Brandywine Realty Trust (BDN) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Brandywine Realty Trust's 2003 second quarter earnings release conference call. (CALLER INSTRUCTIONS) As a reminder, this conference call is being recorded.

Prior to turning this call 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 that 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 31, 2002 and any subsequent filings, a copy of which are all on 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 of requirements of the Securities 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.

Any non-GAAP information that may be disclosed in the call is reconciled to the most comparable GAAP measure, and such reconciliations are available on the Company's website.

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

Thank you very much, and thank all of you for joining us for today's call to review our second quarter results and for an update of our business plan. In addition to our financial reporting team of Brad Harris, Dan Plaozo (ph) and Tim Martin (ph), participating with me in today's call are Chris Marr, Chief Financial Officer; Jeff DeVuono, Senior Vice President of Leasing; George Sowa, Senior Vice President of Leasing; and Anthony Rimikis, Senior Vice President of Development and Construction. George and Tony will be available to answer any questions you may have relative to market conditions, our business platform or our development program at the conclusion of our prepared remarks.

We were very pleased with our second quarter results. From a leasing and occupancy standpoint, the trends were very positive. Also, as we will discuss, the results were driven purely by solid operating metrics. We exceeded First Call consensus by a penny. Much more importantly, though, we are very much in line with our business plan and projected leasing targets.

That being said, market conditions remain challenging and most sub-markets continue to experience rental rate pressure. We continue to maintain a very aggressive leasing stance to ensure that we have stable, and hopefully improving, occupancy picture. Even with this aggressive marketing position, our focus remains on delivering the best effective rents available in this type of market.

From an economic perspective, recent forecasts indicate that economic growth in the region is slowly beginning to accelerate (technical difficulty) uneven across different sub-markets and no different industries. With these increasing number of forecasts predicting better growth nationally, regional expansion is expected during the second half of 2003 and into 2004. Thus far, though, regional growth has been modest, but has still been better than most cases than the national averages.

In general, while it appears as though there are signs of a recovery on the horizon, we're not really expecting any positive change to impact our business prior to 2004. As such, we remain financially conservative and are aggressively pursuing our business plan, clearly focusing on property and portfolio level performance.

We were definitely encouraged by several trends we saw during the quarter. But general economic uncertainty and the pressure of operating (technical difficulty) certainly has led us to remain very prudent in how we look in our business.

So bottom line, we continue to operate on the premise that real estate markets remain extraordinarily difficult and our major area of focuses remains -- first, improving occupancy levels. Certainly during the second quarter we were very pleased with our ability to improve our occupancy levels by 90 basis points, up close to 91 percent. In particular, as you will note in the supplemental package, our office leasing percentage stood at 92.4 percent as of the end of the second quarter. We also have a key focus on controlling, to the extent we can, operating expenses. Finally, continuing to deploy our market penetration and balance sheet strategy.

The overriding goal among bar none is maintaining and improving occupancy levels. In pursuit of this objective we're delighted with the results for the second quarter. From a leasing philosophy standpoint, we renewed leases for approximately (technical difficulty) square feet, signed new leases for over 232,000 square feet. That's almost 900,000 square feet of leasing transactions, which is very good performance for this type of climate. As you will also note, we had net positive absorption in our portfolio of 157,000 square feet. We continue to project that occupancy levels at the end of this year will be around where we are currently.

While there has been a significant improvement since our first quarter numbers, we still continue to be in a market dominated by declining rental rates. As such, a key emphasis in the Company has been holding effective rents as high as possible. For the quarter, you'll notice capital costs were higher than average historical run rates. This was primarily due to several major ten-year leases that were executed in the year 2002, for which we're just now beginning to incur the capital costs. Those deals created a significant skewing of our capital costs for the quarter. In addition, we also had a higher percentage of new leases versus renewals this past -- for the second quarter, which obviously raised our capital cost per square foot.

From a rental rate standpoint, renewal rates, while declining 3.8 percent on a cash basis for the quarter, were positive on a straight line basis. We also saw this trend apply to new leases where the declines were 2.8 percent on a cash basis, but close to 3 percent positive on a straight line basis. This, I think, reflects the stabilization of rates we have talked about on previous calls. I think it's also a positive reflection of our strategy providing for step rental rates in all of our leases. Keep in mind that 96 percent of the leases commencing during the second quarter of 2003 had rent steps, so really as we look at it on a straight line rent basis we're essentially looking at maintaining flat rental rate levels.

