Brandywine Realty Trust (BDN) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the quarterly earnings release Brandywine Realty Trust. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would like to introduce the host for today's conference, Mr. Gerry Sweeney. You may begin.

Lisa, thank you very much. Thank you for joining us for today's call to review third quarter results and update on business plan. Prior to getting started, let me read the following. The information to be discussed on this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in such forward-looking statements are based on realistic assumptions, these statements are not a guarantee and no assurance can be given that expected results will be delivered. Such forward-looking statements and all other statements made on this conference call that are not historical facts are subject to risks, trends and uncertainties that could cause actual results to differ markedly from what is expected. Among the risks are identified on annual form 10-K for year ended December 31, 2001, and all subsequent filings, a copy of which are on file with the Securities and Exchange Commission. For further information on the factors that could impact us, please reference our additional filings with the SEC. We are subject to the reporting requirements of the Securities and Exchange Commission and undertake no responsibility to update or supplement information discussed on this call. Also referenced a disclaimer statement found in the earnings release.

That being said, today's call will provide brief review of market conditions, business plan update and financial estimates for 2003. Participating in today's call with me are Chris Marr, Chief Financial Officer, Jeff DeVuono, Senior Vice President of Operations, George Sowa, Senior Vice President of Investments, Brad Harris, Chief Accounting Officer, Dan Palazzo, Corporate Controller and Tim Martin, Director of Financial Reporting. In the interest of keeping the conference call brief, Jeff and George will not make prepared remarks, but are available to answer questions that may arise relative to market or investment conditions. There is no need to spend any amount of time on general economic conditions. That has been adequately discussed in the media and other conference calls.

We can tell you market conditions remain challenging. Real estate activity is improving, core demand remains anemic. General economic uncertainty is evidenced by lack of emphasis by corporate America on forward investment planning, office space decisions and concerns on providing quality of work environment. While we are beginning to see evidence of increase in activity, these signs have yet to translate into pervasive or quantifiable improvement in office market conditions. As such, the bottom line is that the real estate market remains very difficult. The major areas of focus in our organization today are one, maintaining and improving occupancy levels; two, controlling to the extent possible, operating and administrative expenses; and three, improving operating margins.

Despite tough market conditions, we are delighted with the level of leasing activity during the year. For the third quarter, we leased almost one million square feet of space, 837,000 square feet of renewals and 149,000 square feet of new leases. Year-to-date, we have also continue to post positive rental cash increases 4.6% on renewals and 1.2% on new leases. For the quarter, we posted cash increase of 2.4% on renewals and cash decrease of 9.8% on new leases. On the new lease rate decrease, the sample size is fairly small at 149,000 square feet and is skewed by two leases. One at Main Street Center in Richmond, which is a roll-down we performed when we purchased the building several years ago. The other major decrease driven by space off of sub-lease, which is a short-term add to the deal. You may recall our 10.1% new lease rate increase from last quarter was also based on a small sample size. As we mentioned then, we look at the numbers on trend-line basis, not simply quarter-by-quarter.

We are seeing what you would expect us to see, which is continued pressure on generating positive leasing spreads and a narrower GAAP in mark to market, which we estimate to range depending on submarket from slightly negative to flat to about 5%. Our leasing team has done incredible job for tenant retention, positive momentum on leasing activity and exercising excellent business acumen in balancing cost in a challenging leasing environment. From market standpoint, we continue to see decline in the rent environment and marginal increase in concession packages. But, we still seem to be at the awkward point where price is not necessarily the key driver in either determining or accelerating a tenant’s decision process.

Several key data points that might be helpful in understanding how we gauge leasing activity. On inspections, year-to-date in 2002, we have had 775 inspections by tenants looking for space and closed 161 of those or 21% of the traffic. That compares favorably to this time year-to-date in 2001, where we had 544 inspections and closed about 13% of those. So, 2002 is outpacing 2001 by about 230 prospects or 42% increase in traffic. Bad news is quarter-over-quarter in 2002, activity levels have remained essentially flat. Next point we look at is our deal pipeline. That has also increased. That number stands at 219 deals, aggregating 2.3 million square feet, broken down, 1.2 million square feet on new transactions and about 1.1 million on pending renewals. That is also up from last year's levels.

