Brandywine Realty Trust (BDN) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is [Dishanta] (ph) and I will be your conference operator today. At this time, I'd like to welcome everyone to the Brandywine Realty Trust Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I'll now turn the conference over to Mr. Gerry Sweeney, President and CEO of Brandywine Realty Trust. Please go ahead, sir.

[Dishanta], thank you very much. Good morning everyone and thank you for participating in our third quarter 2014 earnings call. On today's call with me are George Johnstone, our Executive Vice President of Operations; Tom Wirth, our Executive Vice President and Chief Financial Officer, and Gabe Mainardi, our Vice President and Chief Accounting Officer. Prior to beginning, certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports filed with the SEC. As we normally do, we'll start with an overview of our three key business plan components operations, balance sheet and investments. We have also introduced 2015 guidance and we’ll provide color on some key assumptions. George will discuss our leasing and operating efforts. And we'll then turn the call over to Tom to review our financial results. During the last 90 days we raised $835 million of combined debt and equity proceeds. We did that position the company for growth, strengthen our balance sheet, meet our near term balance sheet goals and to increase liquidity in a period of increasing opportunities and ongoing macro volatility. We believe creating capital capacity is one of the best strategies we can execute to both derisk the company and provide capital to accelerate our growth. Raising this capital combined with continued improvement in our markets provides a strong foundation for us to accelerate external growth opportunities. These capital raise is accomplished several key objectives, reduced our debt to GAV to 37%, reduced our EBITDA multiple…

Thank you, Jerry. It was an extremely busy quarter for our regional leasing teams with approximately 1.3 million square feet of lease signings. These leases ensure we achieve our year end occupancy target of 91.3%. As detailed on page 4 of the supplemental package, we are 92.5% leased having over 862,000 square feet of executed forward leases. Of this, 722,000 square feet will take occupancy in the fourth quarter. The pipeline remains strong and weekly inspections throughout the portfolio continue to average around 220,000 square feet. This activity leaves us confident of being 93% to 94% leased by yearend. CBD Philadelphia the Pennsylvania crescent market in Austin, Texas continue to our be our best performers and CBD Philadelphia were 96% leased with less than 5% rolling in each of the next 3 years. GAAP leasing spreads in Philadelphia have increased 30%. The crescent markets are 97% leased while posting 9% GAAP rent growth. In Austin we’re 96% leased and have raised rents 20%. Even Richmond where just a few quarters ago there was concern about the pace of absorption were now 93% leased. The required leasing for the balance of the 2014 plan is nearly complete but more notably is that the leasing achieved to date has yielded improved operating metrics. We have increased our spec revenue target by $200,000 to 44.2 million and are 99% complete on that increased target. Additional renewals and expansions have resulted in a 300 basis point increase in retention to 70%. Our GAAP leasing spreads for the year aided in the third quarter by two long term renewals will come in at the top end of our range but will be lower in the fourth quarter than our year-to-date run rate of 12%. Cash leasing spreads have remained inside our negative 1% to positive…

Thank you, George. As Gerry mentioned the capital markets activities we executed during the quarter represents a significant step in improving our balance sheet and positioning us for future growth. Our common equity offering raise 335 million net proceeds and we then executed on a series of liability management transactions which included the bond offering which had a blended rate of 4.33% and 12.5 years of term repaying our unsecured bonds maturing in 2014 and 2015 and then $250 million of bank term loans were also paid-off maturing in ‘15 and ‘16 for the blended rate of 2.4%. The results whether a debt-to-EBITDA decline 7.2% to 6.4 times debt gross assets decline 13% to 37%, debt maturities increased to 7.3 years an increase of 46% and our weighted average interest rate on our debt declined. These improved metrics give us improved liquidity to fund our current development pipeline of potential net external growth. Our third quarter FFO totaled 62.7 million or $0.36 per diluted share and that represented a 41.7% payout ratio based on our $0.15 distribution. Some observations for the third quarter same store growth for the third quarter was 2.2% GAAP, 4.2% cash both excluding termination fees and other income. We’ve had 13 consecutive positive quarters of GAAP metrics and nine of cash metrics. Our same store portfolio margins remain relatively unchanged as compared to the second quarter. Termination income totaled 1.4 million slight increase over guidance G&A totaled 5.9 million which is basically in line as well as interest expense. FFO contribution from our unconsolidated joint ventures totaled 5.7 and was above our guidance from the second quarter primarily due to the acquisition of the crossings during the third quarter. Third quarter results benefited from the annual amortization of historical tax credit related as a post office,…

