Brandywine Realty Trust (BDN) 2016 Q4 法說會逐字稿

Good morning. My name is Kayla and I will be your conference operator today. At this time I would like to welcome everyone to the fourth-quarter 2016 earnings call. (Operator Instructions). Thank you.

Mr. Jerry Sweeney, you may begin, sir.

Kayla, thank you very much. Good morning, everyone, and thank you for participating in our fourth-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. 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 filed with the SEC.

All right. As we normally do, we'll start with a brief review of 2016 results, then provide color on the status of our 2017 business plan.

For 2016, we really had a very strong ending. We met or exceeded almost every one of our operating, leasing, and capital goals. On the investment front, 2016 was a seminal year, as well; and we're starting off 2017 with solid operational execution and increased sales guidance.

From an investment standpoint, we significantly exceeded our original 2016 disposition target of $450 million, and substantially completed our multiple-year portfolio alignment strategy. This disposition program resulted in a stronger growth portfolio, lower forward capital obligations, and assisted in achieving our intermediate-term balance sheet targets. More importantly, the success of our sales program enabled us to meet our overriding objectives of growing earnings, growing cash flow, and maintaining a strong balance sheet.

An example, our 2017 guidance represents over a 6% FFO growth rate, a 10% increase in CAD, and a balance sheet with $400 million of less debt then we started 2016 with. And during the last 90 days, we also made excellent progress, I'll touch on later, at FMC Tower with the office component reaching 96% leased; and having that put substantially to bed as we entered the close of the year.

So with that brief overview, I'll start with a synopsis of our 2016 business plan and look ahead. And then I'll turn it over to George for a review of our leasing activity, and Tom to review our financial results and our 2017 financial plan.

From an operational standpoint, we had an excellent year and exceeded many of our key targets: namely spec revenue, tenant retention, cash, and GAAP mark-to-market, as well as cash same-store NOI. We leased over 4.5 million square feet, slightly exceeding the leasing activities of the past few years. We ended the year at 93.9% occupied and 95.1% leased, up 40 and 70 basis points, respectively, from year-end 2016 levels -- of 2015 levels.

Our GAAP mark-to-market was 12.9% for the quarter and 11.6% for the year, almost doubling our targeted range of 5% to 7%. Our cash mark-to-market was 4% for the quarter and 2.8% for the year, also exceeding our targeted range.

Tenant retention for the quarter was 87%, and 70% for the year, again above our original business plan forecast of 65%. We generated $28.3 million of speculative revenue during the year, which exceeded our target plan of $27.8 million. Our cash same-store NOI increased 8.6% for the quarter, 4.4% for the year, well above our targeted range of 2% to 4%. Our leasing capital came in at $2.44 per square foot, well within our targeted range. And increasing our mark-to-market rents while maintaining our deal capital spend has allowed us to increase our net effective rents by 5% year-over-year.

In looking at our balance sheet, our sales significantly accelerated the execution of our balance sheet strategy. We reduced our net debt to EBITDA to 6.6 times at 2016 year-end from 7.1 at year-end 2015. We reduced our net debt to total assets from over 42% at the end of 2015 to 38% at the end of 2016. We reduced our weighted average cost of debt from 4.9% at year-end 2015 to 4.5% at the end of 2016.

We also ended the year with a net cash position of $194 million with zero balance on our $600 million line of credit. We have reduced our total debt load by 15% during the year, from $2.4 billion down to $2 billion today.

So we achieved many of these balance sheet goals while significantly shifting the composition and growth profile of our operating and development platform.

On the investment front, as I mentioned earlier, we significantly exceeded our 2016 original business plan goal by $410 million, selling $860 million at an average cap rate of 7.3% GAAP and 7.2% cash.

The average occupancy of the properties we sold during the year was just shy of 96%, so higher than our overall portfolio, which really does amplify the strong performance embedded in our year-over-year occupancy gain.

The timing of several transactions under contract caused us to be below our adjusted third-quarter target of $900 million of sales for the year. The $40 million of sales we anticipated to close in Q4 will now occur in the first quarter of 2017. We have already closed $50 million year to date, and have an additional $120 million under contract at cap rates well within our guidance range.

Due to the timing of these dispositions, we are increasing our 2017 net disposition guidance by $100 million, from $100 million to $200 million, or a net increase of $60 million. With our recent land sale at Concord and the building sale at Concord, we have also completed our exit from California.

As indicated in our press release, we have updated our previously issued 2017 guidance range of $1.35 to $1.45 per share to $1.35 to $1.42 per share. The lowering of the upper range by $0.03 is due to the increased volume and the timing of our original 2017 disposition assumptions. We had originally projected $100 million, and projected those sales to occur in the second half of the year. Our new guidance range is $200 million, with $143 million scheduled to close in Q1, which creates a $0.03 dilution over our original business plan assumption of the lower volume of sales occurring in the second half of the year.

