Brandywine Realty's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 7.13 | About: Brandywine Realty (BDN)

Brandywine Realty Trust (NYSE:BDN)

Q4 2012 Results Earnings Call

February 7, 2013 9:00 AM ET

Executives

Jerry Sweeney - President and CEO

George Johnstone - SVP, Operations and Asset Management

Gabe Mainardi - Vice President and CAO

Howard Sipzner - Executive Vice President and CFO

Tom Wirth - EVP, Portfolio Management and Investments

Analysts

Jamie Feldman - Bank of America Merrill Lynch

Josh Attie - Citi

John Guinee - Stifel Nicolaus & Company Inc.

Evan Smith - Cantor Fitzgerald

Michael Knott - Green Street Advisors

George Auerbach - ISI Group

Jordan Sadler - KeyBanc Capital Markets

Mitch Germain - JMP Securities

Brendan Maiorana - Wells Fargo

Operator

Good morning. My name is [Latingy] and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the conference over to Mr. Jerry Sweeney, President and CEO of Brandywine Realty Trust. Please go ahead sir.

Jerry Sweeney

Latingy, thank you very much. Good morning, everyone and thank you for participating in our year-end 2012 earnings call. On today's call with me are George Johnstone, our Senior Vice President of Operations, Gabe Mainardi, our Vice President and Chief Accounting Officer; Howard Sipzner, our Executive Vice President and Chief Financial Officer; and Tom Wirth, our Executive Vice President of Portfolio Management and Investments.

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

To start our call, as is our normal practice, I'll provide an overview of our three key business plan components; of operations, balance sheet and investments as well as some color on recent transactional activity. George and Howard will then discuss the operating and financial results in more detail.

The macro-economy remains the focal point in our thinking, uncertainty remains a concern, tenants do remain cautious on the near term economic picture however, generally speaking our portfolio remains a beneficiary of tenants like the quality product as is evidenced by our strong trend-lines in operating metrics as well as our moderating capita cost.

And looking at operations, 2012 was a very good year. The leasing momentum, we built the year is improving our operating metrics across the board and we ended the year at over 88% occupied and over 90% leased. Positive pricing dynamics remain in several key markets with strong performance particularly in several of our Pennsylvania suburban locations, CBD Philadelphia and Austin, Texas.

In addition, our operations in Metro DC and New Jersey have clearly troughed and are on the path to recovery, retention rate for the quarter was the highest of the year at 74% and moved our over 2012 retention rate to over 66%. We also improved our marked to market on both new and renewal leases and our 2012 marked to market was much better than our original business plan forecast. Capital cost continue to moderate and we are in a much better position closing out 2012 then in 2011.

We averaged capital cost of $2.10 per square foot per lease year for the fourth quarter and our 2012 full number was $2.61 right within our targeted range. Our same store number for the quarter was particularly strong for the year we had positive same store growth on a GAAP base of 2.9% and 1.8% on a cash basis which has established a very strong platform as we move into our 2013 business plan execution.

During the fourth quarter we also [covered] 2.9 million square feet of inspections which is also of year-over-year. Another key positive as we look at 2013, and certainly 2014 and beyond is our low level (Inaudible) roll over. For 2013 we have just 1.0 million square feet remaining to renew which is about 7% of our portfolio, our lowest level in over 7 years.

And looking at our balance sheet, we had a very active fourth quarter, from a forward liability debt management standpoint we are in extraordinarily good shape. The overall objective of our fourth quarter transactions was to lengthen our maturity profile reduce our average weighted cost of debt and increase the size of our unencumbered pool and on each of these metrics we were successful.

Our average weighted maturity moved from [5.] years to 6.4 years an improvement of 10%. We reduced our weighted average debt cost 24 basis points and we increased the size of our unencumbered pool to 86% of assets which is the strongest in the company's history. All of these capital market transactions are outlined on page 8 of our supplemental package.

Reducing our debt levels below 40% and achieving a 6.5 EBITDA ratio if not lower remains a core objective. The pursuit of this objective is amply evidenced by the recently announced sale of Princeton Pike Corporate Center, when this sale close it will eliminate our year end line of credit balance and provide for further debt reduction.

Liquidity for the company remains extraordinarily strong operations are driving continued improvements to our financial metrics and rigorously adhering to our deleveraging, path remains a primary objective. On the investment front, we achieved our 2012 sales target, having sold a $176 million, at an overall disposition cap rate of 7.1%. Also during the year we acquired $76 million at an average cap rate of 8.5% on a cash basis thereby achieving our objective of being a net seller approaching $100 million. From a joint venture standpoint, during the year we invested $22 million on all-state joint venture to acquire Station Square, $120 million, 5000 square foot project in Silver Spring, Maryland.

Now turning our attention to 2013, we do expect tenant activity levels to remain strong and consistent with our expectations in all of our markets, and we've had very good success since our last call, as George will touch on, Our 2013 leasing plan is already 66% executed. We are targeting a yearend 2013 occupancy target to be 90%, a 200 basis point increase over where we showed at the end of 2012 with most of that occurring in the second half.

We expect our 2013 retention rate to be 62% and we do anticipate very strong same store numbers with the GAAP range between 3% to 5% and the cash range between 4% and 6%. Capital cost for the year projected to run around 12% of revenues well within our targeted range resulting in another year of strong CAD coverage.

Our 2013 business plan does not contemplate any capital market activity during the year we'll continue our path to achieve our interim debt to GAV target of 40% and EBITDA multiple of 6.5% as we work towards our longer term target of mid-30s debt to GAV and below 6 times EBITDA.

For 2013 we remain optimistic and track the interest climate with the overriding objective continuing to reduce our cost of debt capital, reducing floating rate exposure as well as continued lengthening of our debt maturity profile. Our 2013 plan does not contemplate any common equity issuances as evidenced by our accelerated sales program we continue to believe that our best source of equity is simply selling non-core assets.

The final component of our 2013 plan is accelerated growth through our investment strategy, that focus remains on increasing our urban and town center concentrations, the sale of our Central New Jersey Asset evidence that shift that sale of Princeton Pike reduces our exposure to New Jersey to 6% of revenues which is down significantly from several years ago, and very illustrative of our shifts to urban and town center Metro markets.