In addition to leasing activity, another key benchmark is capital cost on per square foot basis. During the third quarter of '02, we committed average cost per square foot, both in terms of tenant improvement on leasing commissions of $492 per square foot or $1.26 of square feet per lease year. That breaks down about $10.80 per square foot for new leases and roughly $3 for renewals and $8.60 for expansions. By way of comparison, for the third quarter of 01, that overall number was $6.78. So, you can see this quarter represents strong improvement over last year's numbers. Again, however, you need to look at the trend line. For 2002, year-to-date, we're at $5.19 a square foot, average, versus a 2001 comparable number of $4.70. So, even though activity this quarter was better than our run rate last year, our actual costs have increased 10%. Interestingly, average weighted lease term remains the same of about four years in ‘01 and '02. Occupancy rate remains in line with projections at 90.2% and overall leasing percentage is close to 91%, so I think reflects aggressive leasing stance.

From financial reporting standpoint, third quarter was a good one. We exceeded First Call consensus by a penny, primarily driven by predicted performance in core portfolio, which Chris will outline. Another good success is retention rate for the year remains above 75% benchmark. Year-to-date it stands at 76%. So, I think it speaks well for quality of our product, but more importantly to the skills and enthusiasm of our leasing and property management teams.

As we discussed on previous calls, credit has been a key focus of the company. Our team has done a wonderful job of reducing accounts receivable. It is tremendous accomplishment. In fact, net accounts receivable balance is significantly below our balances as of year-end 2001. I continue to be a bit disappointed with level of leasing on our three development projects. We continue to see moderate activity, we are still experiencing difficulty in actually getting tenants to sign leases. Those projects stand at 41% leased, which is really no change from last quarter. We have split the stabilization date of the projects back again. Frankly, at this point it is a guess. We have good activity, but need to get people across the finish line. While the projected yields have gone down from last quarter, we are expecting them to be north of 11%. In addition, our 2003 financial projections reflect bringing all three of those projects into our income statement.

We remain pleased with our investment activity for the year. At this point, we continue to see very strong buying activity by private buyers. As a result, we're having difficulty identifying acquisitions that meet our pricing criteria. Based on the activity in previous quarters, however, we anticipate that we will end the year in excess of our original acquisition and disposition targets. For the year we have acquired $122 million of properties and average cap rate of 10.7%. We are also well in excess of disposition target and by year-end expect to have sold $194 million at a cap rate of 9% on in-place NOI.

To summarize, general market conditions remain challenging. While it appears we will see stabilization in vacancy levels, we certainly expect to see continued rental pressure, particularly in some markets. In the meantime, our marketing stance remains incredibly aggressive. Our retention rate remains high. Our pay-out ratios are in line with our projections. Also, expenses and capital costs are under control, but will remain a key area of focus in '03.

With that overview, Chris Marr, Chief Financial Officer, will walk us through financial results.

Thanks. As Gerry pointed out, it was a very nice quarter. One cent in excess of First Call expectations and we did hit the range of guidance that we provide in the prior quarter. I think the release, with all the detail is very self explanatory, and we will be glad to take individual questions on specific items as we get to the end of the call.

Two points that I would like to elaborate on relate to credit and relate to our dividend coverage. I think two very important points to REIT today. From a credit perspective, in the past year, we have been focusing on several initiatives to improve the quality of our receivables and the quality of our efforts in that area. The first being technology. We have spent a lot of time and energy improving our cash management systems. This has resulted in streamlining our billing, more rapid posting of cash receipts and faster identification of any problems. We've also been focusing on communication, specifically internal communication to improve process between accounting and leasing, property management and legal to identify any issues well in advance of them becoming serious problems.

As Gerry pointed out, our focus on tenants has -- and on tenant service has a side benefit to allow us to identify issues early on. When the property managers are walking through space, they can see early warning signs i.e., reduced space utilization or employee reduction by tenants. That information is fed back to corporate and can be processed and analyzed. Leasing agents have dialogue with tenants to provide feedback on business prospects. We have conservative approach to our reserve policies in light of these interesting economic times. So, what does all that mean? I think the results speak for themselves. Our AR from a gross perspective is lowest in several years. Our reserve as percent of tenant AR and straight-line rent are at 14.4% up from 8.3% for the same quarter of 2001. We really have no material items or material credits on our watch list. We're comfortable right now having a conservative policy in terms of our reserves.

