Jerry Sweeney – President and CEO George Johnstone – Executive Vice President of Operations Tom Wirth – Executive VP and Chief Financial Officer.

Rich Anderson – Mizuho Securities Jamie Feldman – Bank of America Merrill Lynch Craig Mailman – KeyBanc Michael Lewis – SunTrust Robinson Humphrey Manny Korchman – Citi John Guinee – Stifel Mitch Germain – JMP Securities Chris Belosic – Green Street Advisors.

Good morning. Thank you for standing-by. At this time, we'd like to welcome everyone to the Brandywine Realty Trust Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. I'd now like to turn today's conference over to Jerry Sweeney, President and CEO. Sir you may begin..

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

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

For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports filed with the SEC. As we always do, we will provide an overview of our 2017 business plan.

And we'll also introduce 2018 guidance and we'll provide some color on those key assumptions. Before starting that component though, several overriding comments. As noted in our press release, we exceeded our sales target by over $230 million, more than doubling our projected 2017 volume of $200 million.

We have said all year that if the market presented us with an opportunity to exceed our target that we would do it. It did, and we think it's actually great news for the Company.

We harvested significant value creation, continued our portfolio refinement, pre-funded our 2018 development pipeline and further delevereged both directly and through joint venture debt attribution. That philosophy of sales though clearly has had an impact on our near-term earnings forecasts.

For several years, we've maintained that balance sheet considerations are paramount. And as we look ahead, we see a tremendous opportunity to create great value for our company through our development pipeline. That costs money and our overriding goal is to deleverage.

So we did see a window to accelerate sales, while at the same time, continuing to grow earnings, increase our dividend, pre-fund our development pipeline and get on a clear disciplined path to our 6.0 times EBITDA target. The impact was that our 2018 FFO forecast of 6% growth is below street estimated growth rates.

But we felt it was effectively counterbalanced with a 16% cash flow growth rate, no funding exposure in our development pipeline and the financial discipline of creating a stronger balance sheet by year-end 2018 in accordance with our five year plan. All of these efforts have culminated in certainly reinforcing our cash flow trajectory.

And given our visibility on cash flow growth, we are also announcing our intention to raise our dividend by 12.5% or $0.02 a quarter or $0.08 annually during 2018.

So in stepping back and looking at where we are going, the story of 2018 is really one of FFO growth, CAD growth, dividend increase, pre-funded development pipeline and an EBITDA target range of 6.0 to 6.2 times.

I know that we miss consensus estimates, but that was really driven by several key factors, the major one of which was obviously the doubling of our sales target, but also augmented by our 2017, 2018 spot known vacancies that reduced our year-over-year average occupancy rate and the burn off of some third-party development fee income.

But with FMC coming online and the other strong portfolio metrics, we felt we created the earnings momentum to accelerate the sales whilst still posting earnings and CAD growth.

The vacancies that George will walk you through are in projects and submarkets where our operating teams excel and our business plan for 2018 forecast lays out a baseline absorption pace that we believe is conservative and very achievable. So moving ahead, there are very few pieces left in our 2017 business plan.

And we have good visibility on projected results. Certainly as a consequence of that, we've either increased or tightened most of our 2000 business ranges. For the year, our focus, as we've articulated on previous call has been on operational performance, growing cash flow on our disposition program and we believe that focus has paid off.

A very quick recap of 2017, all of our operating goals are essentially in the bag, with 99% of our speculative revenue target achieved. We ended the quarter, where we thought it, 92% occupied and are at 94.1% leased.

Mark-to-market for the quarter on a GAAP basis was 10.7%, 3.2% on a cash basis, which helped us maintain our 2017 range of 6% to 7% of GAAP and 10% to 11% on a cash basis. Retention was slightly ahead of our plan at 81%, and as anticipated, our same-store numbers for the quarter were a negative 1.3% on a GAAP basis and 6.3% on a cash basis.

And for the year, we are maintaining our GAAP NOI growth rate of 0% to 1% and our cash NOI growth rate of 7% to 8%. Our leasing capital metrics continued to perform on plan, so we are leaving that range intact.

And on the investment front, we sold $220 million of additional assets during the quarter, primarily highlighted by two sales within our 50% ownership joint ventures, a $333 million portfolio sale in Austin and $106 million sale of an office property within our Allstate DC joint venture.

So year-to-date, we've sold a total of $370 million and are increasing our disposition target by $230 million to $430 million for 2017. We have several other properties in the Pennsylvania suburbs, aggregating about $60 million under our agreement that we anticipate closing during the fourth quarter of 2017.

As part of our Schuylkill Yards development, we closed on two redevelopment opportunities in University City, containing a total of 340,000 square feet for total pricing of $67 million. These opportunities were funded with $30 million from the borrowings under our credit facility and $32 million of a 1031 exchange from our Concord sale in Q1 2017.

We do expect to start the renovation of One Drexel Plaza in the first quarter of 2018 and anticipate about an 8.5 yield upon completion in 2019. Some other news on the development front, we did announce our anticipated construction start of a 165,000 square-foot building in our Four Points campus in Austin, Texas.

This project is 100% leased to an existing tenant under a 10-year lease. They needed expansion space, with an estimated construction cost of roughly $48 million. We anticipate delivering that project in Q1 2019 at an 8.4% return on cost.

We continue to make great strides in Broadmoor 6, our renovations is 144,000 square-foot building is really the first step in us executing our overall master plan for the Broadmoor campus. And during the quarter, we leased additional square footage bringing us to 79% leased with a strong pipeline of activity.

We expect to deliver that building by the end of this year and stabilize in Q2 2018 at a 9.8 cash yield on cost. We are also continuing with the construction of our second building of Subaru of America at Knights Crossing Campus. That project is also 100% leased to Subaru on an 18-year lease at an 9.5% return on cost.

