Brandywine Realty Trust (BDN) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the 2003 first quarter earnings release conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer and instructions will follow at that time. As a reminder, this conference call is being recorded.

Prior to turning the all over to Mr. Gerry Sweeney, please let me read the following disclaimer on behalf of the company. The information to be discussed on this earnings 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 reasonable assumptions, these statements are not guarantees of results and no assurance can be given about the expected results will be delivered.

Such forward-looking statements and all other statements that are made on this earnings conference call that are not historical facts 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 filing, a copy of which are all on the file with the Securities and Exchange Commission.

For further information on factors that could impact us, please reference our additional filings with the SEC. We are subject to the reporting requirements of the Security and Exchange Commission and undertake no responsibility to update or supplement information discussed on this conference call. Also reference the disclaimer statement in our earnings press release. Thank you.

I would now like to introduce your host for today's conference, Mr. Gerry Sweeney, President and CEO of Brandywine Realty Trust. Mr. Sweeney, you may begin.

Jennifer, thank you very much and thank all of you for joining us for today's call. Today's agenda will provide a brief review of market conditions, a financial review of our first quarter results, and an update on our 2003 business plan.

Fundamentally we are very pleased with our results for the first quarter of 2003. From a leasing and occupancy perspective, it was also a very strong quarter. Also, as we will walk through results for the first quarter, we wind up being right on and very much in line with our business plan as indicated on previous calls.

As the numbers illustrate, market conditions remain challenging and certain submarkets continue to experience rental pressure. Our major thrust is continuing our aggressive leasing posture to ensure we stay ahead of all our renewals and continue our track record of attracting new tenants into our portfolio.

Several of our operating metrics did not witness a continuation of positive trends that we have seen in previous quarters. As we will walk through, however, key variables related to snow removal expenses reflective of the difficult winter conditions we had in the northeast, as well as a couple of larger renewals that were done with no or minimal tenant improvement cost but rate slightly below those currently being paid, and finally our decision to accelerate absorption on some state budget to be vacant for the entire year. In fact, right now we're running approximately 200,000 square feet in occupancy ahead of budget.

We are continuing to see increased activity throughout our portfolio and our deal pipeline remains very healthy. However, the overlay of general uncertainty creates a tenant environment where cost control is a paramount consideration and quality, location, and other attributes are of a secondary concern. While the increased activity is encouraging, we're not really seeing that translated into any quantifiable improvement in effective rents. So bottom line, I'm sure you're hearing on other calls, the real estate market remains very difficult and while we have numerous tools we're effectively using to maintain our competitive edge, our major areas of focus remain as we stayed previously.

Number one goal is obvious lie to maintain and hopefully improve our occupancy levels; secondarily, to control to the extent that we possibly can operating and administrative expenses. And finally, to continue to deploy our market penetration and balance sheet strategy. As we have discussed on previous calls, our overriding goal is to maintain and hopefully improve occupancy. In pursuit of this objective, we're very delighted with the results for the first quarter.

From a leasing velocity standpoint action we renewed leases for approximately 546,000 square feet and signed new leases for over 135,000 square feet, very good performance in this type of climate. In addition as I mentioned on our last call, we are for the year projecting essentially flat occupancy levels and for the first quarter we had anticipated being in the 88% occupancy range.

As you can see from our supplemental package, the portfolio stands almost 200 basis points above that at 90%. So fundamentally, we are very happy with the level of our occupancy performance. As the numbers indicate, we continue to be in a market dominated by declining rental rates and as such a key emphasis has been holding effective rates as high as possible through a combination of an aggressive renewal strategy, emphasis on direct lease transactions, and controlling our capital costs.

We are very pleased however, with the combined real estate and financial results. To give you an illustration, renewals in this quarter showed a negative 2.9% cash decrease and basically flat GAAP rents. This is the first quarter we have shown a decrease in renewals and was primarily driven by a 45,000 square foot five-year renewal where the expiring rent under a previous ten year deal was slightly more than $23 a foot which had incorporated previously committed capital costs.

The new five-year deal we signed was a $22.50 foot with $0 in tenant improvements or leasing conditions. As a result, when you simply look at the mark-to-market rent, it shows decline. But from an effective rental basis, we think it was a delightful transaction and put us in a very good position with that renewal. Also keep in mind that 89% of our leases factor in rent steps. So in a straight line basis across the board we were essentially looking at a flat renewal environment.

On the new leases, the decrease in cash rents was primarily driven by several larger transactions. The largest one was a ten year deal with a very good rental rate with a higher than normal capital cost. It was still a very good economic deal and we locked away a block of space for ten years with annual contractual rental rate increases. On several other transactions, we leased difficult spaces that either had restricted access, a tough configuration, or spaces that had been vacant for a while.

