Brandywine Realty Trust (BDN) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to Brandywine Realty Trust's 2003 fourth quarter earnings release conference call. [OPERATOR INSTRUCTIONS]

Prior to turning the 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 filing.

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 requirements of the SEC, 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.

Maria, thank you very much and thank you all very much for joining us for today's call. The agenda for the call will provide a brief overview of market conditions, a financial review of our 2003 results, a brief look forward at projected real estate market conditions, as well as our 2004 business plan.

Participating with me in today's call are Chris Marr, our Chief Financial Officer, Jeff Devuono, and George Sowa, two Senior Vice Presidents in charge of our leasing operations, Brad Harris, our Chief Accounting Officer, Dan Palazzo, our Corporate Controller, and Tim Martin, our Director of Financial Reporting. Jeff and George will be available at the end to answer any questions you may have relative to market conditions.

We were extremely pleased with both our fourth quarter and year-end results. From a tenant retention, operations and occupancy perspective, we continued our track record of significantly outperforming both general market and local submarket conditions. Make no mistake, however, despite this progress, the real estate markets remain challenging.

While we are extremely encouraged by the increased level of activity and, frankly, marginal absorption in some submarket, it remains a very competitive climate. While our leasing costs continue to show quarterly volatility, more symptomatic of specific leasing activity, we are seeing a stabilization of rental rates.

In particular, we are seeing the demand for high quality projects remain at the upper echelon of tenant demands. Let me just tick off a few statistics that reflected our progress during 2003. We ended the year at approximately 91.5% lease, which was essentially flat with our year-end 2002 performance.

During the year approximately 3.8 million square feet either expired or were terminated and we renewed leases for 3.1 million square feet and signed new leases for 800,000 square feet to essentially keep our portfolio in a steady-state position.

More importantly, we exceeded our tenant retention stretch goal. You may recall, our five-year tenant retention rate is approximately 75%.

We actually wound up 2003 with a retention rate of 80.2%, which is truly a tribute to the quality of our leasing, maintenance, property management and frankly our entire team. We were also pleased that the GAAP rental rate growth on both new and renewal leases was positive for the fourth quarter.

We ended the year with a 6.1% decrease in cash rental rates on new leases but only a 1.2% decline when you look at the straight-line basis.

We also ended the year with only a 1% decrease on GAAP rental rates, thereby highlighting the importance of our tenant retention efforts. From a financial performance standpoint, we posted FFO in excess of FirstCall consensus for both the year and the quarter.

Our FSO payout ratio was in line with our 65% target while our increased capital costs resulted in a CAD payout ratio of 88%, which was slightly above our 85% target. Capital costs for the year increased over our historical averages. As we mentioned on previous calls, quarter-to-quarter volatility is primarily driven by specifically quarter leasing activity.

During this particular quarter, the fourth quarter of '03, we had a number of ten-year transactions that required higher capital. These costs were anticipated and very much in line with our budget and the achieved rental rates for the most part were in excess of our budgeted projections.

As you recall, we record these capital costs in the period in which they are spent, so these lease deals were actually done up to a year ago. From an anecdotal standpoint and certainly from looking at 2004, of about 100 leases that we've done thus far in 2004, we are having a capital cost of about $1.75 per square foot per lease year, so it appears at least on the activity, we're seeing in 2004 that we're beginning to track back towards our historical averages.

As we have in the past, we continue to maintain an extraordinarily aggressive leasing stance to ensure we achieve all of our leasing and capital targets.

From an overall standpoint, we are beginning to see some evidence of a recovery. Our estimation, however, is that this recovery will be slow but we do believe there is now a bias towards rent stability versus continued downward pressure.

We are also witnessing increased levels of activity and additional tenants in the marketplace, seeking longer-term larger size commitments. By way of illustration, for 2003, our conversion ratio, that is the number of showings that actually convert into signed leases, jumped to 23.6%, which is up from 2002's ratio of 17.4% and 2001's of 13%. Clearly a sign that more decisions are being made, and that we are capturing more than our share.

From an economic overview, the region's job growth continues at a slow pace. Most areas in the suburbs are gaining jobs.

