Brandywine Realty Trust (BDN) 2016 Q2 法說會逐字稿

Good morning. Welcome to the Brandywine Realty Trust second-quarter earnings call. (Operator Instructions). I would now like to turn the conference over to Mr. Jerry Sweeney, President and CEO. Sir, you may begin.

Nan, thank you very much. Good morning, everyone, and thank you all for participating in our second-quarter earnings conference call.

On today's call, with me as usual are George Johnstone, our Executive Vice President of Operations; Tom Wirth, our Executive Vice President and Chief Financial Officer; and Dan Palazzo, our Vice President and Chief Accounting Officer.

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

So to kick off as we normally do, I'll provide an overview of our three key business plan components. George will then discuss 2016 leasing and operating efforts, and then we'll turn the call over to Tom to review our financial and balance-sheet results.

So looking at the quarter and after significant disposition activity in Quarter 1, the second quarter was relatively quiet for us. Our focus for the quarter remained on operational performance and executing our 2016 business plan. That focus is paying off, as we've had a very strong year thus far in 2016.

During the first half of this year, we made significant progress on our business plan and advanced our investment and balance-sheet objectives. On the investment front, we have executed 97% of our $850 million disposition target, with the potential to exceed this level. Our 2016 dispositions will substantially complete our portfolio repositioning strategy, and going forward, it's really fine-tuning our submarket positioning to drive value creation.

Just as a frame of reference, since early 2015 we have sold approximately $1.2 billion of assets at an average 6.9% cap rate, thereby really transforming the operating portfolio of the Company. And those efforts have produced a stronger forward growth profile, reduced recurring capital spend, and achieved our intermediate balance-sheet targets. We are now just beginning to see the impact of these efforts on our operating performance. And looking ahead, we believe we are exceedingly well positioned for future growth as an urban and town center operator and developer.

In looking at operations, as the numbers indicate we are well on track to achieving our 2016 key business plan goals. We had another strong quarter, leasing over 1.2 million square feet, with 2.4 million square feet executed year to date, which exceeds the same-store numbers achieved last year. We ended the quarter at 92.1% occupied and 93.5% leased, up 40 and 50 basis points, respectively, from prior-year levels, but, as we expected, down 70 basis points from Q1, primarily due to known moveouts that we had incorporated to our business plan.

Our mark to market on both new and renewal leases for the quarter was very strong, with 13.1% on a GAAP basis and 5.8% on a cash basis, both well in excess of our targeted ranges.

Our speculative revenue plan is 97% executed and 86% executed on a square footage basis. Given the strong performance thus far, we are increasing our 2016 revenue target to $28.3 million. So our revenue target is up 14% from our initial 2016 business forecast at the beginning of 2016.

Tenant retention for the quarter was a strong 73%. Our same-store numbers for the quarter were 2.9% on a GAAP basis and 1.1% on a cash basis, again, as our business plan projected, a below-range quarter result for this metric, primarily due to several moveouts in King of Prussia and the expiration of some free rent periods. We expect Q3 and Q4 to return to range levels. So for the year, we are maintaining our guidance range of 3% to 4% on a GAAP basis and a cash range of 4% to 5%.

Leasing capital for the quarter came in at $1.59 per square foot, significantly below our targeted range of $2.25 to $2.75 per square foot, but that's primarily due to IBM's as-is renewal in our Austin market. Due to expected Q3 and Q4 activity, our full-year number will be well within our existing range.

For the quarter and the balance of 2016, we are now posting numbers that demonstrate our improved portfolio and operating approach to drive strong same-store growth and positive mark to market. In looking quickly at our balance sheet that Tom will amplify, our 2016 disposition plan has generated ample liquidity and driven improvements in all of our leverage metrics.

We have reduced our net debt to EBITDA from over 7 to down to mid 6's at quarter-end. We reduced our net debt to total assets from over 42% at the end of 2015 to about 37% at quarter-end. We've reduced our weighted average cost of debt from just shy of 5% at year-end 2015 down to about 4.5% at quarter-end, and we also paid off our 2016 bonds in cash of $150 million that were due in April 2016 and retired that debt that had a 6% rate.

We also refinanced about $87 million of secured debt, extending that maturity by four years and lowering the rate from about 7.6% down to just below 4%, resulting in an annual interest savings of $3.1 million. As Tom will amplify, we have no further debt maturities in 2016.

So after all these debt payoffs, we end the quarter with a net cash balance of $266 million, with zero balance on our $600 million line of credit. We anticipate having a cash balance at the end of the year of approximately $155 million. We further anticipate continued EBITDA improvement as FMC comes online and anticipate ending the year around mid-6.5 times.

On the investment front, we did sell about $61 million of properties during the second quarter, which increased our 2016 total to $824 million of sales, or, as I mentioned earlier, 97% of our $850 million target at an average cap rate of 7.1% cash and 7.3% GAAP. Including sales accomplished to date, we are maintaining our 2016 disposition guidance of $850 million and have about $25 million of future sales under contract planned in the third quarter at an average cap rate of 7.5%.