Looking ahead, more capital sources are a focused on office space, this appetite is driven by the lower rate environment, emerging visibility on the economic outlook and relative yields.

Our 2013, plan originally contemplated us being a net seller of a $100 million we are increasing that to $221 million, giving improving fundamentals and increased investor focus. The Princeton Pike sale of $121 million is the first step in that execution that sale occurred at approximately 8.5% cap rate and a $150 per square foot. We anticipate that the remaining $100 million of dispositions will occur in the second half of the year at a targeted 8% cap rate. The plan right now does not incorporate any acquisitions and to the extent we find any that will be financed by additional sale activity.

And looking at some other activity, recall that our land investment is around $102 million. We did add-in the supplemental package on page 34, a land summary schedule to provide more visibility, so you can readily track our activity in this area. Our goal remains either selling outright or effectively monetizing about 35% of that value. We did achieve $15 million of that during 2012 with the Toll Brothers joint venture at Plymouth meeting.

Yesterday we did announce another step with our Cira Center South joint venture with Campus Crest and Harrison Street. Our 30% ownership stake puts Brandywine overall equity requirement at approximately $18 million of which about 50% of that is coming from our land contribution. This project represents the next phase of Cira South development. We expect a delivery date in Q3 of 2014 with an initial return on cost of 7% and a first full stabilized return of 8%.

In a broader sense there is no question that markets change and tenant appetites evolve. Our internal review program is continually focused on ensuring that we have realized optimal value for every single piece of real estate we own. As part of that process we've determined that of our New Jersey assets have a higher value proposition by being converted to mixed-use developments. Both properties are older office products that are part of a larger local Brandywine business park with available land providing an opportunity for mixed-use development.

Achieving the necessary result to create this value will take between 12 to 24 months and based on economic and zoning analysis both buildings have been removed from inventory, both projects have a very low basis enabling us to move in this direction and create significant upside through the entitlement process. While these two projects are somewhat unique within our portfolio, it does reflect our recognition that obsolescence and market shifts can affect the ongoing value of certain of our assets. We have identified these projects as re-entitlement properties on page 32 of our supplemental package.

At this point George will provide an overview of 2012 operational performance and then turn it over to Howard for a view our financial activity.

George Johnstone

Thank you, Jerry. We continue to see good levels of leasing activity from state inspections to pipeline to lease executions. In terms of pipeline we saw an increase in the overall pipe of 277,000 square feet during the quarter resulting in a total pipeline of 2.8 million square feet. 646,000 square feet in active lease negotiations with the balance all [entertaining a] proposal.

During the quarter we signed 993,000 square feet of leases including 545,000 square feet of new and expansion leases and 448,000 square feet of renewals. This results in total lease signings for 2012 of 3.7 million square feet. Tenant decision making remains relatively unchanged. Leases executed in the fourth quarter averaged 94 days from initial inquiry to lease execution as compared to 98 days in the third quarter and 103 days in the second quarter.

Lease commencements totaled 723,000 square feet including 422,000 square feet of new leases, 248,000 square feet of renewal leases and 53,000 square feet of tenant expansions. During the quarter we also had 99,000 square feet of tenant moveouts upon expiration and 58,000 square feet of early terminations. Absorption for the quarter was 318,000 square feet and we ended the year 88% occupied.

We also have 509,000 square feet of executed leases on space that was vacant at year-end above our 90% leased level. We're encouraged of the leased levels we were able to achieve in Richmond at 89%, New Jersey Delaware 88% and Metro DC at 86%. This level of achievement is a testament to our regional leasing teams. Leasing spreads for the quarter were positive 2.8% on a GAAP basis and negative 4.1 on a cash basis. Leasing capital for the quarter was $2.10 per foot per year on a weighted average lease of six years. All other business plan and operating metrics for 2012 were in line with expectations.

Turning now to 2013; we're maintaining all of our original business plan operating metrics. We've achieved $28.9 million or 66% of our $43.9 million spec revenue target. This compares to 33% achieved last quarter and 64% achieved this time last year. Of note we're 71% achieved in Metro DC versus 51% a year ago and Richmond is 45% achieved versus 30% this time last year. Occupancy will increase to 90% during 2013 from 1.6 million square feet of renewal leases 2,000,000 square feet of new and expansion leases offset by 275,000 square feet of known and anticipated early terminations.

These early terminations are a combination of lease rights being exercised by tenants and landlord negotiated terminations to accommodate existing tenant growth. 79 square feet of this early termination space has already been re-leased. We've executed 947,000 square feet of our 2013 renewals of the remaining 653,000 square feet remain in the plan, the single largest lease is 45,000 square feet.

Leasing spreads will range between 3% and 5% on a GAAP basis and negative 1.5 positive, 0.5% on a cash basis. Leasing capital will range from $2.25 to $2.75 per square foot per lease year. Our CAD ratio in 2012 was 75% versus a 105% in 2011. The continued focus by our regional leasing teams on controlling capital will enable this favorable trend to continue into 2013. These leasing assumptions and trends will translate into same store NOI growth between 3% and 5% on the GAAP basis and 4% to 6% on a cash basis, both excluding termination fees and other income.

Metro DC and New Jersey Delaware will generate cash same store growth in excess of the upper end of this range as a result of improved occupancy levels. Austin is generating double digit cash same store growth as a result of rent growth. Our regional leasing teams are also focused on extending lease maturities, to date we have executed early renewals on 486,000 square feet of our 2014 expirations including our two largest KPMG and Tysons and Drinker Biddle in Philadelphia.

To conclude we remain encouraged by the level of activity in our various markets the quality of our inventory and the achievements thus far in our 2013 business plan.

At this point I'll turn it over to Howard for the financial review.

Howard Sipzner

George, Jerry, thank you. Core FFO totaled $48.2 million for the fourth quarter of 2012, or [$0.33] per diluted share. Our core FFO payout ratio is 45.5% on the $0.15 distribution we paid in October 2012 to common shareholders. We derived fourth quarter 2012 core FFO by adding back $27.1 million of capital market and transactional items to our $21.1 million FFO calculation.