In Southern New Jersey, for example, job growth rate at annual rate of 2.5%, Philadelphia suburbs, that is still below 1% but the unemployment rate in the suburban counties has dropped below 5% while the city has dropped below 6.5%.

Bottom line, we continue to operate our business on the premise of markets will remain challenging and our focus remains maintaining and improving occupancy levels. We're delighted with where we wound up the year but will further stretch our capabilities in 2004 to exceed those levels that we are right now. We will continue to control our operating and administrative expenses.

Even with the margin squeeze presented by rising real estate taxes, utility and insurance costs, our team has done a great job in managing our controllable expenses, in line with our 10% reduction target, without compromising by any measure the quality and presentation of our portfolio.

We also made significant progress during 2003 on our balance sheet program and are delighted with our strong year-end transactional activity.

All of these activities were designed to - 1. improve all of our financial metrics, and 2. create capacity and flexibility to ensure that we can accelerate our growth as market conditions improve. While disclosed in more detail in the supplemental package, I'd like to take just a moment and summarize some of these transactions that made it across the finish line either at the end of the year or shortly thereafter.

First, we successfully executed a series of convertible preferred redemptions and common preferred equity issuances that significantly improved our balance strategies. Chris will review those points in a few moments. In addition, to these redemption conversion transactions, we were also very active on the acquisition and development front.

During the fourth quarter, we sold six properties containing over 300,000 square feet for approximately $30 million and three parcels of land for an aggregate value of $3 million. The exit caprate on the earnings properties was about 7.25%.

During the fourth quarter, we also entered into a joint venture with McCarry office trust, in which Brandy Wine considered two office properties in Wilmington for a value of approximately $113 million and we retained a 20% interest. Net proceeds from this transaction were used to pay down debt, and repay some secured borrowings. This structure, which we're very excited about also provided the ability to proceed with additional co-investment activities with McCarry.

In addition, in late December, we announced we had signed leases totaling 374,000 square feet with three tenants at our Ceres Center development in University City. The signing of these three leases put us above our 50% threshold and right in line with our originally fourth quarter 2005 delivery date.

We had commenced construction on this project shortly after the first of the year. We are delighted with the projects leasing momentum, the stacking plan of our lead tenants and the construction pricing we received on the job buyout thus far.

We have also retained complete flexibility on the assets capital structure ranging from on balance sheet unsecured financing to either a pre-sale or joint venture. We also acquired four properties located in the King of Prussia, Pennsylvania containing approximately 250,000 square feet for $45 million, and one office its property located in central Jersey for $20 million. These properties were purchased for an average cap rate of 10.1%.

During the quarter, we also proceeded with our renovation program, which will generate excellent returns for us as these projects are placed in service during the latter part of 2004, and early 2005. We are delighted with all of these transactions, and that they were well executed, perfectly consistent with our announced business strategy, and truly position the company for external growth as the real estate market conditions improve.

As we've discussed on previous calls, in addition to excellent property level performance, our overriding objective has to put our company in a position to accelerate growth by increased acquisition, development, and financing activities, which create an increasingly stronger financial and operating platform for our shareholders.

All in all, a very solid end to the year. I'd like to congratulate our entire team for a fairly frantic holiday season that wound up enabling us to begin 2004 on a very strong note. At this point I'd like to turn the presentation over to Chris to walk you through these financing transactions, our year end results and discuss our 2004 estimates.

Thanks Gerry. It was a very straightforward quarter for us. The kind we like, no material variances from our plan. So I'd just like to spend a moment and touch on a few points as it relates to our statements of operations, and then focus the remaining time on commenting on the transactions that helped improve the quality of our balance sheet.

Our tenant reimbursements and billable expenses both were up year over year basis in terms of the gross dollars impacted primarily as you will recall from previous conference calls by the tremendous amount of snow fall that was experienced in the Northeast in the first quarter of 2003.

So while the pure dollar amounts are up, if you look at things as a percentage of our billable operating expenses, pretty consistent. We had about 42% of our billable operating expenses and reimbursements in 2003, and that number was 41% in 2002.

Also, for the year, other income is up about $1.2 million. And if you recall from our conference call at the end of the third quarter, we did have some tenants that had, in 2001, unfortunately gone bankrupt, and we received proceeds from the settlement of those bankruptcies in the third quarter of 2003, and that really explains the bulk of the difference in terms of our other income.