So now looking quickly at 2017, year-end occupancy levels will continue to improve to a range between 94% and 95%, and our leasing levels will improve to 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 range between 8% and 10%.

Our average leasing capital per square foot will also improve 8% from the 2016 actual of $2.44 down to $2.25 per square foot, per lease year. The combination of improved mark-to-market and reduced deal spends translates into an average 2017 net effective rents improving by 10% over 2016 levels.

We are also projecting a speculative revenue target of $28.7 million, which is already currently 80% executed. Same-store numbers will range between zero to 2% on a GAAP basis, and an extremely strong 6% to 8% on a cash basis.

We will redeem that $100 million of preferred stock in April of 2017 for cash. And as Tom will detail, we will be refinancing our $300 million of unsecured bonds that carry a 5.7% coupon with a combination of cash and debt in the second quarter.

Some quick notes on several development projects. Our 1919 Market Street joint venture with CalSTRS and LCOR is now fully open for business. The office and retail component is 100% leased and occupied. The 215-car garage is already averaging 90% occupancy per day. And we're still projecting a free and clear return of 7%, and the apartments are already 76% leased and 68% occupied.

As per our original plan several years ago, we exited our apartment joint venture with Toll Brothers, netting $27.2 million in cash, along with achieving a $27 million reduction in debt attribution; and posted a gain of $14.6 million, with an IRR of 18.6%.

Our interior renovations at 1900 Market are substantially complete. We remain in zoning for approval for some exterior improvements which we hope to wrap up in the next couple of quarters. Construction remains on schedule and on budget for a 111,000 square foot fully leased build-to-suit property in King of Prussia, Pennsylvania. That project is expected to be completed in the second quarter of 2017 with total construction costs of $28.7 million, and it will generate a 9.5% free and clear return on cost.

As I mentioned earlier, FMC Tower experienced great success in the last 90 days. We met our key goal of leasing up the office component by year-end 2016 and are now 96% leased. The office portion is now complete, and we have also commenced operations this month on the residential component. We also announced the signing of a Michelin rated chef to open a world-class 3,000 square feet restaurant in the next several months. We are forecasting the office component to stabilize in Q4 2017, and our residential component to be stabilized in Q1 2018.

Our project at Schuylkill Yards is -- zoning ordinances have been introduced, design/planning work continues, and we anticipate that project moving forward through the zoning process in the next quarter. We continue to advance planning and predevelopment efforts on several of our development sites and are still projecting in our 2017 business plan a $50 million construction start this year.

At this point, George will provide an overview of our fourth-quarter performance, some color on 2017, and will then turn it over to Tom for a review of our financial performance.

Thank you, Jerry. Another strong quarter. Our leasing teams generated a tremendous amount of activity during 2016 that allowed us to meet our beat our operating targets. Our activity in the fourth quarter has the 2017 business plan in great shape, as I'll touch on further in a moment.

All of our markets continue to see good levels of activity. The pipeline, excluding development properties, remains at 1.7 million square feet, with 415,000 square feet in lease negotiations. During the fourth quarter, we generated 94 space inspections totaling 750,000 square feet, which represent 80% of available square footage.

Turning to our three core markets. Our CBD Philadelphia portfolio, at 98% leased, is outpacing the market by 840 basis points. Overall absorption in Philadelphia was 152,000 square feet for the quarter and 207,000 square feet for the year. Leasing activity from outside the CBD has been 21% over the past two years. And Brandywine has benefited from that migration, including FreedomPay's lease at FMC signed during the quarter.

Forward lease expirations on our CBD portfolio have been reduced to 136,000 square feet or 2.5% in 2017; and 453,000 square feet or 8.5% in 2018. Lease discussions are underway with most of these tenancies.

Leasing spreads also remain strong. During the quarter, our leasing spreads increased 8.7% on a GAAP basis and 7.3% on a cash basis in our CBD portfolio.

The Pennsylvania suburbs also continue to perform well. We ended the year 94.5% leased, which exceeds the market vacancy of 11%. Approximately 50% of the regional vacancy is isolated in one King of Prussia building where eBay vacated earlier in 2016. As we have discussed on previous calls, we have a few larger blocks of space coming back in the second and third quarter in Radnor. We continue to market these spaces to both existing tenants for required expansion needs and prospects coming new to the Radnor submarket. Leasing spreads during the quarter within the suburban portfolio were 17.3% on a GAAP basis and 4% on a cash basis.

Turning to Metro DC, the region is in the midst of a robust expansion, driven in large part by the private sector. Over 72,000 jobs were added during the year with regional unemployment at 3.9%. Another 51,000 new jobs are forecasted for 2017. Regional growth is expected to be driven by the professional and business service sectors.

