Brandywine Realty Trust (BDN) 2016 Q3 法說會逐字稿

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

I will now turn the conference over to Mr. Jerry Sweeney, President and CEO. Please go ahead, sir.

Kathy, thank you very much. Good morning, everyone, and thank you for participating in our third-quarter 2016 earnings call. On today's call with me today are George Johnstone, our Executive Vice President of Operations; Tom Wirth, our Executive Vice President and Chief Financial Officer; and Dan Palazzo, our Vice President and Chief Accounting Officer.

Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. And although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances 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.

Okay, to move into our presentation. As we normally do, we'll start with an overview of our 2016 business plan. We have also introduced, as is our tradition, 2017 guidance, and we'll provide color on some of the key assumptions driving those forecasts.

Looking at 2016, our business plan is substantially completed, with good visibility on year-end results. As a consequence, we have either increased or tightened most of our 2016 business plan ranges. Our focus year to date remained on operational performance and our investment plan. And that focus has paid off as we believe we have posted strong results and advanced all of our investment and balance sheet objectives.

2016 is a seminal year for us, and we have substantially completed our portfolio repositioning plan. We have already exceeded our $850 million disposition target, with year-to-date sales totaling $860 million, so we are increasing our 2016 disposition goal to $900 million.

Our sales efforts have created a stronger growth profile, reduced recurring capital spend, and accomplished our intermediate-term balance sheet objectives. We are now beginning to see the impact of these efforts in our operating performance. And looking ahead to 2017, we are exceedingly well-positioned. Our overriding objective is to grow earnings, grow cash flow, and maintain a strong liquid balance sheet, all of which are reflected in our 2017 guidance.

In looking back at 2016, our operating goals are essentially in the bag, with 99% of our speculative revenue target achieved. We had another strong quarter, leasing over 700,000 square feet, with 3.2 million square feet executed year to date, which exceeds the same-store numbers we achieved last year.

We also ended the quarter at 92.7% occupied and 93.7% leased. And our mark-to-market on both new and renewal leases for the quarter was 7.9% on a GAAP basis, and a negative 1.9% on a cash basis.

Looking at the year, we have increased our mark-to-market guidance to 11% to 12% from 9% to 11% on a GAAP basis, and to 2% to 3% from 1% to 3% on a cash basis. So strong improvement on both fronts.

Our retention rate for the quarter was just shy of 80%, ahead of our targeted ranges, and we have increased our projected 2016 retention rate from 67% to 73%. Our same-store numbers for the quarter were 1.7 on a GAAP basis and 3.2 on a cash basis. And as George will touch on, we expect an 8%-plus same-store number in Q4, primarily driven by free rent burnoff. And for the year, we have narrowed our GAAP NOI growth from 3% to 4% to 3% to 3.5%; and our cash NOI growth from 4% to 5% to 4% to 4.5%.

Our leasing capital per square foot, per lease year, for the quarter was above our targeted range, primarily due to a higher capital and a large expansion lease in Philadelphia and a renewal lease in Northern Virginia. But year to date, we are well within our range. And as a result we have narrowed our leasing capital range from $2.25 to $2.75, down to $2.45 to $2.55 per square foot per lease year, essentially maintaining the same midpoint.

A key item to note, and we think truly important to growing NAV, is the increase in our net effective rents. For 2016, our average net effective rent increased 5.1% over 2015.

In looking at our balance sheet, Q3 snapshot versus year-end 2015, we reduced our net debt to EBITDA from 7.1 down to 6.6 at quarter end. We reduced our net debt to assets from 42.3 down to 37.7. We have also reduced our weighted average cost of debt from just shy of 5% down to about 4.5% at quarter end.

We did end the quarter with a net cash balance of over $200 million, with a zero balance on our $600 million line of credit. And as Tom will touch on through the source and uses, we do anticipate having approximately a $200 million cash balance at the end of the year. As we certainly look forward, we anticipate further EBITDA improvements as the developments come online, and project ending the year between 6.4 to 6.5 times.

On the investment front for 2016, we sold $35 million of properties during the quarter and increased our 2016 total to $860 million. We are, as I mentioned, increasing our disposition target to $900 million, and expect to end the year at an average cap rate of 7.3% on a GAAP basis and 7.1% on a cash basis.

It's interesting to note, the average occupancy of the properties we sold during the year was 95.5%, which frankly makes our year-to-date occupancy gains highlight the strong run rate through the rest of our portfolio. We currently have several properties under letter of intent and some more properties on the market in both Pennsylvania, New Jersey, Maryland, and Virginia.

We believe these sales transactions, the development pipeline, and our operating performance do put us on track to achieve our long-term target of debt to GAV in the low 30% range, and an EBITDA of around 6 times in the next 6 to 8 quarters.

Some quick notes on a couple of development projects. Our 1919 Market Street joint venture is now fully open for business. The office and retail component is 100% leased, and the 215-car garage is already averaging just shy of 80% occupancy on a daily basis. We are still projecting a 7% free and clear return, and the apartments are already 59% leased and 56% occupied.

Our interior renovations at 1900 Market are substantially complete. We are in zoning for some exterior improvements that we plan to make over the next several quarters, so we help to fully wrap up that renovation project by mid-year 2017.

Construction is underway and on schedule at our 111,000 square foot, 100% leased build-to-suit property in King of Prussia, Pennsylvania. Projected completion is estimated for the second quarter of 2017, with total construction cost estimated just north of $29 million. And we'll generate a 9.5% free and clear return on cost.

