Brandywine Realty Trust (BDN) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarterly earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will open the lines for a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Sweeney.

Thank you very much, Paula, and thank you all for joining us for today's call to review our fourth quarter results and for an update on our business plan. Let me read the following disclaimer.

The information to be discussed on this 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 statements are based on reasonable assumptions, these statements are not guarantees of results and no assurance can be given that the expected results will be delivered. Such statements and all other statements made on this earnings conference call that are not historical fact are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those expected. Among these risks are the risks that we have identified in our annual report on Form 10-K for the year ended December 31st, 2001, and any subsequent filings a copy of which are all on file with the S.E.C. For further information on factors that could impact us, please reference or additional S.E.C. filings. We are subject to the reporting requirements of the Securities and Exchange Commission, and under take no responsibility to update or supplement information discussed in this call. Also, in reference to the disclaimer statement that was included in our earnings press release yesterday.

That being said, today's agenda will provide a brief review of market conditions, a financial review of 2002 results, and an update on our 2003 plan. Participate in today's call are Chris Marr, Chief Financial Officer, Jeff DeVuono, and George Sowa, our Senior Vice-President for the company, Brad Harris, our Chief Accounting Officer and Dan Palazzo, our Corporate Controller. In the interest of keeping our conference call brief, Jeff and George are available to answer any questions about the market conditions, but will not make any prepared statements.

Clearly, there's not a great need to address general economic conditions. What we can tell you is the real estate market conditions remain challenging. While activity levels are increasing, core demand remains anemic, yet positive, but there continues to be an overhang of space in certain submarkets. The year-end numbers being reported by the various brokerage firms, and consistent with our statistics for the Philadelphia suburban market place show approximately 4m square feet of leasing activity with absorption numbers ranging from a couple hundred thousand square feet negative to a break even absorption for the year.

In southern New Jersey about 1.2m square feet of leasing occurred last year with about 200,000 square feet of net absorption. While these leasing activity numbers are down a bit for Pennsylvania, by historical standards, they're up for South Jersey, and the absorption numbers in general as you would expect are down from historical norms. The overlay of the general economic uncertainty continues to contribute to a lack of real forward planning by our corporate tenant base on both investment planning, which incorporates their office space decision, and any concerns they have on providing quality work environments.

Employment growth remains weak throughout the region. There was a half percentage point in job growth 2001 over -- or 2002 over 2001. Not dramatic, but still negative. The unemployment rate within the Philadelphia suburban counties stand about 4.3%, which is up slightly less than a percentage point from the same time at ear-end 2001.

A positive point, however, is that the unemployment rate has trended down since November of 2002, and that the general unemployment rate in the region is staying below the national average of about 6%. While increased leasing activities is encouraging, we are not yet seeing this translate into any pervasive or quantifiable improvement in effective rents. So bottom line, the real estate market remains difficult, our major areas of focus on a day-to-day basis are, first maintaining and hopefully improving occupancy levels. Second, controlling to the extent possible all of our operating and administrative expenses, and third, continuing to deploy our market penetration and BS strategy. Despite the overhang of the general economic uncertainty and continued difficulty in the real estate markets, we are delighted with the level of leasing activity we had during 2002.

From a leasing velocity standpoint, it was a very good year. For the 2002, we leased almost 3.7m square feet of space about 2.7m square feet on renewals, 700,000 square feet of new leases, and almost 200,000 square feet of tenant expansions. For the entire year, we posted rental cash increases of about 3.5% on renewals, and essential stayed flat on new lease rents. Given the real estate market condition, we think those results are very encouraging. We continue to be in a market dominated by declining rental rates.

As such, our key emphasis has been holding effective rates as high as possible through a combination of aggressive renewal strategy, emphasis on direct lease transactions, and to the extent practicable , controlling our capital costs. In giving illustration, in 2002, we executed 271 transactions encompassing 1.4m square feet, or about 46% of our total deals on a direct basis. That's a real testament, we think to our tenant services and leasing groups. In addition. Our leasing property management and maintenance teams have done an incredible job of maintaining a very high level of tenant retention and exercising great business judgment in balancing capital costs in a challenging leasing environment.