Core FFO provides the better sense of our FFO run rate by eliminating transactional activity. For comparison purposes, we have applied this methodology retroactively to each of the eight quarters and the full year periods in our supplemental package on page 16.

I would like to make the following observations regarding our fourth quarter results. Our FFO is generally of a high quality with termination revenue, other income, management fees, interest income and aggregate JV activity including the direct financing obligation totaling $7.1 million gross or $5.7 million net in line with our targeted 2012 quarterly run rate.

Our NOI and EBITDA margins at 60.5% and 63.2% respectively remain at or near their highest levels with these metrics, all the way back to early 2009. Our same-store NOI growth rates were 4.7% GAAP and 4.5% cash, both excluding termination fees and other income items.

We've now had six consecutive quarters of positive results for the GAAP metric and three for the cash. At 2.9% and 1.8% respectively for the full year, we met our upwardly revised 2012 targets of 2.5% to 3% GAAP and 1.5% to 2.5% cash.

Fourth quarter G&A increased to $7.2 million versus our $6 million run rate due to $460,000 of transaction expenses including in the G&A line item and accelerated deferred comp costs and other adjustments from an officer departure.

Our fourth quarter interest expense of $33.2 million ticked up a bit from $32.6 million in the third quarter as we had a few brief periods where double debt was outstanding pending repayments. The capital market moves we made in the fourth quarter will have a beneficial impact on our 2013 interest costs as we will note later on.

And lastly, the $13.8 million of revenue maintaining or recurring capital expenditures at moderate level gave us $0.19 of CAD or cash available for distribution per diluted share and a 78.9% payout ratio. With respect to balance sheet and financial metrics, I would emphasize the following points.

Our debt-to-GAV at year end of 45% and our debt to total market cap of 56.7% and are 7.5 times debt to EBITDA ratio, are all somewhat above recent levels for these metrics due to fourth quarter activity and will moderate during 2013 as we pay off additional debt and projects come on line.

We continue to manage interest risk with just $169 million of floating rate debt and we expect to have no outstanding balance on our $600 million unsecured revolving line of credit following the closing of the Princeton Pike sale later in the fourth quarter.

Lastly we have no significant maturities until late 2014. With respect to 2013 FFO guidance we are increasing our prior range of $1.38 to $1.46 to now be in a range of a $1.41 to a $1.48. Setting aside the historic tax credit income of $0.08 that we will recognize once again in the third quarter of 2013, our quarterly FFO for 2013 should be in a range of $0.33 to $0.35 per diluted share.

In addition to the assumptions detailed on pages 30 to 31 of the supplemental package and noted by George, please observe the following. Gross other income in 2013 should be similar to 2012 levels at $20 million to $25 million or $14 million to $19 million net for a basket of other items such as; termination revenues, other income, management revenues, less associated management expenses if stated in net fashion, interest income which will be much lower in 2013, JV income, preferred return on our Thomas Properties Commerce Square joint-venture and the 3141 Fairview financing obligation costs.

2013 G&A will remain unchanged at $24 million to $25 million in line with the projections for 2012. Interest expense in 2013 will drop due to various capital market activities in the fourth quarter and should now be in a range of $122 million to $226 million versus $126 million to $130 million previously guided.

Our preferred distribution should total $6.9 million on our Series E shares reflecting the December 2012 optional redemption of our Series D shares. Besides the Princeton Pike sale we are programming additional sales of $100 million or $221 million total with a $100 million at an average 8% cap rate somewhat back ended handed in $2 million to $3 million impact or loss of NOI in 2013 from current NOI in place.

As I mentioned the historic tax credit income of $11.9 million or $0.08 per share will be recognized in the third quarter of 2013. It is generally offset by about $0.01 of total associated incremental interest expense that occurs throughout 2013 in all of the quarters. The historic tax credit revenue is essentially non-cash is excluded from our CAD calculations, represents the third occurrence of 20% of the net proceeds realized in connection with the 2008 historic tax credit financing and again will be recognized in the third quarter of each year from 2011 through 2015.

We are assuming no issuance at this point under our continuous equity program, no additional note buyback or capital market activity and we are programming weighted average shares for 2013 for FFO purposes of 146.7 million shares. Our FFO payout ratio is projected to be 41.5% using our current quarterly distribution of $0.15 or $0.60 for the full year on the midpoint of the dollar $41 to $48 range.

And lastly, we are projecting cash available for distribution or CAD to be in a range of $0.79 to $0.87 per diluted share versus our prior projection of $0.75 to $0.85 reflecting $50 million to $60 million of revenue maintaining CapEx lower than the prior estimate of $60 million to $70 million reflecting moderating capital expenditures.

In terms of our capital plan for 2013 it's very clean with total 2013 uses of $299 million. That includes $11 million for mortgage amortization, $95 million for aggregate dividends on the common and preferred shares and an allocation of $193 million for various capital and investment activities. These include $55 million of revenue maintaining CapEx at the midpoint of our range, $90 million for revenue creating CapEx lower than our prior estimate of $100 million and that includes cost for lease up of previously vacant space.

New project lease up such as Three Logan Square and other revenue creating activities plus $48 million for a variety of other capital projects including finishing our 660 West Germantown Road development, a possible ground lease buyout, some funds to start one or two other small developments, funds for Grove project in University City, funds for the Thomas Property Group joint venture that was already funded in early January and various other costs related to joint ventures.

We actually have sources of $405 million or a $106 million more than we need and this reflects a $184 million of cash flow before financing, investments and dividends and after interest payments and the aforementioned $221 million of sales proceeds, reflecting the pending under $21 million Princeton Pike sale and a $100 million of additional sales. We will use the $106 million surplus to pay down our $69 million credit facility balance at year end 2012 and we expect to end 2013 with a $37 million cash balance.

Lastly, in terms of account receivable and credit activity, we had $16.6 million of total reserves at December 31, 2012 versus $16 million at the end of the third quarter. Our reserves consist of $3.2 million on $16.4 million of operating receivables or 19.5% and $13.4 million on a $135.5 million of straight-line rent receivables or 9.9%. These levels are in line with prior activity and overall percentages. In the fourth quarter of 2012, we had typical performance on receivables and reserves and no major credit issues.