FMC Tower remains on track. The office component is completed. FMC moved into their space in May, and the University of Pennsylvania and three other tenants moved in during the third quarter. The office component remains 75% leased, with a strong pipeline of deals in near-term play on the remaining 150,000 square feet. That pipeline is strong. And given the timeline of projected occupancies, we are looking, as we mentioned last quarter, at stabilizing in the fourth quarter of 2017. Residential units will commence delivery in late Q4 with the marketing campaign fully underway.

Our evo joint venture is performing well, and over 95% leased for the current school year. We continue to advance planning and pre-development efforts on several development sites, and also continue to see an increasing number of build-to-suit opportunities in several of our markets.

Now, turning some quick attention to 2017. Our 2017 guidance reinforces our goals to grow earnings, grow cash flow, and maintain a strong right side of the balance sheet.

Headlines of our 2017 plan reflect an 8.5% increase in year-over-year FFO growth, an 11.9% increase in cash flow growth, a midpoint 7% cash same-store growth rate, improving occupancy, declining average capital cost, and an investment plan that reflects that 2016 completion of our portfolio repositioning efforts.

For 2017, we see continued market strength and improving operating metrics, especially operating cash flow, completing the lease up of FMC, and further portfolio refinement with a $100 million disposition program. The business plan is based on $28.7 million of speculative revenue, of which we are already 66% complete.

The $100 million of sales is portfolio refinement, targeted for non-core market properties. Our multiple-year repositioning plan has seen us sell over $1.2 billion of properties at an average cash cap rate of 7%. So, overall, a fairly straightforward 2017 business plan.

Some other quick highlights. We expect year-end occupancy levels will continue to improve to between 94% to 95%. Leasing levels will improve to be between 95% and 96%. We are forecasting a 2017 tenant retention rate of 68%. We expect GAAP mark-to-market to range between 5% and 7%, and cash mark-to-market to be between 8% and 10%, so pretty solid numbers on that front.

Same-store numbers next year will be in a range of 0 to 2% on a GAAP basis, and an extremely strong 6% to 8% on a cash basis. Our leasing capital per square foot, per lease year, will also improve 10% from a $2.50 average in 2016, down to a $2.25 average in 2017. On the investment front, we anticipate $100 million of dispositions with the mid-year convention at an 8% cap rate.

We're also projecting one development start during the year based on a pretty strong pipeline of potential deals. We will also redeem $100 million preferred stock at par in April of 2017 for cash. And we plan on refinancing our $300 million unsecured bonds that have a 5.7% coupon rate with a combination of cash and a bank term loan.

As Tom will touch on, we may accelerate this refinancing as we monitor the current interest rate and bond market activity.

Another real key beneficiary of our 2017 plan will be more cash flow and an improving CAD payout ratio. The assets we sold were generally high capital consumers, so our 2017 CAD payout ratio will range between 64% and 71%, a significant improvement to our 2016 payout ratio at the midpoint.

The narrowing of the gap between FFO and cash flow reflects portfolio stabilization, our accelerated early renewal program, better control on capital, and increasing our average lease term. The exclamation point on our 2017 plan is that our average 2017 net effective rate will improve over 10% over 2016's average net effective rent.

Now, at this point, George will provide an overview of operating performance, including some color on our 2017 business plan, and then turn it over to Tom for a review of our financial performance.

Thank you, Jerry. We're extremely pleased with our third-quarter results and the substantial completion of our 2016 business plan. Our 2016 accomplishments create momentum heading into 2017. Leasing activity remains robust in all of our markets. The pipeline, excluding development properties, stands at 1.7 million square feet with 337,000 square feet in lease negotiations. Space inspections during the quarter totaled 882,000 square feet, which represents 50% of available square footage.

Turning to our three core markets, our 98% leased CBD Philadelphia portfolio outpaces the market by 820 basis points. Leasing spreads remain robust, and forward rollover exposure has been reduced to 2.7% in 2017 and 8.7% in 2018. The overall outlook for the greater Philadelphia region remains encouraging. Positive absorption occurred for the sixth consecutive quarter, and absorption for the year totals 464,000 square feet. Market rents continue to escalate as tenants shift towards newer, amenity-rich products.

The Crescent markets of Pennsylvania also continue to perform well, where we are outpacing market vacancy by 770 basis points. In Radnor, we have a few larger blocks of space coming back in the second and third quarter of next year. These are the first larger blocks that have been available in Radnor for some time now, and activity levels to date by both existing tenants and new tenants has been encouraging. Our vacancy in King of Prussia is aggregated in two buildings. One of those, a 93,000 square foot, five-story midrise, will be placed into redevelopment during the fourth quarter of 2016.

Turning to Metro DC, the region has added 95,000 jobs during the year, and regional unemployment is 4%, which is 100 basis points lower than the national rate. During the quarter, the state and local government sector led all categories of employment growth, followed by the professional and business services sectors. Our toll road properties at 91% leased, and outpace the market by 1,100 basis points. Overall rent growth remains challenging based on the available inventory in the region. Properties offering amenities and within a half-mile of the metro continue to gain market share.

In Austin, tenant demand has kept Austin's office market soaring. Overall Austin metro occupancy is 92%. Third-quarter absorption was 600,000 square feet, bringing absorption for the year to 1.5 million square feet in total. Rents in Austin are at an all-time high. These same market characteristics are evident in our Austin portfolio, where rents within our DRA joint venture have grown 14% on a GAAP basis, and 8% on a cash basis. Cash and GAAP NOI has improved 7% and 11%, respectively, year-over-year.