I'll spend a moment on several points we use in measuring leasing activity. First is our general level of inspections. For 2002, we had 1,139 inspections by tenants looking for space. We closed almost 200 of those transactions, or at least more than 17% of our traffic. That compares favorably to 2001, where we had less than 1,000 inspections and closed about 13% of our traffic. So 2002 over 2001, our activity improved by about 16%, or about 160 prospects, which we think is a good indication of increased velocity in the marketplace. Secondly, we look at our deal pipeline. There are tenants in active discussion and that number has increased from the last several quarters and stands right in and out at 205 deals, aggregating about 1.5m square feet broken down into about 91 transactions on new transactions and about 114 pending renewals that would accomplish about 800,000 square feet. That benchmark is also up from last year's levels.

Third, we look at our capital costs on a per square feet per lease year basis. During the fourth quarter, we committed to an average cost per square foot, both in terms of tenant improvements and leasing commissions of $6.32, or $1.43 per square foot per lease year. That breaks down to about $10 per square foot for new leases, $3.80 for renewals, and about $8.30 for expansions. For the full year 2002, capital costs were $5.46 a square foot, or $1.32 per lease year. By way of comparison, for 2001, that overall number was slightly above $4.70, or $1.17 per lease year. So even though there's been an upward trend on our capital costs, we certainly think the migration upward has been controllable, and given where our rental rate numbers have come in, we've been successful in holding the rental rate levels where we hoped we would. In addition, our occupancy rate remains right in line with our projections, and we closed the year at 91% with an overall leasing percentage close to 92%.

From a financial reporting standpoint, the fourth quarter was again a good one. We exceeded First-Call consensus and Chris will outline the factors driving those reasons as well as our core portfolio performance. Another very significant success has been our retention rate. For 2002, our retention rate was 78%, which we think speaks very well to both the quality of our product and the skill and enthusiasm of our entire team of both maintenance folks, property managers, and leasing agents. It really is a benchmark of which we're very proud. It's also encouraging to note that our historical tenant retention run rate is about 75%, and we think that that really reflects very clearly the value of a regional platform and our ability to provide tenants with an increasing array of options.

Also, as we've discussed on previous calls, credit remains a key focus. I think it's a real attribute to our entire team that our net accounts receivable balance is down about 42% from our balances as of year-end 2001. Certainly in this type of economic climate, I think that's an excellent achievement. We continue to focus on the level of leasing in our development projects. We have active prospects, particularly for 401 Plymouth and Berwyn Park. Certainty an improvement over last quarter, these deals are taking longer to get signed and we would anticipate we would have positive news to report next quarter. We still expect the yields to be around 11% on these projects, an as indicated previously, all those will be brought into our P&L statement during 2003. We also remain very pleased with our investment activity for 2002. We exceeded all of our internal goals.

For the year, we acquired $123m of properties, about 840,000 square feet at an average cap rate slightly above 10.5%. In addition, we disposed of approximately $194m of properties at an average cap rate of 10.2% based on the 2002 budget or about 9% on in-place net operating income.

So to summarize. Market conditions remain challenging. Our general expectation is that there will be stabilization at vacancy levels in the region, but we still expect to see continued rental pressure, particularly in some of the soft sub-markets. To combat this, our marketing stance remain very aggressive. From an overall standpoint, our operating strategy remains very much on pace; our retention rate is high; our payout ratio, both from an FFO and CAD standpoint remain very much in line with our projections; operating expense and capital costs are under control, and all of these remain a key area of focus during 2003.

With that brief overview, Chris will walk you there our financial statements.

Thanks, Gerry. Obviously, we're pleased with the quarter both operationally and financially, coming in at the high end of our guidance as provided in our press release of October 29. We do continue to focus our efforts internally on credit and our underwriting, as well as fine-tuning our early warnings systems, as Gerry said, we are pleased with our accounts receivable balances as of the end of the year, and I think we have done a wonderful job in reducing those balance year totals, and we're very comfortable we have systems and controls in place to manage that risk. What I'd like to do is address certain items in the BS and income statement which some additional color will help everyone on this call and their understanding of our results for the fourth quarter, and also assist those of you who are modeling our 2003 results. If we start with the BS, touch on a couple of the items here, the decrease of $53m in our construction in progress consists of the placing in service of several buildings, 15 Campus Boulevard, our Newtown Bucks County ICD Building, and then the leased portions of 401 Plymouth and 400 Berwyn Park.