Our toll road properties, at 92% leased, outpaced the market by 1,200 basis points. Rent growth remains challenging due to the level of market vacancy. Tenants are continuing to focus on amenity-rich properties offering close proximity access to the Metro. We have reduced our forward rollover risk to approximately 100,000 square feet or 3.3% in 2017. In 2018, Northrop Grumman's full building tenancy in Dulles Corner expiring in the third quarter, accounts for over half of our 476,000 square feet or 16% rollover.

Market dynamics in Austin continue to fuel office demand. Fourth-quarter absorption of 216,000 square feet marked the 24th consecutive quarter of positive absorption. And absorption for the year was approximately 1.8 million square feet. Although 872,000 square feet of space was added during 2016, vacancy fell 40 basis points to 8.3%.

Our wholly owned Broadmoor properties are 100% leased, and activity on the one building being redeveloped remains steady. Our joint venture portfolio is 95% leased and continues to experience very favorable leasing spreads: 10% to 12% on a GAAP basis, and 6% to 8% on a cash basis.

In terms of the updated 2017 business plan, we have maintained all of our original targets, but we've made additional progress since the last call. Our 2.2 million square foot leasing plan will generate $28.7 million of spec revenue. As Jerry mentioned, we're 80% complete; and 60% complete, from a square footage perspective. This time last year, we were 55% and 38% complete on a comparable revenue and square footage plan.

So to conclude, we're very pleased with our operating performance for 2016, the momentum it has provided going forward, and the additional achievement on the 2017 business plan.

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

Thank you, George. Our fourth-quarter net loss totaled $14.1 million or $0.08 per diluted share and our FFO totaled $63 million or $0.35 per diluted share.

Some observations for the fourth quarter: same-store growth rates for the fourth quarter were 2.2% GAAP and 8.6% cash, both excluding net termination fees and other income items. We've now had 22 consecutive positive quarters on GAAP metric, and 18 for the cash metric.

G&A expenses sequentially rose from $5.5 million to $5.9 million, and our fourth-quarter G&A was below our $6.0 million reforecast primarily due to lower professional fees. Our full year G&A totaled $26.6 million. FFO from our unconsolidated joint ventures totaled $9.2 million, above our fourth-quarter projection by $0.7 million, primarily due to improved leasing at our Austin joint venture.

Interest expense totaled $20.4 million, a $0.4 million sequential decrease, primarily due to the deconsolidation of 3141 Fairview Park in October. For the year, our 2016 cash interest expense totaled $97.5 million, which is 20.6% below 2015.

Other income totaled $1.7 million or $0.9 million above our projection, primarily due to real estate tax rebates in our Philadelphia region, and are nonrecurring.

Third-party fee income for the year totaled $26.7 million, $2.7 million above our forecast. And third-party expenses were $10.3 million or $1 million above our forecast. The $1.7 million outperformance is due to increased development fees and leasing commissions, primarily generated from our Austin joint venture.

Unimproved real estate -- in accordance with the NAREIT definition, we included a $9 million gain on the sale of unimproved land in Oakland, California, partially offset by impairments on unimproved land totaling $5.6 million. The land impairments are generated from our landholdings in New Jersey and Richmond. The net effect of these items resulted in a $3.5 million net gain.

CAD for the quarter totaled $41.2 million, representing a 68.8% payout ratio, which included $10.9 million of revenue-maintaining capital. We also incurred $5.5 million of revenue-creating capital expenditures. For the year, CAD totaled $152.4 million, representing a 73% payout ratio.

Looking forward to 2017, we note the following. For property operating income, excluding term fees, third-party and other income, for the quarter we will be approximately $72 million to $73 million, and will include approximately -- we anticipate a slight loss on NOI due to the accelerated sales that we are forecasting for the first quarter.

G&A expense, consistent with prior years. Our first-quarter G&A expense will be higher due to timing of expense recognition and will be approximately $8.5 million. And the full year will continue to be between $27 million and $28 million.

Other income we expect to be $600,000 for the quarter; and full year, $3 million. We expect $1.5 million in term fees for the first quarter, with our full-year estimate at $3 million. Interest expense will increase to approximately $22 million, primarily due to the reduced capitalized interest. For the full year 2016, capitalized interest -- interest expense for 2017 should range between $85 million and $86 million. And capitalized interest for 2017 should approximate $3.5 million, a $9.3 million reduction from 2016.

FFO contribution from our unconsolidated joint ventures should total $8.5 million for the quarter. And we're project our joint ventures will contribute approximately $36 million in 2017. Third-party fee income should approximate $25 million for 2017 and $8.5 million in related expense.

Looking at our business plan assumptions, revised our sales to $200 million. And we've got 85% of that either sold or under contract today.