If you then switch to the activity in the fourth quarter and first month and a half of 2004, and it's substantial impact on the credit profile of Brandywine, just take a moment and I will walk you through each of these transactions.

In October, we raised 64.1 million of common equity using the proceeds as Gerry described to acquire Bay Colony, which was a 95%, leased unencumbered asset located on our core King of Prussia submarket. And then in early December, as Gerry mentioned we did our joint venture with McQuarry Office Trust paying down a 105 million of debt. Significant to that is 53.4 million of that debt were secured borrowings.

So not only did it reduce our overall leverage but it also helped us in terms of our desire to increase the pool of unencumbered assets. At the end of December, we announced the conversion and subsequent redemption of our 8.75% series-B preferred. Twenty-five percent of that position or 1.1 million common shares was converted by five arrows and the balance we redeemed for approximately 90.2 million.

This served to eliminate 3.3 million shares from our diluted share count. To finance the redemption, we issued two million of our 7.5% series-C for perpetual preferred shares raising net proceeds of approximately 48 million, and then in early January, we issued common equity to fund the remaining balance.

Then in early February, we announced the redemption of our 7.25% series-B convertible preferred units for $93 million. $50 million of this redemption was executed on February 6th with the remaining 43 million to be redeemed at our option before March 15th, 2004.

In order to fund the 50 million that we have already redeemed, the company sold 2.3 million of its 7.375% series-D for perpetual preferred shares in early February. The result of all of this activity is a substantially re-characterized balance sheet and improved credit profile.

To place a bit of a finer point on that, the following are some indicative credit statistics. Our ratio of debt plus preferred to book capital has moved from 59% in 2002 to 50% pro-forma 2004. Our ratio of secured debt to adjusted book capital moving from 28% in 2002 to 21% pro-forma 2004. Our unencumbered NLI pool moving from 41% in 2002 to 55% pro-forma in 2004, and our fixed charge coverage moving from two times in 2002 to 2.6 times pro-forma 2004.

Nothing really validates an improving credit profile better than a market transaction. Our series-C preferred was sold at a 7.5% yield matching the lowest yield ever achieved for a REIT preferred. A little over a month later, we issued our series-D preferred at a 7.38% keep on establishing the new benchmark low over an unrated re-preferred instruments.

We were able to implement our balance sheet strengthening program while maintaining our earnings guidance for 2003. In fact, we ended the year above the 262 to 269 range of guidance we had originally provided back in October of '02. The guidance issued in October of 2002 considered a 0.5% to 1% decline in same-store occupancies and a decrease in same store NOI ranging from 1.7% to 2.6%.

Our actual 2003 same store results slightly exceeded that guidance with occupancy slightly up year-over-year and same store NOI coming inside the low end of that range. Both are a testimony to our strong tenant focus and quality asset base.

We are re-affirming our first quarter and 2004 full year guidance ranges of FFO per share at 61-63 cents for the first quarter and 260-270 per share for the full year 2004.

Underlying that guidance is a continued expectation of a challenging leasing environment with pressure on both rental rates and capital. We continue to take steps design to move the company towards a rated unsecured debt strategy. The company's outlook at Moody's was upgraded to positive in mid-December of last year and recognition of our strengthening credit metrics.

Our goal remains working towards an investment grade credit profile with the hope that we may earn that status from the three agencies by the late spring or early summer of this year and be able to enter the investment grade market with a debut bond offering at that time.

To put a fine point on that, one of the strategy is obviously to get to the investment grade rating has been to have a pool of debts that is pre-payable and eligible for us to take out without incurring any prepayment penalties or other costs.

As a result, our floating rate debt is a percentage of our total debt at around 30% at the end of the year is higher than our long-term goal. I think if you look back, a $250 million bond offering in the mid-summer of this year, and then combine that with access to that market on a go-forward basis, our goal is to bring that ratio back inline with our rated peers as a result of those transactions and be back inline with our rated peers by the latter part of this year. At this point, I'd like to turn the call back over to Gerry.

Great, thanks a lot, Chris. Let me spend just a few moments talking about 2004. Certainly given the competitive leasing environment, we have focused all of our attention on our 2004 rollover as well as positioning us to have net absorption throughout our portfolio.