We also accelerated leasing on space that we had programmed to be vacant for the entire year . In all cases made a value judgment we have been in the past on the trail between the continued vacancy of a space or accelerating occupancy with its intended affective rental rate. The general theme as we have said before is that there continues to be rental rate pressure, but we're doing solid economic deals with affective rates that either meet or exceed budget expectations. The important point is that these results were anticipated and are right in line with our budgeted expectations.

Another key operating metric is our tenant retention rate. The retention rate for the quarter ran up slightly north of 70%, a very strong number and while that is down from our historical average of 75%, we indicated previously that our first and third quarter of 2003 it would be hard for us retain our rate. This 70% number is at the high-end of our competitive environment and our leasing property management maintenance teams continue to do an incredible job of maintaining a very high level of tenant satisfaction and exercising excellent judgment in balancing capital costs in a challenging leasing environment.

As you look forward to the balance of the year, we're expecting our retention rate to be in the 65% to 75% range for the year. Some other key points that are illustrative to leasing activity and we discussed some of these on previous calls, first is our level of inspections. For the first quarter, we had 451 inspections by tenants looking for space and closed 86 of those or 19% of our traffic. That compares favorably to 2001, where we had a closing percentage of 13% and 2002 where the closing percentage was 17%. So bottom line we're seeing more people come through our buildings and we're continuing to improve on our past successes by signing those transactions.

The 451 inspections compares very favorable from an activity standpoint. For example, for the first quarter of 2001, we had 128 expected inspections and in 2002 the first quarter we had 309. So the 451 in the first quarter of '03 is a very positive continuation of the trend.

Secondly, we always look at our deal pipeline and these are tenants that we view to be an active discussion. That number has also increased and stands at 1.9m square feet. That is up from 1.6m square feet last quarter and is also a continuation of the successful trends we experience each quarter of last year.

Third, we look at our capital costs and on a capital cost basis you'll notice that during the quarter we did have an increase in our tenant capital expenditures. As I mentioned, that was primarily driven by several leases transactions where we accelerate at lease up over our budgeted assumptions. Capital costs, however, remain very much in line with our budgeted expectations and overall on a blended basis, that is new leases, expansions and renewals, we're still well below $2 per square foot for lease year.

To illustrate our point what our capital costs on new deals increase, we had a significant decrease on our capital for renewals. For example, our capital cost for per square foot basis for this quarter for the first quarter of '03 was $1.34 or 47 cents per lease year per square foot. This represents a significant decrease from what we had experienced in the fourth quarter last year of $3.34 per square foot or 81 cents per lease year. And is also well below our historical averages that are in that same range.

A truly key element in this success is our leasing team gets out ahead of our renewals and continues to do a great job on direct transactions with tenants. This quarter our percentage of direct transactions was 63%. We also had a higher than normal percentage of leases and new expansions this quarter and last quarter versus renewals which contributed to the increasing trend in our capital cost.

As we view it, however, on a blended basis, our capital costs per lease year and our nominal rental rate levels still put us in a very good position for delivering acceptable, affective rental rate increases. As I mentioned, our occupancy level is at 90% on a same-store basis that number is 90.6% and our overall leasing percentage is close to 92%. That occupancy level exceeds what we expected and is reflective of very, very good operating results and the success of our operating and leasing teams.

From a financial reporting standpoint, the first quarter again was a good one. We are in line with first call incentive estimates and Chris will shortly outline the factors driving our core portfolio performance. During the first quarter, we also bought into 401 Plymouth Road and 400 Berwin Park. We have seen activity level on both of these projects and with lease commitments in place we anticipate that 401 Plymouth Road will be at 87% and 400 Berwin Park at close to 75%. That compares to 67% occupancy for 401 and 40% for 400 Berwin Park when he brought them into our P&L.

Finally, to give you a reference on leasing activity, according to Wakefield within our Pennsylvania and New Jersey submarkets stand at 15.8%. Brandywine vacancy level of 7.7%, you can see we're outperforming our marketplace by 800 basis points. Further finer points, in central New Jersey, that office market up there is about 16% vacant, Brandywine's vacancy percentage is less than 4%. In the Lehigh Valley, the office market vacancy rate is 18%, our vacancy rate is 5.8% which is about a 1200 basis point spread.

While nobody in our market is happy with prevailing market conditions and we are all hoping for a speedy recovery, we're also very pleased with our market performance, the clear strength of our operating team and the dominance of our market position.

With that overview, Chris will now review our financial results.

Thanks, Gerry. Just like to provide a succinct review of the highlights of our financial results for the quarter. As Gerry said, the quarter progressed almost exactly as we had expected. If you look back on the guidance that we provided in our October, 2002 and February of 2003 press releases, we anticipated occupancy on the same-store basis to be 50 to 100 basis points below our 2002 average of 90.4%.