It also incorporates 2% annual bumps. We expect to deliver and stabilize that project in Q2 2018. On FMC, we have placed the final residential units fully into service. The hotel and service segment will close October at about 70% occupancy and for the market right rental residences, we are currently 68% occupied and 75% leased.

Our revenue pace for 2017 is behind the original plan but with all units now delivered, rates and absorptions are in line with our proforma and we do expect the residential component will be stabilized by Q1 2018.

We also are continuing to advance planning and predevelopment efforts on several development sites including 405 Colorado, Garza, our Broadmoor master plan and our Metroplex project in the Pennsylvania suburbs. We are also finalizing plans for two smaller renovations projects in the PA suburbs that we expect to deliver in late 2018 and early 2019.

From an overall standpoint, the development pipeline is 83% preleased and our projected 2018 development spend has been fully funded through the sales though the sales acceleration.

As Tom will review in much more detail, we did tighten our guidance range from $1.34 to $1.38 per share to $1.32 to $1.34 per share primarily driven by these factors I mentioned earlier. Looking at 2018, the headlines of the plan are the 6% increase in year-over-year FFO growth, 16% increase in cash flow, punctuated by a 12.5% dividend increase.

And we had this year an FFO range of $1.36 to $1.46, which is as I acknowledged earlier, is below street consensus primarily again driven by those factors.

We have also included to provide some additional guidance to the analysts and our investors, a new page in our supplemental package, which compares our 2018 plan to the five year metrics and targets we laid out at our recent Investor Day so you can easily track our forecast versus our five-year plan that we outlined during that meeting.

Quickly looking at our 2018 plan highlights, based on $26 million of speculative revenue, which is 49% complete. 2000 year-end occupancy levels will range between 94% and 95%, leasing levels will improve to between 95% and 96%.

However, as I noted, our average same-store occupancy in 2018 will be around 92.5% versus our 93.5% average in 2017, which is primarily driven by the large tenant vacants that we’ve highlighted on previous calls that are occurring during 2017.

Now obviously, from a mathematical standpoint, that lower average occupancy has impacted our annual same-store growth rate for 2018. We are forecasting a retention rate of 67% and a blended GAAP mark-to-market to range between 8% and 10%.

And while we expect 4% to 6% cash mark-to-market on new leases, our blended cash mark-to-market will be between negative between 0% and 2% after adjustments for the Northrop Grumman lease that George will talk about during his presentation.

Same-store numbers as a consequence will range between minus 1% to plus 1% on a GAAP basis and 1% to 3% on a cash basis. Leasing capital is up slightly year-over-year primarily driven by the lower levels in 2017 due to the no capital IBM renewal that we did for 586,000 square feet in the first half of 2017.

But the capital costs remain well with inside our 10% to 15% of revenue target. We do anticipate our net effect that rents will increase 6.6% from 2017 levels. We are not programming any acquisitions or sale activity during 2018.

We are projecting, however, one additional development start, that we anticipate will range between $50 million to $100 million during the year based on a pretty strong pipeline of potential deals. Just to reinforce, we will not start any new development without a significant prelease.

Tom will touch on our financing plans, on our unsecured bonds on term loans. And as a final point as been noted, the real beneficiary, we see of our 2018 plan is the achievement of our real goal to grow cash flow and improve our CAD payout ratio. So with our 2018 CAD pay ratio will range between $1.05 to $1.15 per share.

When you factor in our targeted $0.02 per quarter, $0.08 per year dividend increasing that to $0.72 a share, we do anticipate our CAD payout ratio will be 65% at the midpoint. And on a FFO basis, again at the midpoint, our 2018 payout ratio, will be around 51%.

So, with that overview let me turn over to George to look at our operating performance including some color on our 2018 business plan. George, will then turn it over to Tom to review our financial performance..

Thank you, Jerry, good morning. We're pleased with our third quarter results. The substantial completion of the 2017 business plan and the momentum of our operational performance that has generated into the coming year of 2018. Leasing activity remains robust in all of our markets.

The pipeline excluding development properties stands at 1.7 million square feet with 557,000 square feet in advanced stages of negotiations. During the quarter, we generated 82 space inspections, totaling 506,000 square feet, which represents 55% of available square footage.

Turning to our three core markets and the underlying base assumptions contained in the fourth quarter of 2017 and our 2018 business plan. For CBD Philadelphia, we're currently 93% occupied and 96% leased. During the third quarter of 2017 FMC Tower and 1900 Market Street were placed into service and we acquired 3000 Market Street.

We expect to finish 2017, 94% occupied and have several transitional vacancies in our 2018 plan. First, as discussed on previous calls, a 100,000 square-foot tenant will vacate Three Logan Square on December 31. We've assumed in our 2018 plan that 60% of this space is reabsorbed, 40,000 square feet in June and 20,000 square feet in November.

Based on the tenant's expiring, lease, we have a slight roll down in cash rent and a 20% increase in GAAP rent. At Cira Center, two full contiguous floors totaling 55,000 square feet roll on June 30. Our 2018 plan assumes these floors will remain vacant for the duration of the year.

Our leasing plan for 2018 in the city will result in a year-end occupancy between 95% and 96%, up a 100 basis points from our projected year-end 2017 occupancy. However, as a result of these transitional vacancies, the average occupancy of our CBD same-store properties will be 94% in 2018 versus 96% in 2017 or 200 basis points lower.

Turning to the Pennsylvania suburbs, the focus remains on Radnor, based on move outs that occurred earlier this year. As we discussed previously, five tenancies totaling 189,000 square feet vacated during 2017.