In addition, and like you may be hearing on some other calls, we continue to generate solid effective rents deals. For example, one of the ten-year transactions was with a credit tenant 50,000 square foot data center. We had an effective cash rent north of $15 per square foot, with about $30 or so in capital costs, and that deal absorbed all the space that had been previously occupied by Comdisco, which you may recall is a tenet of ours that went bankrupt back in 2002. We had another ten-year that had $21 in TIs (ph), but (technical difficulty) GAAP effective rent of 24. I think very illustrative of very good and solid real estate transactions.

I think the take away is there continues to be rental pressure. I am, however, delighted with the job our team has done in both meeting or exceeding budget expectations. The important point to note here is that we have not seen anything thus far this year in our portfolio that was not in line with our budget projections.

Another key operating metric is our tenant retention rate. Tenant retention for the second quarter was at 90 percent, a historically high level for our company. As I have mentioned on previous calls, though, this retention number is subject to the specifics of transactions in each individual quarter, and as a result we tend to look more at the trendline than the results of any one three-month period. As you recall, our historical tenant retention averages around 75 percent; the 90 percent this quarter certainly exceeds that, but I will caution you, as we have on previous calls, that we anticipate our retention rate for the year to be between 65 and 70 percent. As also we've discussed, we have several program rollovers later this year, in particular in the third quarter, that we believe will drop that retention rate into the 60 or 65 percent range. Even so, our retention rate will be at the very high end of our competitive environment. Our leasing, property management and maintenance teams continue to an incredible job of maintaining a very high level of tenant satisfaction and exercising excellent business judgment in responding to our tenet requirements.

I think several other points are worthy of mentioning because they illustrate the success of our ongoing leasing activity. First is our level of inspections. For the second quarter we had 187 inspections for a total of 510 year-to-date by (technical difficulty). During the quarter thus far this year we've closed 26, or almost 27 percent, of our traffic. That compares very favorably to a 13 percent closing rate in 2001 and about an 18 percent closing rate in 2002. So bottom line, we're seeing a consistent volume of people coming through our buildings and are continuing to improve on our past successes by improving our conversion rates.

Secondly, our deal pipeline -- they're tenant's in active discussion. That number stands at slightly more than 1.9 million square feet, broken down as 93 new deals and 134 renewals. That is up slightly from last quarter and is also a continuation of the unsuccessful trends we experienced over the last several quarters.

Third, as I touched on, our capital costs were significantly skewed by several large lease transactions. Capital costs, however, remained very much in line with our budget expectations, and on a blended basis we're still running well within our range of acceptability. It's very important point to note that our capital costs on our renewal tenants are still running below the $2 per lease year, which is a very good metric for us. Also impacting the tenant finish numbers for this quarter was our percentage of new leases stood at about -- a little more than 41 percent versus 20 percent of all deals in the comparable period last year. As a results, since our capital costs on new leases are clearly higher than those on renewals, that created some additional upward pressure.

The take away point I think on capital is that while the overall capital costs on new leases have increased, it is very consistent with our budgeted expectations. Our overall capital costs are ahead of budget,primarily due to the Company being over 200,000 square feet ahead of budget absorption and the clear success we've had in attracting new tenants to the portfolio.

Finally, to give you a relative frame of reference on our leasing activity, according to one of the major brokerage firms the vacancy rate within our Pennsylvania and New Jersey suburban markets stands at about 15.7 percent. Brandywine's vacancy level for the same areas is at about 8.1 percent, so you can see it we're outperforming our markets by about 760 basis points.

To put a finer point on a couple of sub-markets, in the central New Jersey market the office vacancy rate is slightly above 18 percent; Brandywine's vacancy is 3.3 percent and a notable accomplishment has been the 100 percent leasing status of our Princeton Pike (ph) portfolio within the last quarter. In the Lehigh Valley (ph) the office market is slightly north of 11 percent vacant; our occupancy stands at slightly more than 94 percent, so again about a 600 basis point spread.

So while we are clearly not content with prevailing market conditions and, we are quite pleased with the level of our operating performance. We are also confident of our ability to continue to outperform general market conditions, which really, when you come down to it, focuses on our people, our quality product and our strong market position.