We anticipated pressure on rental rates and capital. We included the placing of two of our development assets into service in Q1 in our guidance and we had expected FFO per-share for the first quarter to be 64 to 66 cents per-share and $2.62 to $2.69 for the year, a range we continue to remain comfortable with.

Our balance sheet had minor changes to it from the end of the year. Construction in progress was down $18.8m as we moved into the operating property line, the two development assets, 401 Plymouth and 400 Berwin Park that Gerry referred to.

Cash changed $18.2m as we paid down a corresponding amount of debt between our line and mortgage borrowings. Accounts receivable net was up around $800,000 which is expected as we bill our Cam settlements in the first quarter. Our aging has improved from year-end and we remain diligent in monitoring our credit and collection efforts and maintaining our reserves.

On the income statement, few comments. When you look at the operating data on a quarter-over-quarter basis, Q1 of '02 to Q1 of '03, you have to keep in mind we added about 617,000 square feet since March of '02 in the core operating line, not in the held for disposal line. So a portion of the change in certain line items is attributable to that increased square footage. When you do compare Q4 of 2002 to the first quarter of '03, there were no material or unusual fluctuations aside from operating expenses being impacted by the unusual weather and G&A, which as we discussed in our fourth quarter call, we expect to run at $3,000,004 to $3,000,005 per quarter in '03.

Our other income line included $1.4m of nonrecurring revenue in line with the trend that we've seen over the last several quarters. We did sell a parcel of land during the quarter and generated a gain of $1.2m and also disposed of three small office buildings totaling 28,000 square feet for a gain of $560,000.

Our same-store results are skewed by the absence of any meaningful snowfall in 2002 as indicated by the $700,000 of that expense in that period versus the $3.6m in 2003. If you were to make the apples to apples comparison, same-store expenses grew 3.6% and same-store declined 2%, both directly in line with our guidance, particularly our guidance of negative same-store NOI and a range of 1.5% to 3%.

Based on the fact that expenses are somewhat seasonal in nature and will fluctuate and the fact that our average occupancy on our same-store pool is performing better than expectations, we continue to forecast our same-store NOI for the year to be within our previous guidance of negative 1.5% to negative 3%. On the financing front, we exercised our pension option on the $15.7m loan on 630 Allendale Road, the maturity which is now March of '04 and anticipate expanding the loan on 400 Berwin Park for one year.

The Princeton Pike maturing July we anticipate paying off and utilizing our free line of credit. We have a unique opportunity in the next 15 months as close to half of our debt rolls giving us a wonderful amount of flexibility in terms of managing our balance sheet on a go-forward basis.

At this point I would like to turn the call back over to Gerry.

Thank you, Chris. I would like to spend a few minutes talking about our 2003 business plan. Those of you that have met with us or listened to our calls before, understand that clearly in this type of environment the major priority is simply leasing office space and then doing more leasing and then doing more leasing after that.

Our entire organization is geared towards that direction and I think as I mentioned in the introductory comments, we feel very pleased with the progress we're making. We're certainly not in any position nor is any other real estate company in a position to dictate market outcomes. Simply need to make sure you're well-positioned within the markets you operate and use all the affective tools you have at your disposal to achieve the desired results. I think we're very pleased with how we're doing thus far this year.

One point that I could touch on as we look at 2003 that we think is particularly important is our remaining roll over exposure. At the beginning of the year we had approximately 2.5m of square feet of space expiring in 2003. As of the end of the first quarter, that number has been reduced down to 1.3m square feet or almost a 50% reduction.

The remaining 2000 expirations represent just about 8% of our overall portfolio so again I think we're quite pleased with our ability to mitigate that roll over risk in this type of climate, maintain fairly flat renewal rates on a straight line basis and really experience a very nice downward trend in our capital obligations. That practice of being aggressive on our renewals as well as trying to attract new tenants in a portfolio is certainly going to continue.

For 2003, as we have mentioned before, our financial outlook continues to be driven by significant caution. As you have undoubtedly heard on other calls with other companies and certainly the theme of this call is there is simply too much uncertainty in terms of quantifying the time lag until the economic recovery actually impacts the office market and whether the track benchmarks like jobless claims and manufacturing indexes, the results are still so mixed that it's just hard to be aggressive in projecting where you think the economy is going, but more to the point in our business assessing its impact on our occupancy levels. So as a result, we're remaining conservative.

As Chris touched on, we are firming our 2003 guidance range of $2.62 to $2.69 per-share from an FFO standpoint. And consistent with prior discussions, those results were primarily being driven by essentially flat occupancy levels. We certainly are still of the mind-set that even though we're ahead of budget at this point, we still expect our year-end occupancy levels to be approximately 91%.