We also currently have several properties under letter of intent and more properties on the market in both Pennsylvania, New Jersey, Maryland, and Virginia. As we get more visibility on these sales efforts over the next several months, we will certainly re-look at our $850 million target, and as I mentioned last quarter, if the market presents an opportunity for us to exceed that target, we will.

These transactions, our development pipeline, and operating performance put us 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 in the next six to eight quarters.

Just some quick notes on several development projects. 1919, as you know, is our joint venture project with CalSTRS and LCOR. That project is now open for business. The office and retail component is 100% leased. The 215-car garage, which recently opened, is already averaging 63% occupancy daily. The first residential units were delivered in March 2016. We are already 45% leased and 31% occupied. Substantial completion occurred during the early weeks of July. We still anticipate a 7% return on this project and are very pleased with the reception by the market, the leasing acceleration, and the rent levels thus far.

Our interior renovations at 1900 Market are substantially complete. We still anticipate some exterior improvements over the next several quarters, upon obtaining some additional approvals. We had the AmeriHealth division of Independence Blue Cross move into their first phase of occupancy that will ultimately aggregate 228,000 square feet. The project's 89% leased currently, a very strong pipeline of transactions, and we are still projecting a stabilized free and clear return of over 11%.

During the quarter, we also commenced development on a 110,000-square-foot, 100% leased build-to-suit property in our King of Prussia, Pennsylvania, markets to a single tenant on a 12-year lease. That project is scheduled for completion in the second quarter of 2017. Total construction costs are estimated just slightly more than $29 million, resulting in a 9.5% projected free and clear return.

FMC Tower continues on schedule. The office component is completed and FMC moved into their space in May, slightly earlier than planned. Other tenants are scheduled to move in starting in August through Q4. The office component remains 75% leased, with a strong pipeline of deals in play on the remaining 150,000 square feet. That pipeline is very strong and, given the timeline of some of those projected occupancies, we have looked at moving the stabilization date on that property to Q4 2017.

On the residential front, those units will start delivering in Q3, extending into Q4, with a marketing campaign well underway.

Design and approval work on our Schuylkill Yards project continues. As you may recall, this development site is located in University City, adjacent to Amtrak's 30th Street Station and in close proximity to Cira Centre and Cira Centre South. The structure is a long-term option with milestone dates. This transaction provides us with significant structure and flexibility and the ability to bring in other development and financial partners. Page 14 of our supplemental package outlines this opportunity in more detail.

We also refinanced our evo joint venture in the second quarter, paid off an existing construction loan of $94 million, and replaced it with a $105 million term loan, with the additional ability to provide $12 million more financing based upon project performance. Brandywine received $6.3 million recovery of our capital base as part of that refinancing. The project is currently 98% leased and 90% leased for the upcoming school year.

We also continue to advance our planning and predevelopment efforts on several of our development sites in Philadelphia, the Philadelphia suburbs, Washington DC, and Austin, including finalizing the approval process at 405 Colorado in downtown Austin and commencing the master planning process at our Broadmoor campus in northwest Austin. Marketing and pre-leasing efforts are underway at a number of these predevelopment projects and we are also seeing an increasing number of build-to-suit opportunities in several of our markets, further evidencing customer-driven demand towards higher quality, more efficient, flexible office locations.

Our key objectives remain growing cash flow and net asset value. The dispositions and developments we executed are a compelling step in the right direction and, as evidenced this quarter, will be translated into improved operating results going forward. Narrowing the gap between FFO and cash flow remains a key strategic objective. Our portfolio trend lines are encouraging, reflecting a better asset mix, portfolio stabilization, continued control on capital, and increasing our average lease term and annual rent escalations. Our sale transactions have raised cash, reduced debt, improved our portfolio, and generated more cash flow.

Along these lines, we were delighted to have the Board increase our dividend on May 24 by 6.7% to $0.64 a share annually. With this in the consideration, we are projecting our CAD range at $0.80 to $0.90 per share or about a 70% payout at the midpoint, which is a very well covered dividend.

At this point, George will provide an overview of our second-quarter operational performance, some color on our 2016 business plan, talk briefly about market conditions, and then turn it over to Tom for a review of our operational performance.

Thank you, Jerry. It was another productive quarter that has led us to nearly completing the business plan with solid operating metrics on a transitioning portfolio. Leasing activity remains robust in all of our markets. The pipeline, excluding development properties, stands at 2.2 million square feet, with over 200,000 square feet in lease negotiations.

Turning to our three core markets, our 98% leased CBD Philadelphia portfolio outpaces the market by 850 basis points. Leasing spreads remain robust and forward rollover exposure has been reduced to 3.3% in 2017 and 8.4% in 2018.