Our unsecured bond maturity in May 1, at 5.7%, will be paid off. We will also look to redeem at par our preferred shares at $100 million during April. And then we plan to finance that with cash on hand and also issue a bank term loan. We're anticipating a term loan between $150 million and $200 million to partially fund those maturities and redemptions, and we have increased our assumed rate from 3% to 3.25%.

We don't have any contemplated speculative acquisitions in our guidance. While we have some land sales under contract, we have not programmed any of that FFO into our 2017 guidance as a gain or loss. And we should have 178 million weighted shares for the year. And that includes no buyback or ATM activity.

As outlined in our 2017 guidance assumptions, we have highlighted that we anticipated an additional $100 million of sales. In our initial guidance, we had $100 million of sales at $4.0 million of dilution.

Based on a revised guidance to $200 million, we believe that most of those dispositions, between 70% and 75%, will occur during the first quarter, and only 15% to 20% occurring during the second half of the year. As a result, the increased sales volume, net of fourth-quarter sales shortfall and the accelerated timing of our 2017 disposition activity, will approximate $9 million of dilution. Based on the performance of the balance of our portfolio being in line with guidance, that resulted in the reduction in the upper end of our FFO guidance.

Looking at our capital plan, we continue to project 2017 CAD between 71% and 64%. And we reflect $35 million roughly of revenue, maintaining CapEx to get to the midpoint of that guidance.

Primary cash uses will be $155 million of development; aggregate dividends totaling $117 million. We still anticipate putting $23 million into our capital joint ventures. And revenue creating should total $38 million for the year.

We plan on paying off the bonds, as I mentioned; redemption of the [preferred] shares at $100 million. And we did retire $27 million of debt attribution as a result of the Parc at Plymouth meeting joint venture sale. And we had $5 million of mortgage amortization.

Looking at the sources, we anticipate $192 million of cash flow from our properties after interest expense; $200 million of asset sales. A bank term loan will use $250 million; and $15 million of JV financing on Encino Trace, which we would anticipate putting on during the first half of the year.

Based on this capital plan and using a $250 million term loan, we will have cash balances approximating $80 million to $85 million at year end. We also project our debt to EBITDA to remain in the mid-6 area. In addition, our debt to GAV will be approximately just below 40%.

We continue to be mindful of the interest rate environment. And we are considering a number of financing options besides the ones mentioned previously, which could also include taking a look at not just our 2017 maturities but the 2018s also.

I will turn the call back over to Jerry.

Great, Tom. Thank you. And George, thank you, as well. So to wrap up, 2016 really did close out strong. It was a transformational year in terms of our operational platform and setting a much stronger growth platform, going forward. So we really do anticipate that 2017 will be a strong continuation of our drive towards growing operating cash flow and growing NAV. And our focus on improving forward growth, reducing forward capital spend, will generate solid NOI growth, strong same-store performance, and positive mark-to-market.

Just as a final note, we will be hosting an Investor Day. Save the date cards will be going out shortly. There will be an evening event on the night of May 9, and the Investor Day will be May 10. So please keep an eye out for those save the date notices.

And with that, we would be delighted to open up the floor for questions. We ask that in the interest of time, you limit yourself to one question and a follow-up.

Kayla, please open up the line, please.

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

I'm hoping you can provide a little bit more color. I think you had mentioned some Radnor expirations; and Northrup as some kind of leasing you still have to get done. Can you talk about progress for that space, and then also what's in your guidance?

Sure. So in Radnor, we've got really three larger blocks. They all expire in July of 2017. One of those is a 50,000 square foot lease that moving out of the portfolio to King of Prussia. The other is FreedomPay, which will be moving down to FMC. And then the third is HTH, which is moving and doubling in size by going to the build-to-suit that we're doing for them in King of Prussia.

So because of the fact that they all expire in the third quarter, and knowing that the construction turnaround will take a couple of months, we really don't have -- we have a little bit of space, but not much of that space coming back into the plan, late in the fourth quarter.

But we feel great about having inventory in Radnor. It's one of the things that we haven't had for a number of years. And with our additional lease-up in King of Prussia, we think we're sitting in a good spot in the Pennsylvania suburbs.

Northrop Grumman is a 2018 expiration. It is our largest expiration in 2018. They continue to go through a couple of extensions on a short-term basis. So we now have them expiring Q3 of 2018. And we continue to have a dialogue, but we know we've got a little bit of runway on that transaction.

Great. And Jamie -- Jerry -- just to add on to George's comments. One of the things that is actually interesting in the Pennsylvania suburbs now is you're really seeing a pretty steady resurgence of leasing activity and increasing rents in King of Prussia and Plymouth Meeting. So, I think that is historically how things have gone in this market in terms of when the core markets of Radnor, Conshohocken, get very tight, typically there will be a certain number of tenants will look to migrate outside from a price point standpoint.