We're also projecting minimal investment activity. Our general expectation remains that our acquisition pace will be matched by our dispositions. I mean, certainly given the strength of the investment market, we are test marketing a number of projects with the investor marketplace, but we're also certainly taking a look at whether it's an appropriate time to harvest full value on some of some of those assets against balancing that with acquisition opportunities we're seeing in the market.

From a portfolio management standpoint, we certainly plan on continuing our process of having our land approval program become self-funding and some of our land sales so far this year. In addition, we're also undertaking a number of innovations. The supplemental package speaks to two of those. 1000 Lenox Drive in central New Jersey and a building 7535 Windsor Avenue in Allentown. We will be investing a significant amount of money to reposition those buildings. We would imagine the repositioning will occur in the late second or early third quarter.

From an overall standpoint, I think we're extremely comfortable with our dividend safety margin. As we have talked about on previous calls, our occupancy levels would have to drop to 80% and even then you would have to assume the same level of capital commitment for us to reach 100% par ratio. So certainly in light of the economic climate in which we're operating, I think one of the things that we're very comfortable with is the level of dividend safety that we have within the organization.

We also believe that we're in an excellent position to generate internal growth by moving our occupancy levels up as market conditions improve. We have a strong track record on tenant retention. We have an aggressive marketing posture on attracting new tenants to our inventory and we have very high quality product that is well-positioned in the respect of some markets so our expectation is that as leasing velocity accelerates, we will continue to do a very good job capturing our fair share of transactions.

Finally from an external growth standpoint, we think we again remain very well-positioned. We enjoy solid relationships with all of our various constituents. That is our tenants who we work very hard to service, the surrenders and brokers who we really view as part of our extended family and we see all opportunities presented by the market and are confident of our ability to convert on those transactions that we will believe will add value both near and long-term and create shareholder value.

So all in all, while market conditions remain challenging, our entire management team continues to do an extraordinarily good job. Occupancy levels are in line. All of our leasing velocity trends appear to be positive. We're analyzing each individual leasing transaction to make sure that we do the best we can in this type of climate to ensure a positive trend on effective rents and we continue as Chris had touched on the focus on a financial planning strategy that we think will create some increased opportunities for the organization going forward.

Jennifer, at this point I would like to open the calls to any questions.

+++ q-and-a.

Thank you. If you have a question at this time, please press the one key on your touch-tone phone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment for questions.

Our first question is from Donald Fandetti from Wachovia. Please go ahead with your question.

Hi, it is Donald Fandetti and Christopher P. Haley. I wanted to confirm, Chris, the developments that were moved in this quarter, did you say the original leasing took place in the second quarter or the first quarter? Meaning was there sort of a -- did you get the outside of the leasing in Q1?

No. When we moved the properties in to service at the end of Q1, they were 67% and 41% approximately occupied. So the activity has been subsequent to that point.

Okay. And I was wondering, Gerry, if you could give us an update on how you think the performance of your joint Ventura sets are doing and what the sublet percent is in that versus your wholly owned?

I think in terms of the joint venture we're really down to just a couple of those and they continue to perform very well. I mean, the properties we have in the Conchohocken (ph) market have a high level of stabilization with the exception of one building in which we're a 5.5% limited partner. That was a late delivery into a weaker market and that building right now just stands about 14% leased. And our partner there who is handling the leasing operations continues to aggressively pursue all tenants. But if you take a look through some of our other tower bridge developments in Conchohocken, one is 95% leased, one is 97% leased, and one is 100% leased. So really the only soft spot right now that we view in Conchohocken in those venture is the eight tower bridge project. Again, which we're only a 5.5% partner.

The overhang of that space in the market certainly has a ripple effect throughout the region but I think we went into that transaction with the sole objective of completely mitigating our financial risk. And in fact that transaction is a joint venture with both the local developer and a major institutional investor. Our project at 1000 Chester Boulevard which is in the north erne 202 marketplace is 100% leased and they have a small block of that space available for sublease right now because the major tenant was Provident mutual which has since merged with another entity. If you look in the spin-off in a little bit of that space. So I think we're happy with the way the joint venture partners, the projects are performing. I will tell you we're delighted with the level of integrity and business that our joint venture partners show at this point in the cycle.

And what -- Jerry, do you have an idea what your sublet percentage is for our total portfolio?

Yes, for the total portfolio we have been bouncing between 2.4% and 3%. Right now I think at the end of the first quarter we were right at 3% with total sublease space of around 500,000 square feet is what it equates to and I think the average remaining term of that was just a little bit short of three, four years. So there really has not been much change in that statistics, Don, at least for the last five quarters.

Lastly if I could ask one other question. Your lease termination fees, how much have you assumed for the remainder of '03?