To-date we have leased 64,000 square feet, with 28,000 square feet taking occupancy in the fourth quarter of 2017 and 36,000 square feet occupying next January. We've assumed 96,000 square feet will be reabsorbed in the third quarter of next year, with the final 29,000 square feet taking occupancy in 2019.

The cash mark to market on these spaces range between 6% and 8%. Similar to the City, these Radnor vacancies will result in an average occupancy of 89% in 2018 versus 92% in 2017 or 300 basis points lower. Turning to Metro D.C, the Northern Virginia office market drivers continue to be Metro access and fully amenitized buildings and office parks.

Regional job growth continues to be driven by the professional and business service sectors adding roughly 19,000 jobs or 22% of all jobs all added over the past year. We extended our largest lease rollover in the region by renewing Northrop Grumman for five years in Dulles Corner. We're presently 51% complete with the regional business plan.

Additional renewals account for over 50% of the remaining plan in our D.C. leasing for 2018. Tour activity during quarter were 21 tours totaling 150,000 square feet, which was booked flat quarter-over-quarter and year-over-year.

Our leasing plan for DC in 2018 calls for year-end occupancy between 91% and 92%, a 100 to 200 basis point improvement over 2017 year-end levels. Market dynamics in Austin remained strong and positive. At Broadmoor, we're now 79% leased and with the existing pipeline of prospects, we expect to be 100% leased by year-end 2017.

The remaining portion of our DRA joint venture continues to perform well and projects to continue along those lines in 2018. A handful of short-term renewals are anticipated to be finalized in the coming months and cash rent growth will continue to be north of 10%. Our overall 2018 plans are off to a good start.

While the handful of transitional vacancies described earlier impact our same-store NOI performance, our leasing plans lays a clear path to year-end occupancy between 95% to 96%.

As Jerry mentioned, the primary driver of our 2018 same-store numbers is the impact of these transitional vacancies and having the average same-store occupancy being 90 basis points lower than our 2017 levels.

Our mark-to-market cash metrics adversely impacted by the as is renewable with Northrop Grumman, but as we detailed on Page 3 of the supplemental, our new leasing cash mark-to-market will range between 4% and 6%.

The same store will return to growth levels ranging between 3% and 5% on a GAAP basis and 2% to 4% on a cash basis in the fourth quarter of 2018. Leasing capital per square foot has escalated over prior year levels but at 12% of rents, we remain well within our targeted 10% to 15% range.

Our budgeted leasing assumptions also contain a third-party brokerage commission assumption for every deal. Our historical run rate of direct deals is 30%, which could lead to an overall reduction in leasing capital going forward. And at this point, I'll turn it over to Tom..

Thank you, George. Our third quarter net income totaled $18.8 million or $0.11 per diluted share, and our FFO totaled $61.9 million or $0.35 per diluted share. Some observations for the third quarter, are same-store NOI growth for the third quarter was a negative 1.3% GAAP but positive 6.3% cash.

Both excluding net termination fees and other income items, we've had 19 positive quarters of the cash metric improving. While we've had negative quarterly same-store GAAP NOI growth, we continue to anticipate positive growth for the full year.

G&A expense decreased from $6.7 million to $5.8 million, our third quarter G&A was below our $6.5 million forecast primarily due to the timing of professional and other fees that will be incurred in the fourth quarter.

FFO from our unconsolidated joint ventures totaled $8.9 million, below our third quarter projection by $0.6 million, primarily due to the sale of 7101 Wisconsin during the quarter. Interest expense totaled $19.7 million or $600,000 sequential decrease from the second quarter primarily due to the unsecured bond repayments from the previous quarter.

Our third quarter CAD totaled $42.3 million representing a 67.1% payout ratio. During the quarter, we've incurred $9.8 million of revenue maintaining capital and $5.1 million of revenue creating capital.

Looking to the fourth quarter, property level operating income for the fourth quarter remained relatively unchanged, with an increase in FMC being partially offset by the sale of one property that's held for sale in the wholly-owned portfolio.

G&A expense for the fourth quarter will be approximately $6.5 million and for the full year, we're approximating $28 million. Other income, excluding FMC retail, we expect fourth quarter to approximate $0.5 million and for the full year estimate its $3.5 million.

Termination fees also $0.5 million for the fourth quarter, with a full year estimate of $2.5 million. Interest expense for the fourth quarter will be $19.5 million and our full year number should approximate $81 million. FFO contribution from our unconsolidated joint ventures should total about $6 million.

The sequential drop of $2.9 million is primarily due to the sale of 7101 Wisconsin, the partial quarter sale of Austin Joint Venture. And included in that is also $1.2 million prepayment penalty for the early extinguishment of debt, which will be a deduction from our FFO in the fourth quarter.

We project that our joint ventures will contribute about $36 million for 2017. Third-party fee income should approximate $27 million, with $9 million of related expense. Our general business plan assumptions include the increase of our targeted sales range to $430 million, acquisitions totaled $67 million.

Both acquisitions represent development and redevelopment opportunities as mentioned by Jerry and the initial 2017 combined GAAP yields will create no accretion in 2017. Our share count on a weighted average basis is 178.4 for the fourth quarter with no additional buyback or ATM activity.

Our 2017 capital plan, ratio will be between 71% and 80%, reflecting a $9 million revenue creating CapEx for the balance of the year.

Our capital plan for the fourth quarter is comprised of $40 million of development and redevelopment, primarily FMC, the Subaru Training Centre, Broadmoor and Four Points, the acquisition of One Drexel Plaza for $37 million, a $28 million common dividend, $6 million of revenue creating CapEx and $1 million of mortgage amortization.

