay that at 6.9%. So chances are we will target to take that out in 2017.

The only other financing we have is a consolidated property that is part of the Allstate JV in Fairview Park and as Jerry mentioned earlier, that is a set of properties we are looking to sell which would eliminate that maturity. So that is really our maturities for the next -- through the end of 2017.

Okay, great. Thank you.

At this time I would like to turn the call back over to Jerry Sweeney for closing remarks.

Thank you very much for joining us for this quarterly earnings call. We look forward to updating you on our business plan progress next quarter. Thank you very much.

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