We are aggressively in front of all of our expirations, and our hope is to experience the same level of success in 2004, at a minimum that we've had over the last seven years. As Chris indicated, we've provided guidance and reaffirmed that several times. It's a true tribute to our financial reporting systems in the fact that we are able to do so many financial capital market transactions and stay within our guidance range, and in fact exceed our original guidance that we gave the Street.

But the financial outlook continues to be driven looking at 2004 by an overabundance of caution. The overriding construct is we really do believe there is simply too much uncertainty in anticipating the timing of the recovery. As such we continue to be conservative and are focused on maintaining our financial performance through 2004.

While I mentioned in the introductory comments, we're seeing a lot of anecdotal evidence of more activity, marginal absorption in some markets, a clear bias towards rental rate firming, when and how that all gets translated into signed leases and then from signed leases into occupancy, is simply too many uncontrollable variables. So we will continue our practice of being very pragmatic in how we look at our financial forecast.

Looking forward, though, we do see some positive trends. We do in fact anticipate being a net acquirer of properties for really the first time in several years.

Our guidance at this point incorporates an additional $50 million of acquisitions at cap rates ranging from 9-9.75%. From a portfolio management standpoint our land approval program will continue to get to its goal of becoming full funding. Two thousand three was a very successful year in this regard, and we anticipate its continuation during 2004.

We also, as I touched on, had several renovation projects underway. In addition we are looking at several additional projects that would commence renovation during 2004. This program, as I've previously discussed will position well-located assets in our core markets in the state-of-the-art buildings where we can achieve higher rental rate levels as market conditions continue to improve.

We are also undertaking selected development activities. In addition to the Ceres Center project, which I talked about earlier or supplemental package identifies our Bishop Scape project in Southern New Jersey, which is 70% leased as well as our delivery of an office product in the Lehi valley, which is 69% leased.

We continue to look at numerous build to suit opportunities that if leasing terms and market conditions justify, we would move forward with some additional development during 2004. We also remain very comfortable with our dividend safety margin. While forecasting capital cost can be a strenuous exercise, we do believe that those capital costs are being more than compensated by longer lease terms and tenant expansion requirements and we feel as though we are in very good shape in terms of our dividend.

We were delighted to wrap up 2003 in such a strong fashion, and have been so successful in executing our previously announced balance sheet and growth program.

For 2004, from an internal growth perspective, we believe we are in an excellent position to begin generating same-store growth.

Our earnings projection incorporate a 1-1.5% increase in this growth rate and we are also anticipating a slight increase in average occupancy over year end 2003 levels and steady state operating and administrative margins.

From an external perspective we remain very well positioned in the marketplace and are looking at an increasing number of additional investment opportunities.

Our team continues to do an outstanding job, we are extremely excited about both our financial and our development activities, our core business, as indicated through Chris's comments and the numbers we have posted remains in extraordinarily strong shape.

We have demonstrated a clear ability to effectively deploy a regional strategy, which has resulted in significant out performance.

Marketplace psychology will begin to turn more positive later in 2004 and into 2005 and that will position us extremely well to continue generating significant value and accelerating our growth program. Thank you very much for taking your time to listen to our prepared comments. Maria, at this time we'll open the floor up to any questions.

Thank you. [OPERATOR INSTRUCTIONS]

Your first question is coming from Gary Bostin with Smith Barney. Please pose your question.

This is Andrew Coldwood with Gary and John Litt here. I just have a question for Chris. Chris, what are the, are you guys basically at the financial metric level that would allow you to achieve an investment grade rating now or can we expect more capital market transactions in the future?

I think from a pure credit metric perspective, if you look at levels of debt and debt plus preferred to book capital and fixed charge coverage and interest coverage, we are at the levels of, that we need to be in order to demonstrate an investment grade credit profile.

Now, that being said, obviously that's at a point in time. So, as we move forward and execute on the business plan, we need to maintain those levels. So, it's not as if we've, it's not as if it's a static thing. But no, we are definitely in the ballpark, and are working actively with Moody's, S&P and Fitch to work our way through that process.

That's all. Thanks.