In terms of the updated 2016 business plan, as Jerry mentioned, we are essentially done for the year, and our operating metrics are demonstrating the quality of our transitioning portfolio. During the fourth quarter, we will see a dramatic improvement in cash same-store NOI. At 8% to 8.5%, this level of growth is predominantly due to the continued burnoff of free rent, and the renewal characteristics of IBM's 2016 lease expiration at Broadmoor in Austin.

Turning to the 2017 business plan, we will generate $28.7 million of spec revenue from a leasing plan of 2.2 million square feet. The plan is currently 66% complete from a revenue perspective and 48% complete from a square footage perspective. At this time last year, we were 47% and 29% complete on a comparable revenue and square footage plan.

Our leasing strategy of reducing future rollover exposure now has us with less than 10% of remaining expirations in each of the next three years. We have a handful of known move-outs, some in buildings identified as potential sales candidates, and a couple in Radnor, as previously mentioned.

Our leasing spreads in 2017 on a regional basis will range as follows: in CBD Philadelphia, between 3% and 5% on a cash basis and 11% to 13% on a GAAP basis. In the Pennsylvania suburbs, 3% to 5% cash and 15% to 17% GAAP. And in Austin, 29% cash, while a negative 5% GAAP. In Metro DC, we'll be negative 6% to 7% cash, but we'll be positive 3% to 5% on a GAAP basis. Worth noting is that the Austin numbers are 100% complete, with the earlier execution of the IBM renewal at Broadmoor.

So to conclude, we are extremely pleased with the near completion of the 2016 business plan and another solid year of operating performance. The 2017 business plan is off to a good start, and the plan's key operating metrics clearly demonstrate the quality of the portfolio.

And at this time, I'll turn it over to Tom.

Thank you, George. Our third-quarter net income totaled $6 million or $0.03 per diluted share, and our FFO totaled $58.3 million or $0.33 per diluted share. Some observations regarding third quarter. Same-store results for the third quarter were 1.7% GAAP and 3.2% cash, both excluding net termination fees and other income. We have now had 22 consecutive positive quarters of GAAP, and 18 for that cash metric.

G&A expense decreased from $6.1 million to $5.5 million in our third quarter. G&A was below our forecast, primarily due to timing of professional fees, some of which will be incurred in the third quarter. FFO contribution from our unconsolidated joint ventures totaled $8.6 million, below our third-quarter projection due to higher-than-anticipated operating costs in several of the portfolios and increased interest expense due to the refinancing of the mortgage at evo.

Interest expense totaled $20.8 million, a $1 million sequential increase from the second quarter, primarily due to the reduction in capitalized interest as FMC becomes operational.

Compared to the third quarter of 2015, our quarterly cash interest expense, excluding capitalized interest, has increased -- has decreased 25% due to the lower debt levels and lower interest rates from our financings.

Our third-quarter CAD totaled $37.5 million, representing a 75% payout ratio. During the quarter, we incurred $9.9 million of revenue maintaining capital and $4.3 million of revenue creating capital.

Looking for the fourth quarter, property level operating income for the fourth quarter will be approximately $75 million to $76 million. This sequential increase from the third quarter is a roughly $1 million, coming primarily from increased occupancy at FMC, partially offset by the recent and increasing disposition activity.

G&A for the fourth quarter will be approximately $6.3 million, and the full-year number will be $27 million. Other income we expect fourth-quarter to be $800,000 and a full-year number of $3.5 million; and termination fees of $1 million for the fourth quarter also.

Interest expense for the fourth quarter will remain flat as reduced capitalized interest is primarily offset by reduced interest from the deconsolidation of 3141 Fairview Park, which had a mortgage loan of roughly $20 million which we subsequently paid off in October of this year.

FFO contribution from our unconsolidated joint ventures should total about $8.5 million, and we project that our ventures will contribute about $35 million for 2016. Third-party fee income should approximately -- $24 million for the year and $9.3 million of related expense.

Our general business assumptions for 2016 is that we have a revised $900 million net sales, 96% done. Our 2016 business plan doesn't contemplate any speculative acquisitions. And our weighted average share count is 177.8 million for the fourth quarter, with no additional share buyback or ATM activity.

Looking at our capital plan for the fourth quarter, we have $9 million of revenue maintaining capital for the balance of the year. For uses of cash, we have about $65 million of capital development. The majority of that is FMC, 1900 Market, and 933 First Avenue.

We have aggregate dividends of $30 million, $5 million of JV investment, $10 million of revenue creating, and $1 million of mortgage amortization. Our primary sources are $35 million of cash flow, $42 million of speculative asset sales, and $13 million from the sale of Allendale Road, which occurred after the end of the quarter. This activity will bring us to roughly a $200 million cash balance at the end of the year, and net debt to EBITDA should be roughly 6.4 to 6.5.

Looking at 2017 guidance, net income at $0.29 per diluted share; FFO at $1.40 per diluted share, both at the midpoint. Our 2017 range is built on the following assumptions. Excluding FMC and 933, core NOI for the GAAP portfolio will drop $10 million, primarily due to the full effect of the 2016 sales, partially offset by the slightly higher GAAP NOI growth of the same-store portfolio. G&A will approximately be $27 million to $28 million, so approximately flat to 2016.

