Good day, ladies and gentlemen and welcome to the Brandywine Realty Trust First Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Jerry Sweeney, President and CEO. Sir, the podium is yours.

Right, thank you very much. Good morning everyone and thank you for participating in our first quarter 2018 earnings call. On today's call with me, are George Johnstone, our Executive Vice President of Operations; Dan Palazzo, our Vice President and Chief Accounting Officer; and Tom Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning, certain information discussed during this 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 normally do, we will start with a review of our quarterly activity, and then an update on our 2018 business plan, and looking at 2018, the plan is off to a great start with in line results. We are 83% done on our revenue plan, with a strong pipeline of pending lease activity, and our operating plan remains on solid footing. Our balance sheet is strong, we have ample financial capacity, we continue to pursue pre-leasing on a development and redevelopment pipeline projects, and are pleased with our success this quarter in both Austin and King of Prussia, Pennsylvania. We also continue to monitor the investment market, for both sale and value add opportunities. Market activities remained in line with our business plan expectations. The tenant activity is strong, and as George will amplify, we continue to have a lengthy leasing pipeline. Our focus remains on completing our business plan, creating positive cash flow growth, executing leasing tactics that increase our net effect of rents, and pursuing growth opportunities.…

Thank you, Jerry, and good morning. Activity levels in all of our markets remain solid. The pipeline, excluding development properties totals 1.6 million square feet, with 285,000 square feet in advanced stages of negotiation. During the quarter, we generated 77 space inspections, totaling 508,000 square feet, while slightly below last quarter's volume, these tours cover 56% of our available inventory. Our leasing teams are converting 59% of all tours into proposals, with 49% of those proposals further converting to executed leases. Now shifting to our strategic markets and the underlying assumptions contained in the 2018 business plan. In CBD Philadelphia, during the first quarter, Verizon vacated its 100,000 square foot lease at Three Logan, which accounted for the entire company's negative absorption for the quarter. As previously discussed, we have leased 85% of this space to four different tenants. These four deals were done at an average cash mark-to-market of 10%. Rollover in the city ranges between 6% and 9% for each of the next three years. Our largest rollover for the balance of the year is at Cira Center, two full contiguous floors totaling 55,000 square feet roll on June 30. Our 2018 plan still assumes these floors remain vacant for the duration of the year. Several tours have occurred to-date and we have one proposal outstanding for half of that space. Turning to the Pennsylvania suburbs, the large Radnor vacates in 2017 continue to see good levels of activity, and first quarter tours outpaced 4Q 2017. The pipeline in Radnor consists of approximately 290,000 square feet, including five prospects over 20,000 square feet. Our selected demo and common area improvements have all been completed. King of Prussia continues to perform well, currently 93.2% leased, and our recently signed lease at 500 North Gulph Road, highlights the dynamics of…

Thank you, George. Our first quarter net income totaled $44.2 million or $0.25 per diluted share, and FFO totaled $57.3 million or $0.32 per diluted share. Some general observations regarding our first quarter results, our quarterly operating results met our expectations, and although, some of our operating metrics were below our stated ranges, we expect incremental improvement throughout the balance of the year. As a result, we have not adjusted any of our 2018 business plan metrics. Our balance sheet continues to improve, as our first quarter fixed charge and interest coverage ratios were 3.3 and 3.6 times respectively, a 14% and 9% improvement compared to the first quarter of 2017. The first quarter sale of Evo helped us reduce our net debt-to-EBITDA to 6.0, a 9% improvement from the first quarter of 2017. Our balance sheet improvement has been confirmed by Moody's, as they changed our outlook from stable to positive during the quarter. We anticipate that our net debt-to-EBITDA may move higher in the next quarter, but we expect it to stay within our range of 6.0 to 6.2 by the end of the year. Looking forward to the second quarter of 2018, we have the following general assumptions. Our portfolio of operating income levels will be approximately $75.5 million and will be sequentially the same, as the first quarter due to the following, as we see FMC and the residential operations will generate an incremental $1 million of GAAP NOI, offsetting that increase will be a reduction in the core NOI, which will also include $500,000 of demolition costs. FFO contribution from our unconsolidated joint ventures will total $6 million. G&A for the second quarter will decrease from $8.7 million to $7.5 million, and annual G&A should be approximately $28.5 million. Interest expense remained steady at approximately…