The second issue I want to touch on is security of the dividend. This is something that there has been a tremendous focus from analysts and investors on and rightly so, as well as a focus at Brandywine. I want to walk you through analysis that will stress the dividend against occupancy and hopefully give you comfort there. If you take the 66 cents of current FFO in the quarter and annualize it to 264, then back off from that straight-line rent adjustment of 11 cents per share or four-and-a-half million and amortization of deferred non-cash items, deferred cost and deferred compensation costs, you end up with a pre cap ex number of $2.65, 5-cent add-back for deferred financing cost and 7 cents for deferred compensation cost, so $2.65. From that deduct capital expenditures of 26.7 million. That is broken down as maintenance cap ex of 40 cents per square foot and TI of commission at $8.50 per square foot number, against $5.19 year-to-date, little conservatism in that number.

That translates to about 58 cents per share, giving you CAD number on run rate basis of $2.07, against $1.76 dividend, that gets you to about 85% CAD pay-out ratio on a forward-look, and 31 cents cushion, basically, in terms of the per share cushion between dividend and CAD. If you stretch that against occupancies, in essence, 1% change in occupancy, utilizing the information above gets you to about a 3 cent per share deduction. So, again, take the 3 cents into the 31-cent cushion and you have about a 10% margin for error, basically between the current 90% occupancy and the 80% level where we would have stress against the dividend.

So, we feel very good about that. I think that is a significant amount of cushion between the dividend and our CAD. And feel good about the coverage there both today and on an ongoing basis looking out into 2003.

At this point, back to Gerry. When we get to the end of the call, if you have specific questions on financials, we will talk then.

Thanks, Chris. Let's talk about the business plan and financial projections. As I talked on previous calls, from risk management standpoint, I think we are on top of our existing portfolio. More importantly, that we’re also lay the framework for planning for ultimate recovery. So, leasing came looking forward and they are well into discussion with numerous tenants for 2003 lease expirations. We remain focused on rollover situation, existing vacancies and also on working hard to create catalyst for tenants to renew early.

Since it’s election time, I thought I would share recent results. We just completed annual tenant survey process. We received close to 60% response, returns still trickling in. That is where we stand now. I am delighted to report the level of tenant satisfaction has increased about 12% over last year's level. That is our largest annual increase yet. I think it is a real tribute to the hard work of our maintenance property management accounting and other support personnel. So, a great job in keeping that level of tenant satisfaction high.

Several other points that are interesting to share with you. Space utilization in our portfolio remains high. In fact, almost 90% of tenants indicate they are more than fully utilizing their space. In terms of tenant expectation on space requirements for the next 12 months, we had about 7% of the tenants who indicated they anticipate needing less space in the next 12 months. Conversely, we had 12% of our tenants representing about 1.1 million square feet, indicating they need more space in the next 12 months. 51% indicated no change, 24% were undecided, and we had 6% that did not respond to that specific question.

Of the tenants who were not fully utilizing their space, only 37% said they anticipated needing less space in the next 12 months, so clearly an indication that people are still not sure what their long-term planning aspects will be from space requirement. Six percent of those tenants who were not utilizing their space currently indicated they expect to need more space next year. We had 36% that had anticipated no change and 22% undecided. So, I think the numbers really are fairly accurate reflection of the uncertainty we are facing everyday in our business.

Our financial outlook as a corollary for balance of 2002 and 2003, is being driven by continued overabundance of caution. It makes no sense in this environment to be overly aggressive on financial projections. There is too much uncertainty on the timing of general economic recovery and more importantly, for our business, quantifying the lag time until the recovery impacts the office market. As such, looking at 2003, we are taking conservative tact on projecting both core portfolio performance and investment activities.

For 2003, we are projecting FFO range of 2.62 to 2.69 per share. These results are being driven primarily by the following: first, we anticipate essentially flat occupancy levels. We are projecting average occupancy in 2003 of about 90%. We anticipate that being in the 88 to 89% range in the first quarter and trending up toward the year-end occupancy level of close to 91%. We are projecting minimal investment activity. In fact, at this point, we are not really projecting any acquisitions during the upcoming year. This fact will probably create the largest variance from existing '03 Street forecasts, as some analysts were projecting acquisition volumes ranging from 100 to $170 million. Our projecting no activity would be primary reason for the variance from existing '03 estimates.