The increase in our balance in land-held for development consists of land that we acquired when we purchased a building, 1000 Lennox drive in Lawrenceville, New Jersey in July of 2002. That land basis of about $1.6m, and then our investment in Sierra center to date of approximately $1.6m. The decrease in our investment in joint ventures at equity of $4.2m consists of our purchase of our partners' interest in 200 and 400 Commerce Drive in Wilmington Delaware of 220,000 feet we had done earlier in 2002.

If you switch to our income statement, our selected financial data, and we'll walk through some of the changes there, the other income line of $1.7m reflects the fact that we had less than $100,000 of termination fees during this quarter, and that is the significant component of the drop from the prior quarter of this year as well as the fourth quarter of 2001. Interest expense at $15.3m versus $16.1m reflects the expiration of swaps in September of 2002. Those swaps that expired had a weighted average rate of 7.63%, and we had replaced them with swaps of a weighted average rate of 5.72%. The new swaps are in place through June of '04. Our general and administrative expense of $3.0m versus $3.4m in the fourth quarter of '02, and $3.9m in the third quarter of 2002 touch on that first, the third quarter of 2002 was impacted by audit fees relating to our fiscal 2000 and 2001 re-audit by KPMG and some personnel costs in that quarter.

As you recall, we discussed in the third quarter call as a result of our adoption of the FAS covers assets held for sale and discontinued operations, we needed to properly state 2000 and 2001 as applicable for those discontinued ops. Obviously Arthur Andersen was our accountant at that time and someone would need to consent on those years, and since they no longer exist, we had KPMG go back and re- audit, and we have that expense reflected in the third quarter. So if you factor out the items which spiked up the third quarter which obviously do not repeat in the fourth, the remain difference is about $400,000, and that $400,000 decrease in the fourth quarter is related to cost reductions, as well as your typical year end accruals. If you look at a run rate for 2003, as we forecast earnings, a good run rate would be about $3.4m to $3.5m per quarter of G&A.

The equity and income of real estate joint ventures line shows a $65,000 loss. That line item and that loss has no impact on FFO, as the factors related to that are all depreciation items. Our partners in some of our joint ventures had done a cost component study during the quarter, componentizing several parts of the building and depreciation. As a result, we booked an additional amount of depreciation for our share in the fourth quarter, and as I said , has no impact on FFO, and a good run rate would be about $275,000 per quarter income contribution. The line item called unrealized loss on assets held for sale booked in the quarter, $665,000, that relates to a reserve we have taken against the book value of one of our assets for sale. We have one remain asset in North Jersey which we are disposing of, that asset has a basis that appears to be in excess of the price that our interested buyers are offering, so under GAAP it's appropriate for us to reflect that value difference in our 1231 financials and would true it up based on an actual sales price we would receive on the closing on the sale of that particular asset.

The last item that is worth pointing out is, we did adopt the provisions of FAS 141 during the quarter that require us to book the difference between the higher market rents for leases and buildings we acquired over the past year and a half versus the rates -- versus the in-place rents. And the impact of amortizing this net liability was an increase in rental income of about -- I'm sorry -- of $459,000 during the quarter, and if you look at our reconciliation of net income, of which that is a GAAP component, to FFO, you will see that since it is a GAAP component of net income, we have left that item in our FFO, but we have excluded it for CAD purposes as it is a non-cash item. It's in our reconciliation under the caption deferred market rental income, as this will be something that all real estate companies that acquire assets will have to deal with o go-forward basis. This is the way we've chosen to break it out for you, so you can see the impact of it on our FFO within the CAD table and monitor that on a go-forward basis. That item did contribute $.01 of FFO to the quarter. And for the entire year of 2003 , assuming no additional activity, we would expect that item would contribute about $335,000 for the entire year of 2003.

If you look on a same-store basis, the one significant item that sticks out when we talk about our same-store results is the expenses in the quarter. They were up 14%. Those reflect our increased snow removal expense of $850,000 during the fourth quarter, along with increases in insurance, repair and maintenance and utilities.