As indicated in the supplemental package during the second quarter, we also did a 2 million share equity issuance, which netted the company about $47 million. This equity issuance was made in the anticipation of an increasingly attractive investment climate, as well as taking advantage of us being able to repay a higher priced debt instrument.

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

It was a very nice, straightforward quarter from an operational and financial perspective. Our FFO per share, at 67 cents, was at the high end of our guidance. That was a result of positive leasing activity ahead of our expectations at effective rents in line with our budgeted expectations. Let me spend a few minutes discussing some of the financial highlights.

From a balance sheet perspective, we continued to aggressively monitor and manage our credit exposure. Our accounts receivable has been lowered by almost 7.5 percent and our aging has improved, both from year-end levels. We continue to maintain very conservative reserve levels and our watchlist (ph) for tenants is down from where it was at the end of last year.

At June 30th, we had reduced our debt levels from year-end by approximately 65 million and the subsequent to the end of the quarter we repaid, with no penalty, the last remaining 2003 mortgage maturity. This was the 56 million of debt, bearing interest at 6.8 percent, that was to mature in December.

As to our statement of operations, as I said, the quarter was very straightforward, so really the only fluctuation to address is that of other revenue, down 1.4 million from the second quarter of last year, driven primarily by the fact that we had virtually no termination fees or material non-recurring revenue in this quarter.

Our margins improved versus the first quarter, as the weather cooperated and it was neither hot enough for the tenants to run the air-conditioning nor cold enough for them to run the heat; thus, our utility costs were lower than in the first quarter. In addition, our expense control programs continue to bear fruit and lower janitorial and landscaping costs.

From a corporate credit profile perspective, we continued to improve all of our credit statistics. Our leverage at the end of the second quarter was 43.7 percent versus 46.6 percent at the end of the same quarter of '02. Our interest coverage ratio, at 2.95 versus 2.77 at the second quarter of last year, and our fully loaded fixed charge coverage -- this would be a real rating agency calculation which would include capitalized interest, principal payments and interest from our joint venture debt -- at 2.07 is improved from the 2.02 at June 30, 2002. Each of these important credit stats is improved from the previous levels, and is evidence of our previously stated goal of improving the quality of our balance sheet. As of today we have no remaining debt maturities in 2003. Our goal for the rest of the year is to continue to strengthen our balance sheet in a manner that creates the most flexibility, while allowing us to maintain our earnings outlook.

Finally, from an earnings outlook perspective, we've introduced our third quarter FFO expectation of 66 to 67 cents per share and have tweaked the bottom end of our full-year guidance up by 2 cents to $2.64, and have left the upper end of our expectations at $2.69. Our third quarter expectations are driven by average same-store occupancies at levels slightly below those experienced in the second quarter, and the full quarter impact of our recent common stock offering, offset by the previously discussed reduction in the 6.8 percent mortgage debt, and continued benefits from expense reduction programs. We expect occupancy to recover in the fourth quarter, and end the year at approximately the same point we ended this quarter. As previously stated, we continue to expect dispositions and acquisitions to net, but clearly the timing of each individual transaction does have an impact on our results, either positively, if acquisitions proceed dispositions, or negatively in the inverse.

With that, I will turn the call back to Gerry.

I'd like to spend a few moments talking about our 2003 business plan. Consistent with prior quarters, and certainly for the last several years, a major priority in the Company is simply leasing office space. That's the focus of our field personnel, our administrative support and all the key officers in the organization. And I think we've done a very good job of mitigating our rollover exposure. I think we're certainly very happy with the level of tenant retention we've had this year and our ability to attract new tenants, and I think as we look at 2003 we continue to believe it will be a very successful reflection of our operating prowess.

Attention, though, has clearly turned to 2004. For 2004 we're rolling up close to about 14 percent of our portfolio. Broken down, about 7 percent, or half, of our rollover next year will be in the Pennsylvania suburbs, about 4 percent in New Jersey, with the balance in our Richmond operation. Our really renewal program is clearly gearing up and we're already it beginning to address aggressively all of those renewal opportunities.

An important point as we look at the perspective of our financial projections, our average 2004 expiring rent is $17.21, which compares to our 2003 average expiring rent of $17.63. So assuming rental rate levels just simply remain static, we think we're going to be in a good position to maintain rental rate levels going forward.