Great. Thank you, Tom, and thank you, George. So our 2018 plan is on track. First quarter came in just as we expected it would. We do recognize that there is a ramp-up in leasing activity implicit in our 2018 business plan execution. We are fully focused on achieving all those objectives. As George touched on, we think the pipeline of leasing activity through the company is strong and in line with what we expected at this time of the year, and our leasing team and our field operations are focused on making sure that we optimize every opportunity to make transactions, continue to improve our proposal for lease execution percentage, focusing on direct lease transactions. So we think given the product we have, the talent of the leasing teams we have in our field operations, supported by great property management operations, that we are in very good shape to fully executing our 2018 plan. With that, Brian, we'd be delighted to open up the floor for questions. As we always do, we ask that in the interest of time, you limit yourself to one question and a follow-up. Thank you very much.

[Operator Instructions]. And our first question comes from the line of Craig Mailman from KeyBanc Capital Markets. Sir, your line is now open.

Good morning. It's Jordan Sadler here with Craig.

Hi Jordan.

Question regarding the [indiscernible]. So regarding the cadence of your tenancy, here we are in April, are you feeling increased optimism, or is it just directly in line with what you anticipated a few months ago in terms of the appetite for space?

Hey Jordan, I think we continue to be pretty bullish on what we are seeing throughout the portfolio. I mean certainly, with 83 or so same store properties, we think all those properties are well positioned in their submarkets. The pipeline, the forward look we have in activity, still is pretty good. I mean, we are not moving though, off the mind that we have a -- of being very aggressive in pursuing all leasing opportunities, where we need to compromise some of the economic terms to accelerate absorption. We are certainly doing that in some markets. We never lose sight of the fact that where we think we have leverage with tenants, or in particular products. But in general, when we talk to our leasing teams, again whether it is in Austin or Philadelphia, even as George touched on in D.C., we are feeling pretty good about our ability to execute the plan that we have laid out, and move forward on that basis. George, do you have any other --?

I think we are encouraged by the volume of space inspections. Our team continues to do a great job in converting. We are still seeing good levels of direct deals, which sometimes has given us the ability to kind of renew tenants before they even want to go out. So look at the market and speaks to that relationships that we have, both in the brokerage community and with the tenant base. We are kind of at the same point, in terms of achievement as we were a year ago. So I think we still feel confident in the plan that we have laid out.

And then, as it relates to the investment market, through the asset guidance. You talked about remaining [indiscernible] in willing. What was the most dense in terms of incremental opportunity to pare the portfolio or to raise capital here in this type of environment on development or whatever else, you can put money to work. What else in the portfolio would be considered non-core, good opportunity to sell today?

Great question Jordan. I think, when we look at the portfolio, we are where we were last quarter as well, we have a few remaining properties in kind of our other categories, and this includes some properties in New Jersey, couple of buildings in Delaware, some of our buildings in Maryland. So I think we continue to have a dialog with the investment market, with the brokerage community, with direct buyers on a reverse inquiry basis, to potentially trying to achieve some of those sales. And in the meantime, we also keep our eye on where we think there are some other opportunities to add some value through buying something that needs to be fixed, and certainly one of those avenues that we have laid out, as part of our multiyear business plan, is we continue to look at some of our joint ventures as an opportunity to either sell assets there, or to recapitalize or refinance, which changes the level of NOI contribution we get from those projects. So certainly similar to what we did at Evo in the first quarter. We look through our joint venture portfolio, there are some other properties there, that are either near term candidates for recapitalization, refinancing, and potentially some way to harvest some dollars there, that can go into our core development pipeline or trade capacity to maybe pursue a value-add acquisition opportunity.

Okay, thank you.

Thank you.

And our next question comes from the line of Manny Korchman from Citigroup. Sir, your line is now open.

Hey guys, good morning. George, if you think about the leasing pipeline that Jerry talked about in his remarks, can you just give us some flavor as to what types of tenants are those, are those tenants that are expanding, that are within your portfolio, new to market tenants?

Yeah, a little bit of a mix, Manny. We do continue to see good levels of tenant expansions. We saw what last quarter, with the Comcast deal at Three Logan, this quarter, with the 500 North Gulph Road transaction. But it varies a little bit market to market. I think downtown, it's a nice blend between expansion and new tenant. In Northern Virginia, its predominantly new tenants that we are seeing, and we are seeing good levels of activity in these recently completed renovations we have done at both Cooperative Way and at 8260 Greensboro, kind of bringing new tenants to these buildings that they hadn't seen in the past, as a result of our improvements. Much the way we did with Dulles Corner last year. Pennsylvania Suburbs, similar to the city. It's a little bit of a blends and expansion of the existing tenancies, and some new tenants kind of moving submarket to submarket, coming from other landlords to Brandywine space.