From a portfolio management perspective, we plan on undertaking three renovations during 2003 and continuing to press full speed ahead on perfecting our outstanding approvals on land holdings. 2003 estimates also assume a 100 basis point increase in interest rates. As mentioned earlier, these projections incorporate bringing existing development pipeline into our P&L during 2003. Two buildings will be placed in financial reporting service in the first quarter with final one in the fourth quarter of '03. The financial projections do not at this point incorporate the benefit of potential share repurchase program. Those of you who follow the company know we have been an active share repurchaser when there is dislocation between share price and long-term value. As indicated in the supplemental package, we have 843,000 shares remaining under the current authorization.

On Sierra Center in Philadelphia, just by way of update, we formally kicked off the marketing campaign in mid-September and opened a project office within 30th Street Station. We expect total investment base in the project in three years to be approximately 250 to 350 per buildable foot for a total aggregate investment of 2.5 to $3 million, in line with our typical front money expenditures on a per square foot basis on suburban properties. Market response has been positive, but certainly the Philadelphia marketplace has its challenges. In accordance with proper financial reporting treatment, our results for the third quarter do incorporate approximately $360,000 charge that we have taken as a marketing expense for this project.

To wrap up the prepared comments, fundamentally, we think market conditions remain difficult, but are confident we are weathering the storm in good shape. We believe the real estate markets will improve during 2003 and into 2004. We will be a slow process, but we are confident our market position, product quality and the enthusiasm and dedication of our leasing and operating teams will continue to hold us in good stead. Lisa, we will be happy to open for questions.

Thank you. If you have a question, please press the 1 key on your touchtone telephone. If your question has been answered, press the pound key. First question is from Chris Haley (ph).

Chris Haley (ph): That was pretty quick. Good afternoon. Have a question, Gerry, you mentioned mark to market, yet you went some markets positive, some markets negative. Do you have overall figure?

I don't have an overall figure. It depends on timing of where those rollovers occur.

Chris Haley (ph): How about '03, could you give us a sense in terms of major markets where you are in terms of mark to market?

In terms, we are planning for purposes of being 1 to 2% increase in rent across the board. That's certainly in some of the western suburban counties, probably negative. We are having good resilience in southern New Jersey.

Chris Haley (ph): Okay. For '03?

That's correct.

Chris Haley (ph): Your mark to market. So, kind of a cash number you expect on rent renewal activity, as well?

The only anecdotal evidence I can share with you is what we have seen is what our year-to-date activity has been. You know, the actual numbers wind up being -- just purely subject to what lease transactions get pulled together.

Chris Haley (ph): One more question. On your tenant survey, which sounded pretty good, are the percentages you offered, are they based upon the number of the responses or are they reflection of the square footage?

They were based upon the number of the responses, but I have square footages, also.

Chris Haley (ph): I would like to get that offline, if possible.

Okay.

Two quick questions on the development pipeline, assets moved into the end service portfolio in P&L in '03, what level of pre-leasing have you assumed when those are moved into the P&L in '03?

This is Chris. The financial projection assumes we go into '03 at 42% and then by the end of '03, we are up to 74%, with the bulk of the leasing activity taking place in latter half of the year.

For all projects?

That is an average for the three, that is correct.

Okay. And secondly, if you could comment on the decrease in industrial occupancy sequential decrease?

Jeff, why don't you do that.

Give me a moment to look up specifically which project that might be.

Looks like it was down 5%.

Let me get back to you on that specific question.

That's fine. Lastly, Chris, could you provide us a range or run rate for other income on a quarterly basis going forward?

On a quarterly basis going forward in terms of what we assumed in the guidance provided is we've assumed 100,000 per quarter. That is very low when benchmarked against our historical run rate on other income. But, as I think we talked about in the release and talked about before, the items such as termination fees are very difficult, if impossible to predict both the dollar amount and the timing of incurring those. So, in the forecast we provided there is minimal other income in that guidance.

So, it looks like two-and-a-half million this quarter in other income, which includes more than lease termination fees. Do you think that is a fair run rate or will that number go down?

I think if you were to take the -- if you were to take the termination fees out of the equation and just look at the other items that are there, we run probably between one and one-and-a-half million a quarter in terms of the other income items.

Great. Thanks.

Once again, if you have a question, press 1 on your touchtone telephone. Next question from Louis Forbes (ph).

Louis Forbes (ph): Good afternoon. On interest capitalization what did you capitalize in Q3?