For the balance of the year, our financial outlook continues to be driven by caution. There is simply too much uncertainty in terms of attempting to quantify the time lag of when this economic recovery on the horizon impacts the office market fundamentals. As such, we are maintaining conservative. Chris had touched on us moving up guidance. I think that's more a reflection of not a change in philosophy on what we think is happening in the marketplace, but simply more reflection of the solid operating performance we've had year-to-date.

As we look at the balance of the year, as Chris touched on, we're essentially looking at flat occupancy levels -- certainly a dip in the third quarter, but moving back up to the levels we're at today. Minimal investment activity on a net basis. Timing will certainly be a factor, but we continue to aggressively test market a number of properties for sale to determine whether it is an appropriate time to harvest full value and to balance that appetite with what we're seeing in the marketplace in terms of potential acquisition opportunities.

From a portfolio management perspective, we're undertaking at least three renovation projects. The supplemental package speaks to two of those -- 1000 Lenox Drive (ph) in central New Jersey and Windsor Drive in Allentown, Pennsylvania. The amount of money we're investing in those two projects, we expect to realize a rate of return of just short of 15 percent on that initial investment -- on that incremental investment, rather. And this program is also being applied to several other assets in our core markets that will enable us to use this market downtime to refurbish clearly A located assets into state-of-the-art products that will generate higher rental rate levels and be prime for market recovery.

We also remain extremely comfortable with our dividend safety margin. As indicated on previous calls, we have to have our occupancy levels drop well over 1200 basis points until we reach the 100 percent payout ratio, and even then we would have to assume the same level of capital commitments. Fundamentally, we believe we are in an excellent position to generate internal growth by moving up our occupancy levels as market conditions improve and maintaining our strong track record on tenant retention.

Finally, from an external growth standpoint, we remain very well positioned in our marketplace. We're beginning to see an increasing number of attractive investment opportunities that will enable us to use our market position, deal flow and control of tenancies to create significant value. We enjoy a very solid relationship with all of our various constituents and see all the opportunities being presented.

From our perspective, it really is better quality people, the quality product and our strong market position. As this market trough has proven, we continue to perform at the very high-end on each of those metrics. Our employee base continues to be very motivated to exceed our competitive conditions. Our product, both from a quality and location standpoint, is at the very upper echelon available in the market. And our market position and relationships give us a competitive edge.

So all in all, while market conditions remain challenging, our team continues doing an extraordinarily good job. Occupancy levels have exceeded our expectations, effective rental rates are very much in line with our budgeted projections and we continue our clear focus on improving our balance sheet and positioning the Company for greater growth opportunities.

At this point I would be happy to open the floor for additional questions.

(CALLER INSTRUCTIONS)

Chris Haley, Wachovia.

Good afternoon. Congratulations on a decent quarter. Gerry, I wanted to get your read on two items -- first, what your expectations are for second half capital expenditures related to leasing activity; and secondly, the properties that are currently designated as out of service or under redevelopment, how do you plan on disclosing or accounting for that in terms of CapEx?

In terms of our second half capital expenditures, I think what we've seen at a run rate level for our renewals, and for our expansion -- tenant expansions or relocation within our portfolio, we don't see those varying that much from our historical norms. As I touched on, we were running slightly less than $2 per square foot for renewals back in the second quarter of '02. And we're below that range currently. So I think as we look at a trendline for how capital costs will vary from where they have been historically, I think we're seeing -- while there's -- again with the overlay of increased capital pressure across the board, I think our team is doing a very good job of controlling those very effectively within our existing tenant pool.

Where we tend to see the higher level of capital has been obviously on tenant's we're attracting to the portfolio. And I think there we continue to go through the very straightforward calculation of effective rents and take a look at our average lease term in terms of what the payback period is on that capital.

To give you an example, this quarter we had for expansions an weighted average lease term of about -- a little more than seven years versus less than five years back in the third quarter of last year. The capital costs were up, but certainly not anywhere in a range that would give us a cause for concern. So I think in our minds we looked at this past quarter's capital as really being skewed by a couple of those larger transactions and not being really reflective any continuing trend. Chris?