In the investments, guidance assumes no new acquisitions and one development start. That development start will not generate any earnings in 2017. We have about $5 million of dilution from the 2017 program dispositions. Interest expense will decrease approximately $3.5 million due to the refinancings to lower interest rate. We plan on paying off the 2017 bonds, $300 million, in May at a rate of 5.7%, and currently look to issue a $150 million term loan to partially fund that buyback. And we're estimating a 3% rate on that.

Capitalized interest will decrease from $12.5 million to $5.5 million as the development pipeline becomes operational.

Our preferred shares, we plan on redeeming at par in April 2017. If we do redeem those shares, there will be a $0.02 charge for unamortized issuance discount costs. I have not included that in the base guidance.

Land sales -- we have several under contract, but we're not probing any FFO gains in our guidance. Termination fees and other income will be $2 million and $3 million, respectively. And leasing and development fees will be $15.5 million, approximately $1 million above 2016. No anticipated ATM or share buyback activity.

On our capital plan, we plan on having about $35 million of revenue maintaining CapEx. As Jerry mentioned, the range for our midpoint on the CAD payout ratio has decreased significantly.

Our uses are about $750 million, representing $130 million of development; primarily again finishing FMC and 933, as well as 1900 Market, but we have earmarked $50 million for a development start.

Aggregate dividends of $117 million, $23 million of projected capital investment into our joint ventures, $26 million of revenue creating, $300 million repayment of the bonds, $100 million redemption of the preferred, and $5 million of mortgage amortization.

The primary sources for those uses will be $195 million of cash flow from interest payments, $100 million of spec asset sales, $150 million term loan, $15 million from the JV. The financing of Encino Trace, which was initially to occur in the fourth quarter, we believe will happen now in the first quarter of 2017.

Based on that capital plan outlined above, we would have a line of credit balance of about $80 million at the end of the year, and we also believe our debt to EBITDA will remain in the mid-6 range. In addition, our debt to GAV will be approximately 40%.

While our base case model does reflect a possible refinancing scenario of the 2017 bonds, we are very mindful of the current interest rate environment. We are considering a number of refinancing options that may include accelerating the timing and potentially addressing more than just our 2017 maturities.

I will now turn the call back over to Jerry.

Tom, thank you. George, thank you as well. Let's wrap up our prepared comments. Sorry we ran long, but we're going through 2016 and previewing 2017. I think as we assess our performance in 2016 and looking to our 2017 plan, the trend lines are strong, reflecting, as George touched on, the better asset mix; portfolio reaching stabilization; we think a good, disciplined control on capital spend; and some pretty successful leasing strategies.

Our sale transactions have really repositioned the portfolio, raised plenty of liquidity, reduced our debt, and put us in a position where we can actually start to grow cash flow at a fairly good pace.

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

(Operator Instructions). John Guinee, Stifel.

Very nice quarter and guidance, guys. Let me drill down and ask a couple questions on the internal growth. And I think what I heard here was $35 million of revenue maintaining CapEx and $26 million of revenue creating CapEx. I'm assuming that's all associated with leasing. So should I take that $2.25 per square foot, per year, of re-tenanting costs and add another $1.70 to it of revenue creating CapEx?

John, first off, your comment on the two numbers, they are correct. That's what we gave for a range. I would say that is close to accurate. I think in our revenue creating bucket, we do do some additional work that wouldn't really be what I would call dollar-for-dollar against leasing. It may incur base building work. It may include some repositioning of properties that may not have a direct effect to a lease.

Perfect, okay. And then I think what I also heard is you are finishing the year and with $200 million of cash on hand, and then finishing 2017 with an $80 million balance on your line. So, effectively, that's about a $280 million spend. Is that the right way to look at?

It is. And I think as looking at that -- and again, we're still working on our -- how we'll look at the refinancing. $150 million of that is going to be related to the financing. So we're going to be paying off -- in fact, $250 million of it. We're going to be paying off the preferred stock of $100 million, paying off the bonds of $300 million, so that's a total of $400 million. And the only refinancing assumption we've made right now is $150 million term loan to take care of that. So, in effect, that's going to be a large use of the cash.

In addition, we have $130 million of development. So when you look at that, you are going to then add the development costs of about $130 million, which I outlined a majority of it being FMC, 933, 1900 Market, and a development start.

Okay. And then the last question would be, if you look at midpoint to midpoint, $1.29 to $1.40 for 2016 guidance to 2017 guidance, basically a very healthy $0.11. How much of that $0.11 is coming from the preferred payoff, preferred share payoff, plus the lower cost of capital on your bonds? And how much is coming from operations and/or development?

The effect of paying off the bonds in April will be about $0.02. I didn't do a specific calculation on the debt, except that our interest expense is going down about $3.5 million I said sequentially from 2017 from 2016. So that would probably be another $0.02 on interest expense.

And then a sizable portion from paying off the preferreds, I'm assuming.

The preferreds are about $2 million.

Got you, okay. And then the last question --.

Sorry, $0.02.

$0.02, okay. Then the last question for -- I guess probably for Jerry. What we see happening in the investment sale market is an amazing spread between incredibly or historically low cap rates for core and super core assets; but a very, very high cap rate for commodity assets in commodity markets. Can you expand on what you guys are seeing out there?

Sure, John. Happy to. Look, I think from our perspective we are really happy with how we've been able to do during the course of the year so far in meeting the goals and certainly being able to increase the target up to $900 million.

I think our viewpoint in the investment market right now for commodity product is somewhat restricted to small-sized transactions. Essentially what we have in the market today, the average deal size is probably in the $20 million range. So we still have a pretty good list of bidders for that.