We capitalized 685,000 during the quarter, and that includes land and buildings.

Louis Forbes (ph): Okay. And what do you expect to happen to that number during '03 bringing development on stream?

Looking at '03, the capitalization on the land is something that is currently being fully vetted. As we look in the guidance we have out there in the release, we are certainly considering that that run rate comes down and on the buildings under construction, certainly as we placed in service, we see capitalizing interest and the other variable is whether there is any new construction and then the three -- timing on the three renovations or rehabilitations we are talk being doing.

Louis Forbes (ph): Okay. On your share repurchases, you're active during the quarter at certain price levels. Can you speak to what activity you've had since the quarter end?

We have been in quiet period. We have not been active in the market place through that period.

Louis Forbes (ph): Can we assume your appetite remains the same?

No change in underlying philosophy.

Louis Forbes (ph): Okay. And at what point do you go for a further approval? You've got capacity of 800,000 today. Do you feel you need more?

In the past, original share purchase program was for 2 million shares. When that got around 500,000 share level, I went back to the board for additional million shares. Certainly there are conditions. If they persist, I expect to be in the same position.

Louis Forbes (ph): Thanks. Referring to page 10 of your supplemental, just want to confirm something. I suspect there is a typo. Down toward the bottom, secured debt, quoting current rate of 3.32 on three slices of line of credit. Down below in the footnote, you indicate different rates for the same items. Should we believe the footnote?

Believe the footnote. That represents effective cost.

Louis Forbes (ph): Relevant rates are in footnote?

That would be correct.

Louis Forbes (ph): Change in LIBOR rate, did that happen beginning or end of September on the three items? I mean, have we seen benefit in the third quarter?

Change in the hedged rate occurred in September.

Louis Forbes (ph): Beginning of month, end of month?

Beginning of the month.

Louis Forbes (ph): Thank you.

Paul Furrier (ph).

Paul Furrier (ph): Thanks, Gerry, you are right, we would have assumed acquisitions in '03. Could you comment on your -- how you are looking at your potential for acquisitions relative to the share buyback? Isn't it too conservative not to assume any acquisitions?

Look, as I mentioned as an overlay comment, I think we have tried to be conservative, cautious, whatever it might be in looking at '03 just because of the unpredictability of both the investment market and the traction we get on new leasing activity.

You know, we're seeing -- if you look at our track record over the last three years, we have been active capital recycler and sold a lot of properties and bought a lot of properties. As we look at '03, in particular, what we were seeing is we accomplished through our dispositions in '02, a key benchmark of our strategy, which was to exit a couple of markets. That was a primary source of the disposition activity. We are through that wave. On the acquisition front, we made a couple of key end-market acquisitions, particularly Plymouth Meeting (ph) Executive Campus, which is $70 million of the total acquisition volume. So, we look at '02 as having been a successful year.

'03, we're still seeing pricing levels on some of the higher quality properties that are frankly a bit above what I think are fair value right now. I mean, we had a transaction in King of Prussia, which is one of our four markets, go off at $180 a square foot on a building that was 83% leased that had rolled down -- clear roll down in the rental stream, 16% rolling in the next year. And we could not be effective player. It is good use of money. As I look at the planning process right now, the thought is that our disposition activity in '03 would probably match our acquisition activity. So, the financial impact of that at this point right now because of timing and the buying is hard to project. I opted to be conservative and not include any activity.

To answer your other question in terms of share buyback, I think we will continue to take a look at as we do recycle capital, what the most opportunistic way to invest that money is. When the stock is trading at existing FFO yield and more importantly AFFO yield, juxtaposed against the current strength of the investment market in terms of lower cap rates, it becomes attractive investment for us.

Paul Furrier (ph): How much fire power do you estimate that you have right now on the balance sheet?

Right now, a line of credit of $550 million of committed and outstanding right now about 400 or so, including our term piece. So, certainly think we have enough financial firepower to deploy, if we were to find the right opportunities.

Paul Furrier (ph): What I was asking is what your comfort level for net spending?

I think as you look at that, you have to look at how you will allocate your capital next year and where you are comfortable on leverage. There is a lot of different pieces that go into that, which I also think comes back to the amount of shares we have left under the plan at $20, that is -- you can do the math on what that adds up to be. Question of where we want to go with the plan. A lot of things are worth focusing on and have our focus at the moment. It is a question of trying to put the different pieces together.