The overall outlook for the greater Philadelphia region remains encouraging. Unemployment is down year over year and positive absorption occurred for the fifth consecutive quarter. Second-quarter absorption was 272,000 square feet, raising the total for the year to 435,000 square feet. The west of Broad submarket absorption is even more favorable, with 665,000 square feet for the year.

The Crescent markets continue to operate in a similar strong fashion where we are outpacing market vacancy by 440 basis points. Our 99% leased Radnor portfolio has seen strong double-digit rent growth during the year. Our continued lack of inventory in Radnor has forced expanding tenancies towards King of Prussia, as evidenced by our development at 933 First Avenue. That known moveout and a few others in 2017 will allow us to accommodate other expanding Radnor tenancies, open the submarket to out-of-market tenants, and provide an opportunity to increase leasing spreads.

Overall second-quarter suburban Pennsylvania absorption was 726,000 square feet, raising the year-to-date total to 954,000 square feet. This increased submarket demand has translated into solid leasing spreads for our portfolio at 12.6% on a GAAP basis and 3.7% on a cash basis.

Turning to Metro DC, job growth surpassed the rate of growth for the entire nation during the quarter. Regional unemployment dropped an additional 70 basis points to 3.5%. Employment growth is primarily being driven by the professional and business services sectors. Our Toll Road properties at 92% leased outpaced the market by 900 basis points. Overall absorption along the Toll Road has been flat for the year. Activity was up in Tysons, but equally down in Dulles Corner. Buildings located within a half-mile of the Metro continue to outperform those off Metro.

In Austin, strong demand has kept Austin's office market booming. Overall Austin occupancy is 91.8%. Second-quarter absorption totaled a modest 173,000 square feet, while 480,000 square feet of new construction delivered during the quarter. An additional 1 million square feet is set to deliver in the first quarter of 2017. It is currently 44% pre-leased, with another 28% in leases out for signature. That leaves only 300,000 square feet to meet strong demand.

Our Austin portfolio continues to perform well. Rents within our DRA joint venture are projected to increase 14% to 16% on a GAAP basis and 8% to 10% on a cash basis.

At our Encino Trace development, we've signed three additional tenancies, totaling 74,000 square feet, and the project is now 82% leased.

In terms of the updated 2016 business plan, our remaining plan is in great shape as leases currently in negotiations account for the majority of the balance left to lease. Reducing forward rollover exposure remains a priority for our regional leasing teams. To date, we've renewed over 1 million square feet of 2017 expirations at an average mark to market of 17% on a GAAP basis and 7% on a cash basis. This leaves approximately 1.5 million square feet or 9% of the portfolio still scheduled to expire.

We have several third-quarter 2017 expirations that are projected to vacate. Discussions and varying stages of negotiations continue with the remainder.

So to conclude, we remain pleased with the level of activity in our core markets, the achievement to date on the business plan, and the quality of the plan's key operating metrics. At this point, I will turn it over to Tom.

Thank you, George. Our second-quarter FFO totaled $57.4 million or $0.32 per diluted share.

Some observations on our second-quarter results. Same-store growth for the second quarter was 2.9% GAAP, 1.1% cash, both excluding termination fees and other income items. We've now had 21 consecutive positive quarters of GAAP growth and 17 for the cash metric.

G&A expense decreased to $6.1 million, which is below our previous $6.6 million guidance. Our second-quarter G&A was below forecast, primarily due to some lower professional fees.

FFO contribution from our unconsolidated joint ventures totaled $8.9 million, above our first-quarter projection by one point -- $0.4 million, primarily due to improvements in our Austin and DC portfolios.

Interest expense decreased to $19.8 million, a $3.9 million sequential reduction from the first quarter, primarily due to the retirement of the bonds and using cash on hand and the refinancing of Two Logan Square to a much lower interest rate. Compared to 2Q 2015, our quarterly interest expense, excluding capitalized interest, has now decreased 24% due to the debt reductions and lower interest rates on the refinancings.

Our second-quarter CAD totaled $37.2 million or $0.21 per diluted share, representing a 76.2% payout ratio. During the quarter, we incurred $10.5 million of revenue maintaining capital and $6.5 million of revenue creating capital.

Looking forward to our third quarter 2016, property-level operating income will be approximately $75.5 million, a sequential increase from the second quarter by $3.5 million, primarily coming from same-store portfolio and FMC Tower.

G&A expense for the third quarter will be approximately $6.6 million and the full year will be approximately $28.5 million.

Other income, we expect third quarter to be $0.5 million with our full-year estimate of $2.8 million, and term fees will be $0.6 million for the third quarter and our full-year estimate is $2.5 million.

Interest expense for the third quarter will increase $0.8 million to $20.6 million due to reduced capitalized interest, and our full-year 2016 expense should range between $86 million and $87 million. The reduction in capitalized interest is due to the occupancy of the office portion of FMC Tower being placed into service, and this trend will continue as our development pipeline continues to decline.