Thank you. Our next question is coming from Ken Weinberg with Legg Mason. Please pose your question.

Yeah, good morning. Quick question on the guidance numbers for the year. Is your first quarter guidance, it's 61 to 63 cents, that's implying a pretty large ramp up to get to even the midpoint of the range. I know you've touched on the occupancy assumptions of the acquisitions. What's really driving that particularly, if you've got to be fixing some of your debt during the year?

Hey Ken, it's Chris. I think, two things. One, as you think about fixing the debt, I mean, right now we have 175 million of our line borrowings are hedged. The floor on that, the base rate on the hedge is 4.2 and we are borrowing at 150 basis points over that.

So right now, where the ten-year is, and if we were able to issue at say 130 or 135 over that, at least the first 175 million of bonds would be a little bit below, if we're talking about a 405, 408 ten-year, a little below where the effective cost is already.

So I think the issuance in the size I call it 250, is relatively neutral to interest expense as you look at where we are now. More to the direct question of the first quarter, I mean I think the first quarter historically in our business is one in which you have two things. You have both snow, and you'll have the beginnings of your spring landscaping cost. Whereas, if you look at the fourth quarter, especially in our markets, you generally have limited amounts of snow, and virtually no landscaping.

So a certain amount of the first quarter reduction if you're kind of going from the fourth to the first is just related to the seasonal nature of those items.

And then in addition, in the fourth quarter we did the McQuarry transaction in mid December, so the impact of that is fully felt in the first quarter with no reinvestment of those proceeds. I think our acquisition assumptions are weighted more towards the midpoint.

So you're impacted a bit by that in the first quarter. So I think it's not so much going to be impacted by any issuance of public debt as it will be by the reinvestment of some proceeds into acquisitions as well as just the seasonal nature of the business combined with our expectation of some slightly rising occupancy as we get later in the year.

OK, thanks, helpful. And then Gerry, quick question on Cira Centre. Could you touch on I guess on where some of your underwriting assumptions are, particularly related to asking rents and what you're anticipating in the way of TI build out there?

Sure, be happy to. We are looking at all end cost on Sears that could range between 2.50 and 2.60 a foot. We are looking for rental rates in the low 30s with the TI package in the mid 30s. At this point, we are -- the project consists of about 690,000 square feet of office. That office component is about 54% leased. The overall pre-leasing for the building is 51%.

In terms of our pro forma assumptions, we've assumed that when we open the doors in the fourth quarter of '05, we'll be about 63% leased.

So we've taken a fairly conservative tact in lane reabsorption for the project. Certainly we have lots of expectations that we will be able to exceed that. In terms of looking at the investment thesis for the building, we certainly, as we laid out in our previous calls, the initial criteria was to achieve a 50% pre-leasing level.

Secondly, to get the right stacking plan on our lead tenants in the building. And then to have some strong leasing momentum behind the project. So I think we're delighted with the way things have all come together and that we're moving forward through the construction of the building.

OK. Low 30s gross, where do you anticipate operating expenses falling out?

We anticipate expenses being in the 6-6.50 range.

OK, great, thanks guys.

Thank you.

Thank you. Our next question is coming from Rich Anderson with Maxx Core Financial. Please pose your question.

Thank you. You mentioned the 2004 leasing activity a 100 leases, can you comment on what the retention rate has been thus far this year?

I think if you look at those on a pro forma basis for 2004, right now, based on that level of activity, we're right inline with our historical trends in the, 70-75% range. And again as Gerry mentioned, our target remains for 2004 that 75% retention rate.

OK. Do you have the end of period share count? It might be in your supplemental but with all the activity it would be helpful.

Yes, it's on page nine, Richard.

OK

It's 47.599 million.

Thank you. With regard to acquisitions, where are you looking most notably, is it in Jersey, in Princeton still or elsewhere?

I think it's throughout the entire marketplace. We do see some good opportunities in central New Jersey. We made a couple of acquisitions there last year that really expanded our operations, both with earning and assets but also by being able to buy some contiguous properties that at one level gave us control of a park and the other level gave us control of contiguous parcels of ground.

So we have not identified any specific market as being higher on the acquisition priority list than any others. I think we remain very aggressive in looking at acquisitions throughout the entire marketplace.