On the second question, if I understand the question correctly, on the property listed as under development -- 935 and the Lehigh Valley -- we have always had the policy that once stabilization is reached, or one year from the date they are placed in service, we bring them into the P&L and 935 first Avenue comes in in the third quarter. And on the redevelopment properties essentially the accounting policy is the same. We're capitalizing, obviously, the hard and soft costs related to the construction efforts at those properties, and then one year from the date that property is placed back in service or when it is stabilized we will bring it back into the P&L. So the accounting on the redevelopment and the development is essentially very similar.

Your opportunity set, in terms of the number of assets that you would like to do every -- or dollar amount that you think you could do in this type of market environment would be what for redevelopment?

Right now we're actively evaluating four other properties for potential rehab, and the range of capital investment -- incremental capital investment in this project will range between 30 and $60 a square foot, depending on the scope of work that we're doing.

Okay. Is there a typical size asset in your portfolio or smaller deals (ph)?

No, I think they're typical size assets. What we're doing in Allentown is a very clear reflection of how we're looking at this. That asset is a good size, it's an incredibly good location, great visibility, excellent parking ratio, good ceiling heights, generally good building design. But clearly, bad window lines, in serious need of HVAC upgrades, lobby renovations, lavatory renovations. In that case we're taking the building back to steel, changing (indiscernible) on the building, upgrading the lobby areas, redoing all the common area so that will wind up being a Class A redone assets in what has been a class A location. So I think as we look added it philosophically it's a good opportunity or good time in the market right now for us to aggressively pursue taking some of our A located, yet, call it 1980s vintage properties and upgrading those so when the market recovery does occur, we will wind up with properties that will be able to achieve at the higher end of market rental rates.

Ken Weinberg, Legg Mason.

Gerry, could you talk a little bit about -- you touched on some of the activity you're seeing throughout the portfolio. Can you touch on the activity you're seeing (technical difficulty) pressure right now and then also maybe specifically about 935?

I think we've seen an increase in activity in King of Prussia -- I will have Jeff take a lead on answering -- providing more color to it. In 935 we continue to actively market it. We have a number of prospects, but nothing signed. So I think we're seeing as the market -- while activity in that market has picked up, the size of the tenancies and their lease term requirements have not really been great fits for 935.

Deal flow, you continue to work hard to get foot traffic. But our assets, I think, as you know, are -- we have a dominant share of that market. They are Class A assets at the Class A locations. Of the foot traffic that's out there I think we're getting to see all of it. As far as making the short list, I think our properties seem to rise to the top.

If we're looking back at the volume of people, 2003 versus 2002, it seems to be consistent with the previous year for this year-to-date activity. It a little slower in that market than we would like it to be certainly. It's primarily Fortune 1000 big corporations, which obviously have had some slowdowns across the board. But the road improvements are just about to be completed, which we do think has had a negative impact on that market over the last 24 months. But it is the largest infrastructure project the state has seen in a long time with $250 million scope which is (technical difficulty) expanding all the major roads, which is scheduled to be done on time, on budget -- actually below budget, November of this year, I believe. Ones that dust settles, I think things will improve much more.

Where would you put the rents differential between, say, King of Prussia and Plymouth Meeting today versus where it's been I guess historically?

Plymouth Meeting, quite frankly, has been a continually good market for us. We're very pleased with the leasing activity we have on 401 Plymouth. Right now we've got either leased and/or committed to -- we should have close to 95 percent leased at this point. And the market rents seem to be pretty strong. King of Prussia is a little softer and doesn't quite have the deal flow at this point as Plymouth Meeting does.

I think we're seeing a spread in rents of 4 to $5 a foot between Plymouth Meeting and King of Prussia and it's a bit hard to draw historical comparison. Our success here at 401 has really been due to the fact that Plymouth Meeting never had an office product of this quality to market. So this product that we've been marketing at 401 winds up competing more directly with some of the very high-quality products in some of the other sub-markets. So the rental rates we've been able to achieve here on 401 is on the high-end historically with what Plymouth Meeting has achieved. Historically, there's always been around that type of spread between Plymouth Meeting and King of Prussia.

To put a finer point on what Jeff was saying for 401, right now we're in a position with deals committed that would be above 90 percent leased. So we feel real good about how (technical difficulty) there's some smaller deal transaction behind that. So I think we've been pretty pleased with the way 401 has gone for us.