Okay, thank you, Tom and thank you George. So to wrap up our prepared remarks, third quarter results were very strong, consistent with our 2004 business plan. And as both George and Tom outlined, we feel as though 2014 while there is still some work to do is very much locked away. The 2015 plan we’re excited about. We certainly think as though we have more work to do. But the core themes running through the program are continued financial strength, focus on NAV growth, taking advantage of solid fundamentals that we’re seeing in many of our markets by being able to extend lease terms, increased annual ramp bumps and reduced capital and pursuing some very good value add opportunities including the completion of our development pipeline. With that, we’d be delighted to open the floor up for questions. As we always do, we ask that in the interest of time, you limit yourself to one question and one follow up. Thank you very much.

[Operator Instructions] Your first question comes from Brendan Maiorana, Wells Fargo.

Thanks. Good morning. George, wanted to ask a little bit about the leasing plan for next year. I think Gerry mentioned that kind of where you guys are focused and where you probably need to get the most execution done as Metro DC and New Jersey and Delaware. So, based on your plan for ’15, where are you expecting occupancy to end in each of those regions at the end of next year?

Well, our plan contemplates that Metro DC kind of gets somewhere between range of 84% to 86% we contemplate that will be 83% occupied at the end of ’14, so we are looking for roughly 200 basis points of improvements down there. New Jersey, Delaware will finish ’14 at 88 and again we’ve got about 200 basis point assumption built into this 3.3 million square foot leasing plan and occupancy plan.

Okay, and I think the 400 commerce building I think that’s the one where CSE is in which you guys have I think on the last call and that one as you mentioned is going vacant on January 1, my recollection was that you guys were thinking about marketing that building but I presume that the sale of that building whether it be empty or not, is not included in the leasing plan as we look for 2015 or the yearend target number overall for the company of 92.5%?

We have that property is part of the small complex we’ve that complex and that building on the market for sale. We have the building itself on the market for sale or lease or going through the price discovery process on that. What we did for the leasing plan is that we basically assumed that, that property remained down all year. So our operating metrics figure same store numbers reflect that building remain vacant all year. We do have a pipeline of potential transactions out there but certainly nothing that’s advanced the point where we felt comfortable identifying that as an uptick of its January fully vacant level.

Okay, that’s helpful and then just last one quick for Tom, I appreciate all the details on the capital plan, I didn’t do all the math right away but could you just give us an expected level of cash yearend 2015?

We should be right around breakeven on cash Brendan.

So, zero cash balance 2015?

Yes, zero cash.

Your next question comes from Jordan Sadler with KeyBanc Capital.

Thanks, good morning. I guess following up on sort of the last question and just guidance for 2015, so the assumption is that all of the cash will be utilized to fund anyone to a Tom so that was helpful a lot of it is development spend so I guess there is some pickup from capitalization of interest I don’t know if you have that number handy that’s embedded in the guidance but that number I’m looking for and then maybe just a little bit more color that you could offer on the non-cash item ticking up to 19 million I guess in our number we had the 11 or so from the post office the legacy historic tax credit but this is a new market tax credit if you just show little bit late for some reason I didn’t have that in there.

Sure, the first answer is there is about 11.5 million of capitalized interest in the plan for next year based on the activity that’s going to be rolling into there for CIT as well as what’s going to occur next year in spending. The second part of your question is this new market tax credit is really related to the unwind of the structure we put in place which was to earn certain credits for the building and the rehab of the garage as well as the building and rehab of the IRS building and in that process we received certain benefits, the one that we’ve been amortizing has been over the course of the period, the last one which is as new market tax credit was deemed to be earned when there is 5 year anniversary from the start of construction. So that date is going to be late in 2015, the anniversary of that so that’s why the credit is going to be hitting in the fourth quarter. It has something that we’ve had in the 10-K in terms of this was coming due but I would grant no one -- I haven’t seen anyone had into their numbers.