Our seeing opportunities to buy very good quality assets, in some cases that pricing are fairly dear, so we're not an effective bidder for it. But in other cases we have been able to ferret out the right opportunities because of adjoining properties we own or our ability to close quickly, with limited risk, we have become a preferred buyer.

OK. My last question is with regard to joint venture activity. I mean how much more could you envision happening in 2004 beyond that which you've already done in December?

I'm sorry just on the joint venture front?

Yeah, I mean how much more activity could you envision transacting during 2004, if you see that as an additional opportunity on a go-forward basis?

I think we do see co-investment with institutions as an opportunity for us. That was one of the real constructs behind structure and the transaction in Wilmington with McQuarrie. The platform with them has been set to look at additional opportunities in the marketplace. There is no commitment nor obligation on either part's side to have any preset investment thresholds but we certainly view them as they view us as a quality partner, and working together, we will continue to look at new opportunities. We have not forecast any new co-investments during 2004 at this point.

Would you see them as a potential partner at some point down the road in Cira Centre?

They certainly could be a potential partner for that property as well as any other opportunities that we identify over the next several years.

OK, thank you very much.

You are welcome.

Thank you, our next question is coming from Paul Puryear with Raymond James. Please pose your question.

Yeah, hi, good morning Gerry.

Hi Paul.

On Cira Centre, could you just talk about the competitive landscape in the leasing on downtown Phily, what you think the competing rates are for rents in some of the older buildings and also touch on the yield objective that you've got there?

Sure, I would be happy to. We - I mean I want to repeat we have talked about before is that I mean we do not view Cira as a CBD building either in size or location. And certainly, our marketing program has been geared along those directions.

The opportunity we see for Cira is that it will wind up being a pretty good connection point between some of the suburban counties and the traditional CBD. From a competitive standpoint, I think we went into Cira center with the same expectation we have with any project, which is it is incredibly competitive landscape across the board in every sub market and throughout the entire marketplace.

Our objective on that project was to position it at the midpoint of the competitive range, present a higher, newer quality, more efficient product that had some physical advantages that would attract some tenants.

So I think from our standpoint, you know, we put our marketing hat on and we're very, very optimistic about the prospects of the absorption on that project being accelerated. When we put our financial hats on and analyze the investment thesis, as I mentioned a few moments ago we have been very cautious in projecting out what the absorption of that project would be.

The build out would be approximately two years and as we look at the target that we have, the leasing percentage upon core and shell completion, we feel that it will be at least able to at least meet that and hopefully exceed it by a great degree.

So what is the rate differential right now versus the other CBD buildings?

Really depends on whether you are talking about, general buildings or trophy class properties. I mean I think right now, we're anticipating the rental rates that we're looking for are comparable to what's seen in the very high quality buildings, in both the in-fill suburban locations, whether it's Bala Kimwood, Raadner or in some of the trophy properties in downtown Philadelphia.

And the yield expectation?

I think the yield expectation will be right inline with what we said it would be which is north of 10% and we believe those numbers will hold.

Two more things, on the TI's and leasing commissions, the $1.75 that you quoted earlier, that excludes maintenance Capex, is that correct?

That is correct.

And you said you thought it -- or did I hear you correctly, that you feel like you are starting to get some relief here at the leasing cost?

I think what we're seeing is at lease for activity thus far this year, is, you know, our capital costs seem to be reverting closer to our historical average. Now, I will tell you this, our historical averages were very, very low and one of the drivers of that was our ability to do 50-60% direct lease transactions, and not having as many expansions or contractions throughout our portfolio.

As the marketplace has become more competitive, our percentage of direct deals has dropped to about 42%, as opposed to the 60% average, and we're having much more movement of tenants within -- within, you know, the spaces and the adjoining spaces, which is tenant to drive up capital cost on a per square foot basis. But we are as I mentioned seeing I think more rent stability and fortunately the bulk of our tenant base tends to be smaller sized tenancies that don't necessarily require a very, very high level of tenant finish.

OK, thanks and then one more question, if you could just comment on Richmond and sort of the outlook for that market and the performance there?