Sources of that will be $35 million of cash flow after interest, $86 million of net proceeds from the joint venture sale and $59 million for the anticipated sales of properties held for sale at the end of the quarter.

This activity will result of $68 million net reduction to the outstanding line of credit and our year-end net debt-to-EBITDA will be roughly 6.5%. Our third quarter fixed charge and interest coverage ratios were 3.2 and 3.5 respectively.

Starting with the 2018 guidance, net income will be $0.39 per share at the midpoint, FFO will be $1.41 at the midpoint. Also our 2018 range is built with the following assumptions.

Property-related GAAP NOI will increase $20 million due to the following, FMC will generate an incremental $15 million to $17 million of GAAP NOI as compared to 2017 projections; One Drexel Plaza and 3000 Market will generate an incremental $2 million; and redevelopments including Knights Crossing will generate an incremental $8 million of income between 2017 and 2018.

Partially offsetting those increases are the dilution from the sales that took place within our wholly-owned portfolio of roughly $8 million. FFO contribution from our unconsolidated joint ventures totaled $28 million, the decrease from our projected $27 million is primarily due to the sales of the joint ventures in DC and Austin.

G&A between $27 million and $28 million and then our investments, we have guided no new acquisitions and one development start. Interest expense will decrease to approximate $81 million to $82 million.

Included in that assumption is the refinancing of our $325 million unsecured bond, which matures in April, with a new $350 million unsecured bond offering, we're probably targeting at 10% – a 10-year bond for that.

Issued $200 million bank term loan during the year, roughly at 3.25% that's to reduce the outstanding balance on our line of credit as we go into the end of 2018. And capitalized interest will decrease from $3 million to $2 million, as development pipeline becomes operational.

We have land sales and a tax provision which will generate $1.3 million of positive income, termination fees and other income will be $3 million each and net management fees will be $11 million this year on a net basis. That's primarily due to the couple of factors.

One is lower construction management fees of roughly $5 million and that's substantially due to the Subaru headquarters building at Knights Crossing, which will be completed later this year and finalized in the first quarter and that will result in a $5 million decrease in 2018.

Also lower property management fees due to the third and fourth quarter joint venture property sales that will eke about $2 million. Our plan also includes as announced, the two share – an intent to have a two share increase to our quarterly dividend. There is no anticipated ATM or share buyback activity.

Our capital plan for 2018 will include CAD increasing 16% and our coverage ratios will be 63% to 69%. The coverage is very similar to our 2017 coverage on our current dividend.

Using the 2018, looking at our uses, we've about $130 million of development, mainly that's going to be Sale Point, the Subaru Training Centre, the redevelopment of One Drexel Plaza as well as 500 North Gulph Road and the Drexel Square development.

Common dividends are $114 million, revenue maintained will be $36 million with revenue created $23 million. We have – we will repay our $325 million unsecured bonds and we will have $7 million of mortgage amortization.

The primary sources will be cash flow from operations after interest payments of $220 million, a secured bond offering of $350 million and a $200 million term loan, which proceeds will be used to pay down the line of credit.

As a result of all this, we will reduce our line of credit balance by $140 million to just about $30 million at the end of the year. We also predict to have a net debt-to-EBITDA between 6.0 and 6.2x. In addition, our net debt-to-GAV will be in the high 30% area.

In addition, we anticipate our fixed charge ratio improving to 3.3 and our interest coverage improving to 3.6. I know it's a lot of numbers and I will be available to help anyone sort those through after the call. I will now turn it back over to Jerry..

Great Tom, thank you. Thank you, George, as well. We're sorry our comments went a little bit longer, we're trying to cover 2017 and 2018. So to wrap up, our third quarter results were strong, 2017 plan is essentially completed.

And our 2018 forecast we think really represents earning and cash flow growth, little forward leasing risk, a stronger balance sheet and a steady pipeline of development and redevelopment value-add opportunities. So with that, we’d be delighted to open up the floor for questions.

As we always do, we ask that in the interest of time, you limit yourself to one question and a follow up.

Holly?.

[Operator Instructions] Our first question is going to come from the line of Rich Anderson, Mizuho Securities..

Good morning, thanks very much..

Good morning, Rich..

So first question is, a lot of moving parts in terms of investment activity, do you see yourself committing even more to the Philadelphia region including the suburbs over the next year? It seems like that the direction this company is going that, already leveraged to that market.

But do you see reason for that percentage over the next few years to continue to go up? And if so, by how much, if you can give that kind of color?.

Hey Rich, it’s Jerry. I don't think we've really anticipated going up that much. I mean, I do think that the activity was a little skewed this year because of the – I think what we saw was a significant pricing window in Austin, where we wound up selling 1.1 million square feet through our JV.

But certainly, we have a lot of expectations to continue to invest in that marketplace. We just frankly thought that given where pricing had gone through, that our better deployment mechanisms in the Austin market were primarily on the development front.

And certainly given our landholdings at Four Points, Garza as well as the significant master planning opportunity at Broadmoor, we had a really good clear path there to increasing the revenue contribution coming from Austin. We'll certainly continue to take advantage of, I think, the opportunities we see in Philadelphia.

I mean, given our footprint, we do have a unique position to see a lot of activity. But I think we have also sold a lot in the Philadelphia area and we would certainly anticipate that even as part of our five-year plan, as we're moving forward on liquidating the remaining properties in New Jersey and Delaware.

And there will be some selective premier over the next couple of years. I would expect that at some of the Philadelphia assets as well..

Okay. Fair enough. And then, a lot of talk about Amazon HQ2, can you provide any color about how Brandywine and the city and the state is approaching that opportunity. Obviously, many cities interested in having a discussion with them.