And with that, I will turn it back to Jerry for some additional comments.

Jerry Sweeney

Great, thank you very much, Howard, and thank you as well as George. To wrap up our prepared remarks, the fourth quarter and 2012 really were very successful. Operating metrics improved and we remain confident that our forward momentum will continue in 2013. We remain committed to outperforming our markets through accelerated leasing efforts.

We remain committed to our deleveraging goals and to our portfolio shift to urban and town center markets, our operational teams and we believe that approach will provide us with the continued competitive advantage and that advantage will continue to be reflected in our operating results and investment activities.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

Jamie Feldman - Bank of America Merrill Lynch

Your expected returns and some of your recent investment activity whether it's student housing development or the Toll Brothers JV or even some of these redevelopments. Just kind of what are you guys thinking these days and how should we be thinking about what you can put to work going forward?

Jerry Sweeney

Jamie the first part of your question got cut off, but I think in terms of returns, we actually outlined the returns in the supplemental package on both the downtown Philadelphia asset which we view as a development project and that will provide some -- a pretty good rate of return to us, as we move forward through that redevelopment process we anticipate will take a couple of years.

I outlined the returns that we expect on the student housing project will be in that 7% to 8% range, 7% with the first kind of year we opened for occupancy and moving through the lease-up and then certainly stabilizing at the 8% moving out from there with the annual rental rate bumps.

Then Toll venture, is -- which should commence construction by midyear, is very clearly in that range as well. The returns we do expect to get from the redevelopment project that Plymouth Meeting 660 is in a low-double digits. And as we look at some of these other redevelopment opportunities, we would expect that to be more the order of the day.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then the follow-up in terms of your disposition activity and just you made the comment that there is more capital interested in your markets. Can you talk a little bit more about what you see in the last three months or so, kind of pricing and what kind of assets people are looking for?

Jerry Sweeney

Yes, certainly, I will pick up on that and then, Tom please follow through it. I mean look the relative yields on office space still remain relatively high given other asset classes. I think the level reverse inquiries we're getting, the discussions we're having with investment brokers throughout our markets still indicate that that quest for yield. People are beginning to feel arguably a bit more comfort economic outlook and certainly the low interest rate environment is continued to have people think about offs investments is a bit of a proxy for the economic recovery.

So we've, you know with the Princeton Pike transaction, which we launched kind of right before the year ended we had some very good activity on that. Pricing levels came in line with what we thought we would realize. We have a number of other assets were -- as we always do putting out in the marketplace for price discovery. And early signs on that are again very much in line with the cap rates that Howard talked about and I referred to as well, but in the meantime what are we saying in some of these are markets.

Tom Wirth

Hi, Jamie. Taking a look at like Philadelphia CBD besides our 1900 transaction 2000 market reportedly is being sold at about $169 a foot, a low seven cap rate on a 95% pre-stabilized property. The suburbs hasn't had much activity but there has been more discussions on properties coming on the market and potentially trading this first half of 2013.

Looking at the Metro DC market, we have seen obviously a slowdown that's continued since the last time we had our call in terms of product coming to market, which has been slow and continues to be slow at the beginning of 2013, but the product that has been coming to market has received a lot of strong investor interest and the pricing that we've seen on some of that product whether it be a Class A trophy asset inside the Beltway trading below 6% and then the revolver replacement costs shows that there is investment appetite for well located in CBD assets.

Looking at Austin that is [a bit also] market where we have seen lot of activity this year and expect to see more in '13. Cap rates on a lot of the product we are looking at going in. The ones that have traded have been set in or below in most cases very few above that. And then little activity in Richmond and Delaware, we monitor those markets but they have remained quite. I think part of that activity that we may see pick up also is on the lending side as Jerry mentioned the lending is strong and I think also CMBS lending has come back and become more competitive with the life companies and that leads to more interest as the buyers were able to pick up better financing.

Jamie Feldman - Bank of America Merrill Lynch

Okay. Great, thank you.

Operator

Next question comes from the line of Josh Attie with Citi.

Josh Attie - Citi

On the two properties that were reclassified as re-entitlements that increased core occupancy by about 50 to 60 basis points. And my first question is, was that move contemplated in your original occupancy forecasts both for year ended 2012 and also for 2013?

Jerry Sweeney

Yes, it was.

Josh Attie - Citi

And when we see the core portfolio today, do you anticipate any other reclassifications to get to 90% by the end of '13?

Jerry Sweeney

We're actually done. I mean, these were the properties that went through a long thoughtful process within really are somewhat unique in a sense they are a part of a business parks have adjoining land holdings I touched on, so it really does create the opportunity for stepping beyond and adapt of reusing going into new entitlement process. So we're continually looking at these types of properties and take a look at where we can create the best value, but as of right now we certainly don't anticipate any more of those reclassifications occurring in 2013.

Josh Attie - Citi

Can you talk a little bit more about your long-term plans for those, once they get re-entitled do you plan to redevelop them on your own balance sheet, do you plan to sell the properties with the new entitlements?

Jerry Sweeney

Yeah I think probably to be determined what the ultimate outcome will be, but the lowest probability is us developing them ourselves. I mean, I think the process we've started with is evidenced by the total JV or the Campus Crest JV is, from our perspective there is a lot of talented companies out there that can provide great counsel to us and capital to move these projects through their ultimate value creation cycle.

To the extent as certainly we have talked at our Investor meeting and call since then, our preference always remains to on these non-strategically located assets that simply sell out and realize full length fair market value. So our expectations that we will use our local reputation and political contacts to start this owning process in the re-entitlement path.

During that process we will certainly talk to companies who are experts in retail or multi-family development and our hope would be we would either windup disposing of those assets at fair value. We are creating a venture structure that recognizes that fair value contribution and provides a different path to creating the value.

Josh Attie - Citigroup

Okay, thanks. On acquisitions you reduced the acquisition guidance to zero from 75, you know what were some of the reasons for that, is it that you try to use your balance sheet capacity for other things or is it lack of opportunities that you are seeing in the market?