So we're actually -- having been in the high 90s in Radnor for a number of years, I think our leasing team is actually pretty excited about the prospect of getting back some very marketable space to re-lease that at what we think will be good mark-to-markets.

Okay, that's helpful. And then my follow-up. You had commented DC -- I think you used the term robust. Can you talk more about what you're seeing there, and what your expectations are going forward?

Yes, we're seeing a lot of increased activity. I'm not sure that we can necessarily say that it's all due to the election. But just the overall deals, and more importantly, the size of the deals in the marketplace has picked up in the last 90 days. We're seeing anywhere from 60,000 to 400,000 square foot transactions in the greater DC markets.

So again, our largest block of vacancy in the toll road is about 30,000 square feet. So the team has done a good job in getting us back to a 9 handle on occupancy, and we just -- we have amenitized the Dulles Corner portfolio. So we're feeling good about where we sit, and we're feeling good on some of the increased activity we're seeing elsewhere in that marketplace.

And what sectors are you seeing, mostly?

Mostly private sector. It's not really defense or contract driven; more private sector and professional services.

Okay. All right, great. Thank you.

Emmanuel Korchman, Citi.

If we just look at two things: the dispositions -- just help us understand what changed to get those pools. I understand the part of them being later from 2016 into 2017, but what made them move earlier from late 2017 to early 2017?

Manny, a great question. I think as you know from our previous calls, we always keep a fairly sizable pool of assets in the market for what we call price discovery. And when we looked back in October at visibility we were seeing on forward sales activity, I think we were seeing a fairly limited pool that was circling at price points that were probably below our overall expectations. And I think what we really saw happen in December was people -- and again, a lot of the assets we're selling are assets we've always considered to be non-core -- that there were spot opportunities to accelerate that.

So for example, our team did a really nice job in our Concord, California, asset, restructuring a major lease. That lease required some give-back of space, and had a pretty forward capital spend for us. So we looked at what we thought the present value of that property was to us.

And the team -- we reintroduced the property to the market. And because of some connections point with that tenant and some other buildings, and generally what's happened in that marketplace, we were able to find a buyer who wanted to close pretty quickly on the asset. And that certainly accelerated a big, big asset sale that we were thinking would be later in the year.

Same thing with a couple of our Pennsylvania suburban assets. We had one asset that -- an office building, about 130,000 square feet, that our expectation would be marketing in the fourth quarter. We received a number of -- we got some good leasing activity done. We've received a very qualified reverse inquiry to sell that building. That will close sometime in February at a very good cap rate and a good sale price for us.

And then we had a couple of lower-quality sales that we really weren't sure where the buying pool would be. One in Maryland, for example, that's really a land redevelopment. It's older office product, really functionally obsolete. So we were evaluating taking it through the rezoning process or rezoning it for residential and for retail.

And inasmuch is that's not really a core market for us, we started to research the market and found a buyer who felt that was a good opportunity for them. So, I think it was just that we were getting feedback on some of the assets we had for sale in the early stages of pre-marketing where we got some pretty good traction. And certainly not knowing where interest rates are, certainly taking a hard look our capital plan where between our preferred stock and the bond maturity, our main focus was really to generate good liquidity while, at the same time, reduce our exposure to these non-core assets.

Does that answer your question?

It does; thank you. And Jerry, maybe one more for you. If we look at -- if we go through your comments and we look at developments you have under plan, it sounds like starts in 2018 could be pretty big. Am I understanding that correctly? And how do you think about debt funding when the time does roll around?

I think when we look at 2000 -- well, 2017, we think we'll hopefully get one build-to-suit moving forward. In 2018, I think it's purely, Manny, a function of where we see the market. I think what we're doing right now is -- whether it's on the Schuylkill Yards project or the Broadmoor development in Austin, or Knights Crossing in New Jersey -- I think we're just really focusing a lot on pre-marketing, making sure that we have our approvals perfected. We're far enough along in the design/development process that we can effectively price the assets from a construction standpoint, and then see where the market goes.

I think we certainly hope we'll be able to get some things done in 2018, but we're very carefully watching all the macro forces, what's happening with construction pricing, and the tenant demand drivers to really figure out what we want to do in 2018.

Great. Thanks, guys.

Craig Mailman, KeyBanc.

Just to follow up on the sales question, Jerry, you noted you guys always have a decent amount in the market. I'm kind of surprised on the timing here. What's the possibility that you guys could ramp dispositions even further? And what do you think timing on that could be, given what you have in the market?

Craig, great question. I think when we took a look at -- knowing full well that we were running ahead in terms of sales closings than we anticipated back in October, last time we had our call, we did spend a lot of time focused on what we really thought we could deliver in 2017. When we program that $200 million, that really does reflect what we have under letter of intent; what we anticipate closing, as Tom touched on, in the next 60 or 90 days. And that's really what we see on the horizon.