As we look at 2003, switching gears, we have affirmed the guidance we provided in our press release of October 29, 2002, and our assumptions remain consistent with those detailed in that release. Our weighted occupancy in the fourth quarter of 90.4% was consistent with that of the third, and we continue to expect to see a slight decline in Q1 of 2003, which would reflect the challenging environment as well as two development assets being placed in service in the first quarter. These two assets, 401 Plymouth Road and 400 Berwyn Park are factored into our guidance. The impact of bringing them on the in the first quarter is an additional interest expense of $142,000 per quarter, and that obviously will be offset by any increased leasing activities at those properties from where we are at the end of the year. So that 142 is making the assumption that not another square foot was leased throughout the year; obviously, any positive leasing activity there, which we do expect would reduce that number. So overall, as we look at '03 right now, the only thing that's an interesting challenge in the first quarter relates to the large quantities of snow we have had in the Philadelphia area. Our gross snow removal expense anticipated for January and February is around $2m. When we did our budget back in October, there were predictions for an above-average snowfall in this area, so we certainly didn't budget for the four inches that we had received in the prior year. So of that amount that we've experience so far, plus what we would expect for March, roughly about $1m of that is probably above and beyond what we had thought would be budgeted, and somewhere between 40% and 50% of that, in theory, is reimbursed from our tenants. So when you look at it, we're probably $400,000 to $500,000 above where we would have thought, and we would have factored that reality to our affirmation of the first quarter.

So we're excited going into 2003 and at this point, I'd like to turn the conversation back over to Gerry.

Thanks , Chris.

I'd like to spend a few moments talking about our 2003 business plan. I mean , the name of the game is really continuing to lease space staying very much in front of our tenants, making sure we manage the properties as aggressively as we can. Try and really balance the trade-off between controlling operating expenses, but still very much delivering a very quality operating environment to our tenant base. People that have followed the company know we have tried to be very much ahead of our renewals. In 2003, we're well into our discussion of the number of tenants. As a matter of fact of the 2.4m square feet that we have rolling in '03, as of the end of January, we have already renewed about 32% of that, or about 765,000 square feet. That's a great start, and as we're looking at the risk profile of the company for the balance of the year, even with bringing on the additional development projects, that means that our net unsigned rollover risk is about 1.5m square feet, or about 9.3% of our portfolio. So as you go back in time a few quarters, I think our leasing and property management teams have really done a very good job of getting ahead of the curve on these renewals. I think we've seen a good trend line on holding the rental rates.

In fact, actually closed the year 2002 with an increase on the cash rate for the renewals, and really controlling the capital costs. So we continue to very much focus on aggressively executing all of the current rollover exposure, leasing up our existing vacancies, and doing everything we can to create a catalyst for those tenants still sitting on the sideline to renew early so we can manage the risks for our portfolio more effectively. For 2003, as Chris touched on, our financial outlook continues to be driven by an overabundance of caution.

There's simply way too much uncertainty not just in the real estate market but in the general economic picture in terms of where that goes, and then trying to quantify the lag time between when an economic recovery or positive event happens, when that translates into a positive dynamic in the office marketplace. As Chris mentioned, we are affirming our guidance rains of the $2.62 to $2.69 for '03, and that's being driven by a couple key factors. One is flat occupancy levels. We had a good quarter. During the fourth quarter where the occupancy rates went up to about 91%, we had me good leasing activity.

We are projecting that that for the first quarter , that range is going to be in the 88%to 89% range and trending back up to an occupancy north of 90% by the end of the year.

We're also continuing to project minimal investment activity, and our general expectation is that our acquisition pace, if any, is going to be matched by our dispositions, and that's really going to be driven by identifying properties where we think we have harnessed the full value and are ripe for selling versus the acquisition options we’re seeing in the marketplace.

From a portfolio management standpoint, we really do believe that now is a great time to undertake several renovations, and as a result, we have three projects scheduled for complete renovations during 2003 , and we're continuing to press full speed ahead on per effecting any outstanding approvals relating to our land bank. These projects are all in the planning stages, and we anticipate commencing with the renovations later in the first quarter and into the second quarter of this year.

On Sierra Center, which is the parcel of land we have until option in University City, the marketing campaign is moving forward. The market place response has been positive, but certainly Philadelphia like every other marketplace has its challenges in terms of being able to deliver effective rents that would support any addition inventory additions. And in accordance with proper financial reporting, our fourth quarter results incorporate just shy of a $100,000 of additional costs we're taking as a marketing expense for the project.