Got it. And you talked about, I guess, the concessionary environment. Maybe you could give us an update on what you are seeing in terms of concessions and sort of, how you are managing those, especially with the larger leases that you are doing?

Yeah, I think on the larger lease requirements, we are balancing kind of the entire concession package between free rent, the TI, but then also with the length of the lease term and the rent steps in that. For deals that we did in the first quarter, again, only about 20% of the deals we did in the first quarter had a free rent element to them, so that was a good kind of trendline for us in the first quarter. The TIs, again, we are kind of in that 10% to 15% ratio of total rents over the lease term, that we want to allocate capital to. That capital gained both the tenant improvement and the leasing commission.

Yeah. I think to add on to that; I think one of the -- the major point that's kind of creating us the need to kind of balance the tension, is really on the construction cost side. So we have actually seen an ability to kind of move rents up. I mean, some of the growth reports I mean -- the average asking rate in Philadelphia broke $30 for the first time ever. So you are seeing rents move in the right direction. I think given the quality of the products we have, and it's not without exception, but generally speaking, we kind of have the right product in the right submarkets. So our leasing teams are able to kind of, I think, drive a pretty good economic result. We are always trying to balance that with the capital outlays, and that's why all three of us always talk about how we control capital costs. If you take a look at unit pricing, that continued to trend up, and in some cases, unit pricing has trended up higher than rental rate increases. So we are trying to compensate for that, by obviously moving nominal rents higher, really focused on trying to lengthen lease term to the extent we can, and always analyzing every lease through kind of this window, of, are we actually increasing net effect of rents. And look, in some markets, in some parts, we are in a much stronger negotiation position than others. But I think generally, from a portfolio management standpoint, we do feel like our ability as a -- we mentioned in the comments, the move on net effect of rents up over 4% this year, is a good step in the right direction. So controlling capital tends to be the highest element of balancing the tension on a deal-by-deal basis.

Thanks guys.

Thank you.

And our next question comes from the line of Jamie Feldman from Bank of America. Your line is now open.

Great. Thank you. Good morning.

Good morning Jamie.

So I guess I want to focus on the ramp, both for same store NOI and even to get to your earnings guidance. Could you -- how much of the same store spike in the back half of the year is already baked in, versus requires you to hit your leasing targets? And I guess a similar question, just on hitting your guidance?

Well, I mean, I think you know, in terms of the -- our range assumes that we hit our open spec revenues. So as we laid out in the supplemental, I mean, we have got about 600,000 square feet of leasing. To achieve that leasing, is going to generate an additional $4.6 million of spec revenue; and most of that is all within kind of the same store portfolio. The assets that are transitioning in the same store are fairly well leased at this point. So we obviously need to hit that. We have got the pipeline as we have talked about. That open square footage, about 40% of it is in Pennsylvania, 25% in the city, and 25% in D.C., with the last 10% really being built in [indiscernible], at Broadmoor in Austin.

Okay. But I guess, like of the cash piece, how much of it is actually transitioning those assets into the portfolio? That would -- I assume would already have baked in?

Well I mean, I think everything is baked in, other than this remaining $4.6 million.

All right. Okay.

Yeah, and Jamie, I think also, as we look at FMC, as we mentioned earlier coming into the quarterly same store. But we do still expect some NOI ramp to come from our -- from components of FMC, that weren't there in the first quarter, that will still increase as we go throughout the year. As you relate to -- [indiscernible] into our earnings guidance.

Okay. And then Jerry, I know you had mentioned some assets that you still consider non-core. I mean, what are your big picture thoughts on weighing earnings dilution versus asset sales at this point?

Great question. I think as we look at it Jamie, we have -- we do really all the heavy lifting in the rear view mirror, in terms of the portfolio of earning. So we think we have the ability to be more surgical on how we sell assets, and certainly modulate that to a great degree to other deployment opportunities. So as you think about our two major predicates over last year has been, get the portfolio to where we want it to be, the right product, the right submarkets, the right quality, and get the balance sheet into that targeted range that we have outlined, as part of our 2018 plan. We are there, we know we have got some [indiscernible] on the development side. We want to make sure that we have the ability to kind of move sales, to generate capital, to fund those forward commitments, and renovation projects underway. So I think, we really do believe, as we've talked on the last call, that as we have embarked on sales, one of our key issues is to maintain earnings momentum, as well as really accelerate cash flow growth, and that's kind of -- those two points along with the balance sheet, are really the drivers behind how we are looking at our investment program.