Is that a $0.05 number?

It’s about $8 million so no it’s not $0.05.

It’s ok.

That’s why we end up to $80 million of onetime items coming up in this year.

Okay.

That one will occur in the fourth quarter.

Okay, that’s helpful. And then just any insight that could offered on the development leasing Gerry, from your expectations and progress that you’re seeing sort of across the spectrum and specifically I guess I’m looking more at FMC and EVO?

Sure Jordan, let me touch on both. The project that we have underway down in Austin, Encino Trace is a major anchor tenant he's taken 75% of 1 building. We do anticipate I’m taking more space very good pipeline of activity for the remaining vacant space in that two building complex that will really be delivered kind of mid to late summer of next year. So I think we have a good anchor as well as expectations for expansion in anchor and some good new tenant prospects are evaluating that building which is -- those buildings which are still under construction. On FMC it's frankly off to a great start I mean the projects moving forward on pace and on schedule. You may remember from the last conference call from an office leasing standpoint we ramped up our leasing efforts right after Labor Day and we’re very pleased with the level of activity we’re talking to a number of mid-size and larger-size tenants. We’re looking at moving into University City from some suburban areas as well as some in market expansions. So we are very pleased with this early level of activity, it’s clearly a differentiated product, it's the city’s first vertical neighborhood as we coined it. We pick up a largest draft off the close proximity to University of Pennsylvania and Drexel and that area just continues to improve and we’re really very optimistic that over the next couple quarters we’ll be able to post some solid leasing activity. The residential front in that project is again just kicking off. We do anticipate as we've outlined before I guess about 100 of those units will be fully furnished extend its stay, concierge serviced units. We are partnering with the common organization on that and the targeted users really corporations,…

What do you think -- last one to follow up on and then hop up. What do you think happened between sort of the second quarter call where you’ve seemed a bit more optimistic about sort of September leasing potentially August, September leasing and where we are today?

Yes, lot of the prospects that came through during that time period had already made commitments or had leases rolling at of cycles so it still remained in our prospect list. But I think it really was a function of people not being able to get into the building to actually walk through the units, look at the amenity floor and touch and feel the project as much as we hoped it will. We did have a nice pick in September but again it fell short of what the originally expectations were but I think as we view it we built a very solid base. There is a very broad base marketing campaign underway to appeal to the young professionals and we have a pretty growing pipeline of that will be kind off cycle leasing activity. But I think that’s probably the honest answer Jordan.

Next question comes from the line of Rich Anderson with Mizuho Security

So just turning to Austin. I am wondering what do you think the long term size feeling is in your investment in that market. You're considering the legacy IBM joint venture and what you’ve done today from an acquisition standpoint. How big do you think you can get in Austin?

Hey Rich. We really haven’t set an upper target. And I don’t think that’s wise to do. I think we want to evaluate opportunities as they present themselves. Certainly the million square foot joint venture that we have with IBM remains I think a fairly fertile ground for additional upside for the company. That part does include some additional acreage where some additional building can take place. IBM is in the process of really assessing their long term needs. It's that location for IBM remains a very valuable employment center, they tend to a generate a high level of patents actually second only to what they generated of their headquarters in Armonk. I think we see that marketplace being sought after by a lot more investors so it’s becoming more into the comment [indiscernible] people who want enter Austin. So we are clearly being as cautious as we can and pragmatic as we can on assessing opportunities and really very much focusing on asset trading levels that remain well below replacement cost for well-located assets with upside in the rent rolls as evidenced by these two recent acquisitions that were [$220,000] per square foot and below so well below replacement cost. A number of other assets in that market traded well above those levels. And they really don’t fit for us. We do see that market transitioning a little bit more to development given where the demand drivers are both in the Southwest and Northwest and Downtown. And I think the developments have been announced there including ours that had a very high level of leasing activity and preleasing success. So we still have capital to deploy under our existing venture with DRA, as we talked early on when that we announced this transaction that’s a typical buy-sell provision. So we look at that as an intermediate transitional financial structure for us in that marketplace. And then we certainly always have the opportunity to do things for our own account in that market as well.