I think as you noted, there's certainly a lot of commodity product on the market. We are seeing that, for all intents and purposes, the buyer pool is static. A lot of the traditional large consumers of commodity product have their plates kind of full. So we're seeing a number of new, smaller players enter the game. They typically need to tie up a deal and then get their equity and debt financing pulled together, which we're certainly seeing is protracting the closing cycle of some of these deals.

So I think as we assess where we are, we think our small deal size is a good advantage. All the properties that we're selling are -- at least based upon what we're seeing from the targeted buyers -- is it eminently financeable.

We generally maintain our properties pretty well, so this tends to be a lower level of base building improvements that need to be made if you are looking at it from an underwriting standpoint. And bank financing is pretty available.

But we don't think there's any question that with the flood of commodity product on the market that you are going to see deals take longer to get done. We frankly haven't seen any pricing backing up on our transactions. But again, we're dealing in some very specific markets, and our deal size tends to be below what a lot of other companies are out there marketing.

Great. Thank you.

Craig Mailman, KeyBanc Capital Markets.

Just wanted to do a -- drill in a little bit here in same-store. You guys are basically going to have a 500-plus basis point upturn in 4Q. Can you just run through -- I know, George, you said burnoff of free rent and maybe something about IBM -- what the free rent component of that would be of that uplift versus just operations?

The free rent component, we have roughly $5.8 million of free rent in Q3, and that drops down to about $3.8 million in Q4. And a lot of that, Craig, is coming off of leases that were done 4Q 2015, and earlier in 2016.

And then the IBM deal down in Broadmoor, if you remember, we talked about this maybe a call or two ago, they had two tranches of expirations and basically we moved the rents there from and all-in $17.50 to an all-in $22.57, so a 29% increase in the cash rent. So, the square footage in Broadmoor and the continued burnoff of free rent. And then, again, we're still getting between 2.5% and 2.75% escalators in our leases, so we're seeing natural growth in the escalations as the leases go from year to year.

Okay. But as we look out to 2017, that 600 basis point delta between GAAP and cash, the bulk of that is free rent burning off, right? Could you give us a sense of maybe where straight line could end 2017 to get a magnitude of that impact?

Yes, the total amount of free rent in 2016 was north of $20 million, and it drops to about $8.5 million in 2017.

All right, that's helpful. And then on the rent spreads, I know you guys laid out IBM as the bulk of that. Could you just, though, give us a sense of what you're seeing in market rents in your different markets? I know you touched on the CBD Philly a little bit, but maybe run through some of the others.

I think we're seeing good rent levels in the Pennsylvania suburbs, especially in the Crescent markets. Rents are near all-time highs in Radnor. And that bodes well with the rollover activity that we have in Radnor in 2017 with a couple of the rollovers that we have, with HTH moving from Radnor to the build-to-suit out in King of Prussia. And then with a deal that we had with Hartford in Radnor, where they will be moving out to King of Prussia. So that's really what's helping us with that 3% to 5% range cash and 15% to 17% range GAAP that I alluded to during my commentary in the Pennsylvania suburbs.

Okay. And then Jerry, FMC -- you guys are still -- have the 8% yield that you are targeting. Could you just remind us where the remaining vacancy is in the stack? And is there anything with the leasing taking a little bit longer that could potentially impact that? Or do you guys lock in the higher rent portion of the buildings, so you guys feel pretty good?

Yes, we feel very good. The space that's really available is mid-bank, and the prospect list is very good. With FMC, the project is nearing completion, so the tower crane and the hoist will be coming down in the next 30 days or so. As I touched on, the office tenants have successfully moved in. The residential models and the amenity floor are ready to open up very shortly.

We just completed the porte-cochere entrance along with the elevators up to Cira Green, which has been announced to some great fanfare. We announced a little bit ago that we're bringing a Michelin-rated restaurateur to Philadelphia to occupy the restaurant space at FMC.

And the market momentum is building. Look, certainly, from our perspective, completing the office lease-up is a major to-do, and we're on it. We expect to make really good progress. We have a near-term pipeline of deals. Some have reported. But we are talking to a number of single-floor users where those discussions are advancing quite nicely. We've broke down one floor, Craig, to multitenant. We fully leased that up. We're breaking up another floor down now. So, no, I think we feel pretty good about the response the project's had in the market.

Certainly the profile of the project is continuing to improve. There was just a report that came out in the region that identified FMC Tower as the number-one project in the region that's transforming communities, and that was by Bisnow. So I think things like that start to really build momentum. And then you juxtapose that with some of George's commentary about the strength of the CBD and University City market, I think we feel very good about where we are.

We'd feel a lot better if everything was signed and locked away, certainly. But I think when we assess the pipeline, review the probability of execution, I think we feel pretty good about where we are right now.

That's helpful. And then just one last quick one on development. What's the magnitude you guys are assuming in guidance for the start and timing? And is that -- are you going to only do a build-to-suit there, or do you have a decent pre-lease, potentially, on a partially specced building?

Yes, I think as Tom touched on, we put into our business plan for 2017 is about a $50 million hold for expenditures on development starts. I say that with the number one priority we have in our existing -- is really remains in our existing portfolio, completing our existing projects, with FMC as clearly a number one priority; completing 933 First Avenue. We have the Broadmoor and another King of Prussia redevelopment underway, so that's our core focus.

And we're certainly very mindful of where we may be in the cycle. And I think as we assess some of these opportunities, our hope is to really effectively balance the value creation aspect of those with our balance sheet targets and the overall risk profile in our portfolio.