FFO from our unconsolidated joint ventures should total $9.3 million and we project our joint ventures will contribute $36 million for 2016 to FFO. Third-party fee income should approximate $24 million and $9.1 million of related expense.

Looking at our general business plan assumptions for the balance of 2016, to date we've achieved 97% of our goal on sales. While we continue to maintain those sales based on properties under LOI and marketing, we hope to exceed that goal for the second half of the year. Our 2016 business plan doesn't contemplate any speculative acquisitions. Our weighted average share count will remain around -- at 177.7 million, with no additional share buyback or ATM activity.

Looking at our capital plan for the second half of the year, we project CAD to be between a range of $0.80 to $0.90, reflecting about $20 million of revenue maintaining CapEx for the balance of the year.

Our capital plan for the remaining six months is comprised of the following groups. For primary uses, we have $120 million of development and redevelopment to occur through the balance of this year, $60 million of aggregate dividends, $10 million in net acquisition costs and capital spend for our recent land acquisition in Austin, $7 million for the JV investments, primarily being spent in our developments in Washington DC, $25 million of revenue creating CapEx, and $2 million of mortgage amortization.

Sources for that is $194 million of cash flow after interest, the additional speculative sales of $26 million, and $15 million of financing from Encino Trace, anticipated to close in the fourth quarter based on the recent leasing activity.

Based on the capital plan outlined, our ending cash balance will decrease from the second quarter by $111 million and will approximate $155 million. We also projected our debt to EBITDA ratio will improve into the range of mid-6's, improving to 6.4 to 6.5, by the end of the year. In addition, our debt to JV will be approximately 38%. I will now turn the call back over to Jerry.

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

So to wrap up, our 2016 business plan is very much on track. We really do have excellent momentum in the operating platform. We believe we'll continue to generate solid NOI growth, strong same-store performance, positive mark to market to create both the growing earnings stream and net asset value.

The focus for the balance of 2016 is on operational excellence, achieving all of our business plan goals, executing the last phases of our portfolio repositioning strategy, and ensuring we have one of the best operating and growth platforms in our sector. Key priorities remain leasing, generating cash through sales and improving cash flows, reducing leverage, pursuing internal growth opportunities through executing on our existing and future development pipeline.

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

(Operator Instructions). Michael Lewis, SunTrust.

Thank you. My first question, is the stock price getting close to where you could think about opportunistically issuing equity or are property sales just the better way to go? And then, in either case, what are your thoughts on use of proceeds?

Well, look, as we sit here today, as we indicated before, I think our team firmly believes that our best path to raising capital is to harvest value out of our existing asset base.

We still feel as though the sales market has some legs to it. We are getting good pricing on a per square foot and a cap rate basis. So that remains the major driver of generating liquidity for the Company.

Look, I think as we mentioned in both Tom and my comments, as we look at the application of those proceeds, it's really to generate sufficient liquidity, have an ample cushion in the event that the market does in fact turn, have the capacity to continue our development plan and deleveraging strategy, certainly looking ahead, Michael, to 2017. You know, we have $300 million of bonds coming due in May at about a 5.7% interest rate. We have preferreds that are callable in the first quarter with a high coupon on it, so certainly as we look at capital allocation and balance-sheet strategy, raising cash to pay off at least a portion of those 2017 bonds and retire the preferreds, as well as our funding the existing development pipeline, really remains the focus that we see ourselves allocating capital.

We don't really have any acquisitions built into our current plan. We're continuing to invest, as Tom laid out, money in our predevelopment pipeline. But I think that's how we view the world, from a very straightforward basis. Certainly I think we are as happy as all the other management teams with the continued traction of the REIT marketplace and the index moving up, as well as our sector, but certainly that doesn't change our perspective that as of -- as we view the world today, our best direct path to achieving better operating performance, repositioning our portfolio, generating better forward growth, and deleveraging our balance sheet is by continuing what we have been doing, which is simply recycling some assets for sale.

Thanks. And then, my unrelated follow-up, so you bought some land in Austin. Could you maybe talk about land costs and competition and your appetite for filling your land bank?

Yes, look, I think we -- we did acquire a partial in Austin that we think is very well located and will fit very much into our competitive profile in that market.

But we also, concurrent with acquiring that land, have significant a piece of that land under agreement to sell to a third-party residential developer and a hotel developer. So it will reduce our overall investment base in the remaining land from an office standpoint, achieve getting some co-contributors for overall master planning and site infrastructure costs, and is very consistent with our program of looking at our future office developments being part of mixed-use communities.

We'll wind up having a net investment base in that property of about $10 million or so after recovering the sale proceeds, but in addition to that, I think as we also put in the supplemental package, we have approximately $40 million of land under agreement. Some of those land parcels are going through approvals by the buyers, but we would certainly look at recovering some land equity, so to speak, over the next couple quarters.