Don, we never attempt to forecast that. I think as we have talked in the past on a quarter by quarter basis, they have ranged from generally speaking from $0.5m to $1.5m. The fourth quarter of last year was unusual in that there were virtually none. So as we look at it, obviously the space was expected in many cases to be rented and we were anticipating checking the rental income so it's a timing issue in certain aspects. So we don't attempt to forecast with any certainty what they would be on a quarter by quarter basis

Is there an update on the potential 30th Street Station deal?

The update is that we would continue to finalize the design development process which has been done. The approvals have been received. We have at this point continued the -- we look at it as a three-prong marking strategy which is kind of northeast focus, fill up the region focus and then a focus on existing tenancy and then fill up of CBD. No additional progress than what we had looked at -- we talked about last quarter. I think we're pleased with the reaction to the marketplace of the project and we're convinced that as the marketplace recovers economic conditions stabilize, et cetera, that the project will ultimately be very successful.

Thanks.

Thank you again if you have a question at this time, please press the one key on your touch-tone phone. One moment for questions. I am showing the follow-up question from Donald Fandetti.

You get the other half. Hi, it's Chris Haley.

Chris, I'm so surprised. I'm doing well, thanks.

Good. Can you give me a sense from your regional managers either in Virginia, New Jersey and then Suburban Philly, what your regional managers are telling you in terms of a longer term outlook, what kind of vacancy rates or availability rates do they see that when they might have any pricing power on a rent basis?

Well, let me give you an overview comment and I'm here with George Sowa and Jeff DeVuono and they can address this region they cover it for us. They bill our business plan predicated on kind of a flat environment, at least until the end of 2003 and I'm sure as we look at 2004, we don't view a tremendous uptick. But I think one of the things we actually find quite intriguing about the markets in which we operate, is there is a fairly high level of disparity between the underlying strength or the weakness of each of the different submarkets and we really don't see a lot which it may be hard for some people that don't know this area to appreciate, you don't really have a tremendous migration between a lot of the submarkets.

So on an average we don't have a lot of tenants who are in New Jersey who really look at jumping over to Pennsylvania or in Delaware looking to come up to Pennsylvania. There is always the exceptions, but they tend to be the large corporations, that sizeable space requirements are kind of shopping for the best did he deal they can get with the public agencies. But we actually have in our region some certain submarkets like a southern 202, for example, as we look at that market we view that as being weak for the foreseeable future. There is an overhang of space. There is some additional land that can be developed. That market, we view, as being very competitive which is why we really accelerated a lot of our leasing activity last year. Of course we think it continues for the foreseeable future to be somewhat channeled but other markets like preliminary IT or New Jersey, whether that is central or southern, Delaware seems to be fairing fairly well.

At this point, Jeff and George if you have any comments, please add them.

I guess, Chris, on the New Jersey side, actually we have seen some internal expansion by tenants and it runs a gamut but a lot of law firms continue to show some interest in expanding, Locke Martin is in southern New Jersey and they continue to expand. As far as the future, it seems like New Jersey specifically Southern New Jersey at this point, there really hasn't been that much new construction historically in that market in the last several years. So what has happened if you compare it contrast to some of the other markets, we have not had the spikes in vacancy and the rental rates have held up relatively stable so as far as when it turns, who knows?

One of the things that we have seen though is though stabilizing effects some of the companies continue to expand within that marketplace. Princeton, as Gerry mentioned, in that market we're about 3.5% in central New Jersey. And Princeton specifically we're 1.5% and hopefully getting to 100% if a few of these smaller deals hopefully happen so it has been great in that marketplace and validated by the location we have. If you look at the corporate neighbors, Bristol Myer, Squibb, you have Bloomberg and Merrill Lynch, all along that 95 corridor in central New Jersey. I think in long-term we're positioned quite nicely. Jeff?

In Pennsylvania, Chris, you know the mark is well. It is a pretty diversified economy and you have growth in there between central, and the markets that I see improving first, the Plymouth meeting market which is fairly limited, the upper Bucks County just expand on that and I would say the mainline area out by our new tenant square projects. We're 100% leased, so we continue to hold rents there. The fact of the matter is there is virtually no new construction.

If there is anything out there, it is limited. It's far out on the perimeter and any of the statistics you see may have been related to office condominiums, not related to what we do. I hear what Gerry and George said about the future. You can't really tell what is going on. We're following the general economy and we continue to be out there and very aggressively pursue deals and we have incentive our people well and focused our efforts on these weakly leasing calls to make sure all the information in the marketplace is communicated well amongst the leasing people. And it's if situations present themselves we'll do well with them.

Thank you. Could you comment on Virginia?