To wrap things up, fundamental market conditions remain very challenging, but we're confident increasingly so, that we're weathering the storm in very good shape. The vacancy levels throughout the marketplace have stabilized. Rental rates in some of the submarkets have actually stabilized very nicely. If a few of the submarkets where there's an overhang of subleased space or new inventory, were seeing some continued rental pressure, but we believe these markets will continue to improve marginally during 2003 and into 2004, and are convinced that our market position, the quality of the product we present to the marketplace, the depth of our management team and our operating personnel will real very much continue to hold us in good stead as we weather the next several quarters.

Paul, at this point, that really concludes our prepared comments, so we would open the floor for any questions.

At this time, if you have a question , please press star, 0.

I wanted to ask you, by the way, you gave a very detailed report, and I like the subsections of your presentations. Having said that , who are the main competition that you see in the space , and how are you able to retain your tenants and to get new ones sort of to be directed to your developments and existing locations?

All right. I'll take a couple pieces of that, and then Jeff maybe can cover some of the other points of it. I think from a tenant retention standpoint, we really spend a lot of time focusing on making sure that from a property management and maintenance standpoint, we really are servicing the tenant base to the extent required, and actually do a lot of things above and beyond the call of duty.

That's why I think the results of our tenants' survey came back in so positive, particularly in terms of the physical condition of the property, as well as the quality of the service team we present. I think that's certainly contributing to the fact. Another key factor is a lot of our tenants are smaller in size. They don't necessarily need to or want to disrupt their businesses to relocate to other competitive buildings. And a third piece is we really do, because we control so much of some of the these core submarket, are really ability to present tenants with an awful lot of options where we don't give them a reason to leave our portfolio.

I think we have seen that continue to evolve in a very positive fashion over the last several years, and even in this market where it's much more competitive from a pricing standpoint, we're seeing a fair degree of loyalty among the tenant base which is translating into these higher retention numbers. Anything else you wanted to add?

The next part of the question was, if I understand it correctly, how do we attract tenants to our property?

Yes.

And I think that's a multi-tiered response , which is, first off, we have a very strong in-house marketing team, very good professionals, complemented by the brokerage community who we've had a history of a solid relationship with, and look forward to continuing that well into the future.

As Gerry touched on, the ability for us to provide so many space options so when a prospect comes into the market looking for space, it becomes a very compelling reason to go with the landlord that has such a deep market penetration, so as their business changes, we can remain as flexible as possible to grow with them. So it comes from a couple different fronts, but it's tied together, and ultimately becomes a pretty strong, compelling argument.

Okay. Thank you.

Our next question is from John Stewart.

Gerry, first of all, a couple quick questions on the 2003 rollover. On the 1.5m square feet that is yet to be addressed, what are you forecasting for the mark to market on that space?

It's a hard number to project. I think what we're looking at is the trend line staying in place from what we have seen the past year. I think it's one thing to project where you think the market might be or what you hope the market might be, but I think our projections, John, are really predicated upon some of those underlying financial assumptions that Chris walked through. And we're essential anticipate that at least during this brief period of market dislocation, that we're going to wind up holding our rental levels fairly flat on attracting new tenants into the portfolio, and looking for, you know, a low single-digit increase on the renewal lease, as we have this past year.

Okay. And then of that space, what proportion do you think is likely to remove, is undecided, and may move out?

I think again we're seeing the trend lines right now look pretty much consistent with the historical run rate of about 75%. We know there will be a couple tenants moving out toward the latter part of this year, one in the building we're going to rehab, and another one in a building we'll have with undergoing plans for renovation. That will affect I think our retention rate later this year, but all of our discussions, I mean, every tenant whose lease is up in '03, we have had a number of level of discussions with both at the leasing agent level, the property management up through the Senior Vice President level. So we have a fairly good feel on where the tenancies, at least where we're leaning right now, and I think we're pretty comfortable with our ability to maintain our historical run rate from a retention standpoint.

How many square feet are the known move outs?

I think if you look at right now, people who have said we're absolutely not doing anything, it's something around 100,000 square feet. As you can see, a lot of people at this stage are still working through the process, and I think that's indicative of the overall market, that people are hesitant to make decisions and are waiting as long as possible to do so.