Anything you could share on this call to talk about that potential for you and for the city?.

Well, it is the buzz nationally, isn't it? So I think from how we view it, I mean, first of all we thought it was an extremely smart move by Amazon to kind of create an open auction.

And at least publicly without any broker site selector or outside advisory firm so we thought from Amazon's standpoint, it really created – almost kind of a perfect screening device to get the best bids and proposals.

And I thought it would really kind of reflected their disruption of existing real estate practices, which is really what has always kind of defined Amazon all the way through. But we're fortunate, from Brandywine standpoint, to be in the mix in Philadelphia, Austin and some participation through our land sites in the overall submission by DC.

And I guess our observations have been worked through it now. It's great to see cities come together and align themselves in a political, business, academic, civic level to really present their cities well. And I'm sure that's happening in every city around the country. We're obviously, most familiar with the city of Philadelphia.

In Austin, we have a great Brandywine team working with the local officials on the submissions. And I think there will be excellent submissions coming from both cities. I think, from a Philadelphia standpoint, I think everyone in the city should be proud of the great effort that was put forth.

And I think the city will be presenting a very, very attractive package to Amazon along with great cooperation from the state. And who knows where it goes, I think when we assess Philadelphia, we think it's tremendously well suited.

It's a great location in the Northeast corridor, excellent healthcare and university system, great mass transit access, great quality of life, workable communities, vibrant neighborhoods, emerging business climate with some good traction and job growth, affordable housing and tremendous labor pool access.

And Austin, well Austin defines vibrancy in growth. It's fast growing, supported by University of Texas and emerging health systems downs there, great tax factor, really the Silicon Valley East, great culture and an amazing can-do attitude in that city. So I think our goal is we are just enthusiastically supporting each city's bid.

And stand kind of at the ready to assist the cities in whatever they need us to do to sell the positive aspects of Amazon making decision to locate in the – into either one of those cities or Washington, D.C..

Okay, great color. Thanks Jerry..

You’re welcome, Rich..

And our next question is going to come from the line of Jamie Feldman, Bank of America Merrill Lynch..

Thank you.

I guess just following up on Rich's question, can you talk about specific sites that Brandywine owns that have been part of those bids?.

Well, I think, Jim, think some of the bidding is actually confidential. But I think certainly it's been in the press that we believe our Schuylkill Yards development here in Philadelphia and kind of the domain Broadmoor section of Austin where we obviously have a big presence will be part of that city's bid as well..

Okay, that’s helpful. And then, can you just talk more about the leasing marketplace in both the suburban and CBD Philly. Just kind of what you're seeing on the ground.

And as you're thinking about backfilling some of these vacancies, maybe just some more color on what gives you comfort on the numbers and maybe the prospects of even beating those numbers?.

Sure. And George and I will tag-team. Look I think, the numbers are still showing we've got good velocity through the portfolio from a leasing standpoint. There are a number of reports that has come out in the last couple of weeks that talked about some increasing resurgence in key parts of the Philadelphia suburbs.

King of Prussia in particular, I think is getting some increased traction driven by a number of factors but also by the fact that there is an announced effort now to expand their rail line to King of Prussia. Radnor continues to be a surprisingly strong performer for us.

We have, as George touched on, we've had about 186,000 square feet come back to us, which you never want to see. I mean but if it hadn't been in one market, we'd rather be in Radnor than in Ocean or Great Valley or the 202 Carter.

So same thing in Philadelphia, some of the space we have coming back that was in Three Logan, which was a big – a big we knew that was coming our way. The move-out of the company at Cira for the two floors, we again knew was coming. We've got a lot of pretty [indiscernible] going on and some good traction.

So we are feeling very good about the numbers we've put in the plan. And as George and I both touched on that, you never want vacancy and you never want vacancy when it affects some operating metrics like same-store growth. But the reality is it happens. We’ve locked down a lot of other the leasing exposure for 2018 that we feel really strong about.

And I think the challenge for the company now is just to kind of outperform these assumptions that we know are achievable in the 2018 plan, George?.

Yes, and I think Jamie, to add to that, I think there are good blocks of space in good buildings. So and I think, look if you want to be a tenant in Radnor, Pennsylvania, you've got to talk to Brandywine and if you want to be in a Trophy building in the city of Philadelphia, you've got to talk to Brandywine.

So we've had – we currently have 31 vacancies within our portfolio in the city. 18 of those have been vacant less than a year. So I think when we do get vacancy we're able to kind of turn it around.

Our 2018 business plan, we identified the floors where we've got active prospects and active dialogues and those where we didn't, we took a little bit of a conservative route and slid some of those to 2019..

Okay, that’s great. Thank you..

Thanks, Jamie..

Our next question will come from the line of Craig Mailman, KeyBanc..

Hey, guys. Jerry, maybe just a follow-up on the disposition outlook here, I mean you guys have done a really good job repositioning the portfolio over the last several years. But as a consequence there's really been almost no FFO growth.

And I'm just curious because you guys look at the portfolio today, kind of how much more you think you need to sell and I guess because your guidance in 2018 has almost nothing in it. But you've ratcheted it up kind of 2017 disposition as we've gone along.

Just curious, your shadow pipeline of potential disposition towards that could be relative to what you guys of kind of baked into the guidance?.

Yes, Craig, great question. Look I think from our perspective the push has really been to make sure that we put the company in the best position going forward. So a consequence of lot of our sales has been a muted FFO growth rate.

And we're always trying to balance that versus the real folks we've had on really getting our balance sheet to where we wanted it to be. So one of the drivers I think behind our thought process this year was, we’re going to put a lot of things in the marketplace.

We see where pricing discovery came in and then make the appropriate decision on kind of point pricing for what we had in the market and how we view that point pricing versus value.