Jerry Sweeney

No I think it's got -- it's and Howard and I that (Inaudible) was so in the -- I think we've always looked at our plan as being what our next selling position was. And I think when we were looking at the last quarter we outlined kind of $100 million of net sales. What really happened was more of the disposition side as Tom alluded to we are starting to seeing more activity so we thought we had a window to increase our disposition targets. From an acquisition standpoint, look there will certainly be a number of things we'll look at during the course of the year, but our primary focus remains the portfolio recycling as well as continued balance sheet improvement.

Howard Sipzner

Josh, I don't think there is any change in underlying numbers or assumptions. Previously in October we had $100 million of net dispositions which we structured as a $175 million of sales and $75 million of acquisitions. There was no impact even away from that combined assumption in the model so it was a truly 100 net and in developing the assumptions for the balance of the year we felt [it was] cleaner to eliminate that grossing up factor.

So we are going to go from this point forward with $121 million that's pending and a pure $100 million net. I think as Jerry said in his comments, if it turns out that there are acquisitions they in all likelihood be match funded with additional sales activity to maintain from this point forward that incremental 100 net on top of the 121 already executed.

Josh Attie - Citigroup

Okay. Thank you.

Operator

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

John Guinee - Stifel Nicolaus & Company Inc.

Jerry your land summary and strategy is by far the best disclosure in the industry, so congratulations. Couple of things, first kind of walkthrough the balance sheet strategy, what you are doing Howard is you are paying $20 million in hard dollars to tender for $150 million of bonds that's about $0.14 a share, which I am assuming doesn't get accounted for in your CAD number. And the net, net is about $0.03 a share in decreased interest expense and $0.03 a share in increased FFO. Is sort of a five-year payback appropriate for that sort of transaction?

Jerry Sweeney

John, good question, good observations. When we look at the decision in December to do that early on secured financing payoff some of the debt, accelerate cost, take some hard cost. It really was an assessment of what we might be doing in the future and where rates might be, because under certain constructs we could have waited until as late as the end of 2014 or early 2015 tax really undertake a financing given our other resources.

But we looked at the amount of financing we need to do from 2014 on, we felt that prudent to begin to pull some of that forward, lock in these low rates. And this is a decision that we'll only know in hindsight if it economically made sense by where rates would have been had we waited until those later dates. With the jump in treasuries right out of the box in January, we certainly feel good about what we did and be there as it may, it really reflects more risk mitigation that a pure economic decision and the view of the Company is wherever possible to take risk off the table be that maintaining an overly fixed rate posture or in this case lengthening maturities by about half a year on average.

So don't only look to the economics we think they will play out in the end, there is certainly a component of risk management at play here as well.

John Guinee - Stifel Nicolaus

Great and as a follow-up question George if you think about the sort of generic Fairfax County or Montgomery County 1980s product of which there is hundreds of millions of (inaudible) in the markets combined. What's the going rate right now for that kind of product in terms of gross rents, net rent, PI package what it takes to fill up that space in this [10-H]?

George Johnstone

Yeah, I think that product you are probably looking kind of low to mid 20s full service with an $8 operating expense and somewhere in that $3 to $4 per lease year on capital.

John Guinee - Stifel Nicolaus

Thank you very much.

George Johnstone

Thank you, John.

Operator

Your next question comes from the line of Evan Smith of Cantor Fitzgerald.

Evan Smith - Cantor Fitzgerald

Hi guys, just hoping Howard you could give a little bit more detail on the lease terminations, the assumptions that are in the other income that you detailed, if there is anything that's lumpy in there, big move outs that are expected through the rest of the year?

Howard Sipzner

There are some known move outs, some of them will generate fees some will not. We generally have approached that component along with others and creating a bucket. There are number of items that are somewhat out of our control, namely other income items where there are various fees paid and termination revenue.

So we lump that together with JV activity, management income and we create a range of $20 million to $25 million gross and that's been a very good approach for us the past couple of years. We haven't had certainty around any of the single numbers, but the group of five or six relatively smaller categories tends to come in that range. So, I would recommend you to treat those as a bucket as we do and that way we don't get tied down to a single number on a single component, which ultimately can be pretty small.

Evan Smith - Cantor Fitzgerald

Okay and then over to the 1,900 market redevelopment plans, if you could just give some details on how far below markets those rents are today. Then also I believe there is some vacant retail space and is there any kind of near-term lease up plans and kind of near-term value add before the 2015 redevelopment gets wrapped up?

Howard Sipzner

Great question. I think when we bought the property we really under wrote it with no real additional leasing activity until 2015. And I think the known move out in the market and the major tenant in that building which is a law firm really created an opportunity for us to buy at a very good price, purely given the fact we're a cash buyer in a building like that is very difficult to finance. So we are able to buy it for around $75 a square foot. The redevelopment plan we are working on.

We anticipate rolling it out in the next quarter to the marketplace. It will encompass a high level of interior renovations to the lobby H room, exterior for side improvements, a reconfiguration of the existing lobby areas on both the east side and the west side of the building.

Renovation of the mechanical systems, laboratories, laboratory upgrades as well as a number of other both structural and static improvements that we think have the chance to move this building from kind of rental rate levels in the low 20s to the very high 20s and create a very good free and clear return to us when it goes to the redevelopment process. We certainly at this point are not really leasing actively any of the space subject to the finalization of renovation plan and we would expect that to continue for the foreseeable future until we rollout the plan and then we'll react to what market conditions presents.

Evan Smith - Cantor Fitzgerald

Great, thank you.

Howard Sipzner

Welcome.

Operator

Your next question comes from the line of Michael Knott from Green Street Advisors.

Michael Knott - Green Street Advisors

Hey good morning guys. Jerry can you give us an update on your view of the sequestration impact on your holdings in DC and then may be George can you just update us on your defense contractor exposure in DC region?

Jerry Sweeney

Sure, Michael happy to and look I was at (inaudible) we were just down there last week having a number of conversations on the impact to sequestration. I think the take away points that I have was a much [rent one] really exactly knows. Some folks projected to be in Armageddon if it happens, other folks that it won't really be that meaningful at all. So our view on it is, is we're very defensive on it, in terms of making sure that we stay in very close touch with our tenants to make sure that, we understand what they are thinking and how they are thinking impacts their space plan requirements.