Yeah, certainly I think down in Virginia, we're running around 9% vacant in our Suburban operations and have actually had some pretty good successes down there. I mean, the challenge for us in Richmond right now and has been the building in downtown Richmond but our retention down for the quarter in Richmond was 90%. So our management team down there is doing a fabulous job of what tenants we have of keeping them and I think really stepping to the plate and making sure that we try and add some additional absorption to the portfolio. So in that market, I think we're very comfortable with the quality of assets that we have. I really view that as very much as a flat rental rate market for the foreseeable future on the office side. We don't really have much of an industrial presence.

When you say that, do you mean your roll overs are going to be flat or market rates are going to be flat?

I think market rates are going to be flat with a little bit of a downward trend. We have been able to, for example, new leases down there wind up slightly on the positive side and wind up on the renewals to be a little bit where they were before so generally a pretty flat market in terms for us in the first quarter.

In place of market-to-market for Philly, Jersey and Richmond, where would you put them today for your portfolio?

I have to tell you, Chris, we go through this exercise and at this point with this kind of market, it is very difficult to project that there is a definitive positive spread between existing leases and existing lease rates in your portfolio and what the market is generating. I mean, I think I always rely more on our experience. I mean, last year we wound up affectively flat rents for the year, a little bit of up-tick on renewals, pretty flat on new leases. The trend line we're seeing this year we have kind of reinforced that so I think it would be a little bit disingenuous of me to say our market-to-market is five to 15% where we can move our rents up 5% to 15% I don't see that being the case.

And at the liberty of having no other questions on the call, the showings that were reported in the quarter of 451, on a year-over-year basis, where have you seen or sequentially, which of these markets have you seen the largest pickup in terms of just general regions?

Plymouth meeting and, you know, as Gerry mentioned earlier we have a lot of leasing activity on 401 Plymouth to the extent the best product in the market being 401 gets leased up, that will put a lot of upward pressure or minimize the downward pressure on rents and the surrounding properties like PMC, the properties we swapped out up in long island for and the surrounding regions. So if I had to say that -- if your question was what market rate wise will see the most improvement on the Pennsylvania side, I would say Plymouth meeting, Bluebell areas, meaning the eastern Montgomery County as well as northern Bucks County, to the south would be towards Newtown square project in the mainline area. The king impression market will continue we think in the short-term to be a challenging market and very competitive.

Okay.

Chris, to speak on the New Jersey side, I think the Princeton market is where we have the most positive rent growth but based on historic numbers where they have been and the rest of the market has been as well and Southern New Jersey is a more stable market so I don't see spike -- I know we have had that conversation before about what rental rates are and potential but again Southern New Jersey I see more stable where we have more potential rental rate growth in the Princeton market.

And Chris, I think we see that kind of reflected in the detail of the prospects that come through the portfolio. I mean, I mentioned that your conversion rate for the first quarter was 19% where you really see, you know, the high percentage of conversion rates are generally among the leasing agents over in Southern New Jersey. There has been some cases. For example, our guys down in Richmond did a fabulous job this quarter getting transactions and I think that is reflected in their 90% retention rate. But I think that the flow of traffic we see as I'm looking at these schedules here that laid out from last year by month and this year thus far, it's really fairly radical. We're not seeing a disproportionate showing of space in any one of the marketplaces, but I think it speaks very well to the quality of the portfolio we have in all of our different submarkets. It's not a situation where we have a preponderance of class A space in one market versus the others. I think we would expect to see kind of radical traffic through the portfolio because our product is good through all of our submarkets.

My last question is, can you review the timing, the dollars on the Lenox Drive and the Allentown redevelopment? Are those properties going to technically be out-of-service?

Chris, this is Chris. Those projects are out-of-service and we have moved them in the category of development or under development along with 9935 First Avenue for a couple of months on that project. We anticipate that we would have both of those projects complete in the fourth quarter of this year and have estimated total development costs on the two projects right around $7m.

To give you an idea, Chris, on the building in Allentown, we are well located building, good visibility, great parking. We will wind of essentially creating a whole nice facade on the building, redoing the systems, the lobby, creating a new entranceway. And the game plan as we look at it is we're going to be able to take an A located building and clearly turn it back into a class A piece of product which we think will give us the ability to be very affective in increasing our rental rates.

Can you look at what your origin investment or your current yield prior to redevelopment 90% occupied kind of a stabilized return on the asset a year ago and what you think the stabilized return on the overall new investment dollars will be, can you give us a sense as to the economic justifications?

I think on the amount -- on the incremental investment that we plan on make making in 7535, our rate of return calculation shows mid teen rates of return.

Unlevered?

Unlevered. On that incremental investment I think as we put in the supplemental package, we're showing on the aggregate investment base a return of about 10.3%.

Okay. That would be kind of maybe fully stabilized second half of '04?