Yeah, I would be happy to. I think from what we are seeing down the Richmond marketplace, is some continued activity on the office front. We are seeing, you know, Phillip Morris has brought about 600 jobs into the marketplace. Their -- our projections in terms of rents for '04 is that we see the vacancy, that's on the office side, which is where our inventory is, we see the vacancy rates coming down in a very slight increase in rents.

Our struggle in Richmond quite frankly, Paul, remains the Main Street Center in downtown Richmond. The suburban portfolio is doing well; we are having very good leasing success. Our team is doing a very good job in terms of controlling capital cost. So we think the activity down there will pick up during the course of the year.

Great. Thanks.

Thank you. Our next question is coming from Keith Mills with UBS. Please pose your question.

Good morning it's John Kim with Keith. Couple of questions. First of all on Cira center, could you comment on the leases that were signed here and whether or not these represented expansions for these companies?

We signed three leases. Two of the leases will have -- are expansions over what those tenants currently occupying and one is steady state.

Are they moving out of buildings owned by other REITs or -

No.

OK. In your marketing materials, you mentioned for Cira center - you mentioned you contacted a number of companies, over 2,500 outside of Philadelphia. Could you comment on the level of interest for these prospective tenants?

The number is 3,300 outside of the city of Philadelphia that we have contacted. Reaction has been very good. Certainly relocation decisions come hard in this type of marketplace and relocations, decisions to a building that has just started construction, tenants tended to, particularly the smaller size prospects were waiting until the project actually started.

So we have gone back since we made the announcement on the start of the project to a lot of those companies where there was a positive reaction, with the anticipation of calling them or bringing them back in to look at the project, look at the delivery date and see how that can layer into their occupancy requirements.

OK. As far as TIs this past quarter, I realize it's getting a little bit better, can you comment on the type of tenants in the market that these leases were?

Sure. We had a couple of finance companies, I don't know, George and Jeff, do you want to talk about some of the larger deals we did during the quarter. But we had a number of transactions up in the Lehi Valley and in the northern and western suburbs, as well as the two in New Jersey that were anywhere from seven to 11 year leases. And from an industry standpoint they really ranged all across the board from service companies, couple pharmaceutical companies -

A law firm, we had professional services firms. I think the -- it was a wide array, as was indicative our general overall portfolio. And as I think Gerry said, it's hard to look at things on a single quarter basis and try to draw correlations to that on a go-forward simply because, again as he mentioned many of these leases were signed you know almost a year ago.

So I think if you are trying to draw trend lines, I think it's probably more of a focus on the deals that we've already, the 100 we've already done that will come into play in '04 and kind of where that capital is. Arguably, still call it 30% higher than where we were in '01 and '02 but half of where we were in '03.

Adding color on the New Jersey side, we had actually executed as part of the building acquisition a ten-year deal with a firm 52,000 square foot building. That said in Princeton market or higher than they are on most of the markets. So on a 10-year deal, full building the commission was almost as high as the tenant improvement allowance was.

So when you put that in the context of a brand-new building that we acquired, 10-year lease, and that also fills one of the voids that we had on the ground in Princeton, the land was a 25-acre site associated with that acquisition. So with that building we are also looking at improving another 150,000 square feet on the ground that came with that building.

First touched on the trend going into '04, we see continued mix of tenants being a very broad base both in size and business type.

OK. And finally, as far as expiring leases on this year, can you comment on expiring rents versus market rents, where you see that is in general?

I actually think we're going to see the same trend line we saw in 2003. I think we've maintained for a couple of years, you know, the mark-to-market in our portfolio was essentially zero given this kind of market condition. But I think as we've seen if you take a look at the quarterly activity during '03, and certainly what we're seeing in '04, we are -- we are seeing the spread between expiring rents and market rents narrowing significantly.

As you know we do over 90% of our leases that have contractual rental rate increases during the term. As a result, you typically see tenants expiring rates at the highest rate during their previous term, and we're rolling it in, we tend to focus very much on that what the average rent is during the term of the lease, not necessarily the starting rent in order to attract the tenancy today.

So I think our expectation is to be able to budget is that we're going to wind up having the same type of spreads that we experienced during 2003.

OK. So relatively flat on a cap basis?

We think so, yeah.

OK, thanks a lot.

Thank you. Our next question is coming from Chris Haley with Wachovia Securities. Please pose your question.