Thanks. Chris, real quick, can you give up a quick update on the balance sheet strategy here, given all the debt that is maturing over the next 18 months, roughly?

As I said, for the balance of this year we've addressed all of the '03 maturities. So what's left for us to taken a look at is the '04 mortgage on the buildings in Wilmington, which matures in February, and then the line, which we have a one year extension on, but the nominal maturity is next June. And I think we have taken steps so far this year, and we will continue to taken steps in the third and fourth quarter, and disclose those as appropriate, to put us in a position of having the maximum flexibility. I think based on the credit statistics I walked everybody through, you can see that we are moving very much in a direction of creating the most optionality (ph) for us.

I think at this point, the goal is -- and as we stated at the beginning of the year, continues to be -- creating term and fixing as much of the debt -- making as much of the debt fixed-rate as possible. We're continuing to move down that path, whether that be through the private placement market, whether it be through the bank term loan market, whether it be a thoughtful process of putting some longer-term mortgages on specific assets, or whether it be the unsecured debt market from a public perspective. That optionality still exists for us, and what we are doing this year is certain transactions, i.e. the equity offering, which will put us in a position where we have the ability to decide which option works best for us as we look at the evolution of our business strategy, and which option is most cost-effective for the Company. So very much focused on improving our maturity profile and reducing the current levels of floating-rate debt. I think as the next two quarters evolve, the strategy there will become more and more clear each quarter.

John Litt, Smith Barney.

I wanted to expand, Gerry, maybe if you could, on the opportunities you see on the acquisitions front. I guess there were two purposes to the equity, one was to clean the balance sheet up for -- maybe from debt perspective, but also to acquire some assets. Maybe you could expand on what you see out there.

I'd be happy to. I think we're seeing a range of opportunities, from smaller, individual assets that are clear in-fills to our market position. As you know, we have significant concentrations in a number of the key markets in the Philadelphia region. I think what's happened over time is we've become very much the logical buyer for a number of those assets. I think what we've seen in the last year, why we have kind of pared back, is the level on investments appetite for a lot of those individual assets was really a lot higher as we've seeing buyers begin to focus a little bit more on rollovers, effective rent levels, deferred capital obligations and really opening the door for us to evaluate some opportunities that may fit in very well with our portfolio, whereas for an individual assets buyer they may have certain issues relative to tenancy that they may not be as attractive. So that is one level we're beginning to see those types of opportunities creep back onto our radar screen. I also think they happened be some of the opportunities that may create the best value for us. We have not seen that in the preceding years, I think we're very enthusiastic about a few of those transactions coming to reality.

In addition to that I think we're seeing some of the portfolios come to market that are institutionally owned where pricing levels, we think, while they're still albeit high (ph) on the more stable long-term lease assets, on some of the multi-tenant buildings we're evaluating, we're seeing the bit levels come in a bit where they might be more acceptable to us. So I think as we look at the larger size transactions, down to the individual assets, we're seeing more opportunity to fit our pricing criteria today than we did even a couple of quarters ago.

Can you put some color on that pricing (inaudible)?

I think we're seeing some of the smaller assets migrate north -- back up north over a 10; but more importantly on a price per square foot basis that we feel very (technical difficulty) replacement costs and barriers to entry, whereas a year ago we would have seen those transactions clearly trading in the lower nines and at a pricing per square foot level that was a little bit too dear for us.

Are those rents generally at the money, below, above, --

Generally at the money. In some cases it could be a tiny bit above. (multiple speakers) institutional rate, I think we're seeing going from a range of 9 to 9.5 to a range of 9.5 to 10 on a cash basis.

And it's just because things aren't selling? Is that what is driving it?

There was such a tremendous amount of appetite for products that was purely capital driven over the last couple of years that what we're seeing now is the bid list for some of those assets is getting shorter. The pricing is still, as I mentioned, it's aggressive, but starting to come in a little bit. So we're seeing fewer players with the appetite to do larger office deals right now and we wanted to make sure that we were in a financially good standpoint to have the balance sheet flexibility and short-term capacity to execute on some of those transactions we saw the opportunity.

What's your sense of timing and volume on acquisitions?