The good news about what we did in 2016 is we've sold a lot of the assets that we were planning on selling, so our non-core asset pool is really shrinking fairly dramatically. It doesn't mean we won't be opportunistic; but the reality is that not knowing what the investment sales market would be, I think we just opted from a liquidity and from a portfolio pruning standpoint to accelerate some sales. As of right now, we don't really anticipate anything material beyond the $200 million happening in 2017.

But one of the great things about this business is we know by having things in the market, we're always positioned to take advantage of whatever opportunities come up. If someone comes in, like we did with one of the properties in Philadelphia in the Pennsylvania suburbs that was a very qualified reverse inquiry, I think we take a look at that and compare what that pricing would be versus what the hold value would be to the Company.

What do you think the dollar value of your non-core portfolio is at this point?

I think we're down in that $200 million range.

And then just one follow-up here. George, you pointed out that you guys are well ahead on the business plan versus where you were this time last year. Just curious what kind of kept you hesitant to move that bogie a little bit higher.

I'm sorry, the last part there, Craig?

Just what kept you from moving your guidance range a little bit higher, given how far along you are, at this point in the year?

Well, I think part of it is more of the timing of when we're getting certain spaces back. That fact that the Radnor expirations, as an example, kind of hard to move the spec revenue contribution. If you're only getting space back at June 30, you've got to have a prospect; you've got to have 30 days for permitting, 90 days for construction. So your window of spec revenue gain starts to close.

And I think most of the renewals that we think we're going to do are pretty much done at this point. We've got a little bit of renewal activity left. But for the most part, with the renewals being done, you're now down to just the vacant space. And then the question is prospecting, permitting, and construction.

Thank you.

Chris Belosic, Green Street Advisors.

It looks like you guys put up a pretty strong quarter of leasing in 4Q, and you're getting pretty full in your portfolio. Are there any places where you think that maybe you guys can start really pushing rents that will perhaps exceed some of your expectations that you are starting to look at for 2017?

Yes, look, we discuss that daily. I do think that there are really some pockets within the portfolio -- look, certainly I think we have really been pushing rents quite strongly in Austin. And I think the supplemental lays out some of the mark-to-markets. But we've really have the wind in our sails in terms of having great inventory and a great team on the ground to really capitalize on what we see as very strong demand drivers in the market.

We continue to push the envelope almost with each lease proposal in Austin. And I think we do the same thing in Philadelphia, University City. I think we are very pleased with the traction we're getting there.

And again, from our perspective, it's a matter of pushing rents and also reducing concessions in terms of TI and free rent, and also lengthening lease terms and getting bigger bumps in. That's one of the reasons we cite the growth in net effective rents we've had, because that's really what we key in on.

We might have to, in a certain transaction, not naturally push the rents to the full envelope that we want with a certain tenant. But maybe we get 3% annual bumps over a 10-year term versus 2.5%. Or maybe we put in $35 versus $40 in TI. Our leasing teams and, frankly, the quantitative tool we use internally to evaluate effective returns on leases is very much geared to quantify all those different puzzle pieces to come to the right result.

But I think what will be interesting is we are pretty excited, as George mentioned, about getting some space back in Radnor. This market is tight as a drum. And our expectation will be able to get some very good leasing activity and continue to push rents in this submarket beyond their historical highs.

Great, thanks. And then just one follow-up with that. Are you seeing any changing on the tenant decision-making end of things related to your ability to start getting some leasing done -- yes, both in Radnor and throughout your portfolio?

This is George. I think the overall tenant decision timeline has started to compress a little bit. I think once you got through the fourth quarter and holidays, and businesses having their own internal budgets established, I think tenants are starting to make decisions on a more timely basis.

Okay. Thanks, guys.

John Guinee, Stifel.

A couple quick questions. First, I guess Jerry or Tom, you quoted a $2.25 per square foot, per, year, re-leasing cost. What is that number if you also include your revenue-creating CapEx, as opposed to just revenue-maintaining CapEx?

And then the second question would be help us understand DC a little better; private-sector job growth is not translating into decreased vacancy. And you've got a lot of government-oriented headwinds, cap and balance is still in place. Draining the swamp is getting a lot of press; freeze the footprint still exists with the GSA, and there's a hiring freeze by the new administration. So, one question on re-leasing costs, and the other question on the DC marketplace.

Okay, let me start off with the DC. I think, John, our perspective in our Northern Virginia and Maryland and DC portfolio is just stay very much in front of current leasing activity. There's certainly a lot of, I think, conflicting data points at a macro level. We talked to some of the brokerage firms down there and even to our own leasing team. I will tell you there's a level of optimism that I haven't seen in a couple years, in terms of how they view forward leasing activity will progress during 2017 and 2018.