You know, the game plan is to run our land inventory base kind of in the 2% to 3% of asset base range and that's kind of what we are targeting to in terms of both our land acquisition and our land disposition activities.

Frankly, land prices, we are seeing an escalation of land prices in several of our markets and we're thankful that we have a good land base in those markets and that there is a depth to selling some of the land holdings we view as noncore. Frankly, in a couple of other markets we are seeing land prices remain fairly stable. So it's a submarket-by-submarket call.

But even as we evaluate additional land acquisitions, it's always under the guise of kind of maintaining that 2% to 3% of asset base on land, but more importantly financing those land acquisition opportunities through the dispositions of land that we view as noncore to our business plan going forward.

All right, great, thank you.

(Operator Instructions). David Toti, BB&T Capital Markets.

Just a quick question with regard to dispositions. The other suburban market is about 8% of your NOI. I know you touched on this a little bit, but how close are those to being earmarked for sale? And when you think about the drag on the portfolio, what's the urgency on some of those sales, given the occupancy delta and the growth delta of a lot of those assets?

Yes, look, I think we continue to go through our quarterly review process of every single asset we own and identify targets for either -- properties for either reinvestment, a more targeted leasing strategy, or for disposition efforts.

So, I mean, when we look at our pipeline of projects that we have on the market today, they are in every one of our markets. They are in Pennsylvania suburbs, both core and non-core submarkets in Maryland, in Virginia, in New Jersey, in Delaware. So certainly, the disposition plan runs the full gamut of all of our different submarkets.

So as I mentioned in my comments, I think the repositioning that we are just about completed on has really created, I think, a very good operating platform, but that doesn't mean that we are going to be any less diligent on pruning assets we think don't have the growth profile that we can achieve by allocating dollars elsewhere.

And just as a follow-up to that, in terms of the dilution on those potential sales, is it your estimation that that would be slightly lighter from a dilution perspective on ongoing sales? I would assume it to be a tighter spread to what's been sold in the past.

Yes, look, certainly I think the bulk of our sales are already booked and in our current plan. So as we essentially have about $25 million more to do on our $850 million of sales. As we start to go through that target and look to formulate our 2017 business plan, I think we do have very good uses of those proceeds in terms of paying down debt that certainly from a cash flow standpoint will be massively accretive and certainly we hope to keep the earnings trajectory moving forward at the pace that we've outlined for 2016.

So yes, I mean, certainly the bulk of our disposition activity really occurred 2014, 2015, and 2016 and we really do think that juxtaposing the future sales campaign with developments coming online will create a better balance sheet, better forward growth profile, and much more manageable capital costs.

Okay, thanks for the detail.

Craig Mailman, KeyBanc Capital Markets.

Jerry, you kind of touched on the fact that you guys had thought same-store was going to come down in the second quarter because of some of the known moveouts, but it looks like to hit the guidance, which you guys raised last quarter, it's going to be a pretty substantial ramp in the back half of the year. Could you just kind of walk through the drivers to get you there?

Sure. I'll kick off that. Certainly one of the things we look at is exactly by submarket what our same-store growth numbers are, and to amplify your observation, we clearly knew from the time we rolled out our original business plan that Q2 was going to be below our range both in terms of occupancy and leasing levels, but also same store. And as we look at Q3 and Q4, particularly with having 97% of the plan already baked, I think we have a high degree of confidence that the same-store numbers in those quarters will on a combined basis put us within our targeted ranges. I mean, George, anything to add there?

I think the continued burnoff of free rent is also a player. So as we get to really the fourth quarter, that's when you really see some lift coming through the same-store on a cash perspective.

That's helpful. Then, Jerry, you had noted that you are seeing some increased build-to-suit opportunities across several markets. Can you go through maybe which markets in particular? Is this on some of the newer land that you guys have been purchasing? Kind of some updates there.

Yes, sure, happy to. I think when we take a look across the markets in the Philadelphia suburbs, in Philadelphia proper, both the CBD and University City, we are talking to a couple of prospects about build-to-suit opportunities on both land we've held for a while, but also some new land holdings.

The other market where we are seeing a very significant number of build-to-suit opportunities is in our Austin market, both in the southwest and the northwest. So we are pretty encouraged by the pace of those.

But we were very happy, Craig, last quarter when we were able to take a tenant who was paying below-market rents in Radnor who needed to more than double in size, move them to a piece of ground we owned in King of Prussia to do a fully leased $29 million build-to-suit on 110,000 square feet at a 9.5% free and clear return, and then create that vacancy that we desperately needed in Radnor to accommodate both existing tenant expansions and also moved that tenant from a -- that tenant space from a below-market return to a market return that's much higher.

We certainly see that same opportunity with some of the build-to-suit candidates we are talking to now, a couple of whom are in our existing portfolio. Some are new, which we are certainly excited about that as well.