But then also factor into that our desire to get our balance sheet down to that 6.0x and preserve some capacity for executing a development pipeline that we think will create great growth going forward.

So as we're looking at the 2018 business plan, I mean, we're really down to a very small component of our existing portfolio that will continue to price discovery on. And that's really relates to those three markets I mentioned on one of the other question kind of New Jersey, Suburban Maryland and Delaware.

And then the only other proviso to that is, if you take a look at a couple of our larger sales this year, they've really come out of our joint ventures, which has been a great harvesting profit opportunity with both our partner DRA and Allstate.

And that was very consistent with what we were hoping to do in terms of reducing the debt attribution we were getting from those JVs as a key point of balance sheet strengthening. So we do actually look at this point, 2018 being fairly benign in terms of sales.

That being said, we'll continue to kind of keep track of the marketplace and see where we can, at the margin, make money through a sale and deploy that money into more accretive opportunity..

That’s fair.

And then Tom, maybe could you walk me through how 6% FFO growth from midpoint to midpoint year-over-year translates into the 16% AFFO growth?.

Sure. The change in the AFFO growth rate is really coming from our reduction in some of our cost related to free rent. And we expect that we will see our – as we look at our straight line and deferred rent which is sitting this year, we're expecting it to be close to $50 million, we see that going down to roughly $9 million.

So that is part it, we expect to see smaller growth. Plus I think our CAD numbers are going to be a little lower in terms of our revenue maintaining also..

Right, if I could sneak one third one here. Jerry, you're still adding to Schuylkill Yards additional sites.

Just curious, that submarket, that development kind of how much more would you be a buyer of to kind of in the rest of the pieces?.

Craig, I think from our standpoint, the One Drexel Plaza that was always contemplated as part of the Schuylkill Yards. And we look at the overall framework of what we're trying to achieve at Schuylkill Yards. The other acquisition was the redevelopment opportunity that came our way and fit very well into as a receiver for 1031 property.

So we think that lock between JFK Boulevard and Market Street bounded by 30 and 32nd Street is kind of where we are. So we don't really anticipate as part of Schuylkill Yards, any additional pieces we need to fill in. There were the pieces that were both originally contemplated.

And with One Drexel Plaza we will place that into redevelopment pretty much immediately and really commence the physical work next year. And the 3000 Market Street building we think is a fabulous redevelopment site as the build-out continues to occur..

Great, thanks guys..

Thank you, Craig..

Our next question will come from the line of Michael Lewis, SunTrust Robinson Humphrey..

Hi, thanks..

Hi, Mike?.

Hi. The decision to telegraph the dividend rates, your yield is already pretty competitive, I think.

Is there anything – is your taxable income to the point where it's pushing that up or is it really just a decision to – you've had good cash flow growth and you want to share that?.

It's that simple. I think we and the board and the management team sat down to evaluate, increasing our dividend, creates an additional cash call about $14 million. We’re growing cash flow by between $26 million and $30-plus million.

And I think the perspective of the board may based upon our pathing to get down to our original debt target was that we've had patience engage shareholders. And certainly, we felt that it was an appropriate step to increase their share of cash flow. We're in good shape in terms of taxable dividend standpoints. That really was not a driver.

It was more – the visibility we have for 2018 and beyond in terms of where we believe our cash flow is going really gave the board great comfort particularly when juxtaposed against how we view the solidity of the operating platform with the operating metrics we're posting, as well frankly the very little forward rollover exposure over the next several years that our market leaders and George have really pulled together to create a fairly low risk profile for the company in terms of revenue generation..

Thanks. My second question, Jerry, I saw that you're one of the leaders helping to work high speed rail to King of Prussia. So maybe it's early in that process, but you could talk a little bit about the likelihood, the time frame.

Are there sources of funding for that?.

Yes, I think it's a correlation that's formed of about in aggregate about 600 individuals and organizations that are – Michael, are trying to get the one of our major commuter lines spur create off that to go through the King of Prussia Mall and then through the King of Prussia Business Park where we have a number of assets.

I think it has a lot of the momentum. I think it's been identified as a regional transportation priority. King of Prussia is a major employment center in the Philadelphia suburbs, obviously has Simon Properties King of Prussia Mall, which is now the largest mall in the United States.

It has a resurgent residential and commercial base, and there's a tremendous number of employees that commute from Philadelphia by car out to King of Prussia.

And I think between the business community, the political community and the regional transportation authority, SEPTA, we have all really identified this as a real economic imperative to ensure that King of Prussia accelerates to competitive advantage going forward. So the costs are north of $1 billion.

Environmental impact studies have been completed the cost free funding for all the engineering work is pretty much in place. So there's never any certainty in this kind of climate.

But I think that the powers to be, so to speak, have really viewed this rail spur as an incredibly important component of ensuring the region accelerates its competitive position.

So from a public policy, regional transportation authority and business community, it certainly seems like it has a lot of momentum behind it to achieve the goal by the early 2020s..

Great. Thank you..

You’re welcome..

Our next question will come from the line of Manny Korchman with Citi..

Hey. Good morning, everyone..

Good morning, Manny..

Jerry, just if we look at your sort of your completed dispositions over the last couple of years, it seems like the volumes have been doing great, pricing has been good, but it doesn't seem like the rest of the portfolio is sort of getting the growth you'd expect from selling off sort of the bottom, if you will? Am I reading that right or is that sort of the result in growth in line with what you expect to oppose all of these non-core sales?.

I think it's a little bit of a cloudy picture, Manny, in 2018, because of the year-over-year weighted average occupancy decline.