There are, as George alluded to, a number of larger private-sector employees that appear to be taking down blocks of space in the toll road corridor where we have our largest asset base. Certainly to the extent that I think those larger blocks get taken, per market chatter, I think that does tighten that market up significantly, at least in the short term. And we're sitting there with our portfolio having -- our largest block is 30,000 square feet.

I think our view on the market is the people who are involved every day are feeling more optimistic. I think that has yet to translate into defined activity.

Given that, I think our focus remains on, hey, let's keep our portfolio leased. Let's stay abreast of all the activity in the market, and see what happens over the balance of 2017 and 2018.

John, it's George. I think on the CapEx per foot, per year, if you throw the revenue-creating deals in the mix, it probably adds $0.50 the $0.75 to that metric.

Great. Thank you very much. Nice quarter.

Rob Simone, Evercore ISI.

A lot of the questions I had are already been answered. But at a high level, you guys are incredibly levered to the Philly CBD now. And the market's been going through some pretty incredible rent growth, and you are realizing that through your mark-to-markets today. But could you guys maybe share some of your high-level thoughts on market rent growth going forward, maybe beyond 2017, now that most of your business is locked in for the year?

As we look at Philadelphia, I really do view it as almost three emerging submarkets, with kind of the same but a little bit different demand drivers. We have -- starting off kind of West, moving East -- University City for us has been a stellar performer. We've been able to continue to increase rents. Certainly, as we look forward over the next couple years, we think that we'll be able to certainly achieve the level of rent growth we've had over the last couple years.

The Market Street West corridor, we've had 4% to 5% rent growth. And we're not really seeing anything that would dissuade us from us being -- to achieve that. When we look at the Logan Square section, we do have some rollover coming up there in the next -- in 2018 and into 2019. So I think, there, we're being much more forward focused in terms of trying to lock down some early renewals.

On those early renewers, we're still getting very nice cash mark-to-markets, and getting in between 2% and 2.5% annual rent increases; extending terms, doing blends and extends that have really worked out very well to our benefit.

One tenant, in particular, I think the team has done a great job on getting a long-term extension done today that enables a tenant to refit their space and enables us to move our market rents up -- George, what? A couple bucks a foot?

Yes. This is a 2021 expiration who obviously wants to take advantage of access to capital a little bit earlier, re-do their space. They're coming off a 15-year lease that was done under the old ownership of the property. And they feel that they really need to move now to help them attract employees. So, we find a construct that works for both of us to lock it away.

I think as Jerry mentioned, the annual escalators that we're getting, I think we expect the market to move at a similar pace, if not better, than the annual escalators we're getting in our rent stream.

Great, guys. Thanks a lot.

Mitch Germain, JMP Securities.

Tom, I think you mentioned a bit of a shift or a change in your lending assumptions for the term loan. Maybe if you could just provide some perspective on what the discussions you're having with the banks.

Sure, Mitch. We gave the guidance back in October; and since then, the rate curve has moved a little bit, even on the shorter end. The spread we've been talking about hasn't really changed. The demand is still there. We just felt like going up an extra 0.25 point in terms of thinking about the all-in costs for any kind of term loan we do this year. But it's really -- the demand is there. The banks are very supportive. I just think that curve has moved a little bit, and the spreads really stayed stagnant in terms of a term loans for us.

Got you. And then, Jerry, I apologize if you already answered this, but are there any markets that you would consider doing speculative development at this juncture?

No.

That was quick. (laughter)

No; I don't think it's the time to do that. There's a lot of velocity in a number of markets, but frankly I think with the price we have on the drawing boards, if we can't attract tenants from a pre-leasing standpoint, given their design quality, their efficiency, their locations, that's actually telling us something about the market. And it's a reality we should face before we put the shovel in the ground. As we look in and discuss internally with our development and operating teams, we're not really focused on any speculative development whatsoever.

Thank you. Good quarter.

(Operator Instructions). Rich Anderson, Mizuho Securities.

Great quarter. Of the $200 million of dispositions -- I don't know if you said this, and I apologize if you did. But would you -- you mentioned, Jerry, in an answer to another question that you estimated about $200 million of remaining non-core in your portfolio. So how much of the $200 million that you're planning to sell now is actually non-core, and how much is it that reverse inquiry type of stuff?

Almost everything we have on the market and are projecting to sell in 2017, Rich, we view as non-core.

Okay. Good enough. That's all I need. And then second question is the typical dividend question. Aside from -- we all know it's a Board decision, and you'll get to at some point -- but last year, a small but I would call symbolic increase to your dividend. How do you feel about your cash flow position today, taking into account the dispositions and everything else that you have to deal with, the preferred redemption; and thinking again about raising the dividend, even if slightly, this year, similar to last year?