It could go the whole range. I think what we're we're trying to do, as I mentioned in my prepared comments, is we are doing our best to marry our disposition program with the acquisitions so that we can really manage any dilutive effect from a timing issue. So we're still looking at transactions pretty much netting over time. I think we were projecting really very little acquisition activity at the beginning of the a year, and started to rebid (technical difficulty) when things started to come back in. I'm reluctant a give you a specific number, just because it could have a wide range of error built into it.

But net-net you're going to be positive investment activity, not neutral?

We will be either neutral to slightly positive.

Thank you.

Frank Greywitt, McDonald Investments.

One quick question -- 400 Bruin Park (ph) -- can you give any updates on the leasing activity there?

I'd be happy to. Right now we are in a position where deals we're going to bring across the table will the above 70 percent leased.

Is it currently at 40?

It's currently at 42.48 percent.

(CALLER INSTRUCTIONS)

Chris Haley, Wachovia.

Speaking of the tattoo (ph), was that the Bullwin (ph) building?

Yes.

So you're still around 42?

Yes sir.

About 401 Plymouth (multiple speakers)

401 Plymouth, right now we're signed 70 percent, but we have three transactions that we are counting as happening. That brings us up over 90 percent. We're at that 90 (multiple speakers). We have one more potential candidate out there that brings it even higher than that.

In these ten at (ph) Bruin Park (ph), Jeff, where you are offering deals today, gross and net?

I think you're seeing things there on a plus electric (ph) basis in the 24, $26 range -- 24 closer, I think realistically at this point in time.

What does that work out to on net?

You at about a six (ph) to the operating expense (indiscernible).

Deals out at 4401 Plymouth, what do you think -- where are they?

They have ranged anywhere -- if I had to pick a more number than not, 27.50 to 28 -- 27.50 is really the number, with bumps (multiple speakers) between 50 cents and 75 cents.

Those are the deals that are out for signature?

Yes, they've been signed. They didn't time (technical difficulty) with the June 30 cutoff date. They will be occupying later on this year. And as I mentioned briefly, there's another lease that we think is going to happen that will bring us up even higher.

Has there been any change to your expected development cost of those properties? Have you had to put anymore TI in those buildings? Or have you had a little more carry costs, whenever it might be?

No, actually the TI packages are staying very much in line with what we had originally budgeted. There's been no change at all. Just people making a decision and (multiple speakers)

My recollection is, Chris, that you have assumed in your guidance -- your prior guidance for maybe the previous quarter you had not assumed any net positive contribution from these developments -- from Plymouth Road. Is that correct for '03?

For '03, yes. We had looked at the leasing activity taking place later in the year versus sooner, and were just in general signing leases more rapidly than we had expected.

Marked-to-market question for Jeff and George and the Richmond team. Where would use say your -- by market your marked-to-market is today on overall portfolio?

First, I think New Jersey has actually held up pretty nicely relative to marked-to-market, where overall we're probably closer to that than some of the other regions that we have. So I think we're probably right on line with where the market rents are relative to where we are.

And Philly (ph)?

We are flat at this point.

And Richmond?

I think the same thing. I will speak for Richmond. The suburban properties, they've been generating renewals very much on a flat basis. We continue to be aggressive in the building in downtown Main Street (ph).

Speaking of the word downtown, or Amtrak, do you want to give us a quick update on the Sears Center and where -- I know obviously the KOZ (ph) was extended, which is great. Any other leasing news?

I think as I reported last quarter, our major mission was we announced a project just about a year or so ago and the major mission was to complete the design and development process, which is done and to from a marketing standpoint introduce the project to the marketplace. I think we've been -- we have been and continue to be pleased with the level of positive response we're receiving on the project in terms of its design considerations, its location, floorplate (ph) efficiencies and safety design. All that positive real estate stuff notwithstanding, it's a very difficult climate, I think, both in the suburban counties, as well as in the CBD (ph) of Philadelphia.

We believe one of the advantages that Sierra (ph) has is that it can appeal to a wider range of potential tenancies than either a suburban building or a traditional CBD building. And I think the marketing efforts that Jeff DeVuono is leading for us in his team is doing a very, very good job of getting out and speaking to a number of tenants, certainly within the core market area, but spending an awful lot of time talking to tenants up-and-down northeast quarter. I think one of the positives that we've really come to appreciate is every region wants to try to do its best to attract new businesses. I think that's the lifeblood of any regional growth platform. And Sierra Center (ph) we think has a tremendous opportunity to do that.