We are having a lot of discussions on some of our other development pipeline deals with existing tenants who are looking for expansion, new tenants that we're courting. And, frankly, at this point, they range from significant pre-leases to build-to-suits, like we're doing in the King of Prussia market for a tenant that had to double their square footage.

Great. Thanks, guys.

Jamie Feldman, Bank of America.

This is Scott Freitag here with Jamie. Good morning. Can you please just discuss or provide some more color on the supply/demand fundamentals in Austin and your outlook for that market headed into 2017?

Sure. Look, I think George walked through some very good statistics on where the Austin market is right now relative to absorption activity, leasing activity, what we've seen happening with rental rates. Look, I think we still view that as a very good, strong, performing market with a lot of blue skies. We certainly are always on the lookout for some storm clouds.

So I think as we are looking at the portfolio, we've had a number of moves within the portfolio; and, frankly, have made great progress in the last quarter or so in backfilling where tenants have needed to move into larger spaces; we've been backfilling their smaller spaces. So, from a blocking and tackling standpoint, we're continuing to see evidence that the market throughput remains a very, very strong.

There are a number of projects in the queue for development. We'll see how they fare, and whether there is any kind of pull back on that. But certainly the demand drivers seem pretty consistent with what we saw last quarter. We're continuing to see uptick in rents. Give you a good example: our 906 Broadmoor redevelopment project, we're going through some demolition there, some repositioning efforts. And the pipeline of activity is really very strong at very good rental rates.

So, certainly as we look at the marketplace in Austin from our business plan standpoint, our major opportunity we think in that market today is to simply accommodate the growth requirements of our existing tenant base. And as we assess that, making sure that there's a sufficient pipeline of transactions behind that that can effectively backfill that space.

But we certainly keep an eye on what's happening in the marketplace. With the good news is that the few starts that have commenced have achieved a pretty high level of pre-leasing. Leasing concessions, rental rates, again, seem more steady-state than any kind of early warning sign.

Okay, great. And then just following up on a previous question: when we think about the demand that you are seeing for potential build-to-suit projects and the land bank that you have, are there specific markets that you would feel more comfortable starting new development?

Well, it's a good question. I think we're seeing good activity across all of our markets. I'd say the demand that we're seeing is probably more heightened in Austin with -- primarily, again, driven by some of our existing tenant base. But even within the Pennsylvania suburbs and Philly CBD, we continue to have I think some very fruitful discussions with tenants who are looking, again, to either consolidate space, expand in an outright standpoint, looking to reposition the physical space that drives their company.

But I think, as we talked on previous calls, I think what we're excited about, particularly with the repositioning, for all intents and purposes, behind us, is the inventory class we have within the existing portfolio is much higher today than it was 12 months ago.

And the development pipeline we've pulled together between our core markets certainly puts us at the forefront of a lot of customer discussions on how they want to reconfigure their office space. And with the labor market being tighter, even with the economic outlook being somewhat uncertain, a lot of our customers really are focused on creating the right physical platform to effectively grow their business.

And we're seeing that high-quality office space, higher ceiling, LEED certification, access to mass transportation, amenity programs, are all key considerations as they start to think about their company's physical platform for the next 10 to 15 years.

Okay, great. That's it for me. Thanks, guys.

Emmanuel Korchman, Citi.

If we just look at all of the product you have in the market right now, if you were to sell all of it, how big are those volumes in total?

Well, I think right now we have, Manny, about just shy of $75 million that are under letter of intent. So when we raised our guidance the additional $50 million, we assumed that a piece of those would get done by the end of the year. As we look at 2017 and the $100 million target we have laid out there, and that's a mid-year convention, we will be putting some more properties on the market towards the end of the year for hopefully some effective marketing in the first, and hopefully closing in the second quarter of next year.

Right. And then if we think about your disposition program in aggregate, how much do you think you have moved down the cap rate that we should be thinking about your portfolio being valued at? So if we look at -- pick a date -- so, January 1, 2015, and we look at your portfolio today, how much should we be thinking about that cap rate moving?

Yes, look, I think when we take a look at what we've been able to do, certainly we think that the cap rate that's more assignable to a Brandywine today is in the low to mid-6s across the board. Certainly we've seen in some of the sales transactions taking place in some of our core markets, even with some of the pending transactions in the city of Philadelphia, you are seeing cap rates in the very low 6s for the quality space. So we think that's where we are, and that's where we want to be positioned.

Certainly that's always a tough number to lock in concrete, because it could be high or low based upon what macro conditions are. But when we really take a look at the portfolio, Manny, year-over-year we think we have clearly brought the cap rate down well over 100 basis points with the existing portfolio we have.

Great. Thanks, guys.

Michael Lewis, SunTrust.

I'm going to ask Manny's disposition question a little differently. You've got, it looks like, 21 assets that are not in Philly, DC, or Austin. I'm wondering -- over the next three years from now, four years from now, five years -- how many of those do you think you still own?

Well, what we've really done there in our other category is -- a big piece of that is the two buildings we have in California. We certainly anticipate that 2017 will be the year that we complete that exit. We have a number of other properties, kind of what we call non-core Philadelphia and DC markets. So, as we look at our disposition plan, honestly, Michael, over the next couple of years, I think that other category will be a major source of those sales.