Gerry, on the 935 First Avenue project that you acquired from the asset swap with Prentice. Can you describe what activity, if any, you're seeing and why you sort of attribute -- or what you attribute to the fact that that has languished with not much leasing over the past few quarters.

That's a good question, and it's something we addressed a couple quarters ago internally. The King of Prussia market became one of the softer markets in the region. We have a large concentration in that marketplace. With some of the softness in the market that evolved, we had in our existing inventory base some fairly large blocks of space come up due to a number of tenants deciding to cut back their space, or we had two bankruptcies in that market. One was Reliance Insurance, one was Com Disco. And we made a decision where rental rates were that the primary marketing thrust for the company was going to be absorb space within the existing inventory and to focus our key absorption attention there. Obviously , keeping 935 available for large tenants who are evaluate a full building or a significantly full building use, but our expectations at 935 would not be readily absorbed until there was a genuinely more pervasive tightening in the King of Prussia marketplace in northern 202, and we saw a bit of an increase in rental rates. We continue to active market the building to large prospects, but the major focus has been absorbing the existing inventory in King of Prussia.

Jeff, you can probably speak the success we have had there.

Yes. I think King of Prussia has been real positive over the last six months. As Gerry touched on, if we have the decision point to take a 25,000 square foot tenant, rather than put them in a 935, a new development project and encumber or ability to go after a large tenant and create some better value, we're going to plug that hole into an existing asset where we can be a little more competitive on rental rates and not hurt the long-term value of the portfolio.

John, if you look -- I know when you look at it , you focus very much on the three development projects. I think as I tried to touch on last quarter, really as we look at it, it's not that much space, both in the context of the portfolio, but more importantly in this particular case in the context of our presence in King of Prussia. We have well over a couple million square feet in that marketplace, so to have 100,000 square foot contiguous block of space that's available for large tenants today to look at is great, but in addition to that if it provides a catalyst for us to bring tenants through our whole inventory and dovetail them somewhere else, it's been a good marketing tool for us.

We would love to have it leased up, but I think it's being executed very much consistently with what we planned a few moments ago.

Hey, guys. It's John Lit(ph). In the fourth quarter, I guess you leased about 900,000 feet, you got 1.5m to go in '03. You know, it sounds to me like you should be able to get occupancy pickup, but you're not really forecasting that. What am I missing as I do that math?

I don't think you're missing anything other than the fact that we're taking a fairly conservative tact on the projections. What we have seen is some great success, primary driven by a couple very strong submarkets we're operating in. We have a very good on the ground leasing team that's done a tremendous job.

But deals are still harder to come by. The pipeline is up, but the incubation period on getting those executed is so protracted. It's a hit or miss proposition for us to say of the feet we have in the pipeline today, that we'll be able to execute that in the next 30 or 60 or 90 days.

We are talking to some tenants today that frankly we've been talking to for almost a year that just can't quite make a decision on either a relocation or pulling a trigger on an expansion. So I just think what we're saying is, you know, a general continuation of uncertainty in the minds of a lot of these tenants to make a substantive decision relative to their office space requirements.

It sounds like it's almost a market share game. The fact that you're able to do the kind of leasing you're doing just sounds like you're continuing to get more of the leasing activity than you have in the markets?

I think we've been really pleased. We went on a conscious program a couple years ago to dramatically upgrade the quality of our on the ground leasing personnel. We've increased our property management ranks, and I think there's just been a tremendous residual benefit coming back to the company in terms of increased activity, seeing more deals, seeing them ahead of schedule and then being able to give -- given the amount of inventory we have, to execute those and put them in different holes.

Are there any particular large leases or markets where you have roll that you're worried about for '03?

No, I think at this point we've been well ahead of the curve in having conversations with those folks . The size of our average tenant is relative small, so there's not really anything that stands out, Jonathan.

I think in general we still view, as we have seen -- you know, we're still concerned generally about the leasing dynamic pace and the King of Prussia northern 202 Carter just because of the some of the larger corporations have really stopped on a dime in terms of what they're looking for in terms of additional space.

I think we're feeling very confident a couple submarkets they continue to have an overhang of space, so we have very limited exposure there, but we'll probably continue to see some significant rental pressure.