That's a long incubation period and it's a very complicated discussion and negotiation process, but I think we remain pleased with the progress we're making. We're certainly ahead of our own internal schedule in terms of our marketing platform and we continue to certainly (technical difficulty ) reporting team to do a good job of continuing on a quarterly basis to expense those items that (technical difficulty) standpoint.

Can you remind me -- the tax benefit would accrue to a prospective tenant if they are outside of the region or they grow their job, grow their employment base by some percentage (multiple speakers)

(multiple speakers) two criteria, which is either job growth standard or a capital investment standard. They need to qualify under either one of those criteria.

Job growth would be within region or outside of region?

That would be new job creation.

Okay. What would use say -- how would you define your prospect list in terms (technical difficulty) size or just -- I'll leave it open, however you want to answer that question.

I will be vague on how I want to respond to it. I think from our standpoint we're clearly in a position where there's a couple of interesting opportunities that we're looking for obviously a large anchor, or a series of larger, tenants to mitigate the development -- the economic development risk as we move forward with the development. We continue to look for a series of or a large tenant to start that process moving forward. That's going to be clearly a function of the rents they pay, their credit worthiness, the length of their lease, as well as their position in the building. And I think we have done a very good job -- actually the leasing team has done a very good job of -- there are very few prospects in the region who are looking for large blocks of space that have not considered Sierra Center as a viable option. And we've been pretty pleased with the level of dialog we've had with the number of those tenants.

You're talking about -- it's hard to get a 5000 square foot tenant (multiple speakers) let alone getting a corporation of a significant size in the 2, 3, 400,000 square foot range to make a capital decision to relocate their business, either from within the region or from outside the area. So the same conundrum we find ourselves in with the smaller tenants that we run across in every one of our properties is amplified in what we have with -- in our discussions with some of these larger companies.

I think we have taken a very prudent approach financially. That's why we have the land under option. That's why we have been very cautious in our level of expenditures on the building in terms of working through the design development process. And we have created, we think, a very effective marketing program that, assuming the market conditions stabilize or maybe tick up, I think will be successful. But it's a long process, same as it is for every one of our development opportunities.

Just a larger picture question about cash flow streams or reported expectations into '04. If I put together kind of same-store numbers and leasing numbers where you are at market -- assuming that your expense structure does not change either way, and taking into account that you will be turning out some of your shorter term debt right now -- shorter term debt over the next six months, let's say -- that without at least a little bit of improvement in terms of occupancy, it's hard -- and acquisition it's hard to imagine per-share FFO numbers going up dramatically in '04. Is that a reasonable assumption?

If your question is if there's no investment activity, and no increase in occupancy rates, where we're going to get growth from. Is that -- I want to make sure I (multiple speakers)

I am just trying to solve for -- kind of get an early read on '04, if that's where you are focused.

I think at this point there is obviously a variety of assumptions, primarily related to what exactly we choose to do in terms of the maturity profile, our internal expectations on occupancy and any external growth opportunities, whether it be dispositions or acquisitions. And as has been our practice, at the end of the third quarter we provide '04 company guidance as it relates to the press release on October 23rd and it would be premature at this point, given that we've got a lot of balls in the air in terms of opportunities and decisions, for us to really make any comment and to make a comment that's not thoughtful. So at this point I prefer to stick with our standard practice.

On the percentage of your debt that is floating, hedged or unhedged, I'm getting somewhere north of 40 percent, with the hedge around 20 to 25, with hedging. What is a number that you would like to be on either of those going into early '04?

I think hedged we're more around 25, 27 percent rage, which historically is down from where we had been. I think, again, it depends upon balancing it against what the maturity profile ends up looking like, but certainly I think the norm -- and using the norm, meaning sort of the average for companies of our product type and in our market size, market cap size -- is more in that 12 to 15 percent rage and I think that would be an ideal target. I think it's just a matter of working that direction.

Jamie Feldman, Prudential.

My question has been asked. Thank you.

Ken Avalos, Raymond James.

Our question has been asked as well. Thanks.

There appear to be no further questions at this time. I will turn the floor back over to you for any further remarks.

We'd like to thank you all for participating in our second quarter call. We look forward to talking to you again at the end of the third quarter. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful weekend.

(CONFERENCE CALL CONCLUDED)