We have always targeted the 45 to 50% leverage range. So, I mean, if that comfort level were to stay exactly where it is, which we don't anticipate changing, we have an ability to move forward with a nice-sized program for '03, if market conditions indicate the value is there.

Paul Furrier (ph): Thanks.

Follow-up question from Chris Haley (ph).

Chris Haley (ph): Yes. Gerry, can you comment on the cap rate going into acquisitions in the quarter? And what you would view as your sale yields on dispositions in the quarter?

Certainly, I will get George to give his thoughts. For the year, our average cap rate 10.7 on what we acquired. And what we have sold, it has been 9% on inflates NOI.

Chris Haley (ph): How about the one in the quarter.

980 Harvest Road, George the cap rate on that?

10.7% on the buildings we acquired this quarter.

Chris Haley (ph): Okay. Dispositions in Newark?

649 on inflates NOI.

Chris Haley (ph): A lot of vacancy in there?

There was relatively low rent scheduled to pick up. The combination between the vacancy and the inflation.

Chris Haley (ph): (inaudible) deal, George. Exchange deal?

That was not.

Chris Haley (ph): I noticed on the income statement, Chris, maybe I missed it, wasn't a gain or loss on the sale.

There was not a gain or loss on the sale. In that sale, we did take back some financing and the gain right now is deferred and netted up against that tick back financing and other assets and will be brought into the P&L over time, basically.

Chris Haley (ph): Okay. Question the land parcel you purchased, was this in New Jersey, George, related to one of the developments?

We acquired a building that had excess ground as part of it. We leased the entire building for 10 years and allocated that based on the acquisition side for the ground we picked up. There is another 125,000 square feet of additional development including that ground. That is in the Princeton Pike Corporate Center, Chris (ph).

Chris Haley (ph): Final question is looking at your joint venture, your operating joint venture projects, which one of these again can you say are development properties today?

You cut out.

Chris Haley (ph): Which on page 16, which are either under development or attempting to stabilize?

The only one that is really under development right now is 8 Tower Bridge, which just really came on line. They came on line. I mean, Corn Shallow (ph) was completed in the second quarter and that's being actively marketed right now. As you can see, our ownership stake is 5.5%, limited partnership position.

Chris Haley (ph): Your returns here are levered returns, is that correct?

Returns are levered returns and that is consistent with how we always presented the schedule.

Chris Haley (ph): In terms of putting the acquisition comment you made in your prepared remarks in perspective, I got the sense that some other analysts are having -- from your comment, analysts were including acquisitions in their '03 estimates and you eluded to the fact that if you assume no new investment activity that would account for the -- could account for the majority of the difference from where consensus is versus new estimates, is that to imply you had already budgeted lower occupancy levels and lower same-store for '03 and we missed the boat or…

I can't address which boat you were on or missed. I think we have been consistent all the way through in terms of where we anticipated occupancy levels to be, certainly for this year. This is the first quarter we're giving guidance, either formally or informally on '03. So, I really can't address where assumptions were incorrect. In '03, only from picking up the analyst comments in some of the reports in terms of what they were including as acquisition buying for ‘03, that was really the genesis of my comments.

Chris Haley (ph): Great. You sense, then, the consensus numbers did include some level of acquisition, so script them out and maybe the revisions are not as bad as versus other companies, is that…

Look, each analyst has to draw their own conclusions. What we looked at really for '03 was core portfolio performance based on the assumptions I laid out without giving any increase to the estimates for investment activity.

Chris Haley (ph): Okay. Congratulations and good to hear the tenant surveys.

We are happy with that. Great results and especially in this environment, it is a great conclusion to reach.

Chris Haley (ph): Okay.

Next question from Gary Boston (ph).

Gary Boston (ph): Good afternoon. Chris, could you give us the G&A that was capitalized in the quarter and on the same note, on the interest how you see that trending over the next year?

As Dan talked about capitalized interest was 685,000. We also capitalized a portion of our development efforts. As you look out into '03, I think as I said to answer the prior question, the land under development is something we're spending a lot of time focusing on and the appropriate capitalization of interest on that in '03. At the moment, our expectations as baked into the guidance is that that number will go down. On the development side, similar analysis being undertaken as volume of development activity begins to Wayne, wane, we will have a larger expense for those efforts. That is a group you want to keep together and don't want to cycle in and out of that. It is a question of managing the level of the expense. Certainly in our expectations for '03, we do have baked in decline in the amount of capitalization of interest on land and development.