Great. That's all my questions. Thank you.

Thanks , Jon.

The next question is from John Robertson.

One question on the fundamentals. You talked about your guidance and in light of where you rolled rents, does your guidance include an assumption that rents continue to deteriorate throughout '03.

As we look back in October and re-looked ought our numbers for purposes of closing out the end of the year recently, we do assume that that sort of slack effective rental rate that Gerry talked about to some pressure exists throughout '03, and that there continues to be some pressure on our capital costs, as you saw a slight 1% increase in the fourth quarter. So we are remaining conservative in our outlook.

I think in general, when you talk about lease expirations, when you talk about what tenants are in the marketplace , when you talk about effective market rents and capital, our level of confidence in speaking about that is higher for the first quarter of '03, slightly higher for the second quarter, and hazy as it relates to the third quarter and fourth quarter, because there are so many external economic factors, including the situation in Iraq and North Korea that make it difficult to really be confident in your outlook as you get into the latter part of the year.

Okay. A financing question, maybe best directed at Chris. You have a swap burning off in the middle of '04, have you thought that far ahead about what to do with your line at that point?

Yeah, we're in the process of doing that, and I think we have numerous options. I think we can look at the opportunity to selectively sell assets and use a portion of the proceeds to reduce our overall leverage levels. We have the opportunity with certain mortgages maturing in the latter part of this year and early part of '04 to move to a more unsecured model, as we increase the base of unencumbered assets. We certainly have the option of looking at the line and either fixing a portion of it through some sort of medium-range secured financings.

So, I mean, the options are pretty wide open at this point. I believe given the maturity profile of our fixed-rate debt and the portion of our overall debt related to variable rate that we do have the opportunity to look at this in many different ways and will be doing so over the course of this year and taking action to address the issue well before June of next year.

Can you say which way you're leaning? It sounds like you are entertaining a rating too?

At this point, it's difficult to say which way we're leaning. We're in the latter stages of homework, and coming down to what makes the most sense over the long term for this company as it looks at its financing strategies versus the investment and operational strategy.

One last quick with you. Land help for development declined throughout the year. Was there an allocation that went to increase that number in '02? And secondly, are you capitalizing interest on that land bank?

We are capitalizing interest on certain portions of that land bank as appropriate under GAAP, and as it specify relates to the increase in that balance, the primary drivers were two. One, when we acquired a building in Lawrenceville, New Jersey, we acquired a part of land for $1.6m in basis, and our investment in Sierra center is included in that number, and the balance would be some various small land holdings and capitalized interests and other costs related to the development of that land.

Are you guys active on that stuff? At what point would you stop capitalizing on that?

We would stop capitalizing interest when we no longer consider the item to be under development and there are certain parcels of land which we have concluded that historically and on a forward will have looking basis , and the parcels of land which we are active, we would appropriately capitalize interest.

Okay. That's it.

Next question is from Frank Greywitt.

Hi. I was wondering. You mention you have three renovation opportunities. Can you touch on those a bit? And also explain if you'll be capitalizing the costs?

One of which is 501 Office Center Drive , a property we have in Fort Washington, PA. Fairly well leased. We had two tenants, one of which we relocated out of the property, because they needed additional space. Another one, who also needed additional space, but we ended up doing a build-to-suit sale for in some ground we owned in a neighboring [inaudible] township. So that was a good story to tell there. We figured while the market was not full of activity and the building needed renovations, we thought it was a tremendous opportunity during this down cycle to improve the building and get ready for an up tick in the market.

Same story in Lee High Valley, an office building that is not on the "A" status point, or description in this marketplace at this time. We're going to undertake a program to expand the building's windows, renovate the lobby, deal with the elevators and just upgrade it. So that should create tremendous value for us later on, help us during the lease up cycle. And just improve.

And the cost s there, in accordance with GAAP would be capitalized for those improvements.

What we really saw was a good opportunity on several properties that were very well-located, but frankly , of the early 1980 vintage in terms of exterior skin, window lines, lobby, mechanical systems, a very good chance for us to completely renovate those buildings, take advantage of their "A" location, a high parking capacity, and really position those buildings for level “A” rents when the market conditions improve. So it's a great time for us to be doing that. You know, we'll certainly look at a couple other possibilities during the next several quarters.