We still have a couple remaining properties in New Jersey that we have targeted for sale. We sold the vast majority of those, as you know, over the last couple years. But we still have a couple complexes that we're going through some leasing right now that we hope to put to market. We have two assets remaining in Wilmington, Delaware, that we will continue to market as we move into 2017 and 2018.

So, we do look at that as primarily the source of asset sales over the next several years. Now, that being said, it doesn't preclude the possibility we might reach into some of our core assets if we think pricing metrics are there and sell those, analogous to what we did with the main post office project here in Philadelphia, where we thought that we had optimized the value of that piece for real estate, thought that the market for trophy properties was really very strong, so we were able to sell that for a very effective cap rate and a large profit.

So, we'll be continuing to evaluate that other category, but then certainly monitoring core assets to see where we've reached the optimal value point. And if we think the buying demand is there, that may be a very effective way to continue growing NAV of the Company.

Is it fair to say that if the investment market stays strong, you might go perhaps well over that $100 million, kind of like we saw you increase the disposition guidance from the beginning of 2016?

It's certainly possible. Look, I think we've made very clear that we see the demand drivers for the office business having changed, and continuing to change. So anything that doesn't -- any asset that really doesn't fit our criteria of having multiple modes of accessibility, highest quality construction, the ability to accommodate the requirement for tenant flexibility, I think we'll evaluate all those things.

So, certainly as we go through our asset base, that's something we always spend a lot of time thinking about. So of the investment market remains very strong, I think your observation is on target. We would be biased to accelerating rather than slowing down the pace of dispositions.

Thanks. And then quickly on FMC Tower, you gave a lot of good detail there. Have you said how much contribution -- NOI contribution you expect to get from FMC in your 2017 guidance, and how the timing of that becoming cash flow filters through the year?

Yes, we have -- we didn't say that number. We're anticipating a number in the high-teens to $20 million range, in terms of GAAP NOI coming off of FMC.

Okay, great. Thank you.

(Operator Instructions). Barry Oxford, D.A. Davidson.

Jerry, when I look at your numbers and I see the strong growth in the cash, and I guess most of that probably be driven by burnoff of free rent, how do you guys look at the dividend going forward?

Well, I think, Barry, that's a certainly a Board decision. The Board looks at that every quarter. And actually as we talked a number of quarters ago, in advance of us announcing our dividend increase in May, what the Board is really looking at is, do we have multiple-year operating visibility on being able to grow cash flow? So, if you look at it thematically, we're projecting in 2017 that we'll be circling around a 95% occupancy level.

As George touched on, when we take a look at our 2017, 2018, and further out rollover, we're down to about 10% rollover in the portfolio. So we have a lot of portfolio stability. We have, I think, a multiple-year track record now of really controlling capital costs as a percentage of rent and as a capital per square foot, per lease year. So the operating program looks a very solid, and that's certainly a key aspect that we review in detail with our Board every quarter.

Add onto that that we have done a very good job of repositioning the balance sheet in terms of reducing overall leverage levels, improving our EBITDA margins, lengthening our debt maturity curve, and controlling our exposure to floating rates -- whichever way they go, up or down -- we have a lot of certainty built into our balance sheet.

So, as we look at that aspect, as well, we really have -- 2017, we have bonds coming due; 2018, we have bonds coming due. And the reality is once we effectively address those, we're pretty free and clear on debt maturities until 2022 or so.

So I think the ingredients that project a very stable, growing, high quality of portfolio are all there, which is why we're very happy we how the numbers were coming at our 2017 business plan.

So with all that being said, I think the Board will take a look at the significant growth we're projecting in cash flow, how we have mitigated forward rollover exposure, how we've eliminated inventory risk at some of our lower quality assets, and certainly take a look at whether that's something that -- in terms of increasing the dividend, is something that's on the radar screen either in 2017 or in 2018.

Great, great. And then getting back to Austin, Jerry, are you seeing it mostly being driven by tech tenants, or not necessarily; you are seeing a good diversity of tenant types demanding space?

Well, I think it's still primarily tech, for sure. But Austin does have an element of diversity to it that we really do like. And we see certainly a lot of companies that like the proximity to the University of Texas, how they tie into the academic research and healthcare corridors. There's certainly a lot of activity percolating on those fronts. It has the benefit of a government/legal/financial sector.

So we do still like the diversity that we do see within our prospect list in Austin. It does, however, remain more tech-focused, so we're always monitoring that level of activity versus some of the other tech corridors around the country.

Great. Thanks, guys, for the color.

Jed Reagan, Green Street Advisors.

Can you talk about the occupancy and cap rate profile of the assets you are looking to sell in 2017?

Well, in 2017, Jed, we haven't identified a specific pool of -- specific assets. I think probably the larger pool that we have identified really is the sale in California, where we have -- the property is currently about 100% leased. We've got a rollover there with our banking tenant. But they are also going to sign an amendment to stay in a portion of the space, and marketing activities continue. So we think that will be a nice short-term, stable, but value-add opportunity.

A number of other properties in New Jersey are in the 80% to 92% leased range. And in Delaware we're basically, again, 85% to 100% leased. So a pretty decent mix. Probably not too far off what we were able to do in 2016, where the average occupancy of what we sold, as I mentioned earlier, was about 95%.

Okay, thanks. That's helpful. And what's the plan for the King of Prussia redevelopment that you are initiating this quarter? And was that anticipated in the original 2016 business plan?