Okay. And the follow-up unrelated. There is the story that I read at some point between last quarter and today, about the elevated level of office sale activity in Philadelphia, number getting to 1.4 billion in the first half of this year. I am curious if you are seeing any ramifications of that in terms of pricing in Philly. And how that might be influencing your buy/sell decision in your home market?

Great question. And actually there has been a notable increase in assets going on the market. And frankly some buyers have historically haven’t bought in Philadelphia buying into the marketplace. I think stepping back I think that’s really a function I think of how well Philadelphia has been doing. I see that in the broader sense not just in terms of office, but with the in migration of residential population. Some modification to existing tax laws has made it more attractive for companies to locate in to Philadelphia. And expansion of the retail base continued strengthening and viability to the high-end residential market as well as the young professional residential market. So I think all of those issues are really creating a dynamic where a number of companies, tenants who traditionally would have looked a bit of skew at relocating to Philadelphia are now looking at that as a very viable place in which to do business in terms of attracting and retaining a high quality labor base. Now just during this past quarter we were able to relocate a company from the New Jersey marketplace into Center City Club into one of our buildings, they moved their headquarters in. We have a number of other tenants prospects in the queue who are looking at either moving the bulk or portions of their otherwise suburban tri-state marketplace operations into Center City or University City. So I think people are beginning to see some predictability, some visibility to the demand drivers. And I think frankly I have a number of folks who have owned real-estate in the City that view this as a very good time to put profits on the market given the compression of yields in New York and Washington, Philadelphia has traditionally traded between a 150 basis points…

5 years from now, so 30% now of your portfolio is it greater or lesser than that 5 years from now?

Look, I think we have expectations that we’ll continue to focus a lot of our growth in Washington DC and the other core markets so we would expect that it may move up a little bit but not much more I think we have opportunities to call inventory, optimize profitability and stay very much focused and execute our business plan in the city.

Your next question is from Manny Korchman with Citi. Manny Korchman – Citi: Good morning guys, thanks. If we look at your disposition plan for both this year and next year, you said you had 300 million of asset sort of add on the market but list got hundreds of change in that or I guess 50 million of that is identified to be sold, then you got another $1.15 for next year but you said that's going to close at the end of the year. So are we looking at two different pools of assets and if so what’s the difference between the two pools?

Good observation. Actually I think the comment that we were making frankly on the later in the year I may not have been precisely clear is the acquisitions we had modeled into our plan for a kind of the need to latter part of the year, I think on the disposition front certainly we think there could be a rollover of some of the profits that we’re currently marketing into the first half of 2015. So there could be asset sales occurring in ’15 as well as closing out ’14 that were kind of in that pool. In addition to that, we always take a quarterly review of all of our assets and are always pinging more assets into the marketplace to kind of catch pricing. We are frankly encouraged by the amount of capital seeking some of these suburban assets obviously because of the higher yield that they’re able to achieve and notably one of the assets we anticipate closing tomorrow we sold to an institutional investor which traditionally an asset of that level would have been focused more on a private development company with third party capital but we’re actually seeing middle sized institutional investors now entering the fray for bidding on suburban properties. So, there could be I guess to answer your question precisely there could be some overlap between what we’re marketing today closing in ’14 and ’15 but then we would certainly anticipate that as the year progresses we’ll identify either through the leasing effort or through comparable sales or through user activity, other assets that we’ll target for sale and execute in the second half of the year. Manny Korchman – Citi: Great and then just to clarify on the acquisitions those are all standing property acquisitions and then any development size or land would be separate at that?

That is correct, yes.

Your next question is from John Guinee with Stifel.