But overall you know certainly it's hard to anticipate it being anything less than negative, the question is how negative it will be. That was actually one of the reasons why starting Q3 last year our D.C. teams really ratchet up our efforts to pre-lease as much of our square footage as possible just because there is this big unknown. That was fairly successful from the stand we really move up our pre-leasing percentage near to 86% and we have a good pipeline of deals right now.

And frankly, Michael the name of the game is to get as many of those across the finish line as soon as we can. Now in full while some of those prospects we're talking to will be in a holding pattern should happens on March 1, which George made in same planning to some of the tenants.

George Johnstone

Yeah, I think terms of our largest, clearly it's Lockheed Martin in our Maryland portfolio. As we announced previously, they did extend the 137,000 square feet from '13 into '14 and they are still kind of going through their thought process on what they ultimately do with that space long term. They will be given us back 78,000 square feet in Maryland as we had previously discussed on May 31.

We have executed a 5-year renewal of Lockheed Martin on 158,000 square feet in King of Prussia, Pennsylvania. So that takes really what was our second largest open renewal off the table. We have got a 46,000 square foot lease over in Mount Laurel, New Jersey with Lockheed that were currently in the negotiations with.

I think we have signed 330,000 square foot leases in the last 45 days down in Northern Virginia with government contracting companies. I think we started to see a little bit of the smaller kind of contractors who have what they feel to be a secure contract or executing deals, those deals were 7, 10, and 12 years respectively. I think the larger ones, the Lockheeds, Northrop Grummans of the world are going to continue to analyze existing lease obligations and owned facility and most likely continue to require some flexibility in terms of early termination rights.

Michael Knott - Green Street Advisors

Okay. And then Jerry on the student housing development, I certainly can appreciate the intention to deploy your land bank, but how do you guys think about how you can build student housing products since you have never done it before, do you secure to say you get comfortable with that and then also did you say that yield is going to be 8?

Jerry Sweeney

We expect the return going in on the -- as the price leasing up to be about 7% and first stabilize here to be approximately 8% correct. I think to the broader question Mike, I think the core of your observation is exactly why we structure the transaction as we did. And I think that's why it was a benefit to Campus Crest as well. It was extensive research done by Campus Crest relative to depth of demand for both graduate and undergraduate students housing options in University City section of Philadelphia as well, as well as throughout the Philadelphia marketplace.

And there is clearly a very strong demand for that type of product. I think Brandywine's role in the venture in addition to be a 30% equity partner again which about half of that equity contribution was our land value is handling the vertical development which we know very well. We know the general contracting market, the trademark, the approval process in Philadelphia and us building that type of super structure something we have done in the past, have a very solid team it will execute that flawlessly.

And then our partner Campus Crest was really very much involved in the design of the product, make sure it fit the demand that they know because we anticipated for University City students and then they will pick up on the fixturing of the building and clearly be the driver on the marketing and management side of the business. So I think as we assess the market demand, the NOI characteristics, the absorption space, I think blending and the skills sets with us on the construction side as for the relationships side was a very nice complement to the talent that Campus Crest can bring to the table in terms of making the project a financial and operational success.

Michael Knott - Green Street Advisors

Just real quick are there any promotes to anyone and then do you expect to be in this long term or do you expect to sell your stake once it's monetized or?

Jerry Sweeney

There is a co-promote structure for both Campus Crest and Brandywine which is powered pursuit based upon delivering certain returns given that we have a 40% partner, it is an investors post from operating with Harrison Street.

The expectation we have here Michael is honestly the same as we have with the other venture we have on a residential site. This is not part of our long-term core business. This is an opportunity for us to make money on the land we have and move that into a development platform sooner rather later, use that as well as what value we bring to the table through the development process to create value, and then we will see what happens. Both of these partnerships have buy-sell provisions and remains to be seen what happens to those once the projects reach stabilization.

Michael Knott - Green Street Advisors

Thank you.

Operator

Your next question comes from the line of George Auerbach with ISI Group.

George Auerbach - ISI Group

Great, thanks. Good morning. Jerry or George, you have a pretty successful quarter in terms of your spec revenue targets. I guess the question is, when you sort of laid out these targets at the start of the year and now that you are 71% complete in D.C. and I guess 66% complete overall. How much of those the way done so far was kind of layup as opposed to more competitive deals [were kind of could get] on either way and how much of the remaining 30% or so of those targets is, do you think it's sort of pretty competitive and cut up in the year?

Jerry Sweeney

Yeah, look, it's a great question. And I guess the way we look at it to continue the layup [announced], I mean there are probably some layups (Inaudible) three point shots. So it worked out pretty well to our benefit, but look there's no question when you take a look at the cycle how production is in our business that the ones that are the higher probability are the once that you generally execute sooner which is why we are always very focused on kind of that forward leasing pipeline.

And I think when we assess the 66% done this year, particularly it's some of the submarket analysis George touched on relative to the year-over-year significant outperformance at this stage of the year in Washington, New Jersey and in Richmond. We feel very good about those targets. But as we start to think to our financial plan, we also very much grilled down and take a look at the traffic through those spaces, the number of specific prospects identify for each leasing assumption and George may be you can share what some of those stats look like.

Jerry Sweeney

Yeah, I think, George, when you look at 66% achieved on the revenue, but much of the how many layups are left on kind of the new leasing, we've got 33% of the new leasing square footage done. So really I mean I think the message to the regional leasing teams is to make every deal and we've got that 2.7 million square foot pipeline, 600,000 plus in active lease negotiations like so I guess kind of sticking with our basketball analogy, maybe those of layups but we've got some work to continue to do.

But when I look at D.C. we've got 277,000 square feet of remaining open to new leasing. We've got 27,000 square feet of that in negotiation, 122,000 square foot of that with an active proposal in hand and we've got a 146,000 square feet of prospects who are kind of still in the touring and [Technical Difficulty] type numbers in Richmond where we've got 216,000 of open assumptions, 137,000 square feet with proposals on a 115,000 in inspection.

So good levels of pipeline, continued good levels of traffics are really I think if we can continue to do our job of converting inspections into proposals, converting 40% of those proposals into signed leases that we achieved this business plan and that having gone through the regional meetings just in the past two weeks. We feel very good about where we are. We've recognized those works still to be done but we feel confident in our teams ability to get it done.