I think we've been very pleased with the rate we've been able to grow operating cash flow. We had a good year in 2016. We're projecting essentially a 10% increase in an operating cash flow, before dividends and development, for 2017. And I think the Board reviews that metric every quarter when we sit down and talk about forward rollover exposure. Like, some of the points that George touches on, which is what's our rollover look like in 2018 and 2019? How are we assessing the markets? What do we look at our forward development spend? What's our revenue-creating and maintaining capital?

All those pieces go into the mix in terms of focusing the Board on what they want to do, as far as the dividend goes. The Board, as they did in 2016, is very keen on continuing to grow return to shareholders. They simply want to make sure that when they make that decision, that it's rooted for the long-term, and that we have effectively assessed all the risk on our landscape in terms of capital costs.

So things like paying off the preferreds; reducing our leverage and 2016 by $400 million; the plan with paying off the preferreds in cash; reducing the $300 million bond level through a bank term loan -- that, again, has a deleveraging aspect for us. The reality is I think the Board looks at the operating cash flow, growth profile of the Company with our revised portfolio, and feels pretty good about it.

All that being said, it's their decision. We view it every quarter. But they've recognized the importance to our shareholders of showing continued growth in both the dividend stream and our operating cash flow.

Okay, good enough. Thanks very much.

Jed Reagan, Green Street Advisors.

It's Jed here with Chris. You mentioned the 2018 bonds that are maturing. Just what are your early thoughts about potentially paying those down or refinancing? And could you get at those early? And then just in general, as we look out to the next year or two, do you see the debt to EBITDA changing from that mid-6 range?

Jed, it's Tom. I think on the 2018 bonds, they mature at a rate just under 5%. So I think currently we would have to do a make-whole on them. I think we're really going to keep looking on the curve and talking about whether we think rates could start to move substantially higher from where they are right now. It's not really that compelling based on where we think we could do a 10-year now, if we wanted to take them out. I don't think we have a set plan on them yet, but we are monitoring it to see where we think rates could go, and whether we would opportunistically take them out early.

On the debt to EBITDA, I think this year when we take a look at 2017, while we have some cash ramp-up and some NOI ramp-up and EBITDA, we do have a capital spend that's still roughly in line with the amount we're selling. We still don't see the debt to EBITDA moderating.

I think as we look at into 2018, we do start to see it come down significantly as we get into the second half of the year, especially with the ramp-up of the residential at FMC being fully stabilized after the first quarter; as well as all the NOI from the lease up coming online later this year and into next year. So, 2018 starts to really show migration down.

Okay, that's helpful. And just curious how pricing for some of the recent non-core asset sales have come in, versus your initial expectations. Have you found any changes in buyer interest or cap rates for some of these, especially some of the lower-quality assets you are selling? And then are you fighting transactions are taking longer to close?

A lot of points in there, Jed, so let me try and attack it. Certainly when we took a look at, for example, the property we sold down in Maryland -- that was essentially, as I think I touched on earlier, a land redevelopment play. We had essentially included that given the physical plant and the location of those older buildings, it really wasn't worth the investment to put money into it to retool it as office. We had always carried that in essentially land redevelopment play.

I think with the exit out of California, we knew we had some event risk with that major tenant. From our perspective, the pricing we were able to achieve was pretty much in line with what we thought it would be as the negotiations with the tenant clarified. And, frankly, we viewed that transaction -- which went off at a fairly low cap rate; bad price per square foot, given where the leasing structure was -- as a necessary sale for us to make. It was non-core. We don't have a lot of marketing heft in that marketplace, not a lot of tenant deal flow. And our perspective was that for us to re-tenant that vacant space would cost us more money than liquidating that position today.

But on a lot of the other sales, I think we're -- when I look at the cap rates we were able to achieve, we sold a lot of properties like that in 2016. And we closed right around a 7.2% to 7.4% cap rate, on average, cash and GAAP. What we have under agreement is below our targeted range, in most cases. And we had a couple of cases where it was above basis on leasing statistics.

I think the market, when we are trying to sell assets that are $8 million to $30 million in size, almost by definition the type of buyer we're dealing with is one that's going to be relying on private equity, friends and family equity, higher levered returns, finding bank financing, mezz lending -- all those things take time.

And that was one of the ingredients behind -- or one of the motivations, frankly, behind us trying to clear the deck of a lot of these assets sooner rather than later; just not having a lot of visibility into the depth of some of these financing markets going forward.

Understood. Okay, thanks very much.

And there are currently no more questions in queue. I hand the call back over to you, presenters.

Great. Thank you very much for joining us for this call. As I mentioned, we are looking forward to hosting an Investor Day in Philadelphia. And we will be circulating save the date cards shortly on that. Thank you very much.

This is the end of today's call. You may now disconnect. Have a great day.