George, I’m looking at and I guess Gerry, I’m looking at your leasing activity core portfolio and basically you’ve not had almost two years of plus positive on cash and over 10% on GAAP, can you sort of drill down and tell us how you’re getting there and will that continue and maybe a good idea would be to just sort of run through some numbers in as much detail as you feel comfortable on 90,000 square feet rolling out at [indiscernible] 70,000 feet already rolled in and what are the basic economics of that a deal like that?

I guess from an overview standpoint John and it’s -- we’ve been fortunate with some of the execution success but I think we sat down a few years ago and looked at our average lease term being four to five years the market is being fairly soft, concession package is increasing and I think we all kind of looked at ourselves and said we're really working these properties almost at hamster wheels and we're not really making a lot of progress. So one of the key ingredients that we can focus on to create a better growth trend line going forward and it really revolved around being aggressive on disposing of assets that we thought that we can never achieve in net present value higher than spot pricing, number one and I think that’s one of the reasons why we called out so many properties I think in some of these some markets have remained weak and will probably remain somewhat weak for the next few years and not even factoring in that weakness danger by functional lessons. Then we looked at the rest of our portfolio and said look, we need to lengthen lease terms. We need to focus very hard on getting annual rent bumps that are more than 0% to 1%. And we need to invest in feasible plans to make sure that we’re providing an attractive platform that tenants will want to lease space and call their corporate home. So I think the big change we look back in retrospect is kind of really culling out the percentage and reducing the percentage of our inventory that was in what we call these hamster real markets. And then more importantly honing in on assets where we think we could really improve NPV through leasing strategies and capital investment and I think that’s one of the things we look at our business plan I have to tell you having our average lease term in 2014 be greater than eight years is a sea change from where this company was five years ago. And having a capital run rate of 10% to 15% of rents is a sea change from where we were. So we certainly hope that that track record will continue, certainly we think the portfolio today John is much better suited to continue that trend line than the portfolio we had five years ago. There is certainly always risk in our business but from our perspective we really tried to lay out a path that provides consistent same-store growth, constant capital predictability and a clear platform to creating value every time we sign up the tenant lease. And George maybe share some of the observations on specific markets.

Yes, I think John as Gerry mentioned I mean the tightening of vacancy in a lot of these markets has allowed us to obviously push rent and then by pushing term and getting these higher annual bumps is clearly helping on the gap mark-to-market side of things. I mean the third quarter of this year benefited really from two larger and old [indiscernible] downtown Philadelphia where a large firm at our Logan Square complex renewed and then the other was with down in Tysons where we did a large renewal with an accounting firm. The Radnor deal that I alluded to again that was a tenant that was in place when we bought that Radnor portfolio years ago finally kind of rolling out of the portfolio I mean the mark-to-market on that is going to be positive 25% on a cash basis and 29% on a GAAP basis. So we're really just seeing a lot of these markets. Our ability to kind of push rate, push terms control capital really starting to impact the numbers for us.

Great. And then the second question, would your Board ever be so bold as to think about moving the dividend Gerry.

Well, I cannot speak for the Board and certainly don’t want to predict anything but I will tell you the strong increase in CAD year-over-year which Tom and I touched on as well as the portfolio kind of reaching the low to mid 90s occupancy levels. The balance sheet strengthening we did certainly winds up at presenting an attractive alternative for the Board to consider later this year. We always targeted having a CAD run rate lower than 80% or 85% and it will be well below that in ‘15 and if it's our business plan execution is hopefully successful in ‘15 as it wasn’t in ‘14. It's certainly a very fertile area for the Board to explore.

Your next question comes from Jed Reagan with Green Street Advisor.

Good morning guys. Just wondering you guys have been pretty busy on external growth lately and looking at being that acquire in 2015. So just wondering if you can talk a little bit about, more about that strategy just given your stocks still trading at a pretty significant discount and you have stated goal to deliver the balance sheet overtime. I guess one question if the cost of capital weren't to improve meaningfully next year, would you reevaluate those net acquisition plans for latter part of the year?

I’m sorry Jed if our cost to capital improves next year?