Gary Boston (ph): Okay.

And to amplify that. I think one of the things we have always spent a lot of time on has been working through what's proved to be increasingly cumbersome approval process. As part of that, we invested money into sites both in hard and soft cost. As we are looking at '03, even with the development climate certainly being slower than it has been, we are really planning a lot of our activities for that ultimate recovery and considering the markets are key sites on building suit basis. While the hard construction activity may be down, what I can tell you is that on tenancies (ph), you know, we are spending more time today doing test fits and cost estimates for tenants than we were a year ago. Just in terms of tenants are being a lot more far reaching in how they are evaluating their space options. So, tremendous amount of time being spent on the development, pre-development approval and tenant finish side of our business that you might not necessarily see, just on our development schedule and supplemental package. But, I think we are taking a look in particular at land inventory and taking a look at which pieces of that inventory we should continue the capitalization on or start looking at expensing during '03 until the market does become more robust.

Gary Boston (ph): Okay. Great. Thanks a lot.

Follow-up question from Louis Forbes (ph).

Louis Forbes (ph): Been answered.

Steven Sudlick (ph).

Steven Sudlick (ph): I don't know if this is easy to answer, in view of capital recycling can you give color on the quality of the portfolio has changed in the last 24 to 36 months? Would you say 50% of the properties are B buildings, 25% B+, 25% A-?

That is easy to answer. Going back to capital restructuring, going back three years, one of the key objectives was to continue to improve the quality of the portfolio. So, a lot of properties we sold in Long Island and northern New Jersey we would consider to be B type of products. We recycled that into primarily very high quality A product here in Plymouth Meeting, Blue Bell, Pennsylvania, Princeton, New Jersey. Net to net, we have made a tremendous increase in the portfolio.

Give you a good example, the properties George was referring to, which were the smaller buildings we sold down in Delaware during the last quarter. Those were projects that were over 20 years old. They were clearly management intensive. We were not getting any operating synergies or leasing synergies through the projects. We sold them at a nice price per square foot in a very good yield. That money has been redeployed back into the Blue Bell or Harvest Drive acquisition and other small investment opportunities. We have been very consistent with continuing to improve the overall quality of the portfolio. The overall portfolio, itself, we think is clearly predominantly measured by A quality project. B product, some we will rehab. We talked about doing three rehabs next year in good submarkets and well located. If there is a silver lining to this kind of market, we can in fact do rehab work with our existing buildings without missing tremendous leasing activity.

Steven Sudlick (ph): Do you do tracking on average age of your buildings? Do you have that number any place?

I don't have that number. We will be happy to provide it off line.

Steven Sudlick (ph): Thank you.

Follow up from Chris Haley (ph).

John Findetti (ph): It’s actually John Findetti (ph) with one quick question. In terms of your G&A expense in ’03, can you provide some insight there.

On a margin basis, if you look at G&A as a percentage of revenues, if you look at run rate for ’02, we do that being pretty consistent in’03.

Chris Haley (ph): This is Chris (ph) again I am listening to your comments in terms of lease guidance, including conservative other income in relation to the '02 actual recorded levels. I am hearing capitalized interest will decline. I'm hearing negative same-store and higher interest expense assumption or interest rate assumption. Yet, overall per share results or expectations in '03 are down a couple of cents. What am I missing? Why -- just plain conservative, why would numbers be down more?

If you take the low end of the range versus expectations for this year and you look at that as say six cents and you look at the shares outstanding, you are talking about $27 million. And so, I think when you add up your pieces, the capitalized interest number is not a big number, anyway. The capitalized construction numbers are not a big number to us right now. You are looking at performance of the core portfolio and a 50 to 100 basis point decline on average, which as Gerry said, slight up in what we're able to get on rent. So, you know, a lot of the interest rates, as you know, are hedged. Impact on rates there is not as much considering where the hedges are. All and all, I think if you look at the individual pieces and really put a finer point to it, I think it makes more sense.

Chris Haley (ph): Okay. That's great. Thank you, Chris.

No further questions at this time.

Thank you all for participating in the call. We look forward to talking to you at the conclusion of next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time and have a good day.