Will you be capitalizing the interest and insurance costs and the operating expenses?

Yeah. The total cost of doing these projects is not that significant and there would be capitalized interest on the incremental borrowing costs, and that total amount would be very immaterial.

Okay. Thanks.

Next question is from Ken Weinberg.

Good afternoon, guys.

Hi, Ken.

Just to clarify a come of the earlier questions, you've got roughly a third of your rollover taken care of for 2003. Are the rents in capital costs, which you've outlined in terms of your estimations of where things will fall out, did -- is what you've signed so far, did that fall within that range?

Yes.

I guess that's what I'm trying to get at. So you have a pretty good handle on where that's coming.

Um, and then just a quick question on the tone ants -- I know you put out a press release a few years back in terms of trying to get that out there and market it to a number of firms nationally. Can you touch a little bit on strategy there and costs associated with taking that up to the next level?

It's fairly straightforward. The e-tenants initiatives that we undertook a couple years ago has been very widely embraced by our existing tenant base, both from a service provider standpoint in terms of us providing a lot of services to our tenants through the e-tenants platform, but also through the upgrades we have made to our entire work-flow processing for maintenance calls and work orders.

So we actually have 100% of the tenants registered for e-tenants. We're getting in more of our work orders through that, which has really saved us a tremendous amount of time and effort in house, and overlaid that with some tremendous response time savings on the part of the maintenance workers, both in terms of where the work needs to be performed, but also in terms of closing out the work order, so we can use work order close schedule as really a marketing tool for our tenants. So the feedback we were getting from the tenant base, particularly on the work order processing, as well as the on-line consequence years of age which is being used fairly actively by our tenant base and these service providers really led us to believe that is an appropriate time to go out again and start talking to other companies about deploying e-tenants to their portfolio. The costs to do that frankly is just internal personnel time. There's no significant incremental costs to doing that. It's just simply taking some of the people we have working in e-tenants now, all of whom are included in our operating expenses, and redeploying their efforts to be more externally focus the now that the internal mechanisms and technology for e-tenants has been fairly perfected.

So we'll see where it goes. We got involved with e-tenants with the idea of being able to create a very effective tenant service platform. You know, I don't know how we can quantify whether the e-tenants existence and the success we've had there contributes a certain percentage to you're retention factor, but we certainly know when we interview the tenants and are leasing agents who talk to prospective tenants, the work order and the online concierge service is a very effective selling tool being used by tenants once they move into our portfolio. So we want to try and share some of that operating experience with other companies out there.

Okay. Thank you.

Next question is from Bill Crow.

Good morning, guys.

First of all, if you could give us just a brief overview of construction levels across your markets, and kind of the trends there?

Sure. We've pretty much seen, as Bill mentioned on some previous calls pretty much a complete shutdown of new development. And we're actually seeing anecdotally a couple things. Certainly there's an overhang in some of the submarkets on space that was under construction that has since been delivered to the marketplace. The [inaudible] submarket here, where there's a 300,000 square foot building that was delivered and is less than 25% occupied, and one other building where the target is to complete that sometime later this year that will add some additional stock to that already soft market. But, generally speaking, there's really no other construction taking place throughout the marketplace. We've actually seen a number of sites that have been programmed for office now being reprogrammed for other uses, primary multifamily residential or age-restricted housing, but converted from an office use to a more residential or retail component.

Some of the submarkets really have had very little construction activity . Southern New Jersey, for example has had very few buildings built over the year that weren't 100% pre-leased. As we view the landscape, the overhang of new construction is not necessarily particularly troublesome to us in most markets, and we don't really see that profile changing in the near term.

Great. As you look back on last year and your leasing activity, I think you want it was 800,000 square feet of new leases that were sign. Is there any commonalty between the tenants there? Any industry information you could present to show us who was actually out there looking for new space?

No. To be honest , it's a very broad base. There's not one industry specific or any type of business line that you can really tie it to.

All right. Thanks, guys.

Thank you, Bill.

I'm showing no further questions. Thank you.

Great. We'd like to certainly thank everyone for participate in the call and for weathering the technical difficulties with us, but we appreciate your participation. We're happy with how the 2002 wound up, and we really are aggressively pursuing making sure we meet all our objectives for 2003. Thank you very much.

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