If the cost of capital did not improve overtime, will that sort of cause you to reevaluate those net acquisition plans?

I think certainly, I think I mean even as I mentioned in the comments we're very mindful of our cost of capital and I think as evidenced of that is certainly when we looked at situations of trying to balance evaluating what we think are really good growth opportunities versus our balance sheet objectives. We've always outlined that the driving credit kit of our business plan is continued balance sheet improvement. I think this year in our 2015 guidance for the first time in a number of years we have actually announced that we plan on being acquisitive, we are seeing good pipeline of deals. Again the primary determining factor there will where our cost-to-capital is, what other uses of our precious capital are, and whether we move forward with those. And I think we look at our guidance for 2015 having sequenced in the acquisitions towards the kind of second quarter, third quarter and fourth quarter. That gives us the ability to see how our cost of capital responds to overall macro conditions and hopefully our relative improvement within our peer set in terms of more leverage neutral or even leverage positive FFO and CAD metrics. So maybe we can close that historical discount that exists still in FFO and CAD multiple basis for the company. But yes, look I think that we are very focused on that. I think the approach we've taken the last couple of years has really been focused on improving the balance sheet, trade in that capital capacity. And I think we want to try and do a signal as part of our plan for ’15 that we do see opportunities. We do see the potential to grow the NAV of the company through external growth in addition to all the hard work we are doing on the leasing and property management in margin improvement side of our business. And see how that works its way through. I mean I think we look at the acquisition and dispositions for ’15 through almost neutral in terms of their timing on FFO. So the bottom-line is we will remain very focused on where relative cost of capital is and what the right capital structure is to do any external growth opportunities.

Are those growth plans like actually dependent on the cost of capital improving. I mean if you are sort of where you are today, let’s say come middle of the year do you revisit those plans altogether if you haven’t seen that sort of improvement that you are anticipating?

Well it’s a fair question. And I think that I would answer it by saying that we always look at where the market is, where we expect it to go. And I think have been consistent adjusting our plans based upon where that is. But I don't won’t be an absolutist and say as of this date we would change a certain plan. It depends on what the future holds.

Okay. And then also just on ’15 releasing spread guidance, looks like that guidance has been flat overall and pretty much holding steady with this year. Just wondering how we should think about that and given that comment that you guys are looking to push rates in some markets. I guess it’s the rent growth traction not coming together the way you might have hoped. Or is that not a very true?

I think it’s more where the leasing is going to come from. I mean the fact that Philadelphia and the crescent markets being 94.5% average occupancy. The opportunity to lease more space in those markets where we are getting the more favorable mark-to-market metric are fewer in 2015. As Gerry mentioned most of our leasing and absorption for next year is still coming out of Metro DC in New Jersey where cash rents are still in a roll down situation.

Okay, that makes sense. And just last one for me on the EVO project, does that kind of mid 7% expected yield there, still seem realistic. I noticed that it wasn’t in the disclosure this time, but as you kind of look out to the eventual stabilization of project. Is that still a realistic goal you think?

We think we still are looking for a return on stabilization in the range what we outlined before. We look at the long-term forecast for this project, it's still generating a good rate of return to the company. And certainly a good equity multiple that we would expect to receive greater than two times what our investment was. So it’s challenging right now because there is still not a lot of visibility on kind of leasing up between the 50% and the 85% or 90%. But the pipeline seems good. And certainly we haven’t really revisited what those overall assumptions would be as we have some more visibility on what some others say near-term lease-up goes.

Your next question comes from Nick Yulico with UBS.

Well thanks. I was hoping you could talk a little bit more about the Camden in New Jersey development and explain exactly what sort of plan there and what your partnership stake looks like in that project?