Right. I mean right now the project I believe is right around 50%, 55% lease and will be so during the renovation process and will actually kind of do the work around some of those tenants while we embark on a pretty aggressive marketing strategy, but we're certainly going to in addition move the existing asking rent levels up significantly with the new building being presented to the marketplace.

Okay.

Chris, as it relates to 1001 Lenox, we actually bought that building last year and actually we had a user that we knew was going to vacate as part of the transaction. During the due diligence transaction, we locked up the tenant for a ten year term so we'll be doing renovations now prior to their occupancy. That was prior to the acquisition and the lease actually happened during the due diligent session. It reflects the acquisition as well as the renovation costs.

There is no real pick up in that asset?

When you say no real pick up, it was a pure acquisition with the cost reflected in that so it's actually a very attractive yield. It happens to be right in the Princeton Pike where we have a half-a-million square feet of existing product.

The other thing we did with that acquisition, Chris, we talked about on the last call we also picked up some ground which adjoins our existing Princeton pipe ground which gives us some value added opportunities to replan the whole park and as George mentioned in that corridor in particular in central Jersey, the southern end of the route one corridor , with the Merrill Lynch moving in and Squibb and Bristol Meyer. We have high expectations of that park in this area will perform very well.

Just last on the center, are you getting more interest from suburban tenants or downtown tenants?

It is across the board, Chris. We're getting a lot of inquiries from outside the region. We're getting a lot of inquiries from tenants who are looking for consolidation opportunities where they have multiple locations throughout the Philadelphia area and we're also getting active interest from existing interest in CBD Philadelphia.

Do you feel you're pricing your rents so they are more suburban competitive or urban competitive?

We try the position and say they are going to be attractive to both given the efficiency of the building as well as the amenity the project can offer.

Any update on potential extension of the keystone tax incentive or tax grant?

Well, the existing tax conditions go out through 2013 through hold has been received by the State and the expectation of that is approval should work its way through the local municipal here in the not-too-distant future.

If I'm going to sign a ten year lease in occupancy in '05 I'm going to have the last two years that won't be covered?

You're going to sign a ten year lease in what?

For occupancy in '05. So 2015, 2014 will not be covered?

Underneath the current legislation, yes, December 31st, 2013, you'll be short on the two years but again it's been signed by executive order at the state level and the value of the lease is really viewed over the entire term so I don't think tenants are really viewing it as what happens in the last two years.

Okay, all right. Thanks a lot.

You're welcome, Chris.

Thank you our next question comes from Jon Litt of Smith Barney. Please go ahead with your question.

Thanks, good afternoon it's Gary Boston and Jon Litt. I just wanted to come back to this issue of the showings and to get, just your sense -- it sounds like things were up pretty strongly. The sense in to what degree that existing tenants in the market shopping around versus potentially new demand in the market?

I think in this type of climate, clearly the preponderance of activity is our tenants looking to move around the market places. As Jeff had mentioned a couple of companies, as did George, who are actually doing net expansions in the region but for the most part I think what we're seeing is tenants who are using what they perceive to be a clear shift with tenant marketplace to either upgrade inventory at a lower price, upgrade location, consolidate operations. I mean, each case is very tenant specific, but leasing activity I think while it's improving you still have a fairly anemic net absorption.

Right.

For the first quarter you had marginal net absorption in the region nothing of great consequences but a fairly good leasing activity that lead to believe that most it is tenants moving around.

I was struck by the fact that you guys have done a great job in terms of keeping your occupancy up above sort of your own internal targets and I understand the desire to remain sort of caution in your outlook. But given the amount of leasing that you have done and I assume that the things have sort of continued at that pace into the current quarter. At some point what is the potential in terms of the upside, do you think to where you've targeted the occupancies?

Well, I think it's too premature to talk about upside. Because I think our clear focus of the company is to make sure we mitigate the downside. Part of that is generating additional activity through a very aggressive marketing strategy and I think just tremendously talented leasing folks who have very specific levels of accountabilities and responsibilities. I always view this thing in a continuum, not quarter by quarter. And I think the continuum we're seeing is activity levels are increase can. There continues to be pressure on rents. We believe that we've made a lot of investments in our portfolio over the last couple of years as well as presented a lot of additional products in the marketplace. That is very desirable.

So our expectation would be that we would be doing fairly well in terms of our competitive environment. To translate that into upwardly revising our first quarter I think would be imprudent. You just never know in this type of climate. As Chris touched on, we have done a wonderful job of building good accounts receivable reserves. We have done a good job of managing our balance sheet and our cash. Our leasing companies have done a great job of affectively balancing rental rate structures with capital costs, but we're really in an environment from a macroeconomic standpoint that makes it very difficult to project when the timing of an economic recovery will translate down to the office markets.