But I think it does reflect what we are seeing across the board, which is really a driver of a lot of our investment strategy, that a lot of our tenants are recognizing that now and for the foreseeable future labor markets will be tight. Access to labor will be very important and the ability to have a physical space that is a cultural builder and brand builder for their companies is a very, very important.

So we do think that continuing to work with some of our existing customers and some new customers, to work with them to design and build brand-new office product is a great business strategy for us over the next couple years, and certainly from a numbers perspective, to the extent we can achieve 8% to 10% free and clear returns on long-term leases, it's a very consistent with our strategic objective of narrowing that line between -- or that gap between FFO and cash flow. Because we sign these longer-term leases, it's -- NOI equals cash flow, save for some minor capital repairs over the term of their lease. So we are excited about seeing that opportunity continue to play itself out in our markets.

That's helpful. And just to go back to same-store real quick, Tom or George, how much free rent was there in the second quarter and how much of that burns off by year-end?

I just have it as the straight-line component, not the free versus the step-up.

Yes, Craig, we can get back to you on that. But we do see our straight line running with $6.5 million for just the straight line, forgetting the deferred market rents, but we do see that decreasing over the next several quarters. So I think that that does show that most of that there is a lot of free rent in that $6.5 million, but we can get back to you on the components.

No problem. Thanks, guys.

Anthony Paolone, JPMorgan.

I think in your guidance you just have one start on the development side the rest of this year, but you talked about going into next year. I guess you have redevelopment of Broadmoor, perhaps, and downtown Austin and then Schuylkill Yards. I'm just wondering how you think about sizing the pipeline as you look out the next few years, you know, as you get later into the cycle as well.

Certainly I think, and I think we chatted about this on our call last quarter, as we look forward to 2017, certainly FMC is coming fully online. We have 933 First will be coming online midyear, so I have a number of properties moving from kind of under construction into full development -- into full operations.

And 1900 Market, as I mentioned, we have that pretty much at the tail end of that process. We are looking for some approvals to complete the final stage of that renovation, but certainly in 2017, we just have budgeted some capital for any remaining TI on some of the vacancies there. We have the Subaru National Training Service Center that will be entering construction. So we anticipate about a $17 million, $18 million spend on that next year.

Jumping to like a Schuylkill Yards, we still remain very much in the approval and master planning phase on that. As we identified in the supplemental, we anticipate that will be a $10 million to $15 million spend through year 2017. And then certainly, Tony, to the extent we get any of these build-to-suits pulled together, that would certainly change the amount of dollars directed to those undertakings.

But as we look forward, certainly having a development pipeline in the 5% to 10% of asset base range is where we are comfortable. The reality, though, is that that pipeline needs to be pretty heavily preleased as we start looking forward over the next couple years.

And then, for Tom, it seems like the business plan is pretty buttoned up at this point. What are the key swing factors to get to the higher or lower end of the guidance range?

So, yes, I think on the guidance range, I think, is there to also take care if we do any more dispositions. I mean, we haven't added any to the plan, but, as Jerry mentioned, we have quite a bit on the market.

So we did want to leave room. While that dilution will be back half of the year, so not a full-year effect, it could definitely move our FFO target, and we just want to stay within our range on that side. On the plus side, we do -- George has mentioned some leasing momentum we expect to carry through into the second half of the year. So I think that we have a chance to also see that upper end just hit because of improved leasing. So that's why we left the range kind of where it is.

Okay. So the low end, though, gives you room for asset sales beyond what you had penciled in?

Correct, yes. We've left the low end there to go beyond the $850 million.

Okay, great. Thank you.

Manny Korchman, Citi.

Jerry, if we were to look at all the assets you have out in the market right now in totality, how much more could you or would you be selling if you sold everything compared to your $850 million target?

Yes, look, we have about $50 million in the market right now that are kind of in the negotiation phase, maybe a few more to add onto that, and then have about another $100 million of assets that are entering the market for kind of full launch latter part of the summer or after Labor Day.

What was kind of interesting, Manny, when we looked at it, the average deal size of what we have in the market right now that are in negotiations is only $17 million. I mean, the largest asset is less than $50 million in total and the average cap rate is kind of below the 7% range. So, I think we just want a little more visibility on how some of those discussions go before we look at making any modification of the $850 million sales target.

Great. And then, Jerry, if we can go back to an earlier comment you made, you talked about paying down debt next year and that being massively accretive to cash flow. Do you mean just using the cash you have on hand could be massively accretive or how are you thinking about additional asset sales being accretive in the context of debt paydowns? I was just a little bit confused by the comment.

I think when we take a look at if we are able to pay down higher-priced debt and finance that through the sales of assets that may have a cash flow return after capital lower than that, so we are obviating the need to make investments in tenant improvement dollars that relate to assets that we don't think are generating a lot of growth for us, we think that's a positive trade for the Company.

Great, thanks.

(Operator Instructions). Jamie Feldman, Bank of America.