But I do think when we take a look at the cash mark-to-market on new leases that we're projecting to get for 2018, I mean certainly, look, if you’re a landlord, the numbers for rental never be high enough, but when you look at it for us to be kind of forecasting a 4% to 6% new lease rate in terms of cash flow and then as part of that we also add on a kind of a 2.5% plus annual escalator.

To us that is really very strong.

When you take a look at our average rental rate that we've had in the portfolio a few years ago versus today, there's been a dramatic increase in our average – in our average rental rate, which is frankly, from our perspective portfolio management wise, given us a tremendous ability to keep our capital costs within that 10% to 15% range.

So I do think the growth rate that we were hoping for is I think implied in the numbers for 2018.

It's just not translating down to the same-store numbers that we were – that we ultimately think will be our long-term run rate, which is why we really when we laid out our five-year plan, we laid out that our same-store growth rate will be somewhere between 2% and 5%.

So we actually viewed that having kind of the midpoint of our same-store for 2018 being at 2%, if not the 5% but the midpoint being 2% is kind of the bottom end of our range. And as George kind of walked through, I guess once we get some of these vacancies, we stop at the mark-to-market that the team's anticipating.

We're hoping to kind of move that up higher I think George outlined, by fourth quarter we expect getting above north of 3% same-store growth rate.

So I think we see – in those metrics, we're not seeing it this year in the same-store, but certainly in terms of the average rental rate versus our capital cost and the percentage of revenue we’re investing, we think that our real focus as we’ve laid out has been growing cash flow like what do we actually net after all this work.

And I think from that standpoint, I think we're really pleased with the way things have worked out..

And just switching focus maybe to Schuylkill Yards. Help us think about how you're approaching that.

Are you thinking of that as sort of a compliment to Philadelphia CBD or do you think that ends up being more of a drag or a draw for sort of tenants that want to be whether be closer to the universities, whether be in higher tech space, whether more of a cluster, and that in time would lead to sort of more vacancies within the CBD itself?.

I actually think it has the dynamics to kind of be its own vibrant submarket. I mean, there's clearly going to be interplay, but I think if all of us were involved the University.

So you really that we're at the kind of embryonic stage of growth acceleration, we have great anchors with Penn and Drexel, Amtrak's plan, Children's Hospital, University of Pennsylvania Hospital, all those things that we've all talked about.

So I think it's one of those unique opportunities where when we look at Schuylkill Yards both near and long-term you have the ability to kind of create a new market, that is very good trends and accessible.

We hope that it will appeal to an additive type of tenants to the city as opposed to just bring in people between the Center City, University City. There will undoubtedly be interplay between the two markets and we think both have their very strong points.

But we think University City has the capacity to bring people in from outside of the city at a pretty good pace.

So we're hoping to see that happen and we have two other development partners there at Gotham on the residential side and Longfellow on the life science side and they are both actively engaged in kind of thinking through what they view their steps to be.

So I know it's kind of an uncrisp answer, but I think we do view that we can kind of redefined the future of University City by the quality and the mix of products we build and all of that with the national marketing campaign..

Hey, Jerry, it’s Michael Bilerman speaking.

I guess you need to step back when you think about guidance trends from 2017 and clearly the lower guidance from 2018, you've talked a lot about the accelerating sales activity what you're proving up for some of the values and help you deleverage and fund the development pipeline, but that's not all of it, right? I mean, there's clearly sales happening later in 2017, there's another driver that have cut 5% off.

Our original thought was going to be earnings for 2017 and now you've chopped off another 5% relative to where street expectations are for 2018.

So what are the other variables that's going to play in your mind other than dispositions because it's not all sales that are driving expectations lower than where you have been and where the street was?.

Hey, Michael. No, I think Tom and George both outlined, we looked at 2017 and 2018 year-over-year, sales were the primary driver.

But certainly the lower average occupancy contributes to that lower FFO guidance and then the one of the big kind of specific situations was the burn off of our development fees related to the third-party development we’re doing for Subaru of America.

So those three factors kind of the sales, the transitional vacancy impact on same-store and the burn off of that fee were really the primary components of where we came at for 2018 versus what expectations were in our 2017 numbers..

And your five-year business plan, one that goes up to 2021, you don't have earnings, cash flow and FFO target for that, it was all operational.

Is that right?.

No, we actually did layout that we – we've wanted our CAD number to grow between 5% and 7%..

On an annual rate? But, I guess, with the moves today, you still feel confident that from the point of when you put that out given how much lower 2017 and 2018 FFO are going to be relative to original expectations? You'd still be able to hit that compound annual growth by 2021?.

Yes, I think that I may – I think actually look at the – we laid out the average AFFO growth rate, Mike, that we were forecasting was between 5% and 7%. And we are posting a number much better than that this year. So we have full confidence that every metric we've laid out is part of that investor presentation that we'll be able to achieve..

Okay. Thank you..

Thank you..

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

Great. Thank you. I guess first, Tom, you mentioned in your sources and uses, the $114 million of dividends in 2018 versus 179 million shares that equates to $0.64 a share for the year. And then I'm trying to reconcile that with a 12.5% dividend increase. I guess if I do the math, it really means the dividend increase isn't until year end 2018..

No, it is this year. If I did that incorrectly then I'll let you know. But, no, it is the dividend increase is in for the entire 2018-year..

Yes, we would expect the dividend to be up $0.02 a share starting with the first dividend payment in 2018..

So has the board formerly, in writing, cast and concrete increased the dividend or are they just thinking about it?.

Well, the board had a special meeting to discuss the dividend and adopted the 2018 business plan, which included the $0.02 per quarter dividend increase. They will actually formally declare the dividend at our December board meeting..

Okay.

So it’s a done deal?.

It’s a done deal..