Sure happy to. We were designated as the developer by Kembles a few weeks ago. And it's for their gateway development site which is adjacent to their corporate headquarters and research facility in Camden, New Jersey it’s about 13 acre site that’s immediately adjacent not only to [indiscernible] but also to the two train lines that provide multi-modal access to the site. In being designated as developer, we’re the sole developer, so we’d be the owner of the sites, we’ve essentially entered into a 5 year option agreement to acquire parts of that site or the entire site at a fixed price that modulates based upon ultimate density. We would anticipate taking down those sites once we found a build to suit opportunity that justified us making that investment. One of the public policy items that was instrumental in us pursuing this opportunity was that New Jersey passed a Garden States Growth Zone act which provides tremendous incentives for companies to locate into certain targeted zones. Camden is the only city in Southern New Jersey offering those benefits and frankly already have begun to reap the value of that to the relocation of a couple notable companies into Camden proper. So for us it’s a master planning exercise, a marketing exercise, we will be investing some money in the master planning and marketing but from a business standpoint as I mentioned provides the option not the obligation to acquire those it really does fit into our wheel house and our strategic plan of developing multi-modal office and mixed-use town center developments that are served by mass transportation and the real game changer quite candidly was the recently active economic opportunity program that provides a significant incentives for companies who are willing to locate into selected areas in the state including Camden to promote job retention, job growth and spur private capital investment. From our perspective it gives us a competitive advantage to pursue non-Brandywine tenants who that location is mass transportation access as well as the public policy may very well create a very attractive footprint for our companies to locate there.

Your next question comes from Michael Lewis with SunTrust Robinson.

The [indiscernible] article on Monday [indiscernible] college grads are moving in, Philly was highlighted as one of the most impacted by a large number of young college grads moving into the city, that’s not happening in the suburb, so my question is what’s kind of the driver in the suburbs where you’ve been able to -- achieve high occupancy and then is there any concern of your CBD portfolio kind of cannibalizing what you’ve been able to achieve further out?

Well, I think the demand drivers in the suburban counties and it’s a good observation and one of the reasons why we’ve been very aggressive in kind of refining our suburban concentrations and in the crescent markets for example I mean that’s driven by demand for office space is driven by proximity to high end executive housing, good interstate road system, good school systems, a mixed-use communities where people tend to want to work. The suburban marketplace Michael, has never really been that much impacted by student populations or their tangential benefits of what they do in the suburbs. So I think that demand dynamic stays in pretty good shape. I do think though in our suburban markets we are focusing our strategy on markets where there really have our office product as part of mixed-use communities whether it’s Radnor, Conshohocken, Plymouth Meeting a much different demand driver than now [indiscernible] for example we’re selling our Valleybrooke project, good project only car served we just don’t see the lift in that submarket as we frankly would see in [indiscernible] which is why when we get to our capital deployment program we rather sell there versus buy. There has not yet been any evidence and I don’t think there will be of a cannibalization of inventory. The demand drivers in Philadelphia take are a bit different, certainly University City is benefiting from a nice migration of young professionals as well as a continued expansion of the student base particularly Drexel University.

One more quick one, my second question was going to be about acquisition since you haven’t guided any acquisitions recently but I think you hit that, the flip side of that coin would be if you did decide to tackle the balance sheet a little bit more, what kind of -- what’s the next step that you could get at for the most attractive data you get at what would be kind of like on your to do list for the balance sheet.

Well, I think and Tom, please weigh in, we’ve really done a very good job of really reducing near term rollovers. I think we have a piece of secure debt coming due in one of our Northern Virginia properties during the year that certainly is an opportunity for us to pay down that debt and add that to our unencumbered pool and then certainly as 2015 continues to kick away, certainly looking at our 2016 bonds could be an attractive next step for us.

Thanks.

I would agree now the ‘16 bonds when we first took a look at the offering we did this year Michael, is the make holes were pretty significant 6% money and so we looked at that and said let`s hold off on those and see how the capital plan progresses on the development pipeline in the financing of that and as we get into ‘15 if there is more clarity to that, and things, rate stay where they are and our capital plans moving along we can start to look at ‘16 prematurely also as a possible use of cash.

We have a follow up from Brendan Maiorana with Wells Fargo.