You mean the build-to-suit that we're doing in King of Prussia? Oh, the 500 North Gulph Road -- we did incorporate that, and expect that to be part of our 2017 business plan. It's about a 93,000 square foot building. We've been moving tenants out of that building into some of our other properties. So we're in the planning design. We need a few local approvals. So we would expect to commence that redevelopment program sometime in the first quarter of next year; redoing building systems, glass-lined lobbies, reconfiguring the parking lot. It's really a -- it's an older building, but in a location that's gotten better within King of Prussia. So we have high hopes we'll be able to get some leasing activity out of that project very late in 2017.

And does that move affect your 2016 numbers at all, or that's more of -- that falls to 2017?

Yes, no, we have already contemplated, Jed, storage, in our 2016 numbers. If you look at page 6 and 7 in the supplemental where we do the occupancy roll forwards, last quarter we had introduced that in the Taken out of Service line. So, it's a 93,000 square foot building that will be literally empty in the fourth quarter when it comes out.

Got it. Okay, thanks. And then on the potential development start for next year, is there a specific project you have in mind? And what could be the overall cost of that start?

Well, I think there are a couple that could be potentially that candidate. I think to make sure that we reflected that possibility into our financial plan, as Tom touched on, we've built a reserve amount, so to speak, in our source and use, Jed, of $50 million for 2017.

Okay. But I take it that the ultimate cost could be something north of that.

Well, it could be something north of that or below that, depending upon which transaction or series of transactions comes together.

Okay, great. And last one for me. It looks like your leasing volume slowed a little bit after a busy first half of the year, and your concessions picked up a little bit last quarter. Should we look at that as a reflection of any kind of broader leasing slowdown you are seeing? Or more a one-off or just a function of maybe what your expirations were last quarter?

Yes, I think it really has to do with the fact that occupancy in the portfolio is increasing, so the space we have to market is going down. We've been out in front of these forward rollovers, so you get a lot of larger renewals that can sometimes skew a quarter. But I think in assessing day-to-day prospects through touring vacant space, I think we're seeing almost a constant run rate where we're getting close to a 50% coverage ratio on our available space, with day to day tours.

Yes, and I think also, just to add onto that, the third quarter we did about 700,000 square feet of leasing this year. Jed, by frame of reference, in third quarter of 2015 we did about 640,000. So, when we look at year-over-year, Q3 to Q3, we felt pretty good.

Okay. So, George, you said the activity generally feels pretty steady.

Yes, I think you typically always have a little bit of a summer slowdown. So I think if we went back and showed our third-quarter numbers year-over-year, it probably is arguably the lowest -- sometimes the lowest quarter of the four.

Okay. Thanks a lot, guys.

Rich Anderson, Mizuho Securities.

Great quarter. So, George, first to you: obviously for 2017, your cash releasing spread guidance is above your GAAP because of Broadmoor. Is there any reason, though, to take that out of the equation, why that -- the difference between GAAP and cash should start to -- the spread should start to narrow versus what it has been in the past? And I was wondering if you can kind of -- -- not for 2018 guidance already, but if you could talk about how that might be different in the future as you spend less capital, and so on.

Well, that Broadmoor deal not only is skewing the cash, but it is adversely skewing the GAAP. The GAAP on that one was a minus 5%. So, without that deal, our GAAP mark-to-market -- really when you look at Philadelphia, Pennsylvania, and met DC, we'd be in that, call it, 10% to 12% range on a GAAP basis.

So, it really is one deal that's throwing off the bunch. And that was part of the reason why I tried to incorporate the regional spreads in my commentary, just knowing that that one deal, given the fact that it was 625,000 square feet, had such a dramatic impact.

Right. But it has been -- the spread between GAAP and cash on that measure has been, call it, 700, 800, 900 basis point differential, the GAAP being greater. Is that where we will revert back to, 2018, after this Broadmoor issue runs through the system?

Yes, I think you will most likely continue to see that, and I think --. And again, part of that is going to be until we get our met DC region back to a fully stabilized occupancy level, where cash rents are continuing to roll down. So I think until we churn through some of the 5- to 7- to 10-year deals that we've done and they start to get back to a normalized market number. But I think that typical spread in 2018 will get back to what you saw in 2015 and prior.

Okay. Thanks very much. That's all I have.

Emmanuel Korchman, Citi.

Tom, just a quick follow-up. The building that you've got coming out into the redevelopment pool, how much does that impact your same-store NOI outlook?

I don't think it does at all.

No.

Why wouldn't it? (multiple speakers) I'm assuming it's in the same-store pool now. So by taking it out, won't that improve your same-store outlook?

Are you thinking of something we're taking out of.

You've got the vacant building in Radnor, correct?

King of Prussia.

(multiple speakers) King of Prussia, excuse me. So it's in the pool now, or it was in the pool.

It is in the pool now. It will come out in the fourth quarter as we empty it. Manny, I don't think it affects it much, because it's down to -- it's a very low occupancy right now.

Yes, right now it's got, like, a 25% occupancy level to it, so it's really not a same-store contributor.

Right. It's already not contributing much, and we plan on taking it down to zero. And that's the only reason it's not in redevelopment is because there's active leases in it. But the margin on it has been dwindling over the last year as we have proactively emptied the building. So the net effect on same-store for us would be small, considering it's about a 100,000 square foot building.

Thanks, guys.

There are no questions at this time.

I will now turn the call back over to Jerry Sweeney for closing remarks.

Great. Well, look, thank you all for your patience. I know our comments went longer but we had to cover 2016 and 2017. So we appreciate all the questions and certainly look forward to discussing an update of our business plan in our late January call. Thank you very much.

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