Okay. Second is, looks like you are buying One Drexel for about $124 a foot and you're buying 3000 Market for $546 a foot. Can you elaborate a little bit about what these buildings are? And what their plan is? Looks to me that 3000 Market is one or two stories, not much to it.

Can you elaborate a little bit more on what the plans are for those two assets?.

Sure, absolutely. I mean, One Drexel Plaza also known as the Bolton building here in Philadelphia. We’re going to renovate that. We’ll not add any square footage to it. But there we'll start the reimagination renovation process as I mentioned planning now and then physically starting early next year.

And we're targeting roughly 8.5% return on our invested cost. The 3000 Market Street building is essentially a future development site that we believe can accommodate between 700,000 to 1 million square feet at some point in the future.

So essential for us is the land acquisition that will create some earning revenue for us over the next couple of years while we go through this Schuylkill Yards master planning process..

Got you, okay. Then I noticed lately that you disposition to your asset sales for 2017, anywhere from $166 a foot for Newton Square, $117 for King of Prussia, the New Jersey assets about $84 a square, Culbertson $28 a square, Concord Airport Plaza about $95 a square.

Are you done with the sub-$100, sub-$150 a foot assets or are there more that will likely be sold?.

Well, we think we're through the most of them. We saw the couple of assets in New Jersey that may windup trading around the same level as the previous Jersey sales, but yes, we think that wood has been chopped..

Okay. Thank you. Thank you..

Thank you, John..

Our next question will come from the line of Mitch Germain from JMP Securities..

Good morning, guys..

Hey, Mitch..

Jerry, just maybe if you could provide some perspective as to what was sold in Austin and how’s that compare to what's left?.

Yes, okay. That’s great, Mitch, thanks. Yes, I think in Austin, we look – first of all, we have a great partner with DRA. And I think you always hope you make the right calls, we formed the great partnership with them. Since we formed it, we acquired a ton of properties.

In retrospect, it was truly outstanding pricing compared to where prices have gone to and rents and values have clearly gapped up over the last several years.

So as we had our partnership meeting we looked at kind of the imbedded value that we had in the overall portfolio and kind of broke it down between what we viewed as kind of growth accelerators and moderate growth drivers in the portfolio and put the second package kind of out on a very quiet marketing basis.

We see very good bids and collectively our teams work to a process where we sold that portfolio and made a fair amount of money for both the partnership and for DRA and Brandywine, respectively.

I think the remaining assets, Mitch, the partnership will need is we have an ongoing dialogue and we will start to think about now with this tranche done whether we want to recapitalize and refinance elements of this venture, whether we want to take a look at spending more assets into the marketplace depending on where prices is, or whether we hold tight and continue to ride out the market with what we think – what we collectively think are some of the best assets in suburban Austin..

Great, that’s helpful. And then another guidance question, Tom. Your comments had said $200 million term loan this supplement the business plans on this supplement suggest $150 million.

So, I’m just trying to understand exactly what the size of the term loan is likely to be?.

Yes, I think we're leaning towards the $200 million. I mean, we have $150 million here, but I think we'll probably range between $150 million and $200 million, but I think $200 million is probably where we’re going to end up with that..

Got you. Thank you..

Thanks, Mitch..

[Operator Instructions] Our next question comes from the line of Chris Belosic, Green Street Advisors..

Hey. Good morning, guys..

Good morning, Chris..

Just curious if you could touch on a little more on the 2018 development start that you guys have in guidance, is that essentially Schuylkill Yards or is that all exclusive or anything that could potentially kick off there and any kind of build-to-suits that you guys still thinking of the pipeline?.

Yes, Chris, we’re having a hard time hearing you, but I got the gist of the question. We have projected development start we have right now, we have probably four or five projects that we're getting very strong interest in. We haven’t really identified which start that will be.

It could be in the Philadelphia area, it could be in Austin, it could be downtown or it could be elsewhere. So we haven't really identified exactly as we’ve kind of framed out a dollar range for that.

The predicate that governs all of those opportunities that we want to be in a situation where we have a high level of pre-leasing at 50% range to really get anything off the ground. At the current time, we don't really anticipate a ground up construction start in 2018 at Schuylkill Yards.

That, could change but that's not currently part of the thinking. Again, as I alluded to on the previous questions, there are – we have two other development partners there and how they’re assessing the life science and the residential markets may be slightly different than where we are assessing the office market right now..

Okay. Great. And then maybe just one more. Correct me if I'm wrong, but I believe that at the Investor Day you got you're targeting a low 30% deleverage range by the end of 2018 and now you’re showing high 30%. Is the low 30% a longer-term target? Is that correct? And what kind of out there.

Yes, no, I think of the two we viewed, the EBITDA number being much more important. I think as you know when you’re selling a lot of assets and not quite deploying that same amount of money, it has – it’s hard to move those leverage metrics down. But Tom, maybe you can add on to Chris's question..

Yes, Chris. I think as we look this year we’re not going to – as we go into 2018 we’re going to be a little higher on that side But again, the cash flow growth we see the point of fourth quarter growth on GAAP is going to get us down to that low 6s. And I think, as we look at the next two years, we'll not start to try to get that debt-to-GAV down.

As the cash flow kicks in, we should be able to lower debt primarily on the line of credit and then bring our debt balances done forever. So we were looking at that as a near-term target with the sales we've done..

Okay. Thanks, guys..

Thank you, Chris..

Thank you. I’d now like to turn the conference back over to Jerry Sweeney for closing comments..

Thank you all very much for participating on the call. We look forward to updating you on a business activities with our fourth quarter call and early 2018. Thank you very much..

Once again we like to thank you for participating on today’s conference call. You may now disconnect..