Hey guys, its Greg Coronda (ph) with Chris. Then you guys could provide some additional color on the acquisition guidance for '04, 50 million net numbers?

That would be a 50 million net number.

What does your backlog stabbed now in terms of acquisition pipeline?

It is very significant. I mean, it's - you know, significant multiples of that $50 million. But the more important point is that it's a fairly fluid list. So I mean one of the great things we see during our investment committee reviews is, it seems like a never-ending cycle of properties that are being presented to the marketplace.

Some frankly have, you know, are leasing challenged, which in this kind of marketplace, as we did with a few properties last year, we're not adverse to buying leasing-challenged properties because of our market prices and the fact that we have an underlying belief in the long-term viability of the submarket.

So I mean we have a bias towards trying to find those projects where there's a good tradeoff between existing rents in place, short-term rollover, going and yield and price per square foot. That is exactly what you saw us do with Bay Colony and with Princeton Pike one, at the end of last year.

We have in fact passed on a number of transactions have occurring in our marketplace. Good examples are the property under Grimasham (ph), not too far from our Plymouth meeting headquarters here that will trade out at over $275 a square foot and a cap rate of around 8%. From our standpoint, that doesn't represent a good transaction for us. So that will go somewhere else.

But we at least, given our deal flow in the market have an opportunity to really assess every transaction that we think comes up in the entire region and then make an elective decision whether or not we wand to proceed.

Good and - more of a housekeeping item - what are you guys projecting for termination fees for '04?

We never budget them, since it's so unpredictable. So in our guidance, similar to what we had in our 2003 guidance, we usually include 200,000 to 400,000 as sort of a plug number. But we don't attempt to fine-tune that, and that's spread out over the course of the entire 2004.

So are you guys anticipating a roll down in the other income line item on the income statement from Q4 to Q1? And what was the termination fee in Q4?

Yes, we disclosed in same-store portfolio, which in essence is the entire, for us, it's almost the entire portfolio. We had about 700,000 in the fourth quarter, in termination fees, and that would be compared to about to -- 150,000 in 2002.

Great, thanks.

Thank you. Our next question is coming from Frank Greenwood (ph) with McDonald Investments. Please pose your question.

My question is about the preferred units you are planning to take out in March. Are you planning to take those out with another preferred offering?

The way we set this up, Frank, this is Chris, in the flexibility we've gotten in terms of having between now and ultimately the 15th of March to take out the remaining 43 million.

The reason we've established that flexibility is to give us some time to think through how we would - how we would finance that. I mean, obviously our options are common equity, debt, asset sales, or you know, could be preferred. I think, if you look at sort of the target we've been trying to get to from a - from a debt-plus-preferred to market cap and from a level of preferred in our capital structure, at the 100 million plus or minus that we're at right now, in terms of preferred, that's you know probably reasonably full up from where ultimately we would like to be at least in the near term. But we do have the flexibility and that's what we are trying to create in that structure to determine the right capital structure and the right financing source to take out that remaining 43 million.

OK. And you might not have any real projections on this, but in obtaining the $50 million of net acquisitions, do you expect that you would remain within your, the level of your rated peers, as far as your metrics, down to your metrics?

Yeah. I think, as we looked at, you know, as we looked at modeling the funding for that 50 million, you know, we would be able to do that, utilizing debt, and remain well within where we would like to be from a credit perspective.

And I think we've emphasized, our focus is on acquiring, as we did in 2003, you know, a majority of our assets being unencumbered when we acquired them and allow us to use unsecured debt to acquire the asset.

OK. And finally, on page 15, the TI's and leasing commissions, they were higher and I'm assuming that they're higher in part due to the Cira center?

On page 15

No, the TI and leasing commission that relates to the actual transactions that had taken place, and I think as we had mentioned earlier, most of those leases were signed off earlier in the year. The cost of Cira center, which were fairly minor at 12-31 are included in our construction process.

OK. Thanks.

Thank you. Mr. Sweeney, I'm showing no further questions at this time. I would like to hand the call back over to you for any further remarks.

Maria, thank you very much and thank you all for participating in this call and we look forward to re-addressing you on our first quarter 2004 conference call. Thank you very much.