George Auerbach - ISI Group

That's really helpful, thanks. And I guess just as a follow-up, you guys have done a nice job on the capital costs in the leasing little bit of $2.50 foot per year the last couple of years. I guess one have you been surprised with those costs haven't picked up a little bit given the leasing environment? And two, do you think that kind of $2.60 a foot per year is a good number going forward?

Jerry Sweeney

I think certainly as we look to the financial plan due to all of the leasing information coming up from the field, I mean a key part of that when our team, the regional and corporate team review our leasing pipeline, we are focused on rates are, concession package and capital costs as a percentage of revenue. So every single deal will review and issue a proposal and we know where that capital projection would be.

So I think we feel pretty comfortable staying in that 10% to 15% of revenue range for capital costs. One of the things that we're frankly hoping to see over the next couple years is that as our portfolio come back gets up to that 92% leased and occupied level over the next few years, we are going to wind up having a higher preponderance of renewal deal versus new leased transactions and it tends to be the new leased transactions that create the higher level of capital costs.

So I think for right now we are pleased with what we saw in 2012, certainly like having a 70% to 80% payout ratio versus where we were in 2011 and we are surely forecasting as Howard outlined something in that range again for 2013. So we do expect those capital costs to stay -- moderate to stay in that range and that's certainly what the pipeline he's indicated at this point.

Howard Sipzner

George, it's Howard. One other item to add is I think one of the things that changes the posture going forward is the relatively lower level of leased rollover we're facing for the balance of this year and going into next couple of years. Whereas historically we've been facing 3 million to 3.5 million square feet a year. Almost at any point in time we are looking at sub 2 million square foot levels generally for the next couple of years and that's going to mean that as the production continues more of it's going to -- go to creating occupancy than backfilling space we lose.

Double by the fact as Jerry said as it gets more occupied retention naturally goes up anyway. So the two very strong support features lower rollover, increasing occupancy leading to higher retention then hopefully we'll accelerate the recovery to the low to mid 90% level.

George Auerbach - ISI Group

Great, thank you.

Operator

Next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Thanks. Good morning, guys. I wanted to just go over the Cira South development. They know this is an exciting opportunity for you guys to the joint venture. Can you may be just discuss sort of the competitive set and how you thought of it given American campuses just not square development of I think 865 beds a couple blocks away at what seems to be a significantly lower basis and how you think those will compete?

Jerry Sweeney

Sure, happy to. The couple of key distinctions, one is the project that we are involved in is a much different type of project, it's the ACC project is certainly very well executed and it's geared exclusively to -- direct to undergraduates, different type of unit design, different type of unit, different amenity package. Our project where we saw the real window of opportunity was particularly on the graduate side, I mean you basically have between the two primary universities and that section C, about 50,000 students, of which about 17,000 are graduate students. There is a pressing need in University City for graduate student housing.

What we did in the design thought process on this project is really geared the project to both graduate students and in upscale option for undergraduate students. This project will have bed-bath parity, so for every single bedroom there is a bathroom. We have a pretty high mix of studios, ones and two bedroom units that are geared primarily to again students looking for higher level of privacy and quality. There is a complete amenity packaging here with the full service fitness center of rooftop pool. It really is probably a mix used component of bottom with the retail and conferencing and studying facilities.

So the price point that we are targeting here and the market we are targeting is different than some of the other options in the University City. We are certainly very closed to with universities, in university with some other schools outside of the University City to assess the overall market demand. So I think the market is--

Jordan Sadler - KeyBanc Capital Markets

I mean basically you don't take that you think sucking up 1,800 units or 1,700 units in August 14 won't be a problem?

Jerry Sweeney

Well the project at Drexel that ACC is doing is coming online a full year ahead of our project. The school is requiring new incoming students to live in campus sponsored housing, so that will be a pretty good demand driver for the absorption of that space.

But certainly one this can't lose site of the -- it's a depth of student population both full time and part time in that area. The objective of all the universities in that part of the city is to try and create as much high quality on or near campus student living options and move as many students as they can out of the adjoining neighborhoods. So I think as we assess the existing student population, the location of a lot of the existing graduate students who are living outside of the University City, the chance to bring them into University City and the access to transportation and the quality of this product design, we think we will be in very good shape.

Jordan Sadler - KeyBanc Capital Markets

Okay. And you said 7 going to an 8, is it expected to be a step in upon completion and sort of the first semester if you will in sort of the last quarter of the year and going into an 8 in the full year '15 or how are you thinking about that typically these things open when they are in construction in our experience or the majority of them open pretty well leased?

Jerry Sweeney

Yeah, look, the expectation on this and again the opening is targeted for September '14 that 7% number is going to be kind of operative for '14 and '15 and we expect to fully stabilize rate of return to come in 2016.

Jordan Sadler - KeyBanc Capital Markets

With the difference being an increase in rents?

Jerry Sweeney

The increase in rents but also an increase in offsetting, we're fairly concerned how we expect price that to market.

Jordan Sadler - KeyBanc Capital Markets

Okay, thank you.

Jerry Sweeney

You're welcome.

Operator

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

Mitch Germain - JMP Securities

Good morning.

Jerry Sweeney

Good morning.

Mitch Germain - JMP Securities

Jerry, maybe just some more details on Princeton, was that fully marketed, how many bidders, and if you can share with us please?

Jerry Sweeney

Sure, happy to. It was a fully marketed project undertaking. We received some pretty good interest. Certainly it wasn't some of the bid list debt that Tom had referred to that you see sometimes in Washington, D.C., but there were a number of bidders, I'd say there was a half a dozen or so of really qualified bidders who were looking for some of those characteristics for two early terms of yield then and price per square foot.

We hone those, those half a dozen or so real quality bidders down to two to create a pretty tight auction that gave the buyers -- both potential buyers chance to line up their financing sources when you would have bow-tie deal we signed the agreement and that's exactly what happened. I think the pricing Mitch we achieved there was very much in line with what we had anticipated. So we are very pleased with the execution.