Okay. And then just finally, we are moving kind of in the later stages of the cycle here. Just thoughts on supply risk in Philadelphia and Austin, and how that might impact your business going forward?

Yeah look, we are always focused on supply risk. Fortunately in Philadelphia, there is not a lot on the near term horizon, on the office side. Couple of the projects that are kind of in renovation, like the 2400 Market or having some great leasing success, that's really anchored by Aramark as their new corporate headquarters. But in terms of larger blocks of space in the city, I think the last time I saw, there were six or seven blocks greater than 100,000 square feet. So there is really not a lot of excess supply right now in the marketplace. So we feel pretty good about that. But also, very much focused on getting any deal we do heavily preanchored. I think the same thing is [ph] even in Austin, Texas, where there is tremendous demand drivers, and I know, a lot of other local companies have been moving on spec development, I think we are still holding true to our perspective that if we are developing the right product, it's in the right location, it's designed well and thoughtfully, that we should be able to identify a tenant to anchor that property, before we start construction. And so we still are holding to that kind of 50% pre-lease target across the board, and we really don't see that changing -- and certainly not at this point in the cycle anyway.

Okay. Thank you.

Thanks Jamie.

Our next question comes from the line of John Guinee from Stifel. Your line is now open.

Great. Thank you very much. Couple of questions, I think probably one for Jerry and one for Tom. First Jerry, if we look at the Schuylkill Yards, roughly 5 million square feet of development, and you capitalize all your ground leases, add in your cost to your park, what's the land basis per FAR in very, sort of a rough range?

Yeah. It's going to be in that $40 a square foot range, probably between $40 and $45, kind of depending upon how that sequences in. The leasehold interest that Tom referred to and I referred to, in terms of the parcel, adds around $35 in FAR.

Okay. Then I also noticed, you have about 58 that is under option with 600,000 square feet of development right. That looks like a 0.25 FAR zoning, almost industrial zoning. Can you discuss what you got under option for 50 acres?

That has been under option for a long time. That's a parcel of property in Northeast Philadelphia that we have under option from PIDC, and that is zoned for low density flex space or industrial space.

Got you. And then Tom, you have been very helpful on your re-leasing etcetera, and I think you mentioned that your revenue maintaining CapEx was about $28 million and your revenue creating CapEx was about $28 million. And we understand fully, the re-leasing costs and the mark-to-market, both cash and GAAP for the revenue maintaining portion. Can you elaborate on the revenue creating that space has been vacant for more than a year, what you think your re-leasing cost per square foot per lease year and what the spreads will be on that square footage, and what percentage that square footage is relative to the revenue maintaining?

Yeah John, for 2018, our revenue creating capital per square foot per lease year is actually within the same range as our maintaining. If you simply just blended them all together, we are still kind of in that business plan range that we have outlined for this year. So we haven't -- we have had cases in the past, where revenue creating has trended higher, but we are at a point in the cycle, at least with our space, that that capital requirement is running similar on a per square foot per lease year basis.

And John, to add to that, we have added sort of a ratio of square feet that are in our revenue maintain bucket, for the square feet that are in our revenue create buckets on 20, and we can go through that. You can see the square feet of how we are going to -- how they balance between the two, and can create a ratio on our actual costs, which is obviously cash, compared to a trailing of how many square feet are in a bucket of maintain and create.

Wonderful, wonderful. Thank you.

Thank you, John.

Our next question comes from the line of Rob Simone from Evercore. Your line is now open.

Hey guys, thanks for taking the call. Just a quick question on JFK One; you guys mentioned that you are still in the planning process, and that maybe you are going to wind up by the end of the year. I am just curious, could you guys maybe talk about how you are thinking about kind of carving up the building between different types of tenants, and then maybe, how much of the activity out of the market is really important in that process? And then just a quick follow-up after that.

Okay, great. Hey Rob, I mean, look, the market activity is defining a lot of things, certainly as we go through the design development process. The first building is programmed for about 700,000 square feet of total space. We anticipate somewhere around 50% of that will be office space, and the balance we are thinking through whether that's with our residential partner, Gotham, doing apartments, included in that, or whether it's a lifescience kick-off. So I think we are still thinking about that first building in Phase 1 being in that size range, and we would anticipate that the office component would be roughly in the 350,000 square foot range.