Thanks. So I just wanted to follow up on kind of the guidance in the strategy and the guidance as just mentioned you guys hadn’t historically put the acquisitions in there, why do that this time around just given that if you decide to use capital or if maybe attractive acquisitions don’t show up, does that hurt if you don’t deploy 250 million of acquisitions even late in the year how much does that hurt your guidance numbers? I would guess it probably be like $0.02 or $0.03 but just wondering for some color there.

Hi Brendan its Tom. I think on one how it affects guidance I mean we have left a wide range which we've done for a number of things including when the capital may go out the door or come in the door from either acquisitions or dispositions. Things are back ended, we only feels it’s a few cents of $0.02 to $0.03 maybe in terms of the timing. So we did build it in towards the backend and certainly again will add it, as Gerry mentioned, we'll visit that continuously and update you on that as the course go out. But we did think with where we are in the capital side that we thought there were opportunities to put that out for and it might as well signal that there are some acquisition opportunities as we looked at our markets.

Okay, fair enough. Just second to last question Tom, so you guys give great disclosure on kind of the capital plan it’s very helpful. So I was interested you have 53 million of revenue maintaining CapEx that's down from 75 that was in your guidance last year so that’s coming down and that seems, it’s down a little bit more in percentage terms and the amount of leasing volume that you want to do but it’s somewhat commensurate with the drop in leasing volume, but the non-revenue maintaining CapEx that number went down to 35 million from 75 million. And so are you guys at the point now where that non-revenue maintaining portion of the business, that level of CapEx should be lower and should be -- is 35 a good run rate for the next few years, do you think that number can go down even more?

I’ll answer then George can chime in. One thing we did do Brendan when I highlighted the projects that we are considering sort of development and acquisition is I did mention we do have -- I split out for ‘15 we decided to split out the one and two commerce capital cost because as we usually do, we keep the capital cost into for those projects as a place holder saying we bought it at a certain price for example one and two commerce at 1.75. We told you we stabilized it at 200 a foot when all the capital is spent, that capital is still being spent because we go on a cash basis so certain leases that are being down to get that thing to get those two buildings up to stabilization of 95% which we think will be close to by the end of ‘15 the capital is being spent -- I kind of spiked that out because of that acquisition those costs of 20 million which I put into my total number of close to [300 million, 280 million] for next year. So putting side aside we think that the 35 million is a lower number because of the amount of lease up we’ve been able to do at the vacant space and therefore when you take a look at how much capital is being spent on the renewals and new we’re seeing much less capital being needed to get the building kind of up into the stabilization rate we're expecting, looking out beyond next year in the 35 million I’ll turn it to George on what you think? We haven’t really spent a lot of time on that projecting going out.

Yes, Brendan I think one of the other things that’s really kind of coming into play is the fact that we’ve gotten out in front of so many of these future explorations that some of our revenue maintaining spend and revenue creating for that matter spend in 2014 is because we’ve already started to renew ‘15 and ‘16 lease explorations. So the brokerage commission being paid today versus being paid in the subsequent year. Look I think that revenue creating number just has to kind of comedown as we continue to absorb space. Our definition which I think is kind of the industry standard is if the space has been down for 12 consecutive months, then it kind of flips into that create bucket. But if you lease it after 11 months then it’s in maintain and two months slide you're kind of into to create. But I think as we continue to kind of reduce rollover risk and kind of get the portfolio up to kind of that 93, 94 level, in general total capital just needs to come down and will.

Yes, that’s helpful. Because it seems like kind of relating back to the dividend question and the leverage question, the past couple of years because the revenue creating CapEx has been pretty high. Even that you have been kind of CAD coverage positive on the dividend from a true free cash flow perspective that the number hasn’t been positive but it seems like as long as that revenue maintaining number comes down then you should get into that position which obviously helps your leverage and would make it much more comfortable to boost the dividend. So just seems like you are going in the right direction.

We are.

At this time we have no further questions. I will turn the call back over to Mr. Sweeney for closing remarks.

Great. Thank you all very much for participating in the call. And we look forward to update you on our activities on our next quarterly call. Thank you very much.

Thank you. Ladies and gentlemen this concludes today's Brandywine Realty Trust third quarter earnings call. You may now disconnect.