George mentioned a couple of known moveouts in 2017 in his comments. Can you talk us through what you know at this point on 2017? And then, also maybe give a little bit more color on some of the moves around in Radnor and King of Prussia that we've seen some of the brokers talk about?

Yes, sure, and George and I will tag team. A couple of the moveouts that we anticipate, don't know definitely for sure but anticipate for 2017, are -- a number of those are frankly, Jamie, in buildings that we anticipate selling. So certainly over the next couple months as we start to think about our 2017 business plan, we would anticipate the next quarter would give you a lot more visibility on that question. But George, maybe in terms of Radnor, just bring Jamie up to speed.

Yes, I think in terms of Radnor, the deal we did in moving our tenant out to the build-to-suit in King of Prussia, I mean, that was just an all-around good move for us.

One, it put a piece of land in play for us in King of Prussia. We could not accommodate that tenant's growth in our Radnor portfolio. We've got tenants -- we've got another tenant that we've lost to a competitor who had the same expansion need, so they are going to take some vacancy in Chesterbrook that takes that competition out of play. That's now opened the door for tenants that we do have in our Radnor portfolio that need to expand up at the corporate center. And it quite frankly opens up that Radnor submarket to tenants who have been trying to get to a Radnor ZIP Code and the lack of inventory has just really prevented that over the last several years.

Yes, I think thematically what we are saying is what we hoped for, which is that you are seeing Radnor has had great success. It's at a price point that, frankly, doesn't fit every single customer we talk to. So we are seeing the corollary impact of market improvement by being able to move rents up in the King of Prussia market, drafting off of Radnor and Conshohocken, still getting very good rates of return in our King of Prussia market, and even with that moveout of that tenant at Radnor, we desperately needed, frankly, that inventory to really accommodate some existing tenant expansion requirements, but also keep Radnor very much in the marketing flow of deals.

Yes, and our mark to market in Radnor this year is 14% on a GAAP basis and 7% on a cash basis. So, just an opportunity to kind of churn some of these below-market leases.

Okay, so if I heard you right, you feel like the submarkets will stay pretty stable over the next couple years.

Absolutely.

Absolutely, yes. We actually think Radnor will continue to improve, particularly given some of the expansion of the retail base that you are seeing along Route 30, continued easy accessibility, potentially some rail line improvements, so, yes, we actually remain very optimistic on Radnor's performance.

Okay, and then to your comment on the moveout, you said mostly in buildings that you plan to sell, but are there some that aren't? I mean, just as we sit here today, how should we think about potential vacancy hits to the next year?

Look, I mean, the largest one we have, quite frankly, is in our remaining holdings in California. So, that is a building that we know we are going to lose Wells Fargo. We are marketing that property. We've had a lot of interest in that Concord submarket since Wells announced that they were going to move out. One another sizable deal in suburban Maryland, which is not on the long-term hold process, and then we've got the one I just mentioned a minute ago in Radnor, the 50,000 square feet with Hartford.

So I guess to ask it another way, what's the largest space you plan to keep in the portfolio that is moving out, other than the Radnor one?

It's probably in that 50,000-square-foot range.

All right. And then, can you maybe talk more -- you had some pretty optimistic comments on DC job growth. Just maybe some big-picture comments on what you are seeing in the market and what you are expecting in the market.

We continue to be pleased with our performance down there. I mean, our Toll Road holdings at 92% are outpacing the market. The fact that jobs continue to grow and that the jobs aren't necessarily government contractor-related, they are more professional service related, bodes well. The enriched amenities that we put into our Dulles Corner properties and our Tysons properties have paid off for us and that's what's led us to that improved occupancy level.

Okay, thank you.

John Guinee, Stifel.

Thank you. First, sort of a leasing question for you. What you guys are showing is pretty good mark to market on a gross basis and very low CapEx, less than $10 per square foot, $1.60 a square foot per lease year. Any idea how those mark-to-markets look after you account for the reset of the OpEx, operating expenses? Do they look as good on a net basis?

Those mark-to-markets include the OpEx reset.

So they are on that basis, John.

Aren't these gross rents at $25 and $29?

We take the expiring rent and the expiring OpEx contribution and compare that to the go-forward rent and OpEx contribution. So, they are gross. If it's $25, that potentially could be $24 and $1 of OpEx reimbursement.

We'll catch that off-line. Then the second question is we are going through your development strategy and it looks like you've got a couple sites in the Austin suburbs. You have a site in the Austin CBD. You've got DC pretty well covered at Northeast, Southwest markets, [Boston], and the Toll Road. Got a lot of dirt at Schuylkill Yards, I think in Plymouth Meeting. Do you have any dirt or any development sites in the CBD in the Cira area or in Radnor?

We purchased a site last year in the CBD in Philadelphia at the 2100 block of Market Street. That is what we have kind of in CBD Philadelphia.