Mitch Germain - JMP Securities

And then I think George referenced 990,000 of lease signings in the quarter. I think, A, Jerry maybe you can just share with us the decision not to send it out in press release ahead a time, and then, B, how much of that is for 2013 versus beyond?

Jerry Sweeney

Well, George, I will pick up the detail on the '13 and beyond. I think on the press release front, we did -- we had followed a practice of issuing a quarterly press release and we thought that was very important in terms of signaling what they were making very good progress on each of our quarterly leasing targets.

I think that what we learned through that process as mentioned that it was a big confusing to a number of people who read it well in terms of the characterization of some of the leasing activity. So this quarter we did not do it and don't anticipate doing it going forward and we really use these earnings calls as a chance to kind of bring folks up to speed on our quarterly leasing activity.

George Johnstone

Yeah, Mitch as far as the breakdown, the total was 993, a 130,000 square feet of that was signed and commenced in the fourth quarter of 2012; 614,000 square feet of that will commence in '13 and 249,000 square feet of that will commence beyond 2013.

Mitch Germain - JMP Securities

Thank you.

George Johnstone

You're welcome.

Jerry Sweeney

Thank you.

Operator

Your final question comes from the line of Brendan Maiorana with Wells Fargo.

Brendan Maiorana - Wells Fargo

Thanks, good morning.

Jerry Sweeney

Good morning.

Brendan Maiorana - Wells Fargo

Hey, guys. So first question, this one I thought heard about CapEx, you're mentioning this a little bit earlier but the numbers move down a little bit which is good. It looks like you've got about $40 million of I guess on a is revenue enhancing CapEx related to leasing.

And as we think about occupancy moving up roughly 200 basis points in the quarter I mean in a year and that I think you're likely to do is similar amount in the next couple of years to get your stabilize level. Is that a level of CapEx, revenue enhancing CapEx that we should assume over the next three years?

Jerry Sweeney

Look I think the expectation even as we saw just sequentially in the two quarters that's going down, it's going down for a variety of reasons, one of which is a lot of our leasing activity, the additional retention kind of pulls space forward that plays into a lower rollover theme.

And as that future hill get smaller occupancy climbs, there is going to be less what I'll call primary brand new leasing where we might have to do sealing work and more significant work in the space, a greater amount of retention. We are in many cases, the existing improvements are used as this or minimally cleaned up that leads to lower capital.

And lastly and probably most importantly as occupancy increases, the negotiating dynamics shifts more to the landlord than to the tenant where it's been the last three or five years. So that's going to -- that probably more than anything else will change the dynamic of how leases are done.

We'll get more term. We will be able to spread the cost. The dollars per square foot per year will go down and that's probably ultimately the more important metric in the absolute dollars and we don't mind spending a large amount of dollars if we get the right lease structure, credit and duration in the lease. So there is a definite interplay between all of those which is why and we talk about the overall dollars for a capital plan but it's much more important in terms of performance, the percentage metrics that George talked about and the dollars per square foot per year, that's where you are going to see the improvement.

Brendan Maiorana - Wells Fargo

Okay. And is any of that I think is around $14 million of revenue enhancing CapEx. I guess is that all, is any of that related to development or redevelopment or that's all in that separate bucket?

Jerry Sweeney

Well, I think the $40 million number you are talking about, I said it was $48 million on the call and that's a verity of project and specific transactions related costs. And for example the [$5.9 million] we disclosed that we funded into the Thomas joint venture that already is part of that amount finishing up to 660 West Germantown project, that's in that bucket. Dollars will meet to probably advance in the Grove joint venture with Campus crest.

We've already funded some by contributing lands, so no real dollars, but certainly a contribution, that's in there. So that encompasses more known projects. The general CapEx allow us revenue creating is related to the overall leasing activity not the completion of project. So we make that distinction for discussion purposes.

Brendan Maiorana - Wells Fargo

Yeah, right. I think there is sort of $240 million, because it was $90 million total budget, $48 million was kind of development and redevelopment and then the remainder will be I guess I said $40 million but it's $42 million in that and so. Okay, my second question was for Tom, the dealing of then, I know it's relatively small but $230, $235 a square foot for storey filled up seems like it's a little high relative to replacement costs.

And I would imagine that rents for that product and in that location which is a few miles further southwest of, where further out in Austin where your existing stuff probably garners a lower rent levels than your existing products. So can you just talk about the play there and what it means for Austin longer term?

Thomas Wirth

Sure. Looking at that property, one, it's a good quality product, very well located near the AMG Campus and some other technology companies. The cost per foot I mean we've looked at and we've been doing some pricing of developments in that area and in the southwest. And when you look at the southwest, that's higher barrier to entry market. So we are looking, when you look at about 35 per foot for land down there for that type of a site, we're a little north of 250 a foot. So while it's not tremendously below replacement cost, it is below what we're seeing and on real pricing that we're seeing down there now.

Separately on the rent, we'd agree that rents down there are slightly below, but we're going in on this rent at just about 16.50. So we're below what we even say the discounted rents would be in that part of the southwest. We have a good steady tenant that has their corporate headquarter. So in addition their fit out is quite a bit higher and the infrastructure they put into the space is quite a bit better than your standards. So for all those reasons, we thought it was a good opportunity to buy and with a good long-term credit tenant.

Brendan Maiorana - Wells Fargo

And so at 16.50, what do you think market rents are for that product?

Thomas Wirth

I think they're probably upper teens, it's more like 19 in that market.

Brendan Maiorana - Wells Fargo

Okay. And I think the AMD Campus is, I'm not sure if it's under contract, I think it's on market, is that something that is or was of interested Brandywine?

Jerry Sweeney

We took a look at it just to see it, but it really was an adventurous, it is a great campus, but it is a campus where we already think they're going to be putting some of that space subleased, difficult to multitenant, beautiful campus, has a great set of properties.

Brendan Maiorana - Wells Fargo

Okay, thank you.

Operator

There are no further questions at this time. Gentlemen, do you have any closing remarks?

Jerry Sweeney

The only closing remark is a thank everyone for their participation, and we look forward to updating you our business plan activities on our next quarterly call. Thank you very much.

Operator

Thank you for participating in today's conference call. You may now disconnect at this time.

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