All right. You mentioned the occupancy statistics relative to the market and you're beating your competitive base by a pretty wide margin. On the flip side of that, do you think that you've been more aggressive on the rent side than the potential of the competitors in the market? Is that do you think how you're getting more than your fair share of the leases?

I don't believe that to be the case, Gary, in fact I don't think the numbers support that. I think what that is is that we have a very strong marketing and leasing team. I dare say certainly clearly the best in this operating region. We are, you know, competing day-to-day with very high quality companies. I think we're working very hard to make sure that we meet all of our projections and in fact trying to exceed those and we have our leasing agents out there doing everything they can in terms of cold calling, dealing with tenants that try to parlay one tent or lease with the tenant until multiple leases with the same tenants. It's hard to project. I mean, what do you guys thing on that?

If I had to add to that I would say franchise value of Brandywine is really a great marking tool for our guys. The multiple lease concept like George struck a deal with a major company in New Jersey with a master lease and we can use that same document. Where businesses are trying to figure out what their future brings, they're better suited with a landlord that has a lot of product in a concentrated area as their business changes, their landlord with grow with them. I think that is really where we have gotten a lot of value.

And as far as the value just to segue in, I think the franchise Jeff touched on is validated by retention statistics. The companies depends of the leases they have the opportunity to go wherever they want and they choose to stay with us. Look at that fact pattern and how consistent it has been over the years. We like to think it is reflected in the retention but also reflected in the new tag so I think the combination of the factors goes real well for us.

Right. Just a final question. Chris, in reference to the fact that you have a large amount of debt maturing over the next year and-a-half or so, just wondered if you could talk a little bit about the thought process there, you know, any thoughts of unencumbering more of the assets or if you will continue your strategy of securing secure debt for most of that?

Gary, at this point the thinking is still evolving and in general your points are right on. We have a wonderful opportunity given that almost half of our debt matures in the next year and-a-half to decide whether we want to focus ourselves on more of an unsecured strategy or more of a secured strategy. I think we have both options in our arsenal given the amount of debt maturing. That process is still on-going how we would like the balance sheet to look by the end of next year. I think over the next quarter or so we'll be in a better position to articulate which direction or combination of directions we intend to go and what the impact and what the makeup of our balance sheet would like on a pro forma basis at the end of next year.

Great. I appreciate the comments. Thanks.

Thank you. Our next question comes from Frank Greywitt from McDonald Investments. Please go ahead with your question.

Hi. You mentioned the excessive snow and snow removal costs for the same-store. Do you have a number for the total portfolio?

The total amount of snow from the entire portfolio in the first quarter was 4.1m.

We're actually trying to figure out whether that was inches or dollars.

What was your budget on that?

The budget was around $2.9m.

$2.9m. And what percentage do you normally get reimbursed or do you expect to get reimbursed?

That question is a difficult one to answer because as you know there are obviously other expenses within the quarter in our cam pools which in some cases were under budget for the quarter just given timing. So as we progressed through the year, you know, certain expenditures will be at or below budget. In general, we recover of all of our expenses between 35% and 50% of our total pool.

And that is trued up usually in the first quarter of the following year?

We're usually trued up in the fourth quarter as we get close to the end of the year and have a very good handle on what the actual expenditures will be.

So roughly $1.2m more than you thought that you had in expenses for this quarter?

Yes.

Okay. Thanks. And I missed it, I think. What was the total lease term fees received this quarter?

All of what we call nonrecurring revenue which would be termination fees and other miscellaneous items was $1.3m to $1.4m.

All right. Thanks a lot.

Thank you, again if you have a question at this time, please press the one key on your touch-tone phone. One moment for questions.

Our next question comes from James Feldman of Prudential Securities. Please go ahead with your question.

I was wondering if you guys can give me the actual rents that may have the leasing spread for the quarter?

In terms of the whole dollar?

Yeah, just the last -- the cash rent on the last year and the cash rent on the first year.

If you would give us one second.

You can get back to me if you want.

On the renewals, the expiring rents were at $19.34 and the new rents were at $18.77. And on the new leases the expiring rents were $16.68 and the new leases were $15.35.

Okay. And then for the same-store, do you have the --

That is for the overall pool. We don't generally break that out between the same-store. That ties back into the statistics in the supplemental package.

Right, this is a new question. I apologize. For the same-store, the lease termination fees and other, do you have the break out for these two quarters?

It was 1.1 in each quarter.

So there is no change?

No.

Thank you very much.

You're welcome.

Thank you and I am showing no further questions at this time. I would like to turn the program back to you.

Jennifer, great. Thank you. Thank you all for joining us for this conference call and we look forward to talking at the conclusion of next quarter of our regularly scheduled conference call. Thank you.

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