In University City, we have a project along Market Street that has a vacant lot that we can build on that's part of our overall Schuylkill Yards master plan. At the current time -- you mentioned in Radnor. At the current time, we don't have any land holdings in Radnor for additional building. We are certainly looking at replanning some of our existing facilities to see if we can create additional density, but that's part of the master planning process and still kind of in the early stages of its evolution.

Okay. And then my last question, I think you mentioned three moveouts in 2017, Hartford, Wells Fargo, the Maryland suburbs, and just deciding to bite the bullet and sell the building after these tenants move out. Is this -- are you selling these buildings at $50 a foot or $300 a foot? And how do the economics work in terms of going from FFO where you might get a 12, 13 yield on the ultimate sale of a vacant building? How do those numbers work?

It varies by property. I mean, I think as George touched on with our property in the two-building complex in California, we are anticipating losing Wells Fargo. It looks as though they will stay in for a decent piece of the space. More importantly, we have some very good prospects there that we think we can lock away as part of the overall sales campaign.

So I think that will be something that will be a viable sale candidate in the market on terms that makes sense for us. A couple of the smaller buildings in the Pennsylvania suburbs where we are losing a tenant or two, they tend to be smaller buildings, so we are actually marketing those to potential users who might want to occupy those buildings for their own use or to some small investors who may look at kind of redeveloping the building once they buy it. So the numbers there on a per square foot basis look pretty good. Certainly deals like that are fairly small in total dollar value, so we certainly think that if we can achieve our historical pace of sales at the cap rates we've historically achieved, they will be blended into an overall picture that makes sense for the Company.

Great, thank you.

Jamie Feldman, Bank of America.

Thanks. I guess just one last question from me. Can you talk more about the leasing pipeline at FMC Tower? No progress in the second quarter, but it sounds like you've got a good pipeline. Maybe talk about what kind of tenants, and then, is there any spillover to some of the other potential projects you have in the area? So that sounds like you have more demand than you do space.

We actually are very happy with the level of demand that we are seeing. Certainly with the initial tenant moving in, other tenants scheduled to be moving in very shortly, the project really is presenting itself better and better every single day. The amount of activity coming through the building, now that it's alive and vibrant, certainly puts us in a very good position, I think, to accelerate the marketing campaign.

The range of prospects, again, we already completed one multitenant floor. We have several other floors that we are planning on multi-tenanting. We have -- and that's from a range of companies who are both in the existing Philadelphia market, but also out in the suburban and New Jersey markets who are looking to move into Philadelphia. And then, we have a number of single or multiple floor users who were actively discussing a move into FMC.

So I think we still feel very good about it. We certainly think the project presents itself even better than some of the market folks thought they might be. So the demand there, we'll see what the depth of it in terms of how much that spills over into our other projects because our major priority right now is making sure that we get FMC leased up, but certainly rental rates, lease terms, capital dollars are all holding very firm to what we initially thought.

Okay. What is the delay? Why do you think it's taking a while to seal up the last 20% of the building?

I'm not sure. Look, we are in the summer, so that protracts, as we see every year on every project, decision timelines. Some of the tenants we're talking to, it's a locational move for them into a different submarket, so there's a lot of factors they need to think through there in terms of employee commuting times, relocations, etc. So I don't think we view it as any abnormal level of delay. I think when we just took a look at the pipeline, took a look at what some of those targeted occupancy dates were, we just thought that we would take a look at moving the stabilization date back a bit to make sure we capture a conservative view on when people actually start paying rent.

Okay, thank you.

Craig Mailman, KeyBanc Capital Markets.

Jerry, it's Jordan Sadler. Just a follow-up on development. Is it your sense that the environment in downtown is strong enough to support or consider a new start this cycle? So was 2100 a possible go? You just sort of -- on the heels of that commentary on FMC, it sounds like you are optimistic, and I'm just -- as you are putting this one through, could this thing work out for this cycle development?

Jordan, how are you? Look, we bought 2100 Market to create a part of a land bank in what we think is a really high growth corridor in Philadelphia. We are operating currently as a parking lot and that is the existing plan. We are doing a lot of planning work on it to take a look at what the potential uses could be. It could be office. It could be a combination of office and residential, retail based, structured parking. So, certainly, we have it in the mix as part of our marketing presentations in terms of our greater Philadelphia portfolio. But that certainly is not something that's on our immediate-term radar screen as starting right away.

Now if some of these prospects we are talking to show a real high definitive level of interest, they want us to move, we can certainly accommodate that request. But I didn't mean to imply that that's on our near-term development story, absent a very heavy pre-lease.

Okay. Is it entitled? For -- currently, it's obviously being operated as a parking lot, but (multiple speakers)

We would have to, Jordan, go through the approval process on that project.

Okay. Okay, thank you.

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

Great, thank you very much. Thank you, everyone, for joining us for the call. We certainly appreciate your continued engagement with the Company. We look forward to updating you on our third-quarter call, at which point in time, as we always do, we'll roll out 2017 guidance. So thank you again and enjoy the rest of the summer.

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