Got it. Okay, that's helpful. And then just really quickly on the 55,000 square feet of vacancy this year, that's assumed to have remained vacant in the plan. I was wondering if you guys could just maybe comment on, what if any, activity you are seeing on that space right now? And then, what types of tenants?

Yeah. We have had a couple of tour to-date, financial service, some law firm, some co-working prospects. There is really kind of a full gamut of what we are seeing in most of our CBD assets. So a lot of tours to-date, and kind of one active proposal at this time. And Rob, that space isn't vacated till June 30. So we also have plans underway to demolish and reconfigure some of that space, based upon the pipeline of deals that we are seeing.

Got it. Okay. Thanks. Helpful guys.

Thank you.

Our next question comes from the line of Steve Sakwa from Evercore ISI.

Thanks. Sorry for the tag team here. I guess Jerry, just going back to your commentary about sort of planning the space around Schuylkill Yards, and really, you probably can't comment too much about Amazon and where they are going to locate, but to the extent that Philadelphia is still in the running, how does sort of a large tenant like that influence the planning, or how much does that kind of keep your planning on hold, until you ultimately find out what they decide to do?

Yeah. Steve, thanks. Any large tenant that would come our way as part of our Schuylkill Yards development right now, would have an impact on what our planning and sequencing is. So I think that's -- we recognize, even as we go through the design development process, that our ability to attract a larger tenant, even beyond the size range we were just talking with Rob about could impact what we would actually build. So we look at any larger tenant; Amazon or any other large tenants who are floating around looking for large blocks of space. We stay close to those transactions, we recognize that there is a variability that them making a decision would create. But we don't really hold off on our current design development process. We think we have a good near term market opportunity to do a very successful launch on a pre-leased basis with Schuylkill Yards, to the extent that a large out-of-market tenant or a large in-market tenant, would have a requirement to our original development plan. We would factor that into the sequencing and negotiation process with that tenant, and we do like the high profile nature of some of these searches, because I think what it really does is, reinforce that Schuylkill Yards is a fairly unique opportunity on the East Coast, both in terms of traditional office space, mixed use development, or really a catalyst for a tremendous expense of the lifescience business in the Philadelphia region. So we continue to actively market all used components in Schuylkill Yards as we embark on the design development process, and as we do in every development transaction, always very responsive to what the market tells us, is the right mix and the right time in the lot to have a successful launch.

And I am just curious, how much of Amazon -- kind of using that as one of the finalists, has kind of jumpstarted demand from other tenants, who maybe weren't previously contemplating that location.

I think that's a good observation. I think Philadelphia, making the shortlist of 20, has, I think -- number one, I think from a macro standpoint, weighs the profile of all the -- really exciting things happening in this region, that some of these companies that may not have evaluated Philadelphia as an alternative location before, focused on it, because of making that shortlist. And I think, using that momentum as a platform to broaden our marketing approach, has been really very successful. So we were very happy that Philadelphia made the shortlist. We think Philadelphia has a tremendous amount of attributes to offer to any large, small, and medium company that wants to come into the region, and we plan on maximizing that advantage from our marketing channels, as much as we possibly can.

Okay, thanks. That's it for me.

Thanks Steve.

And our next question comes from the line of Rich Anderson from Mizuho Securities. Your line is now open.

Thanks. Just a quick one here. George or Jerry, whomever, what would the same store number be, if it's a 2% cash for 2018? In the absence of additional assets being brought into the pool? So just sort of a steady state portfolio, what would it be in 2018, and then after you have addressed the occupancy loss, what would be kind of like a longer term sort of growth profile, with no moving parts?

So without bringing the 4 in, that's what our current range is for 2018.

Okay.

When you bring the additional 4 in, that's when we start to get the lift and get to the ranges that I gave out in my comments.

Oh, excuse me. So the 2% is a steady state portfolio of assets?

Right.

Okay.

Yes. Correct.

That's all I have. Thanks.

Great. Thanks Rich.

And I am showing no further questions. I would now like to turn the call back to Jerry Sweeney for any further remarks.

Brian, thank you and thanks to all of you for participating in the call. We look forward to continue to make progress in our 2018 business plan and updating you on our second quarter call during the summer. Thanks again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.